The current US medmal crisis is by no means a novel experience.
Ronald Gift Mullins looks at the history of this troubled class, which appears a victim of court awards resulting in spiralling claims costs.
If the vociferous, conflicting, indulgent diagnosis of the medical malpractice insurance crisis, which after periods of remission reappears with renewed vigour and pervasiveness, had been performed on a human being without producing a cure or at least a regime for containing the complaint, a monumental lawsuit for malfeasance would certainly be justified.
The ailment has surfaced in the US off and on since the early 1970s. The pattern begins with a few good years of combined ratios under 100%. Then, slowly, with no clear explanation, claims for medical malpractice begin ratcheting up. Faced with unexpected and unreserved-for claims, a few insurers depart the medical malpractice market. This produces an availability crisis. Then, as more insurers abandon the field, rates begin rising and this compels the medical profession, healthcare providers and insurers to demand corrective action, which usually takes the form of pressuring state legislatures to enact additional tort reforms.
This latest predicament in medical malpractice began about a decade ago. Net written premiums in 1994 for medical malpractice were $4.8bn, according to AM Best, with a combined ratio after dividends of 97.6%. In 1995, premiums were $4.8bn, the combined ratio 99.7%. With an underwriting profit for those two years and adding investment income, the product was highly profitable. Then, in 1996, with a 1.6% increase in premiums, the combined ratio jumped to 106%; in 1997, premiums grew only 0.3%, but the combined ratio had edged upwards to 107.9%. In the years following, premiums rose to about $6.0bn in 2001, but the combined ratio hit 153.3% and early predictions are that in 2002 the combined ratio nudged 165%.
Fat and lean years
The bull market in the mid and late 1990s and higher interest rates helped mask the impending decline of the medical malpractice speciality. The hefty investment income offset the inexorable swelling of jury awards for pain and suffering. Also, these fat years afforded insurers enough confidence to keep rates low, enabling them to enlarge market share and strengthen reserves, hoping these additions would be sufficient to see the company through the lean years that surely would follow. But, since mid-2000, with the stock and bond markets losing their lustre, coupled with very low interest rates, the accumulated reserves from earlier years have now been depleted and insurers - squeezed between ever-mounting claims, lower investment income and state insurance regulators reluctant to grant rate increases - began to abandon the field.
In the fourth quarter of 2001, The St Paul Companies, the largest writer of medical malpractice insurance in the US, announced it was quitting the market and putting its business in run-off. With written premiums of $592m in 2000 and $666m in 2001, underwriting losses were $262m in 2000 with a combined ratio of 142.4%, and $928m in 2001 with a combined ratio of 231.2%. In 2002, the company added $97m to its prior-year reserves for medical malpractice. "In general," the company said in its 2002 10-K report, "the reserve increases...have primarily resulted from claim payments being greater than anticipated due to the recent escalation of large jury awards, which included substantially higher than expected pain and suffering awards."
The St Paul reported that for the full year 2001, the average paid claim was $117,000, including a fourth quarter average of $124,000. In the first quarter of 2002, the figure had fallen to $111,000, but in the second quarter, the average paid claim had risen to $130,000; $126,000 in the third quarter; and $153,000 in the fourth.
The collapse of other malpractice insurance companies followed. Reciprocal of America in Virginia went into receivership along with Doctors Insurance Reciprocal, American National Lawyers Insurance Reciprocal and Reciprocal Alliance, all of Tennessee, which were reinsured by Reciprocal of Virginia. In New Jersey, MIIX Insurance Co was restructured and intensified the availability crisis in that state. In early March 2003, Washington Casualty Co of Bellevue, Wash, was placed into receivership.
Tort reform enacted
Back in the similar availability crisis of the mid-1970s, all US states except West Virginia enacted various kinds of tort reforms. Among the most highly regarded reforms was California's Medical Injury Compensation Reform Act (MICRA) of 1975 (see sidebar). Paramount in MICRA was the placing of a $250,000 limit on non-economic damages for medical negligence claims against healthcare providers. Economic damages, such as lost earnings, medical care and rehabilitation costs, were not limited.
With private insurers increasingly leaving the market in the 1970s, medical groups began forming mutual malpractice insurance companies. The Medical Liability Mutual Insurance Co (MLMIC) was formed under the auspices of the Medical Society of the State of New York in 1975 to fill the void left by the exit of Employers Insurance of Wausau and later the Argonaut, which pulled out despite receiving massive rate increases of 93.5% in July 1974 and an incredible 197% in October 1974. In the more than 25 years since its formation, MLMIC is not only the largest writer of medical professional liability insurance in the state of New York, but also the largest company of its kind in the nation. Other mutuals and state pools now account for about half of medical malpractice insurance premiums in the US.
Edward J Amsler, vice president, MLMIC, New York, observed that the current crisis in medical malpractice is "apparently affordability. In New York State, commercial insurers will not write the line because it is not profitable. There has been an 8% increase in severity from last year, along with a rise in frequency. And since all our policies become due on July 1, it does not bode well for policyholders or insurers."
He stated that MLMIC has the "lowest expense ratio of any professional liability company of our size, yet in the last couple of years we have not been profitable. We haven't paid a dividend." The problem, he said, is that with increased frequency and severity of claims, actuaries say that reserving has to increase in IBNRs. "This affects our surplus and raises costs going forward. We discount our premiums based on future earnings from investments, but if we can't anticipate a fair return in the future, we can't offer as much a discount in the future. Instead of offering a 15% discount on premiums, we may only be able to offer 5%." The mutual does not now reinsure its business.
The increase in severity of malpractice cases has driven them from the $200,000- $300,000 range to $400,000 over the past few years, according to David Kalainoff, senior vice president, Transatlantic Re, New York. He noted that the size of settlements that are decided by juries "is used as a benchmark by plaintiffs to settle similar cases out of court, which tends to push up insurance payouts overall."
As rates began rising in the last crisis in the 1980s, doctors could pass on their higher insurance costs to patients. Now, they are in the vice of healthcare insurers and Medicare, which dictate the fees doctors earn for services rendered. Paying higher premiums for medical malpractice insurance has to come from the doctor's pocket.
This inability to pass on premium increases has brought demands from the medical community that they be lowered or they'll quit. In New Jersey, West Virginia, Pennsylvania and other states, doctors either walked out or marched on their state houses to demonstrate the seriousness of the situation.
Bringing back balance
Some correction, a working solution, a means of pushing the market back into balance has to be found. But who or what was to blame for the predicament? And what corrective actions would be fair to all concerned? 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 sufficient opposing statistics, studies, opinions and verbiage for each group to make its point clearly, authoritatively and selfishly. Most of the conflicting arguments and suggestions for controlling rates for malpractice insurance converge on controlling the ever-increasing severity and frequency of claims.
Information from Jury Verdict Research shows that the average for awards and award ranges have been edging upward for more than the last six years. In 2001, the median medical malpractice jury award was about $1m, unchanged from 2000, up more than 40% over the $700,000 for 1999. However, the largest award at $131m was more than twice the previous year's largest award and the largest in at least six years. About 54% of all medical malpractice awards, based on Jury Verdict Research data, now are over $1m, compared with 43% during the period 1998-1999. These data are based on original awards, and such awards are often reduced on appeal.
In reality, very few claims for medical malpractice ever go to trial. According to closed claims data, 1985-1999, reported by 20 companies that belong to the Physicians Insurers' Association of America, of the 155,671 claims examined, 29.4% were settled in favour of the plaintiff. There were court verdicts in only 6.7% of medical malpractice cases and, of those, 19.1% were decided in favour of the plaintiff. The vast majority, 62.3%, were dismissed, dropped or withdrawn in favour of the defendant.
In his State of the Union address in early 2003, President George W Bush called for legislation that would impose a cap on non-economic losses in malpractice cases nationwide, and referred to how California's MICRA had kept rate increases for malpractice insurance below the national average.
HR 5, which passed the House in March, limits non-economic damage awards in medical malpractice lawsuits to $250,000, restricts attorneys' fees using a sliding scale, imposes time limitations on the filing of such cases and assigns proportional liability for the damage according to responsibility. The measure, however, has run into snags in the Senate as there is concern that the $250,000 cap, which was set almost 30 years ago, is not realistic or fair today.
The Congressional Budget Office in a study released in March said, "the effect of HR 5 would vary substantially across states, depending on the extent to which a state already limits malpractice litigation. There would be almost no effect on malpractice premiums in about one-fifth of the states, while reductions in premiums would be substantially larger than the overall average in about one-third of the states."
The report also projects that the measure's impact on overall health insurance premiums "would be far smaller than the percentage impact on medical malpractice insurance premiums" because malpractice costs "account for a very small fraction of total healthcare spending." The study does not, however, estimate how small the impact would be.
Currently in California
According to the Doctors Company, a major malpractice insurer, prior to MICRA, the cost of malpractice insurance in California was higher than any other market except New York City. "Current California malpractice insurance rates are substantially below those of comparable states without reforms like MICRA," it said in a statement.
Some critics argue that MICRA didn't really hold down rate increases in medical malpractice insurance in California. Harvey Rosenfield, a consumer activist, affirms California's medical malpractice liability premiums actually increased by 190% in the 12 years (1976-1988) following enactment of MICRA. Premiums only decreased after California enacted Proposition 103, a ballot initiative that mandated a 20% rate rollback. Mr Rosenfield was a principal author of Prop 103.
Data supplied by the National Association of Insurance Commissioners show that total malpractice premiums for the US, except for California, grew by 505% since MICRA was enacted. In California, premiums have grown by only 167% during that time period.
The Medical Liability Monitor says that taken as a whole, capped states raised premiums an average of 12.7% in 2001 but states without them saw premiums rise 20.4%.
Mr Kalainoff believes that tort reform that caps non-economic damages will bring down severity of claims and thus medical malpractice rates. He favours a measure similar to MICRA. "It is critical for the lower rates in California today. Considering that Californians are not timid about litigating an issue or cause or situation, I'd say that the lower rates for medmal are evidence that MICRA is working in that state."
Malpractice does not drive malpractice cases observed Mr Amsler of MLMIC. "Of the cases that are brought to trial, only about 2% have to do with severe injuries inflicted by the medical profession. The balance of the cases are brought because of a delay in diagnosis of a life-threatening illness like cancer. It is difficult for a jury to figure out if the cancer had been found earlier, would the patient have lived. Perhaps, the patient came to the doctor too late for anything to be done. Obstetricians pay some of the highest rates for medmal insurance. Are they the worst doctors? No, it is just that the decisions they make sometimes in a difficult delivery results in injury to the baby or mother. Again, it is difficult to demonstrate to a jury that the baby or mother had an inherent deficiency before the delivery. Surgeons also pay a high rate. Are they worse than other medical doctors?
"The problem is that we have a jury system that rewards damages for alleged acts that are not always the fault of the medical profession," Mr Amsler said. "Does this mean this system should remain even though it is costly and in many ways unfair? In the end, society has to decide if it wants to pay for it since the higher costs for insurance are paid by the user, either the health insurer or the consumer by paying higher premiums or the outright costs for medical care."
California's Medical Injury Compensation Reform Act of 1975 (MICRA)
l Limits non-economic damages in a claim against a health care provider for medical negligence to $250,000. No limit on economic damages, such as lost earnings, medical care, and rehabilitation costs.
By Ronald Gift Mullins
Ronald Gift Mullins is an insurance journalist based in New York City.