The current state of the medical malpractice market place was the subject of a lively roundtable discussion in Hartford, CT, with several leading players in the sector airing their views on why the crisis has occurred, and what the solutions may be.
Participating in this roundtable:
Ronn Mullins: The purpose of this discussion is to look forward, but before doing so let's begin by setting the scene, namely the crisis in medical malpractice liability insurance coverage suffered in the US, off and on, since the early 1970s. Faced with unexpected and unreserved-for claims, a few insurers departed the medical malpractice market, producing an availability crisis. Who or what is to blame? The various groups highly involved in the outcome - insurers, reinsurers, the medical and hospital community, consumer advocacy groups, lawyer associations, regulators and politicians - each have their own perspective and there appears to be enough opposing statistics, studies and opinions for each group to make its point clearly and authoritatively. There are a number of factors that have been considered as bringing this dire situation on. The tort system, increased severity of claims, lack of coverage, lawyers' fees, premium increases, poor return on investments of insurance companies forcing rates up. Would each of you briefly give your opinion of what you see are the critical elements of the current state of medical malpractice insurance?
Dave Karp: This seems to be the fourth crisis that I've seen in my 37 years in the malpractice business and although some say there is no predictability in the crises, there do seem to be some common factors in each one. I think we are at a crucial stage now because we're looking at some of the same solutions that have been applied in the past to resolve the crisis, primarily tort reform and increase in premiums. That hasn't worked in the past and I think we need to do something a little different this time.
Dave Kalainoff: Maybe this time is a little bit different than the other crises because the doctors really cannot pass on the cost. In today's environment, doctors are being squeezed without the opportunity to get the revenues, and you're seeing doctors having to take some pretty drastic moves.
DaDavid Shipley: This combined with very low interest rates has produced an extreme squeeze because the rating that's been applied over the years has been discounted quite substantially for investment returns and that's no longer possible. This means that any carrier, whether commercial or mutual, needs to produce combined ratios well below 100 to survive, let alone grow. That involves much higher rates than had been required in the past, at a time when the incomes of physicians are being squeezed. So it becomes both an availability and an affordability crisis, probably with an intensity we haven't seen since the formation of the PIAA (Physician Insurers Association of America) companies in 1975/1976.
Bill Adamson: I agree with David Shipley's point about the doctors being squeezed and unable to pass on the cost, and it probably is being exacerbated because of that squeeze, so doctors are having to see more patients and that's a change in the number of exposure units per physician. The rates don't necessarily reflect that, and that can also be driving some of the frequency/severity trends.
David Thomas: Severity underwriting and pricing is very hard to manage because, while they have considerable data, reinsurers can only use open and closed claims made on prior underwriting years and it can take 18 months or more for a large claim to be developed and reserved. Whilst this data is being analysed, new incidents are taking place, and new exposures and new litigation theories are emerging.
Ronn Mullins: David Shipley, you said this is probably the worst crisis you've seen since 1975/1976. Why is it worse today?
DaDavid Shipley: There are more states now where there is either one or, in some cases, no carriers available to a physician or physician group than at any time that I can remember. Maybe in the mid 1980s when it was something of a crisis, you could increase the premium by 30%, 40%, 50%, and the physicians would still be able to pay them. They'd be very unhappy but they could afford it. Now, it's genuinely a preferable option for them to leave practice or to move states as opposed to paying that increased rate because it's had such an impact on their standard of living. The crisis goes just beyond something that's between the insurers and the insured and something that the whole of society has to look at.
David Thomas: In the 1980s, the market went from an occurrence to a claims made form, which somewhat pacified the need for rate increases and helped the doctors to continue to buy insurance. One of the key problems of today's crisis is its severity can be expressed as being totally out of control. We're looking at yesterday's information to predict tomorrow. We're not getting access to today's information.
Bill Adamson: The complexity of the cases is going way up, as is the severity. You need to understand more about what's going on in the cases, and then you should be able to predict more. The other element is that it's not just the individual physician that needs to be underwritten or evaluated, but the system or team that they're involved with. Again, complexity of medicine is increasing. It's not just a one-on-one with patient/doctor any more. Big problems in the obstetrics suite have to do with the teamwork elements or the training community. Physicians coming into the hospitals are more at risk than the ones who are employed because the ones coming in from the community haven't been trained as well. They don't know the teamwork, they don't know what to do when things go wrong.
DaDavid Shipley: The whole modeling issue is something I've discussed quite a lot within my business because we have a substantial involvement in property catastrophe underwriting and we're leading the market in a number of property reinsurance lines of business. It is infinitely more difficult in malpractice business. We have seen on the property side that the agencies which sell catastrophe models can be a long, long way wrong.
David Thomas: At the same time, I think the data we are looking at is inadequate. The market is looking at open and closed claims as they're developed, which means that when a state sets a new platform in terms of a large award, all the open data has to be revisited and re-evaluated. If we can find a way to look at incidents as they develop as they're reported, rather than wait for the claim to develop, we would at least be more current.
Dave Kalainoff: The key is how much data is available, and ultimately the prospect and the ability to mine it. The question is, is the data really available?
Bill Adamson: Well certainly there's a lot of data out there. Its value is sometimes questionable, but if one can get to the data and look at both open and closed claims you've got a better chance of looking at a trend earlier. This creates some predictive value for rating, but also would give the insurance entities an opportunity to look at what is the cause behind some of those trends and see if there could be some additional risk management programs put into place or adherence to standards that would start to eliminate errors.
Dave Karp: But there is a sameness about a lot of the claims and we do have the data. We have analysed the causes of a lot of claims and there's a subjective factor, which increases the severity, and it is clear that the public is becoming more educated by the media about claims that occur so that if you give the wrong medication to a patient and kill him, you get a certain level of jury award. But you do it three or four times and the juries are going to increase the severity of that award. So we really have to take a look at what we have already experienced, look at why these things occurred and see if there are ways that we can prevent future problems from occurring. It is true that medicine is very complex and tomorrow there may be a claim involving some issue we never even thought of, but the reality is that many claims involve issues that we are aware of and have been aware of. We need to do something about that.
Ronn Mullins: How can insurers, reinsurers, hospitals or the medical community work to prevent claims in the first place?
Dave Karp: There is one model that has worked most effectively. In 1986, anaesthesiologists got tired of being sued, they got tired of paying high premiums. They looked at the causes of their claims and as a specialty they established standards of practice that would wipe out some of the deficiencies in their systems. They had bad monitoring, they had bad documentation, they had bad pre-op and post-op evaluations. They changed all of that in 1986 and today anaesthesiologists are no longer the number one target. This approach is what's needed in every specialty; they each need to take a look at the issues that they can deal with, the systemic problems that exist, and correct them. Those of us who've been involved in risk management and loss prevention have talked about this for years. We have ample data, we presented it, but until the leadership of the specialties say they've had enough and need to address these problems, I don't think we'll see much of a change. We need to learn from our mistakes.
DaDavid Shipley: Can I ask whether there are other specialties where the data would suggest there are solutions as clear cut as the anaesthesiologists? It seems there may be more complexity, and that was a relatively simple set of guidelines that by adhering to them, they fixed their claims.
Dave Karp: Well, there are at least two that come to mind. One is obstetrics and gynaecology, which have had published standards of practice for many years. They haven't been followed very well and in the 1990s we saw an increase in the number of birth injury cases, and that's because the plaintiffs' attorneys read those standards and were using them against physicians. Also in the 1990s we saw more hospitals follow the standards by preserving foetal monitor strips, requiring physicians to be available to do C-sections within the prescribed window of opportunity of 30 minutes as prescribed in the standards, and many other things. It hasn't been as successful as the anaesthesiologists, but it's a start. The plastic surgeons probably 15 years ago realised that their most protective weapon was a good informed consent process and they have the best of any specialty I've seen. You can't have cosmetic surgery without being told every which way about the potential for failure. But for general medicine, one of the biggest problems we have in liability has to do with medication-related claims. There are at least a dozen things that can be done tomorrow that have nothing to do with the competency of practice, but are systemic problems such as, always print prescriptions, always include the condition for which the drug is prescribed on the form itself, and so on.
David Thomas: Sadly, the example that's always cited has been that one anaesthesiology example that everybody accepts as being a successful risk management process. It's hard to find others, when looking at severity, that have had an impact on pricing and on structure.
Ronn Mullins: Why haven't insurance companies or reinsurers played a bigger role in making the constituents they insure more attentive to the fact that they don't want claims?
Ed Trautman: Current underwriting is very actuarial based, which is looking in the rear-view mirror, looking at the numbers, seeing what's happened. But this does not pay attention to the data about the process. They're not looking at part of the underwriting and saying, "We will give you credit if you have certain things in place." If they were to do that, then things would probably fall into place pretty quickly. Instead, they're still looking at the numbers, saying, "You had three bad claims in the last four years, so your rates are this. I don't care that you turned over your staff completely, fired these people, did the other," and that may be one of the shifts that needs to happen. There are some glimmers of that coming out of the insurers and the reinsurers.
David Thomas: I also think that the point about whether the data is available is so important, because if you can provide evidence to a group of doctors about the impact of change at a detailed clinical level, they're more likely to create that change. I don't think there's an unwillingness on behalf of the insurers, particularly the doctor mutuals. I think they've worked extremely hard. There are impediments to progress and it is a difficult process, but if you look at the work they've put in over the years, they've created massive change in patient safety, and had a tremendous impact on that community.
Ronn Mullins: With lines in crisis, capital tends to move into the area to replace what is lost because, after all, there is some money to be made if you know how to underwrite it correctly and have adequate backing. But there doesn't seem to be a great movement of capital into this area. Does that portend a bad future for the whole industry or will it eventually come back in the capital?
DaDavid Shipley: It is very easy to set up and become a catastrophe reinsurer. I'm not saying you'll optimise your result, but all you need to do to get capital to support you is show that there's been a major earthquake or windstorm, that the rates have gone up, that you bought the state-of- the-art model, that you've hired a couple of underwriters and you're in business. To write medical professional liability, you have a whole load more requirements for infrastructure, for risk management, for detailed underwriting and policy servicing. It's a hugely complex and difficult process to run one of those businesses. Quite sensibly, capital providers don't particularly see that as being as exciting an opportunity as going in and writing catastrophe reinsurance business from a virtually zero cost base. The more complicated it is to actually be in the business, the longer time it takes for capital to flow into that class. The other thing is sheer uncertainty of the severity and we don't know whether the rating changes that have taken place over the last two or three years have been adequate to generate the profit. We can't demonstrate that to capital.
Dave Kalainoff: I agree, but I would also add that it's hard to quantify how much actually has moved into medical malpractice. There certainly has been capital that was formed post-9/11 such as Arch and Endurance, and some of the older capital, such as AIG, has come in in a much larger way. I would also add that new capital did not immediately form to write the physicians and surgeons business because there was a bit of a lag on the results in the sector, but we are seeing new mutual companies forming to write physicians and surgeons business. We have not seen commercial capital compete against the mutual business.
David Thomas: If you look at the commercial capital that's come in, it's generally the large institutional-type risks where it can actually operate on a subscription basis. In that regard it can come in and out when it wants to without needing the infrastructure. It would be very hard to compete with organisations that are using their insurance to help them engineer risk, peer review of underwriting and using doctors to peer review claims. You have to build a localised or regional infrastructure that takes a long time to construct and a long time to dismantle, and capital doesn't want to behave in that manner. It wants to come and write hardened property catastrophe rates and then take a view down the road. The doctor mutuals and some of the smaller hospital writers have done a spectacular job in the engineering of the business and they've adopted a predominant position because of that.
Ronn Mullins: What is the medical community doing about medical malpractice insurance coverage?
DaDavid Shipley: In several states, physicians are buying much lower limits. They're responding to increased base rates, increased excess and increased limit factors by taking their limits down from $5m to $2m, or $2m to $1m, or in Florida from $1m to $200,000, and it will be interesting to see what effect the reduction limits has on plaintiff/attorney behaviour. I expect that we will see more creative uses of strategies to bring additional physicians and hospitals into a case. I would also expect that we'll see more allegations of bad faith coming through. The alternative quite often is to move to lower severity states or to alter the practice altogether.
Bill Adamson: There are now a lot of captives, or other alternative vehicles, being formed. Smaller physician practices are forming captives, and there's a whole industry out there to help them do that. This will provide primary cover, and then they'll go into the excess market beyond that. The other thing we've seen is that physician groups are looking at binding arbitration or similar as patients join the health plan. It's just juryless and hopefully more rational, but not entirely so.
Dave Karp: Arbitration is wonderful in that it takes the case out of the courtroom. Doctors are not freaked out by having to go into court. It's a much more private kind of adjudication, but if we're looking at the bottom line, we don't know that it's any better.
Ed Trautman: Well, indeed, while arbitration cuts some of the losses in terms of individual case payouts, according to those who have released their data, the plaintiffs win 51% of arbitration cases. They do not win anything close to that in litigation. We're closing about 30% to 35% of cases with indemnity payments and when we go to trial we win about 85% to 90% of those. So it's a trade-off and we don't have all the data. We don't know how much arbitration actually costs when it's all laid out on the table.
Dave Kalainoff: The other thing that the physician community has done to handle a lack of availability is that where they can, they're moving off their specialties and back to family practice where the price of the product is much less in today's environment.
David Thomas: A huge number of the physicians, however, are starting new captives and I know the hospital groups are starting new captives. The difficulty is going to be what sustained strategy and business plan they have; at the moment they're responding to a crisis. They're generating their own capital and they're out there looking to get protection for severity. That plan is fine as long as they've got a long-range plan to build capital and grow appropriately, and have the infrastructure to run the business because claims management and risk management, underwriting costs and distribution are key to the success of all of those ventures, be they large or small.
DaDavid Shipley: We've seen something of a difference in motivation between different captives and new start-ups that have been formed. Those that have been formed in response to affordability issues have tended to want to price below either the local physician mutual carrier or the commercial market. One would expect that with, at best, the same risk management and claims handling capabilities and likely less resources and less experience to bring to bear on those issues, a significant number of those ventures will fail where they have been formed in response to affordability crises.
Ronn Mullins: As a reinsurer, what can you do to help or compel the insurance company to be more observant of their policyholders as far as claims go?
Bill Adamson: I think that it's difficult for a reinsurer to put pressure on insurance companies to continue involvement in claims. The decision for reinsurers is more to support or not to support as opposed to try to dig deeply into the operational side of insurance companies and make demands. Ultimately you'll reach a decision whether to support them or not, and there's a point where you'll suggest things, but I think it's pretty difficult to demand a massive change of their operational structure.
DaDavid Shipley: I'd agree with that. There have been reinsurers that have sought in the past to be dictatorial to the primary companies as to how to run their business, I really don't think that works. If you're the reinsurer and you've gone in with a list of demands and the management doesn't believe in them, it's going to be resentful. It's not going to implement what you think is the right approach. The one area where I think we will be tempted to, if not intervene, but make suggestions, is if we can show an insured their pricing doesn't leave them room to pay for a proper reinsurance program. I think we have an obligation to make that clear to them. Unfortunately, from the doctor's point of view that ends up with them paying more.
David Thomas: But what's interesting is that there is a process of natural selection to take place in terms of the type of support that reinsurers lend. There isn't an availability crisis in the reinsurance market and there are probably two levels of reinsurance support. There are those who are very knowledgeable and have a good history and background in this field, and there are those who are perhaps a little more optimistic, but less knowledgeable. The one thing I would recommend is to ask, because the market does have huge depths of experience.
Bill Adamson: There's another element about the mutuals, which is, if it's really the doctor's money at stake there are some things that need to be done to protect that investment. Reinsurers might be able to create the right incentives through profit commission, encouraging the insured to invest in the risk management programs. But you can't do that without data, otherwise you're going to be in trouble.
Dave Karp: I like the idea that reinsurers, particularly, would not compel the primary carriers to do anything, but rather look toward ways that they could collaborate and use their influence to convince the leadership of medicine within the specialties that there are problems that can be addressed and can be resolved. A lot of doctors I've talked to over the years don't seem to realise that only 2% to 5% of all of the claims account for almost 70% of the dollars - we're looking at a small number of cases that cost most of the money. I think we need the influence of the reinsurers and the primary carriers to go to the leadership of medicine and say, this is a common problem. How can we work together and what can we do to resolve the problem? Captives have done it in a way. What we don't have right now is enough of an incentive to do it and I think it needs to be a three-part program. We need to have the reinsurers, the primary carriers and the leadership of medicine looking at the problems and coming up with the solutions.
David Thomas: Actually, I'd like to ask a question of the reinsurers; what are your views on reinsurers' direct involvement at that type of level?
DaDavid Shipley: I've always tended to try and reinsure those companies who were better managed, were more proactive in risk management and claims handling. Then, if I felt that a client was second tier on that, then I'd probably only get involved on a limited basis, perhaps higher excess and probably at more punitive rates. It really is very difficult for us to do anything more than have a dialogue and bounce ideas around and be a source of collated information.
David Thomas: It's a commercial, opportunistic marketplace and there is a limit as to what levels of input and advice and control the market can offer.
Dave Kalainoff: I think reinsurers are certainly more than willing to give guidance about exposures that may be problematic, and they'll certainly give guidance. I think that's the role that reinsurers certainly can offer and help improve the results and ultimately help their program, and perhaps the reinsurers may benefit from it as well.
David Thomas: Data mining could be very effective because, if there was more information about clinical procedures and incidents, that would generate a more detailed debate and more support for the customers with problems. The market would also be able to link support on severity issues. It would be more general guidance as to experience and knowledge of what works and what doesn't in the field, but it's severity where the market can really try and assist and ultimately address through market forces, namely pricing. Probably a broader base of information is available at reinsurer level on severity than anywhere else. There is something we can do in that regard if we could gather it together in a meaningful way.
Ronn Mullins: Why can't we gather the information? I find it difficult to believe that there isn't some way of making the medical community respond by reporting these claims or mistakes, or whatever.
Bill Adamson: Up until a couple of years ago it wasn't hot on people's lists to track these things. We've noticed that in looking at different organisations and looking at the claims experience, the quality of the records generally has been very, very poor up until 18 or 24 months ago when the crisis was hitting big time and we got more in the limelight. There are organisations which have captured more information.
Ronn Mullins: Who pushed the need for more information?
Bill Adamson: I believe what happened is that the pricing went way up. The general cost of risk is 1% or 2% of operating budget and when another 1% or 2% ends up going to reinsurers as opposed to the operating margin, then the CEOs have become very interested. The boards of directors of some of the institutions have come into play saying, "What's going on here and what are we doing about loss prevention?" and the answer is a blank stare, and that rolls back to, where's the information? There's a flurry of activity that is going in that direction.
Dave Karp: I think there is a tremendous amount of data already collected. The PIAA has been collecting claims data since 1986. They've published reports indicating what the leading allegations are in the various specialties. They have done particular studies on breast cancer, colon cancer, radiology, communication issues. This data is available. Every company that I've talked with has analysed its own claims and every loss prevention person can tell you the leading allegations, and in many instances they can tell you what some of the contributing factors are. There have been numerous studies published in the Journal of the American Medical Association (JAMA) that relate to the communication problems that exist between the specialties, between the physicians and the nurses in the hospitals and so forth. There is no end to data, and one of the most interesting things about the PIAA special studies is that they found that far from expecting too much of physicians, in many of the cases that were paid, the doctors were not doing the ordinary things. They were not documenting the things that needed to be documented, they were not communicating with each other - in other words, they were not doing things that are easily correctable. These were not indictments of the competency of physicians, they were simply saying there are systems problems that have been identified.
Ronn Mullins: Why isn't the insurance industry using this data?
Dave Karp: Oh, they are. Every insurance company I know of, especially the doctor-owned companies. We're out there day and night doing seminars, giving roundtables, writing articles. It's out there, it's just the matter of how do we get people to embrace it. That seems to be the conundrum today.
Bill Adamson: Do you think now with the squeeze on physicians, there might be greater interest in leadership of the physician practices to start to adopt some better risk management techniques, change some processes, follow standards that will reduce errors?
Dave Karp: Well, you would think so, but I will bet you that the collective response to the problem will be for more tort reform, more controls on damages, all of which is good. I'm in favour of caps, I'm in favour of reasonable awards and so forth, but that is not the only solution. That's only a piece of it. We still have to look at preventing the claims from being filed in the first place and that's going to take some leadership.
DaDavid Shipley: Do you have any suggestions as to who is the audience? What I'm hearing you say is you need leadership from within the medical community and it's on a specialty-by-specialty basis. Can the malpractice carriers get to the leadership of those specialty academies and persuade them that the only way that they can improve their members' experience of buying malpractice insurance is to try and change?
Dave Karp: I don't want to sound cynical, but I think that when the problem exacerbates, the troops circle the wagons and say, "How can we go to Congress and get more tort reform?" We seem to have the view that that's the only solution. I think that we need to have an open dialogue about what else will work. There's only so much tort reform that the legislatures are going to give us. There are only so many caps that they can put on awards and we're going to see a point at which the attorneys are finding much more creative ways of getting around those caps. They're including new allegations of elder abuse or bad faith or intentional infliction of emotional distress and so on, so that they're keeping up with us on that. That's not the solution.
Ed Trautman: There are a few physician mutuals that do give a credit for a certain number of hours of risk management classroom, et cetera, and it would appear in those states that it is somewhat effective. It's a start, where they're getting credit on today's budget.
Dave Karp: With regard to incentives, I've always resisted the idea of giving an incentive upfront. The incentive that's there is simple; don't have the claims and we'll lower the premiums. There is one US company that has a kind of reverse incentive: if you don't do these things, we're going to charge you more. We've done studies in the companies I've worked for, but we only get 40 or 50 doctors showing up at our seminars. I've asked them why, and they all write back and they say, "Well, you don't give us an incentive. Why don't you give us an incentive to come?" and my answer is, if we give you an incentive to come, it doesn't guarantee that you're going to do anything. What guarantees that you've done something is that you don't have the claims anymore.
David Thomas: There is another incentive, which is that losses won't be covered unless you actually follow the procedure as outlined. That has been the most effective incentive and it works when it's built into the policy. But, for understandable reasons, there are varied views on whether or not that approach can be deployed realistically.
Dave Kalainoff: If you can ever make those changes it is in a hard market where you can re-underwrite the book and, with the approval of the Departments of Insurance, exclude procedures. So, if you're going to make any correction in underwriting, today's the time to do it.
David Thomas: That would certainly assist in supporting a risk management program, more than any other incentive.
DaDavid Shipley: Is it possible for a physician insurer to take its data along to the state leadership of the specialty groups and say to that leadership, "Here is the claims data for your specialty"? And pose the question, "What are you going to do about it?" First of all, is that happening now and secondly, if it did happen, do you think that would make a difference?
Dave Karp: I don't think it's happening now. I think it would make a tremendous difference. About three or four years ago we identified wrong site surgery as one of the problems that we cannot defend against when we get sued and one organisation, the American Association of Orthopedic Surgeons, started a 'sign your site' program in which they encouraged physicians to mark the site. The Joint Commission has now made it a standard that you must mark your site, but puzzlingly, that standard was passed in January 2003 but doesn't go into effect until January 2004. My question is, why doesn't the specialty say, "It is the standard of care to mark the site, period"? Why can't we do it today? I mentioned earlier about medications. If it were the standard, as it is the law in at least four or five states right now, that you must print a prescription, we would cut out a huge number of medication error claims. Why can't that be done tomorrow? Why can't we convince the specialties to say to all of their members this is the standard, this is what you must do?
Ronn Mullins: Is there a problem in the UK and Europe with medical malpractice as we have it in the US?
David Shipley: I write no UK medical malpractice at all, even though it's my home country. All of the observations that have been made about risk management and claims management can be made doubly so in the UK. The claims take an extraordinarily long time to come to a resolution and, if you look at the uncertainty that we've been talking about, both in terms of profitability or otherwise, and in predicting severity, all are exacerbated by the length of time it takes to close a claim. The quicker you can close claims either by settlement or getting them through the court process, the less uncertainty there is as to whether your prices are adequate and whether your risk management is working. In the UK, those time lines are incredibly long so you can't have any clue whether you've got the right price or not.
Ed Trautman: That's an interesting point regarding the length of time, because that varies between the states. In New York, you can be eight years on average with the cases and in other states it can be as low as two years. It's interesting to note that the longer lengths of time are in those states where you have the biggest problems.
Dave Karp: Which is a good argument for going back to arbitration/mediation. There are a lot of cases that are clogging the court systems that could be resolved very quickly. They're merely matters of how much to pay or they don't involve complex issues. We don't have the mechanism yet to fast-track a lot of these cases and, if the truth be known, a lot of the delay in litigation has to do with the attorneys who have so many cases that they can't really handle them.
Bill Adamson: I think in some cases, in some states, the target is three years to trial. Tort reform is something where the government can come in and say, you've got to try this, come on. Stop dragging it out for nine or ten years.
Ronn Mullins: On the subject of tort reform, the Medical Injury Compensation Reform Act (MICRA program) instituted in California has been touted as the way to go. They put a cap of $250,000 on non-economic damages alongside several other reforms that have limited access to the courts for these claims, and the result has been a lower increase in premiums compared to the rest of the country. Do you think that a general federal tort reform procedure is a way to increase availability of medical malpractice insurance?
David Thomas: It has to be a benefit to the overall resolution of the crisis because the ability to make severity more predictable enables the crisis to be diluted and allows the companies and the constituencies to focus on other issues. Whilst you're in crisis, and you're trying to catch up and deal with the problems of replenishing your balance sheet, it's very hard to spend money on other critically important issues to do with patient safety, such as loss prevention and risk management. I think it's part of the resolution of the problem and I guess would be preferred by everybody in the marketplace. But it's interesting - we were talking to some folks in a state that has had similar tort reform for a long time. They've raised their rates in the 30%-40% range last year and they're going to have to do it again in the future because, although their severity is somewhat capped, it's still increasing at a rate that is proving very hard for them to predict and it is very hard for them to catch up. That's solely down to the aggressive and creative nature of the plaintiffs' bar.
Dave Karp: One of the reasons that state compensation funds have not worked, and one of the reasons I maintain that the kind of tort reform that is being talked about by the President and by Congress and by many states will not solve the problem, is that it's an 'after the fact' kind of thing. We're looking at how to pay for the losses that occur. How do we cap the damages after someone has been found guilty of malpractice? That does nothing to prevent the number of cases from occurring. Pennsylvania passed a very interesting package of tort reforms recently. I don't know if it's been challenged or if it's been implemented, but they require a certificate of merit of attorneys before a case can be filed. The attorney has to do some homework, has to have an expert witness willing to say that there is a reasonable basis for the case. Experts have to be credible. They have to have some qualifications for testifying, and there are other reforms as well.
Dave Kalainoff: One of the other components that MICRA does not address is economic damages; it's a non-economic cap, not an economic cap, so the severity is continuing even with that cap. Stopping a runaway jury verdict is really what the intent of the cap is, namely where a huge award is granted by the jury of several million dollars that is not economically calculated. The economic side, however continues to accelerate and I don't see any real change in the severity potential along that line. It does just stop the runaway scenario from happening.
David Thomas: The other issue is we're getting a lot more multi-defendant losses. That's another way the plaintiffs bar is getting around the caps - they just bring more defendants into the claim and that's a real problem for the reinsurance market.
Dave Karp: It's also ironic that on the one hand we don't want the federal government to tell the states what to do, but we seem to want them to get involved in tort reform. I think this should be left to the states to do and many states have a tort reform package that reflects modern times. The $250,000 cap has been attacked as never having been increased for inflation or anything else and as juries become more aware - and, by the way, many juries aren't aware of the cap even in California - that there is a limitation on damages for pain and suffering, I wouldn't be surprised to see them raise the economic losses just to make up for it.
Dave Kalainoff: I think the states ultimately should have the jurisdiction to pass the appropriate laws. Texas has passed a law that has a fair amount of limitations and one of them is the non-economic cap of $250,000. It certainly does not stop multiple doctors from being brought into any action, but it does prevent multiple family members trying to spread out across a particular lawsuit because it is limited at $250,000 no matter how many family members are bringing the action.
David Shipley: I'd imagine there are clear dangers in an attempt to mandate the federal solution. It must be the case that in certain jurisdictions where the state supreme courts are opposed to federal legislation, if it was actually enacted, I would expect to see courts all the way up through the system trying their best to uphold awards that certainly conflict with the spirit, if not the letter, of that legislation. So that could be a very dangerous process.
Dave Karp: I think we need the tort reforms, but I really wish we would be asking for other things that we know are equally valuable like the certificate of merit law, like protection for physicians who do peer review. One of the big complaints that doctors have is that they can't police themselves effectively because they're worried about being sued by those doctors whose privileges they limit or take away. Why not have legislation that grants absolute immunity from liability or from being sued for a physician to do good faith peer review? Why not have credentialing of experts? Why don't we have a tort reform that says, "If you want to be an expert, you have to be a doctor who practices, and you have the same qualifications as the defendant"? I would love to see the medical establishment push for those kinds of reforms.
Ronn Mullins: How does the reinsurance market view medical malpractice as a class today and how do you think they'll look at in the future?
David Thomas: First of all, perhaps from a broker's perspective, the marketplace today is very exciting. It gives specialty brokers an opportunity to differentiate. In the 1990s it became more of a commodity market. Everybody appeared to be able to underwrite it and everybody appeared to be able to market to reinsurers, and today it requires a lot more expertise and understanding and ability to robustly communicate. There's a very healthy market out there. There's a lot of longstanding expertise in the reinsurance marketplace. It's a highly specialised field, which means that even with capital you're going to be cautious about entering the field and I think it's becoming more specialised. I think there will be more data. So I think there's a bright future, but the next few years are going to prove complex and tough in terms of primary carriers and reinsurers developing confidence in the underwriting result.
Dave Kalainoff: I think if you look at the general reinsurance market, some view it as an opportunity. There are fewer players. Ultimately there's less supply of capital in the medical liability area. One could argue that less supply means a more opportunistic market and a potential to get the deals, the reinsurance structures and the pricing correct. I think others view it as too unpredictable, too volatile. They probably will not enter it for a number of years and, if you look at the broadened liability market and you read the press today, a lot of people think that it's continuing to be a hardening market in medical liability along with D&O, workers comp and some other areas.
David Shipley: We've substantially increased our book of medical malpractice reinsurance. Over the last couple of years it has grown faster than our book as a whole, even though property rates increased very dramatically between 2000 and 2002. Having said that, because of all the uncertainties and the lack of hard evidence that we're making the margins that we think we've got into our pricing, it remains a dangerous book. Because it's a dangerous book, I think a lot of other players would have an internal cap on the proportion of their overall business that they'd be prepared to devote to this class. It does have the ability to take the business out, as many people have seen, and therefore, providing you keep it within bounds (medical malpractice is in the region of 12% to 14% of our book, which is an historic high for the business), we can stand that risk. We just try and ensure that we balance our portfolio between the different lines so as to protect our capital from extremes of loss and to optimise our overall result. That is our job as reinsurers and you have to integrate that with the knowledge of what's happening at street level in the classes of business you write. Too often there's a severability between the capital allocation process and risk analysis at the sharp end. We try to bring those together.
Ed Trautman: My question for the reinsurers is what kind of incentives would you be willing to offer to shift the process to get that uncertainty, as you described it, lessened? What would you be willing to offer to the insureds, to the primary layers, to the healthcare institutions to better manage the uncertainty of your book?
David Shipley: We have quite a lot of business on experience rated or swing plan structures. Here's a mechanism that if you bring future claims costs down then you pay less money. And the other thing which also helps us manage the volatility is the multi-year deal. We can spread losses across three years simply with both sides able to cancel at any anniversary date because things can change faster either for us or for our clients. A lock-in, with no escape clause is dangerous for both parties, but if you can spread that volatility between years then you're reducing the effect of amount of risk transfer, and we can reduce the margins that we demand over expected losses.
Ronn Mullins: What new exposures or problems are emerging that insurers and reinsurers need to consider?
David Shipley: I believe that one of the great challenges to clinicians will be to keep pace with developments in genetics, as gene mapping produces a great deal of information about which patients respond to which drug or other treatments, favourably or unfavourably - side effects will be a particular menace - generating the potential for rapid changes in the public perception of acceptable standards of care. On a more mundane level, the access crisis is leading to resources being overstretched in many areas - the AMA has a list of 19 states that it views as being in crisis - with potential difficulties for obstetrics and emergency room treatment in particular.
Dave Karp: While it is difficult to predict the future for malpractice liability, insurers and reinsurers must continuously evaluate the risks of new technologies and practices within the healthcare system. The newer and more exotic the procedure, the higher the potential liability risks. Some imaging services offer full body scans, mammography and other screening studies which they claim or strongly imply in their advertising are 'guaranteed' to find cancers that other tests miss. Such promises are unwise and are likely to lead to litigation alleging misdiagnosis. Insurers should require that all surgeries be done in accredited facilities. The growing popularity of so-called 'extreme makeover' surgeries should concern insurers. Patients are undergoing multiple, elective cosmetic procedures, often under anaesthesia for prolonged periods of time. Liposuction, blepharoplasty, breast augmentation, dental surgery, eye surgery, and hair transplants are among the procedures commonly done in tandem. Dissatisfaction with this radical approach to cosmetic surgery could well become a liability disaster. Surgeries performed in unregulated offices and clinics are an increased liability risk.
David Thomas: Another problem we are facing is the increase in the number of bad faith suits filed by policyholders when claims that are not settled result in an economic loss for the policyholder.
Bill Adamson: An area of new exposure concern I'd like to point out is introduction of the new HIPAA laws which increase the burden on hospitals and health care professionals to safeguard the privacy of patient information. No one knows if these stricter protections will result in litigation alleging breach of privacy, because it is difficult to determine how familiar and compliant physicians and hospitals are with the HIPAA rules. Everyone has seen them, but many facilities and individual practitioners don't have the time, money or personnel to take all of the precautions mandated.
Dave Karp: In California, insurers report an increase in the number of elder abuse allegations. One reason for this is that elder abuse claims are not subject to all of the limitations imposed by MICRA. Creative plaintiff attorneys attempt to claim that injuries involving senior citizens not only resulted from medical negligence, but from elder abuse as well. Such allegations increase defence costs and settlements.
David Thomas: Physicians and hospital continue to have to contend with restrictions imposed by managed care organisations (MCOs). Directly and indirectly, MCOs can influence the choice of diagnostic tests, surgeries, medications, length of stay, and referrals to other physicians. If an MCO's recommendation forces a physician to practice medicine contrary to his or her training and experience and a patient is injured, the resulting claim may be difficult to defend.
Bill Adamson: Western - allopathic - medicine still predominates in the US, but many millions of patients are turning to so-called complementary and alternative medicine, which makes use of herbal remedies, over-the-counter preparations and modalities of treatment that are not subject to control, inspection or approval by any public or governmental agency. Studies in medical journals have already reported on complications that occur when some prescription drugs or anaesthetic agents are combined with some herbal remedies. Studies show that most patients who use forms of alternative medicine do not tell their physician (and an overwhelming majority of physicians do not ask their patients), and we do not yet know the extent of the dangers of this merging of traditional western allopathic medicine with complementary and alternative medicine.
Dave Karp: Some courts are expanding the hospital's responsibility for the negligent actions of physicians now designated as 'agents' of the hospital. This includes physicians who act as hospitalists and, in some instances, those physicians who provide exclusive services to the hospital, such as radiologists and pathologists. The degree to which agency liability is extended varies among the states.
Ed Trautman: The insurance industry is particularly good at evaluating past losses to establish underwriting standard, but not as good at considering the impact of advances in procedures, evolving community standards, or changing practice patterns on potential liabilities. Consumer-driven care that brings in revenue is an area to watch - gastric bypass surgery is becoming popular, for example, but standards and possible liabilities aren't yet known. Although technology allows more complex procedures to be performed in offices, protocols, training and backup may not be up to the same standards as in hospitals. In a recent study outpatient claims exceeded inpatient claims in both frequency and severity. Even so, teamwork and communication continue to be the leading risk management issues. With more complex care such as high-risk pregnancies which need clinical teams and intensive and emergency care, there is a growing potential for avoidable error and liability. This is exacerbated by the emphasis on productivity, which puts a strain on the supervision of resident and junior staff.
Ronn Mullins: Gentleman, thank you very much.