PLUS’ Medical Malpractice Prognosis: Positive?

Five words summed up the mood at this year’s Professional Liability Underwriting Society’s medical symposium: “The crisis aspect is over.”

Thus spoke Howard Friedman, chief financial officer at medical liability insurer Proassurance Corp., during one of several panel discussions at the meeting last March. As snow flurries descended from gray skies and eventually joined the Chicago river outside the Sheraton Hotel & Towers (why do conference organizers fantasize that Windy City weather will be decent before June?), the picture painted by the experts inside seemed a little bit sunnier.

Tort reforms, an influx of reinsurance capital, alternative-risk markets, and huge rate increases have combined to abate the crisis conditions that have made medical malpractice insurance unaffordable for many specialties and hospital groups across the country.

The situation, however, is akin to the movie “Speed,” when Keanu Reeves and Sandra Bullock steer the bus into an empty airport runway and can safely keep its speed above 50 mph and avoid being blown up by the bomb Dennis Hopper has installed on board. Yes, the situation has stabilized, but if insurers brake too much on rates, the bus could be blown to smithereens.

James Hurley, a consulting actuary for Tillinghast-Towers Perrin, pointed out that since composite ratios for the line began in 1976, medical liability insurance has seen only four years with a combined ratio at or below 100 percent. A.M. Best has predicted a combined ratio of 130 for 2005, which is down from 160 percent in 2001.

Furthermore, a composite of 30 companies that wrote about a quarter of the line’s $12 billion total in 2003 resulted in a more encouraging 110 percent combined ratio.

“Perhaps the combined ratio will be better in 2004,” Hurley said. “The rate increases are still not felt fully in the financial results. They still need to work their way into the data.”

Phil Reishman of Arthur J. Gallagher’s health-care unit said that things have been looking up for carriers and that customers are expecting a break on rates and conditions.

“Most carriers are making money,” Reishman said. “And if you look at large self-insurers, favorable reserve development is leading to earnings gains for the medical malpractice line. They have shifted from being cost centers to profit centers.

“Capacity continues to expand,” he added. “There are new players, greater appetite and more flexibility. They are willing to write higher limits for different specialties.

“For example, we have a reputation for handling different classes like emergency medicine,”Reishman continued. “We’ve gotten more phone calls in the last six to eight months where companies are looking for that business. It’s a different scenario from the last two years where we were begging to place business.”

According to Paul McKeon, vice president of Transatlantic Reinsurance Co., reinsurers have targeted medical malpractice as their next gamble.

“There are no barriers to entry on the reinsurance front,” McKeon said. “On the insurance side, if you’re going to file a product on an admitted basis you have file rates and forms. On the reinsurance side, capital moves very quickly, and a lot of reinsurers are very bullish on this business. Property rates came down, and they started to look for other lines. A lot of people are making very big bets that tort reform is the saving grace.”

The impact of tort reforms in the various states is still unclear, but some insurers are willing to take their chances. After Texas passed California-style medical liability reform, for example, several insurers announced they would be holding or even cutting rates.

“We’re seeing claims drop,” said Kimber Lantry, executive vice president of the Hudson Insurance Group. “Tort reform is starting to work. The mentality is starting to seep into jurors.” Lantry was referring to the phenomenon of jurors reducing awards based not strictly on the case at hand but on the widespread publicity that high awards are leading to high insurance rates and reduced availability of certain specialists, such as obstetricians.

“Our view,” Lantry added, “is that tort reform without caps is like kissing your sister. It may be nice, but it’s not going to get you anywhere. The collateral source rule, capping contingency fees, pre-trial screening, etc., haven’t shown any demonstrable effect on loss costs. Caps on non-economic damages might be worth in reduction to loss costs of 18 to 20 percent.”

However, an upcoming study in the NYU Law Review by Columbia Law School professor Catherine M. Sharkey contends that non-economic damage caps merely shift compensation to economic damages. In an analysis of about 550 jury verdicts from 22 states, Sharkey found that awards vary in size based on the severity of the harm to the victim, not the award structure in a given jurisdiction.

So even as malpractice insurers and doctors push for tort reforms, their very success on a psychological level is undermining the very argument for them. At the same time, the ballyhooed silver bullet–non-economic damage caps–may be harmless to the plaintiffs’ bar vampire.

“It’s a matter of maintaining integrity in pricing and underwriting and not sliding backward,” said Proassurance’s Friedman.

“We may see a regulatory/legislative backlash, now that tort reform has been enacted. Politically you see much more pressure on a number of companies where legislatures are talking about restricting rate increases on levels of surplus. That’s a very dangerous situation when you have legislatively determined levels of surplus that are appropriate,” he added.

As for medical malpractice legal reform at the federal level, the consensus view was that it won’t be possible to get legislation through the U.S. Senate.

Who’ll stop the rate cut?

As for the future, Hurley said he sees business “still on the stiff side and staying that way. I don’t think we’re out of the woods yet in terms of paying our dues for what we’ve done. There are signals there that rates are softening, but if we’re going to have a 133 combined ratio for 2004 and 130 for 2005, then nobody is making money with those combined ratios.”
But when did losing money ever stop an insurer from cutting rates?

“That’s not going to stop anybody,” said E. Dow Walker, executive vice president of Willis Group’s health-care unit. “It’s unbelievable how reliable the cycle has been, and the professional liability cycle is even more volatile. Through every cycle everyone says it’ll never happen again; we’ve learned our lesson. Right now we’re at a point of equilibrium. We’re pricing well, we’re negotiating well. Still, I see a softer market ahead. I think there will be an underwriter who will break from underwriting selection to market share. When one breaks, two will break and we’ll have a soft market.”