Vaping: Smoking Gun
SCENARIO: It’s 2040, and there were not quite as many attendees of the 25-year high school reunion party as expected. Gossip begins to circulate just as it did around the cafeteria and corridors a couple of decades earlier.
“Is John coming tonight?” one man asked an ex-classmate.
“No, didn’t you hear? He’s in the middle of chemo treatments right now,” she responded solemnly. “Esophageal cancer.”
“Hey Kelly!” another alumnus shouted. “I don’t think I’ve seen you since Nationals senior year. How are you? Still running?”
Kelly was a standout miler on her high school and university track teams, known for her strong finishing kick.
“No,” she responded, exhaling a cloud of raspberry-flavored vapor as she lowered her still-glowing e-cigarette.
“I haven’t been able to run much lately, not without an inhaler, anyway. Developed asthma a few years ago.”
In 2015, when this group was graduating, “vaping” was the latest and greatest trend. It delivered the soothing effects of nicotine without the carcinogens of tobacco smoke, tasted much better, and there were no age restriction laws.
The litigants claim their health issues stem directly from the dubious concoction of chemicals in the e-liquid his company imported from China and sold in their branded vape pens.
E-cigarette advocates predicted that vaping would dramatically decrease the rates of lung cancer and other smoking-related diseases. But 25 years later, the effects of the e-liquid’s various chemicals and concentrated nicotine are clear. Rates of lung cancer, which had been decreasing steadily in the U.S., are rising again, along with heart disease and other types of cancer.
That same night, the CEO of a national e-cigarette distributor is staring at a subpoena. His company is being sued by the families of a few hundred of his most loyal customers who have developed respiratory and heart problems.
In fact, a recent longitudinal study of “vapers” by the Centers for Disease Control and Prevention found strong positive correlations between high use of e-cigarettes and incidence of heart disease and cancers of the respiratory system.
The litigants claim their health issues stem directly from the dubious concoction of chemicals in the e-liquid his company imported from China and sold in their branded vape pens.
Tests of several batches of the liquid by the FDA revealed inconsistent concentrations of nicotine, propylene glycol, and other flavor additives and preservatives. The levels of nicotine found in the vapor were also inconsistent with the label.
The class-action litigants were seeking punitive damages totaling $20 billion, half of which would be used to create a medical treatment fund. The number is staggering, but not out of line with some of the lawsuits that emerged against “Big Tobacco” companies in the late 1990s, the highest of which sought damages of $23.6 billion. Other smaller distributors had already been knocked out by smaller settlements, still in the millions.
The CEO had already talked to his broker. The contractual protection they had in place pinned product liability to the manufacturer, based in Shanghai, but did not address risks of long-term health effects. That liability was all theirs.
ANALYSIS: In 2015, the retail vaping industry is forecast to reach $3.5 billion, more than twice the $1.7 billion estimated for 2013, according a Wells Fargo Securities report on tobacco trends in the U.S.
E-cigarettes, which deliver a nicotine hit without tobacco combustion — and the carcinogens that come with it — attract customers from the traditional cigarette market looking for a healthier or safer alternative to their smoking habit, and from the youth market, drawn to the sleek styling and fun flavors of vaporizers, as well as the claim that they are far less dangerous than combustible cigs.
According to the CDC’s National Youth Tobacco Survey, “the number of never-smoking youth who used e-cigarettes increased from 79,000 in 2011 to more than 263,000 in 2013.”
According to “Monitoring the Future,” a study from the University of Michigan analyzing drug and tobacco trends among teens, there were twice as many e-cig users than smokers of combustible cigarettes among eighth, 10th and 12th graders. Sixty-two percent of eighth graders surveyed said that cigarettes are very harmful to health, while only 15 percent reported feeling that way about e-cigarettes.
And there is basis for these beliefs. Studies of e-vapors show that the amounts of toxic chemicals they contain are negligible, compared to traditional cigarettes, and their concentrations are nearly equal to those already present in the air we breathe. Many public health advocates laud e-cigs as a long-term tool to reduce smoking rates and the respiratory illnesses that come with it.
“There’s no question that e-cigarettes are much safer,” said Michael Siegel, a professor at Boston University’s School of Public Health.
“The risks are minimal, compared to tobacco smoking.”
But the danger in any new product lies in the unknown. Vapors produced from e-liquids may not be as harmful as smoke, but the composition of those liquids varies widely.
“A lot of these devices are made in countries that struggle with quality issues in the manufacturing process,” said Mark Wood, president and CEO of LifeScienceRisk, a subsidiary of RSG Underwriting Managers.
“When using foreign contract manufacturers, you don’t always know who exactly is making the product.”
Inconsistent manufacturing leads to variability in nicotine levels. Byproducts of the manufacturing process, flavoring and other preservatives also potentially introduce other carcinogens into the mix. But the final composition is largely unknown.
Adverse health effects of those unknown chemical mixtures could range from allergic reactions to cancer.
The heating element of e-cigarettes also poses a threat. If it gets too hot, it can “trigger a thermal breakdown” of the materials used to make the e-cig, creating carbonyls like formaldehyde and acetaldehyde. These compounds are delivered in nano-sized particles directly into the airways, where they trigger inflammation that can lead to the development of chronic conditions.
Little clinical research has been conducted on the safety of these vapors, and the long-term health effects may not be seen for another 20-30 years.
“From the FDA’s point of view, they’re waiting to see if e-cigarettes can reduce the number of smoking deaths. They want to see the whole picture before they take a firm stance on the issue,” said Markus Kalin, head of casualty risk engineering at XL Group.
Another problem is the lack of age restrictions, coupled with flavorings like cherry vanilla and blue raspberry, which make these products highly appealing to those under 18.
In a customer base that has never or rarely smoked traditional cigarettes, long-term use of e-cigarettes could increase, rather than reduce, the likelihood of health issues.
“The purpose of e-cigarettes is to get people off smoking in a safer way. They are not absolutely safe,” Siegel said.
Current high-school vapers could be in their 40s or 50s before any ill effects emerge. It may not be lung cancer or emphysema, but perhaps higher rates of asthma, bronchitis, cystic fibrosis or other inflammatory pulmonary diseases.
And distributors of vaping products could be held liable, in much the same way tobacco companies faced massive lawsuits after smoking was definitively linked to lung cancer.
The fact that most e-cigarette manufacturers are based in China also “puts distributors and retailers in the U.S. at higher risk,” said Randy Nornes, executive vice president at Aon Risk Solutions.
“If you’re the only link between a non-U.S. manufacturer and the customer, you’re an obvious target for plaintiffs.”
Wood said that distributors “can subrogate that claim against a contract manufacturer or supplier, but it’s more difficult to do that against an entity in a different country subject to different laws.”
Given the huge settlements with tobacco companies, plaintiffs’ attorneys will be more than willing to take on the e-cigarette industry.
“They look for market opportunities,” Nornes said, “anything that potentially has harm in it and involves a lot of people.”
Vaping distributors could face product liability suits for improper labeling of e-liquid cartridges or false advertising concerning its health benefits. Kalin of XL Group said parents of e-cigarette users could pursue advertising litigation against distributors for failure to protect young people.
“But the next stage will be, if you start to see health issues emerge and more studies trickling out, and younger people developing diseases like lung cancer, that will be the catalyst for mass tort,” Nornes said.
E-cigarette distributors and retailers need proactive risk management, experts said.
“You really have to understand your supply chain,” said Aaron Ammar, risk manager at XL Group. “Make sure you have appropriate age restrictions and proper labeling about potential health effects. Where are the component parts coming from? Do you understand it?”
“I’m sure they’re all doing contractual risk management, to make sure risk stays with the manufacturer,” Nornes said.
“The second issue is making sure the manufacturer has adequate levels of insurance in the event you get sued for distributing someone else’s product. That’s where issues will creep in, because you’re relying on a third party’s insurance.”
Complete coverage of 2015’s Most Dangerous Emerging Risks:
Corporate Privacy: Nowhere to Hide. Rapid advances in technology are ushering in an era of hyper-transparency.
Implantable Devices: Medical Devices Open to Cyber Threats. The threat of hacking implantable defibrillators and other devices is growing.
Athletic Head Injuries: An Increasing Liability. Liability for brain injury and disease isn’t limited to professional sports organizations.
Vaping: Smoking Gun. As e-cigarette usage rises, danger lies in the lack of regulations and unknown long-term health effects.
Aquifer: Nothing in the Bank. Once we deplete our aquifers, there is nothing helping us get through extended droughts.
Most Dangerous Emerging Risks: A Look Back. Each year since 2011, we identified and reported on the Most Dangerous Emerging Risks. Here’s how we did on some of them.
More Accountable Care
More physicians are selling their practices and becoming employees of larger entities, as the Affordable Care Act encourages the creation of expanded accountable care organizations.
So far, underwriters are viewing the trend as a positive, with improved risk management practices and less “finger-pointing” between hospitals and doctors during the claims resolution process, as all parties are now covered under the employers’ professional liability policies (physicians working as employees typically no longer buy medical malpractice insurance.)
But as more patients are served under this model, experts said, certain issues need to be ironed out, such as whether health care organizations can meet new “pay-for-performance” metrics and whether they are buying as much limits as they should to adequately handle jury awards.
Berkshire Hathaway Specialty Insurance views the ongoing migration of physicians toward institutional employment as a favorable trend, both for the individual practitioner as well as for the institution employing them, said Leo Carroll, head of healthcare professional liability.
“Physicians are less distracted and burdened by some of the administrative responsibilities of running a practice, by handing that over to the institution to manage,” Carroll said.
Physicians benefit when they join an institution’s risk management program, in part by being able to use a common medical record system, usually electronic, to help to optimize technological efficiencies and promote consistent communication, he said.
Moreover, communication between physicians and institutions within the employment model generally is “a little tighter and more efficient,” as comprehensive treatment plans can be shared more effectively across a unified team.
Physicians are also integrated into a larger insurance program overseen by the institution, which allows them access to broader risk management training and promotes more time with patients, Carroll said.
Claims can also be resolved more efficiently because the “finger-pointing” between doctors and hospitals under separate insurance policies has been eliminated, and the cost of a coordinated defense using one law firm is typically much lower.
Still, a unified approach to resolving conflict “does come with compromise for all involved,” so that claims can be resolved in the best interests of all parties, Carroll said.
“The future is a pay-for-performance environment.” — Bob Allen, president, Pro-Praxis Insurance
“It’s really important for physicians to be open and well-informed about the culture of the institution they are joining,” he said.
“They need to make sure to understand that there may be differences in the way that care is delivered and what the expectations are of the physicians by the institutions.”
Medical specialists are also making the switch, said Mary Ursul, executive vice president at Coverys, a Boston-based provider of medical professional liability insurance.
In recent years, Coverys has seen instances where independent cardiologists in a community all become employed by a health system, Ursul said.
“Whether it is the push to upgrade equipment, implement electronic medical records, the uncertainty of future private payer and government reimbursement, or the predicted shortage of health care providers, the shift away from independence seems to be heavily weighted towards financial concerns,” she said.
The ACA’s call for more integrated care delivery is also prompting the move toward employment — as well as the increasing trend of hospitals and health care organizations to also acquire acute care, post-care, rehabilitation facilities and other entities across the health care delivery system, Ursul said.
As larger entities acquire physician practices, there are certain training protocols that should be considered to minimize risk exposure, she said.
“For example, something as simple but important as a new patient intake process within an unfamiliar electronic medical record can create situations where risk exposure can increase without sufficient training,” Ursul said.
“That could be a steep learning curve for staff in a physician’s medical office, therefore, time, training and appropriate resources are all important to make the transition smooth and to ensure that clinical information is handled appropriately so that risk can be reduced.”
While Coverys offers comprehensive clinical risk management services to its insured independent physicians, the carrier finds that not all physicians have access to such services, she said.
Coverys advises hospitals acquiring physician practices to conduct risk management assessments as soon as practical, a service that the carrier provides to insured hospitals.
“These assessments can provide a baseline of data on processes, possible gaps in best practices, and assist in determining what type of education and training staff may need,” Ursul said.
One benefit to being acquired is often access to professional clinical risk management resources through the hospital’s risk management department.
“This may not actually be viewed as a benefit from the physician side of the transition as physician practices are largely unregulated, so the level of oversight may be viewed as burdensome,” she said.
As hospitals and health care organizations acquire more physician practices and other entities throughout the health care spectrum, the risk in maintaining “the health of the community” becomes the new issue, said Bob Allen, president of Pro-Praxis Insurance in New York.
The Importance of Care Coordination
To manage the health within a patient population, there has to be coordinated care across physicians, hospitals and rehab services, Allen said.
“For example, one entity says that it can take care of all of the diabetes cases in its region for x number of dollars, and so the ‘risk’ is being able to have the hospital and the doctors on the same page to be able to take care of those cases at or under that targeted dollar amount,” he said.
That exposure is also translated into the financial risk of taking a flat fee for a particular type of care, what is known in the industry as a “capitated risk,” Allen said.
If a health insurer agrees to give a hospital and its physician network a flat fee to treat 1 million people in its area, the insurer may pay for office visits, including annual checkups, but it likely won’t pay if the network provides poor quality of care.
Insurers are now measuring that by “quality indicators,” he said. Insurers are increasingly reviewing the number of surgical infections or falls during hospital stays that occurred due to poor quality treatment or follow-up after surgeries, and determining whether the rates are too low, high enough or whether not to pay.
“The future is a pay-for-performance environment,” Allen said.
“If the network doesn’t perform well, it doesn’t get paid for services rendered — that’s the risk. It’s more of a business risk than a typical malpractice risk.”
To mitigate this financial risk, hospitals and physicians have to be on the same page, have greater collaboration, and “probably” the best way to do that is within an employer/employee structure, he said. Historically physicians had hospital privileges as independent contractors, but now as employees, there is better management of making sure doctors do checklists before performing surgery.
“As an integrated group, there are resources and rules for who will do the follow-up calls after surgery to make sure stitches are not going to be ripped open,” Allen said.
Pro-Praxis offers a professional liability program that covers every entity within the network — hospital, physicians and other employees such as certified nurse assistants, as well as other entities that hospitals have been acquiring such as nursing homes and outpatient surgery centers, as part of providing a continuum of care, he said.
Professional liability has taken the place of medical malpractice for individual physicians, Allen added.
For example, a hospital may pay $1 million in premiums, but after it brought a physician group of five doctors who each used to pay $100,000 in premiums for medical malpractice insurance, the hospital would now pay a total of less than $1.1 million in premiums.
In addition to less “finger-pointing” with a joint defense, typically the new employer/employee structure can result in “behavioral changes.”
“That is not to say that physicians didn’t behave well before, but now the hospital can better manage treatment and follow-up, and the workflow of all of its employees,” he said.
For insurers, the biggest challenge with the new structure pertains to policy limits, Allen said. Under the traditional structure, hospitals typically have a $2 million limit for professional liability and physician groups have a $1 million limit for malpractice. If they were sued and the jury awarded $3 million, the two entities could cover it with their respective limits.
“But now that there is no more sharing and just one health system that has to pay that $3 million jury award, the hospital would now have to pay $1 million out of pocket because its limit is still $2 million,” he said.
“This hasn’t happened yet, but from an underwriter’s perspective, we are concerned about loss allocation.”
Some health care organizations have been buying more limits and have been paying more in premiums, so they won’t have to pay out-of-pocket, something the insurers are hoping more will do as their exposure to losses increases.
“They have to be careful now that they’ve brought on all of those physicians as employees,” Allen said.
“Our job is to figure the impact of losses on how much limits they should get, and there is no hard data on that, yet.”
Healthcare: The Hardest Job in Risk Management
Radically changing cost and reimbursement models.
Rapidly evolving service delivery approaches.
It is difficult to imagine an industry more complex and uncertain than healthcare. Providers are being forced to lower costs and improve efficiencies on a scale that is almost beyond imagination. At the same time, quality of care must remain high.
After all, this is more than just a business.
The pressure on risk managers, brokers and CFOs is intense. If navigating these challenges wasn’t stress inducing enough, these professionals also need to ensure continued profitability.
“Healthcare companies don’t hide the fact that they’re looking to reduce costs and improve efficiencies in practically every facet of their business. Insurance purchasing and financing are high on that list,” said Leo Carroll, who heads the healthcare professional liability underwriting unit for Berkshire Hathaway Specialty Insurance.
But it’s about a lot more than just price. The complexity of the healthcare system and unique footprint of each provider requires customized solutions that can reduce risk, minimize losses and improve efficiencies.
“Each provider is faced with a different set of challenges. Therefore, our approach is to carefully listen to the needs of each client and respond with a creative proposal that often requires great flexibility on the part of our team,” explained Carroll.
Creativity? Flexibility? Those are not terms often used to describe an insurance carrier. But BHSI Healthcare is a new type of insurer.
The Foundation: Financial Strength
Berkshire Hathaway is synonymous with financial strength. Leveraging the company’s well-capitalized balance sheet provides BHSI with unmatched capabilities to take on substantial risks in a sustainable way.
For one, BHSI is the highest rated paper available to healthcare providers. Given the severity of risks faced by the industry, this is a very important attribute.
But BHSI operationalizes its balance sheet in many ways beyond just strong financial ratings.
For example, BHSI has never relied on reinsurance. Without the need to manage those relationships, BHSI is able to eliminate a significant amount of overhead. The result is an industry leading expense ratio and the ability to pass on savings to clients.
“The impact of operationalizing our balance sheet is remarkable. We don’t impose our business needs on our clients. Our financial strength provides us the freedom to genuinely listen to our clients and propose unique, creative solutions,” Carroll said.
Keeping Things Simple
Healthcare professional liability policy language is often bloated and difficult to decipher. Insurers are attempting to tackle complex, evolving issues and account for a broad range of scenarios and contingencies. The result often confuses and contradicts.
Carroll said BHSI strives to be as simple and straightforward as possible with policy language across all lines of business. It comes down to making it easy and transparent to do business with BHSI.
“Our goal is to be as straightforward as we can and at the same time provide coverage that’s meaningful and addresses the exposures our customers need addressed,” Carroll said.
Claims: More Than an After Thought
Complex litigation is an unfortunate fact of life for large healthcare customers. Carroll, who began his insurance career in medical claims management, understands how important complex claims management is to the BHSI value proposition.
In fact, “claims management is so critical to customers, that BHSI Claims contributes to all aspects of its operations – from product development through risk analysis, servicing and claims resolution,” said Robert Romeo, head of Healthcare and Casualty Claims.
And as part of the focus on building long-term relationships, BHSI has made it a priority to introduce customers to the claims team as early as possible and before a claim is made on a policy.
“Being so closely aligned automatically delivers efficiency and simplicity in the way we work,” explained Carroll. “We have a common understanding of our forms, endorsements and coverage, so there is less opportunity for disagreement or misunderstanding between what our underwriters wrote and how our claims professionals interpret it.”
Responding To Ebola: Creativity + Flexibility
The recent Ebola outbreak provided a prime example of BHSI Healthcare’s customer-centric approach in action.
Almost immediately, many healthcare systems recognized the need to improve their infectious disease management protocols. The urgency intensified after several nurses who treated Ebola patients were themselves infected.
BHSI Healthcare was uniquely positioned to rapidly respond. Carroll and his team approached several of their clients who were widely recognized as the leading infectious disease management institutions. With the help of these institutions, BHSI was able to compile tools, checklists, libraries and other materials.
These best practices were immediately made available to all BHSI Healthcare clients who leveraged the information to improve their operations.
At the same time, healthcare providers were at risk of multiple exposures associated with the evolving Ebola situation. Carroll and his Healthcare team worked with clients from a professional liability and general liability perspective. Concurrently, other BHSI groups worked with the same clients on offerings for business interruption, disinfection and cleaning costs.
Ever vigilant, the BHSI chief underwriting officer, David Fields, created a point of central command to monitor the situation, field client requests and execute the company’s response. The results were highly customized packages designed specifically for several clients. On some programs, net limits exceeded $100 million and covered many exposures underwritten by multiple BHSI groups.
“At the height of the outbreak, there was a lot of fear and panic in the healthcare industry. Our team responded not by pulling back but by leaning in. We demonstrated that we are risk seekers and as an organization we can deploy our substantial resources in times of crisis. The results were creative solutions and very substantial coverage options for our clients,” said Carroll.
It turns out that creativity and flexibly requires both significant financial resources and passionate professionals. That is why no other insurer can match Berkshire Hathaway Specialty Insurance.
To learn more about BHSI Healthcare, please visit www.bhspecialty.com.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, and homeowners insurance. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has regional underwriting offices in Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Toronto, Hong Kong, Singapore and New Zealand. For more information, contact firstname.lastname@example.org.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.