‘The right thing to do’: Hahnemann owner will pay its former doctors’ malpractice insurance

The owner of Hahnemann University Hospital has agreed to pay the medical malpractice insurance, or “tail coverage,” for hundreds of its former doctors. The hospital’s owner had previously claimed it was not responsible for those costs, but when U.S. Bankruptcy Judge Kevin Gross threatened to change the hospital’s bankruptcy case from a Chapter 11 reorganization to a Chapter 7 liquidation, the effort to find a solution was taken more seriously.

The malpractice insurance for medical residents and other doctors who had been employed at American Academic Health System’s two Philadelphia hospitals was originally set to expire in January. American Academic Health extended the policy twice while it figured out a longer-term solution. On Thursday, that solution materialized in the form of a settlement, filed in U.S. Bankruptcy Court in Wilmington.

The fix will cost American Academic Health $6.3 million, and an insurance entity also owned and controlled by company founder Joel Freedman an additional $12 million. The agreement was filed jointly by the Ad Hoc Committee of Residents, represented by the American Medical Association, and American Academic Health. It still needs approval from the judge.

“The AMA is cautiously optimistic that, with today’s settlement filing, relief may be just around the corner for hundreds of residents and fellows impacted by the Hahnemann closure,” the American Medical Association wrote in a statement. “This would be a significant victory, not just for these physicians, but for the patients they serve.”

American Academic Health System insured medical professionals while they worked at Hahnemann, which the company closed, and St. Christopher’s for Children, which it sold, through a claims-made insurance policy that covered the workers while employed.

Such policies are usually accompanied by what is known as tail insurance — an extension that covers physicians for the time worked at a hospital after they leave it. That’s important because medical malpractice complaints can be brought months or years after the fact.

When word came out that American Academic Health would not provide the tail coverage, several entities sprung into action. Paul Austerberry of the Philadelphia County Medical Society raised the first flag. The AMA hired a lawyer. The Pennsylvania Department of Health supported the case for the doctors. And David Aizenberg, who had been head of the internal medicine program at Hahnemann, worked to get the word out to all former residents that they had to provide their own tail coverage. He didn’t think the hospital would ever do so.

“I really thought that there was no chance,” Aizenberg said. “This is a really huge relief and a very pleasant surprise for all of us involved.”

Aizenberg said many of the medical residents he was working with were having trouble getting loans for their own tail coverage, especially those who were not U.S. citizens. The residents were quoted between a few thousand and $80,000, depending on their specialty. He was genuinely worried about the impact that would have on the already enormous debt these young doctors carried and their ability to get hired in the future, since many states require no lapse in coverage for credentialing.

The $6 million hit to American Academic Health System, combined with the revelation in court filings that a consortium of six local health systems led by Jefferson will withdraw its $55 million bid for Hahnemann’s residency slots, comes as a financial blow to the owner of the onetime 496-bed safety-net hospital. American Academic has been attempting to sell off its assets since last July, when Hahnemann wound down operations and the company filed for Chapter 11 bankruptcy.

Hahnemann’s owner had planned to cover the tail insurance for at least the residents with cash from the sale of that hospital’s residency program. But the Centers for Medicaid and Medicare Services, which funds those positions, objected to the residency-slot sale. The deal was halted pending the federal agency’s appeal, rendering the cash unavailable. Now, with news that the Jefferson group has withdrawn its bid for those slots, it will never become available.

Still, American Academic Health was able to scrounge up the money. It will purchase the coverage from Pennsylvania Academic Risk Retention Group LLC, or PARRG,  an entity owned and controlled by Freedman, American Academic’s owner. PARRG will pay $9.3 million in premiums and $3.1 million in premium credits to cover the insurance for the former residents, attending physicians, nurse practitioners, and certified registered nurses. That leaves American Academic on the hook for $6.2 million, according to the court records.

In the filing, American Academic explained that it decided to pay the tail insurance, in part, to avoid difficult ongoing legal issues and expensive damage claims from former doctors.

It also noted though, that it was simply “the right thing to do – not only for medical professionals previously employed by the Debtors and the regional and local community, but also for former patients, who otherwise may not have a source of recovery in the event of professional negligence.”

The company added that it wanted to avoid the conversion of its bankruptcy to Chapter 7, which it said “would benefit no one.”