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malpractice awards led to a crisis in both the price and the
availability of medical malpractice insurance. Some physicians
and hospitals formed mutual insurance associations or pools
because the insurance industry was unwilling or unable to provide
malpractice coverage at a price that the physicians and hospitals
considered reasonable.
During 1976, in response to the uncertain availability and
high cost of medical malpractice insurance, petitioners
considered alternative methods to provide professional and
general liability coverage to hospitals which were owned directly
by petitioners at a lower cost than commercial insurance
available from various third party insurance companies.
Alternatives contemplated included self-insuring, joining with
competing hospital companies in the formation of a malpractice
insurance company, or forming a wholly owned captive insurance
company whose principal business would be to provide insurance
for the liability risks of petitioners' hospitals. During the
time that petitioners were considering those alternatives,
approximately 40 to 45 percent of the revenues of petitioners'
hospitals came from reimbursement of costs for patient care by
the Federal Medicare program. Consequently, the reimbursability
of premium costs by the Medicare program was a significant
consideration in evaluating the alternatives.
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