According to a recent Conning Research & Consulting report, the medical malpractice arena and its persistent vagaries "touch a large part of society because of its impact on the healthcare provider community, which directly touches society and represents nearly 15% of the US economy. It is also a lightning rod for some of the most contentious aspects of our political and legal systems."
Yet, despite all this volatility, that recent report - "Medical Malpractice: New Opportunities Emerging? Or the Eye of the Hurricane" - indicates there is good news for medical malpractice insurers on the horizon, at least in the short term. Authored by Stephan Christiansen, director of research at Conning, the report says that, despite the dismal performance of the medical malpractice line over the last few years, the line will again be profitable in 2006, although there are still pockets where problems still exist.
Says the report, "The medical malpractice line of business has demonstrated a history of moving from periods of high profitability to periods of crisis and severe losses. In recent years, the line has been in the loss and crisis part of the cycle, but there is reason to believe that it may be preparing to enter one of profitability again. At a time when the property & casualty industry in general is facing the prospects of a softening cycle of rate competition and stagnant or even negative growth, the medical malpractice line may represent an area of opportunity for some."
Whilst these comments were made before Hurricane Katrina reversed the likelihood of a softening P&C market there are optimistic findings from the standpoint of the insurance industry. For the healthcare community, it is possible that opportunities are also developing, but the potential for continuation of the crisis - or even further deterioration - is also significant. For the insurance industry, sustained improvement may not be possible without a solution to the problem within the healthcare community as well, says Christiansen.
The danger of medical errors
The report has identified an area of potential crisis in medical malpractice that may not yet have emerged. "There may be a large untapped pool of medical errors - avoidable incidents with the potential for becoming claims. The existence of a large volume of medical errors leading to death, disability and serious injury is supported by a number of studies and is widely accepted. Estimates are that only five percent or less of avoidable medical errors become claims." The report further suggests that the trial bar might seek to capitalise on this as yet untapped resource for further lawsuits and the revelation of these avoidable errors might lead to political pressures to change the healthcare system.
Nevertheless, hopeful signs are emerging. "A number of successful reforms in states, many of them AMA (American Medical Association) crisis states, may be changing the environment for successfully bringing claims," says Christiansen. "While this may provide only a short-term relief, it may form the basis for solving some of the longer-term issues. Some improvements in the tort system are reducing the economic incentives for the trial bar to invest in potential claims and increasing hurdles to bringing claims to suit." He explains that many of these, limiting non-economic damages, collateral source rules, periodic payments and limitations on attorney compensation, for example, are modelled after the characteristics of California's Medical Injury Compensation Reform Act (MICRA) legislation of the 1970s. Other reforms involve improving the technical competency of the court system, increasing standards of expert testimony, and providing safe-haven protection to providers who adhere to accepted practice standards. According to the report, severity is still a problem, but it might be coming under control, as might medical inflation.
But these positive notes are only for the short-term. To sustain them, the report maintains there needs to be judicial reform of the system of trial management, better flow of information from government agencies such as Medicare and Medicaid, and state and federal legislatures to develop model laws and regulations - including safe-harbour laws to encourage collection and dissemination of information on medical error. Finally, the insurance and healthcare industries can continue to develop and apply funding mechanisms that include incentives to reduce avoidable adverse outcomes, cost-justify clinical support technology, and support shared best practice protocols, while still providing financial protection to the providers of healthcare.
A triple segment approach
What makes the Conning report particularly interesting is that, in its analysis, it breaks down the malpractice arena into three different market segments. There are the "multiline" insurers that write medical malpractice as well as other lines of insurance. Then there are the specialty insurers - formed by physicians and hospitals during the last "crisis" period - that write predominantly medical malpractice. Finally, there are the alternative market mechanisms such as risk retention groups, onshore and offshore captives and levels of self-insurance.
According to the report, "Statistical information is reasonably available for the first two segments, but very difficult to develop for the third segment". The study adds that the multiline segment is performing with very similar results to the specialty segment, including the Medical Liability Mutual Insurance Company (MLMIC), a large specialty insurer in New York. When MLMIC results are removed, the specialty segment performs better, although it still shows losses in 2003. Of greater concern is the capital base. Multi-line insurers on average write about 2.8% of their business in medical malpractice. Recent premium growth has drawn additional capital allocation, but overall this is tiny compared with the sector as a whole. The specialty sector has shown slight reductions in capital in recent years, but significant increases in leverage against loss reserves and premium, and the segment, with some exceptions, is more constrained in accessing additional capital.
A review of the results of the top 15 specialty insurers points to a 15% gain in surplus from underwriting and investment performance in 2004. But for now, says the study, rates finally appear to have caught up with costs. "Anecdotal information from insurers suggests a decline in frequency may be emerging, although severity continues to be troubling. As rate increases have responded to these losses, an increasing amount of medical malpractice liability coverage has moved to alternative markets, including self-insurance, risk retention groups and captives."
In total, the alternative market may have reached two-thirds of premium equivalents in 2003 and 2004. Thus, the potential total premium in medical malpractice, including the alternative markets, seems to have grown at a steeper rate than might be the case if looking at insurance industry data alone. However, the current mechanisms being used to absorb or finance the cost of medical liability are being strained in terms of making available sufficient capital to support pending claims and volatility.
So, while a period of growth may well be on the cards for the medical malpractice arena as a whole, the Conning report finds distinct disparities between its three different segments with alternative market group currently leading the way.
Phil Zinkewicz is a freelance journalist.
Performance of medical malpractice in the US according to sector
Between capital and surplus, on one hand, and loss and loss expense reserves, on the other, the multiline segment of the industry may be allocating about $11bn in reserves to this segment. However, the multiline insurance industry has been decreasing its commitment and the allocation of its capital to the line, due to relatively poor performance compared with alternative product lines. With a current commitment of about 3% of capital, the companies writing this line within the multiline insurance industry could withdraw completely, without material impact on its overall revenue base. The total surplus for multiline companies that currently write some medical malpractice premium is over $115bn.
Specialty insurers are limited by their ability to raise capital, and are gradually shrinking in capital resources, down by more than $1bn (20%) over the past four years. Overall capital and loss and loss expense reserves may represent about $25 billion for this segment of the market.
The alternative market group should have about $65bn in surplus and loss and expense reserves. A significant portion of this, perhaps $40bn, would reflect exposure carried by physicians, either directly or through captives. As business continues to shift to the non-reporting market, this build-up of loss reserves and required capital can be expected to grow.