Med Mal Fever: When Doctors Walk Out, Politicians Notice

They’re baaack. High-flying medical malpractice liability claims losses, that is. The availability crisis of the 1970s and the affordability crisis of the 1980s may be nothing compared to the crisis insurers and doctors face this time around.

Almost 8 percent of claims now result in payments of $1 million or more, according to the Physicians Insurers Association of America (PIAA), and medical liability insurers now post a staggering combined ratio of 153.3. In addition, the jury award median in medical liability cases doubled from $500,000 in 1995 to $1 million in 2000, according to Pennsylvania-based Jury Verdict Research (JVR). Even when the sides settle, the median award was $500,000 in 2000.

Since 1998, four companies specializing in medical malpractice—Associated Physicians Insurance Co., PHICO Insurance Co., Physicians Insurance Co. and PIE Mutual Insurance Co.—have become insolvent, and industry giant The St. Paul Cos. pulled out of the market in the 48 states where it had offered coverage.

The American Medical Association has declared a dozen states to be in crisis, including Texas, where Gov. Rick Perry has called medical malpractice reform an “emergency issue.”

States on the march
Washington faces a similar crisis since 1998, as the Washington State Medical Association has noted a 31 percent increase in doctors leaving the state. In 1997, CNA exited the Washington market, leaving about 1,100 physicians seeking coverage, and 1,300 more had to turn elsewhere in late 2001 when the state’s second largest medical liability carrier, Washington Casualty Co., decided to pull out of the physician market.

It’s no wonder—2001 saw seven medical malpractice verdicts or settlements of more than $1 million in Washington, with a total of $44.7 million, and individual awards ranging from $1.2 million up to $16.2 million.

A bill being considered by the Washington legislature also calls for MICRA-style changes, but faces an uphill battle. Not only must two-thirds of both houses approve the bill, but since Washington has already declared award caps unconstitutional, the issue must be put directly before the voters, meaning the earliest hope for relief is 2004.

Nevada, meanwhile, placed caps of $350,000 on malpractice liability and $50,000 on trauma centers and emergency rooms last fall after the University Medical Center in Las Vegas shut down for 10 days when 58 doctors walked off the job.

But the caps came without comprehensive MICRA-style changes and won’t have an immediate effect, said Larry Matheis, executive director of the Nevada State Medical Association (NSMA).

“It’s obviously difficult to link premium reduction to the adoption of statutes,” Matheis said. “The inability of the insurance industry to make that kind of commitment is one reason we weren’t able to get more substantial reforms.”

Trotting out the arguments
Most insurers have increased rates since the Nevada legislation passed, Matheis said, and the phenomenon of rates remaining high and even increasing in spite of caps is one that trial lawyers and their allies have latched on to in their argument that insurance industry greed and mismanagement is the true source of this crisis.

“Caps don’t work,” said Chris Munley, partner in the Scranton, Pa., plaintiffs’ law firm of Munley, Munley & Cartwright. “Insurance companies have said that even with caps they won’t guarantee a rollback.”

For example, a report issued by the West Virginia legislative committee studied the relationship between damage caps and malpractice insurance rates for a full year. The report found that in states such as Nevada and Missouri, where malpractice lawsuit damage caps were recently instituted, such actions yielded no short-term reductions in coverage rates.

American Trial Lawyers of America (ATLA) president Mary Alexander asserted that based on the report’s findings, the insurance industry itself needs reforming. ATLA spokesperson Carlton Carl said such reforms would include “mandatory pre-filing of rates with explanations and permission for consumers—including doctors—to challenge rate settings … and serious limitations on the types of investments that insurance companies can make.”

Carl claimed that much more so than malpractice lawsuits, falling investment incomes are driving up malpractice rates the same way these losses are affecting other lines of insurance.

An Oct. 2002 study by J. Robert Hunter, director of Insurance for the Consumer Federation of America and a former Texas insurance commissioner, is often cited by opponents of caps and purports to show how malpractice premiums track more closely with ups and downs in the industry’s investment fortunes than with claims losses.

The study, “Medical Malpractice Insurance: Stable Losses/Unstable Rates” was reviewed last January by Raghu Ramachandran of the insurance asset management firm Brown Brothers & Co. He pointed out that in 2001 only 9 percent of medical malpractice carriers’ investments were allocated in equities, compared to 16 percent for the property and casualty industry as a whole. Eighty percent of medical malpractice carriers’ investments are in bonds.

But did the industry manage its equity investments poorly? Ramachandran maintains that medical malpractice carriers earned a negative 22.4 percent return in the equity market, while the S&P’s return was negative 22.2 percent. Both did miserably, but Ramachandran asserts that this does not show an industry mismanaging its investments.

Ramachandran goes on to write, “Over the last 27 years, the average paid loss ratio was 47 percent and the minimum paid loss ratio was 16 percent. In 2001, the industry paid loss ratio was nearly 75 percent. In other words, for every dollar that comes in the door, 75 cents is paid out.

“It is clear that it has been extremely difficult—if not impossible—for insurance companies to earn a profit writing medical malpractice insurance. Further, at this rate of expenditure, after the company pays its losses and expenses, there is very little ‘float’ on which they can earn investment income.”

About 60 percent of doctors are covered by physician-owned or controlled insurance companies, according to PIAA President Larry Smarr. This first-hand experience has taught doctors the painful consequences of uncontrolled non-economic damage jury awards, Smarr said.

“Doctors know the truth,” Smarr said. The average claim paid on behalf of practitioners in 2001 was $310,000. And MICRA has had an effect in California, he argued, pointing to data from the National Association of Insurance Commissioners and Medical Liability Monitor, which show that since 1976 medical liability premiums have grown by 505 percent nationally, but by only 167 percent in the Golden State.

Med mal goes to Washington
Some are pinning their hopes on federal legislation, which would pre-empt the 15 states that have ruled caps unconstitutional and provide a one-shot, national solution to emulate California’s success in the last quarter century.

Conventional wisdom in the insurance industry has long been, as Nowak, put it, that “state legislative actions can move quicker than a federal initiative,” but given the wild card many states face in getting their reforms to pass constitutional muster, some say it may be time for the focus to move to the nation’s capital.

President George W. Bush proposed MICRA-style reforms last year, including a $250,000 cap on non-economic damage awards, and a bill co-sponsored by Reps. James Greenwood (R-Pa.) and Christopher Cox (R-Calif.) passed the House last year but died in a Democrat-controlled Senate.

Not only has the Senate changed into more favorable Republican hands, but new Senate Majority Leader Bill Frist is a surgeon, leading some to believe he’s more sympathetic to the problems doctors face in accessing malpractice liability coverage. And President Bush has made the issue a priority, traveling to Pennsylvania to unveil his proposal and mentioning it in his State of the Union address in January.

The House has passed legislation similar to the Cox-Greenwood bill six times since Republicans took control in 1995, but the Senate has never gone along. However, Sens. Orrin Hatch (R-Utah) and Judd Gregg (R-N.H.) began an offensive recently. Hatch chairs the Senate Judiciary Committee and Gregg is chair of the Health, Education, Labor and Pensions Committee and the two will hold joint hearings on the medical liability crisis.

Stewart Eisenhart contributed to this story. To comment, e-mail koreilly@ insurancejournal.com.