Subprime’s Meltdown and its Impact on Health Care
The meltdown in the subprime lending market is hitting home. Health care organizations that carry Directors & Officers (D&O) insurance and Errors & Omissions (E&O) coverage are being snagged into the subprime mortgage market meltdown.
According to “Credit Market Aftershock Threatens Professional Liability Profits,” a briefing paper published by Guy Carpenter & Company, LLC http://www.guycarp.com/portal/extranet/index.html?vid=9 a global risk and reinsurance specialist, the subprime mortgage market failure is impacting the professional liability insurance market.
According to the briefing, although D&O insured losses are expected to reach $2 billion for claims filed in 2007, the full impact of the subprime market crisis may not be fully known until 2008 or 2009, with total losses eventually expected to be substantially higher.
“2007 could be considered an ‘incubation’ year, with professional liability insured losses relatively contained,” said Kevin Griffiths, head of Guy Carpenter’s Global Casualty Specialty Practices. “However, as the subprime credit crunch continues to evolve, its impact on insurers will likely continue to grow. We expect losses to rise significantly higher in 2008 and 2009, due to increased stock market volatility and put/call ratios, litigation tendencies and an ever-lengthening list of subprime market casualties.”
Because I had worked for a workers’ compensation insurer who had reinsurance coverage earlier in my career, I pay attention to news like this. And what gives me pause is what Mr. Griffiths continues to note in his briefing: “The developments in the subprime mortgage market could eventually prove positive for reinsurers, if the potential for loss reduces the downward pressure on rates and reinforces the value of reinsurance to ceding companies. The full consequences, however, remain to be seen.”
It’s kind of open-ended there, isn’t it? Will the bottom fall out? Who knows, is basically the conclusion I draw from Mr. Griffiths comments.
I asked some of our editorial advisory board members for their take on their respective markets and the responses were somewhat cautious.
Timothy Stettheimer, PhD, senior vice president and CIO at St. Vincent’s Health System in Birmingham, Ala., said historically job loss and personal health care crisis are the two highest rated reasons for personal bankruptcies. “As far as a local impact, we haven’t been able to show any significant trend in the data yet -- but from an anecdotal angle, we believe these impacts will gather steam,” he said.
“I haven’t seen any noticeable impact of the subprime implosion in our area,” said Chuck Christian, director of IS and CIO at Good Samaritan Hospital in Vincennes, Ind. “I do have concern that the lending market (and available funding) is taking a step backwards, but I think there are much deeper, related issues and it is just part of the whole picture -- along with the current state of the dollar, the price of crude oil, rollercoaster stock market, etc.” Christian said he wasn’t sure what impact all of these variables might have on the bond market and other funding vehicles. “I believe this year’s Christmas buying season will give us a good barometer for the level of discretionary cash families are willing to part with -- or their willingness to carry more debt,” Christian said.
“It’s too soon to tell,” said Scott Joslyn, senior vice president and CIO at Memorial Health Services in Long Beach, Calif. “We have yet to see the effect of subprime lending hit either the overall local economy or health care. We sure have some housing bargains, relatively speaking. I think the questions of magnitude, when and duration are still matters of both speculation and a low-burn worry.”
John Wade, vice president at Saint Luke’s Health System in Kansas City, said in his geographic region they haven’t seen a major crisis yet, but “there definitely is a slowdown in the housing market with reports of scattered foreclosure signs on the news broadcasts.
“While I think people should make sure that their health insurance coverage remains in place, it’s likely to become an unintended ‘victim’ where a family will stretch to make a house payment and use the insurance payment funds, if necessary,” he said. “It’s a basic human need to keep shelter over one’s head for as long as possible, leading to cancellation of insurance. I’ve seen it happen before and it won’t be surprising if the same phenomena were to occur. That will leave the hospital industry holding the bag again. When there are no discernable assets, what’s a hospital going to collect -- zero to pennies on the dollar? Trying to put a lien on an asset that’s already in foreclosure isn’t going to garner much,” he said. “I’m not looking for this to be a doom-and-gloom response, but it’s a phenomenon of our current society. The same banks that made money on subprime loans aren’t going to help the hospitals. They’re running around trying to maintain solvency.”
George Hickman, senior vice president and CIO at Albany Medical Center in Albany, N.Y., said pressures continue to build around “choice” in personal spending -- whatever the cause of funds unavailability. “Consumers must make a very careful choice when standing at the fork in the road that leads to the uninsured/underinsured. Whether a personal crisis is affecting income, a shift in the expense side, vis-à-vis variable-rate mortgages or a decision to buy the newest, hottest car, if the individual can somehow hold onto acquiring personal/family health insurance as a personal priority, he/she should,” he said. “The downside is the risk of not so choosing can be catastrophic. I hope the problem that’s outlined here doesn’t head more folks into that tailspin.”
Dennis L’Heureux, senior vice president for planning and CIO at Rockford Health System in Rockford, Ill., said he’s not sure of the impact of the subprime implosion on his region. “We are more concerned by a local Chrysler plant downsizing and the continued erosion of our manufacturing base. Payer mix is changing and it is not an overall favorable change that we’re seeing. Another thing that I’ve been trying to monitor is whether I have any employees who are about to tank because of the subprime mess. So far I haven’t heard of anyone in dire straits, thank you very much,” he said.
What do you make of Mr. Griffiths’ comments? Will we see the subprime market falter further, impacting hospitals and health systems more directly because of the D&O and E&O insurance they carry?