Rising medical liability costs are named in a recent report as yet another source that’s sapping Medicaid funding, according to a new report by Aon Risk Solutions,prompting a long-term care provider trade group to call for state-by-state medical liability reform to preserve access to services while reducing providers’ liability costs.

“Rising liability costs add to the many challenges already facing our profession,” said Governor Mark Parkinson, president and CEO of the American Health Care Association/National Coalition for Assisted Living, in a statement about the report. “Lengthy, costly litigation drives up costs for our residents, long term care facilities and ultimately taxpayers. This analysis shows costs exploding in states without meaningful, effective medical liability reform. As state and federal governments search for ways to contain health care costs, this is one area that warrants close examination.”

Paying higher liability costs is yet another burden that could impact long-term care facilities, many of which are already battling the effects of the average 11.1% cuts to Medicare reimbursements that went into effect last October, says Aon in its 2012 Long Term Care General Liability and Professional Liability Actuarial Analysis.

“With reduced revenue, providers will find it more difficult to fund in expansion and improvements, maintain existing facilities, and hire and train qualified caregivers,” the report says. “These competing priorities have the potential to impact liability costs, especially if the investment in caregivers is reduced.”

The frequency of claims has actually declined over time, but the severity of claims and the resulting loss rates have been growing consistently since 2009 at an annual rate of 4%.

Since 2005, liability costs have grown from $1,040 to a projected $1,480 in 2012; they’re expect to rise again in 2013 to $1,540 per bed.

As for claim severity, it’s projected to grow about 60% from $109,000 per claim in 2005 to 175,000 per claim in 2013.

Some states have passed tort reform or statutes limiting the validity or scope of claims, and the report shows the effects of pre-dispute arbitration agreements in long-term care settings. Claims that are settled using alternative dispute resolution agreements are 21% less costly than other claims. That’s seen in the average total cost of an outcome subject to an arbitration agreement of about $140,000, compared to $180,000 for a non-arbitrated outcome.

The states that do have medical liability reform, including Texas, have seen “dramatic” decline in medical liability costs, the report finds. Conversely, in states like Kentucky and West Virginia, where there aren’t reforms, or where reforms have been challenged, such as in Georgia, liability costs expenses are rising.

“The state-by-state facts clearly show that comprehensive medical liability reform is the right solution to this problem. For the long-term care profession, reducing medical liability costs can help preserve dwindling resources,” said Parkinson.

View the Aon report here.