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State of Emergency: The Medical Malpractice Insurance Crisis

INTERNATIONAL JOURNAL OF COSMETIC SURGERY AND AESTHETIC DERMATOLOGY
Volume 4, Number 2, 2000

Introduction

Throughout the nation, medical malpractice insurance has been in a state of crisis for the last several years — but never has the situation been as grim as it is today. Currently, the medical malpractice insurance shortage has reached "serious" to "crisis" proportions in 84% of states throughout the nation.(1) The future looks even worse.

Back in 1960, annual spending on medical liability insurance reached a mere $60 million annually. By 1988, however, the annual price tag for medical malpractice insurance had increased by more than 1,100% from its 1960 level, reaching $7 billion. Many states responded in the 1970s and 1980s by enacting tort reform statutes to curb the extraordinary rise in malpractice premiums. In some states, such as California, those statutes were ultimately upheld by the states' supreme courts. (2) In other states, they were not.

Today, physicians are again facing similar problems, with the nation's healthcare being held in the balance.(3) Thus, some physicians are leaving their practices altogether, while others are refusing to perform surgery or other life-saving measures at all. (4) The escalating cost of malpractice insurance premiums, combined with the lack of coverage — particularly for high-priced specialists such as plastic surgeons — are resulting in higher health costs and the defensive practice of medicine. Moreover, in many states, it is becoming increasingly more difficult to find specialist; in others, hospital wings and trauma centers have been forced to close as physicians have refused to treat such patients.(6)

Reasons Medical Malpractice Insurance Premiums are Increasing

There is no single answer as to why medical malpractice premiums are increasing throughout the United States. Several more probable reasons for that increase include the following:

Skyrocketing Jury Awards

There can be no doubt that ever-increasing indemnity payments are one of the primary forces driving increases in medical malpractice premiums. Indeed, as noted in a recent article appearing in Jury Verdict Research:

The biggest jump [in types of jury awards has been] seen in medical malpractice, where awards jumped 175% between 1994 and 2000, from $362,000 to $1 million. Childbirth cases snagged the top spot in median awards for medical malpractice at $2.05 million. Diagnosis cases came in No. 2 with $750,000, and No. 3 was medication cases at $668,000.

Among medical-malpractice plaintiffs awards between 1994 and 2000, the most frequently claimed injury was death, followed by brain injury.

In medical malpractice, the median award in 2000 grew to $1 million, from $700,000 in 1999. The medical malpractice line has been on a sick list, suffering from escalating premiums and underwriting woes carried over from the soft market of the 1990s that saw many insurers under-price coverage. The price of coverage, driven by high awards, is reaching crisis levels for doctors and hospitals in many states, according to physicians. (7)

Jury Verdict Research also notes that from 1993 to 1999, the median malpractice settlement had climbed 63%, increasing from $400,000 (in 1993) to $650,000 (in 1999). (8) The proportion of million-dollar jury awards also increased, by 6%, and the percentage of $1 million or higher jury awards rose from 39% (1997-1998) to 45% (1998-1999), according to that same study. This increase may be due, in large part, to increasing recovery rates for plaintiffs in medical malpractice jury trials - which went from 29% in 1996 to 36% in 1999. (9)

The reason for the increase in jury verdicts and settlements values no doubt relates to what one author call the "Regis" factor. (10) In sum, juries have grown accustomed to the staggering amounts of money given away on television (such as on "Who Wants To Be A Millionaire?") and are therefore more inclined to be excessive in their awards. The American Medical Association has come to a similar conclusion: As recently noted by AMA Chair, J. Edward Hill, M.D., the civil jury system has created "a litigation lottery, where select patients receive astronomical awards, and other pay higher costs for health care and suffer problems because of it." (1)

Increased Litigation Cost and Expenses, and Meritless Claims

In addition to the incredible sums all too often awarded by juries are the related increases in costs and expenses incurred in resolving jury-tried cases. Approximately 10,000 medical malpractice lawsuits are filed each year, and it takes as average of 45 months to resolve those claims, during which substantial fees and costs are often incurred. Regrettably, an eye-popping 57% of total malpractice premiums go towards paying attorneys fees, and 43% of insurance defense costs are spent each year on medical malpractice claims which have no merit. (11)

All of these facts point to a "systemic failure" with the jury system, which allows cases — even non-meritorious cases — to drag on for years and then be resolved at a premium, all to the attorneys' benefit. Should the time to try a case be punctuated, however, it would manifestly result in significant savings in attorneys' fees and related costs. Moreover, jury trials usually take two to three times longer to try than the same case in arbitration, and it usually takes much longer to get to trial before the arbitrator(s). Thus, should a more cost-efficient and expeditious alternative to the jury system be made available throughout America, it is anticipated that there would be significant savings for insurers and physicians alike — as lengthy trials, runaway verdicts, and damage assessments based primarily on emotion and sympathy would all by disappear.

Poor Underwriting Practices

The 1990s was a time during which insurance companies were seeking greater marker share and were driven by capital availability rather than the adequacy of premiums to pay losses. In fact, during much of the 1990s (until 1999), medical malpractice insurance throughout most of America was considered a "bargain" compared to other types of insurance, (5,10) and overall medical malpractice premiums increases remained relatively flat during that time. (12)Capital was readily available. And the stock market was lavishing investors (insurance companies included) with ever increasing returns-on-investment on an almost daily basis.

Then came the recession of 1999. And the tragedy of 9/11. All of which drained off substantial capital from the insurance industry, including medical malpractice insurance lines. Insurers, having under-priced their malpractice lines over the preceding decade, were now forced to scramble to compensate for the artificially low premiums. Thus, starting around 1999, premiums throughout most of the nation started to rise — first by 10%, and then by 15% on 2001. (5) Since 2001, some insurance companies have raised their rates by more than 30%. As noted by the CEO of one major California medical malpractice insurer, "Rates are going up because too many companies were shortsighted and depended on investment income in a strong market to keep prices low." (5)

In sum, the reasons for the steep premium increases are multifaceted. Indeed, experts in the field also point to the difficulty inherent in underwriting medical malpractice policies — given the often extensive duration between the malpractice and the resolution of the claim. (10)Other experts point to the emergence of managed care and its purported emphasis on making money to the detriment of patient care, as a primary reason why jury verdicts (and premiums) are increasing. (10) Still others cite the explosion on the number of attorneys "chasing" potential medical malpractice claims, resulting in the filing of numerous lawsuits with large upside potential but questionable liability — all in the hope of collecting significant settlements. (5,10)

Whatever the reason(s), medical malpractice premiums appear to be going up, and up, across most of the nation, (13) In essence, the state of malpractice insurance throughout America today is similar to what it was in California in the mid-1970s, when doctors were threatening to (and did) close their practices and left the state in search of "greener pastures."

All this leaves the physician with a sense of despair, and asking:"How, if at all, can medical malpractice premiums be brought under control?"

The California Experience

In 1975, California was confronted with a severe medical malpractice insurance crisis. (14) "Lucky" physicians throughout California were facing skyrocketing insurance premiums; "unlucky" ones could not obtain insurance no matter what the price. Physicians were leaving the start in droves, and important medical services were being denied patients. The California legislature met the challenge by enacting one of the most comprehensive sets of laws in the nation to deal with medical malpractice and rising premiums, known as MICRA (Medical Injury Compensation Reform Act of 1975).

Since the enactment of MICRA, California has had "some of the lowest malpractice premiums in the United States." This, while malpractice premiums throughout American have risen by more than 420% form 1976 to 2000, premiums in California rose only about 168% during the same time period. Costs of malpractice settlements in California have been 53% less than the national average, and malpractice cases in California are resolved in a 23% shorter time period than they are nationally. These outstanding results are due, in large part, to insurers' effective use of the five prongs of MICRA. (14)

What is MICRA, and how does it work so well? The authors of MICRA believed that malpractice premiums could be brought under control only if litigation-related costs and indemnity payments could be reasonably and fairly minimized. Thus, five different statutes were enacted to give MICRA the punch it needed to bring medical malpractice premiums under control. Accordingly, MICRA limits 1) "pain and suffering" damages in medical malpractice cases to $250,000, (15) as well as 2) the amount of attorneys' fees that plaintiffs' attorneys may recover. (16) In addition, MICRA allows for 3) the use of collateral sources in medical malpractice cases, to potentially reduce the amount of damages recoverable, (17) and 4) periodicizing of payments for economic damages over $50,000. (18)Finally, MICRA 5) set up mandatory binding arbitration for healthcare providers, in recognition of the fact that juries are not as well suited as are arbitrators in deciding the complex, and often sympathetic issues, which surround medical malpractice cases. (19)

Largely as a result of MICRA legislation, incurred losses and loss ratios for the medical malpractice line of insurance were relatively flat between 1992 and 2000. (20) In fact, between 1991 and 2000, the average annual loss ratio was approximately 37%. (20) That made the medical malpractice line of insurance one of the most profitable in California during the 1990s. (21) As a consequence, medical malpractice premiums were both affordable, and reasonably available, to the vast majority of California practitioners.

Problems in "Paradise"

Although California doctors have been envied by other states' physicians — who face grave insurance crises of their own — California doctors are now (or soon will be) experiencing increasingly higher insurance rates as well. Indeed, in 2001, loss ratios jumped by 20 percentage points and hit a whopping 57.17% — a ten-year high.(20) As a (partial) response to this fact, approximately one-third of all insurance companies writing medical malpractice policies, have recently dropped out of the California market. Many doctors are now left without any liability coverage. Some have been able to find a new carrier but, often, at significantly increased rates.

Why are premiums in California going up? And why did loss ratios jump so suddenly in 2001?

First, the total number of carriers writing policies in California has become relatively small. In fact, the 5 largest insurance carriers represent more than 71% of all California doctors. Only a dozen or so admitted carries (out of a field of 50+) are currently writing medical malpractice policies. With such a relatively small number of insurers to choose from, competition suffers, and the underwriting mistakes of just a few become greatly magnified.

That is just what happened in California. In the late 1990s, the second largest medical malpractice carrier in California wrote an extensive number of out of state policies. (5)

The physicians who were insured under these (out-of-state) policies were, of course, not able to take advantage of MICRA protections accorded California practitioners. Disastrous results followed. And out-of-state losses began to significantly accumulate last year. In the case of one particular carrier, which claims more than 17% of the California market, loss ratios increased to more than 53% — 45% greater than the ten-year loss California average. (22) Those out-of-state losses — especially for such a major player — helped to raise the overall loss ratios for the entire malpractice line, and to reaffirm the axiom that "operating without MICRA protections can be disastrous to an insurer's health."

Second, jury verdicts (and related settlements) have been rapidly increasing — even in California, and even with MICRA protections. (10)Juries — in response to sympathetic plaintiffs and not-so-sympathetic doctors and medical groups — are now awarding more money than ever for noncapped damages. Insurers are responding with ever-increasing settlement offers. And plaintiffs' attorneys are figuring out new ways to get around MICRA caps. For example, in a case decided just last year entitled Perry v. Shaw, (23) the California Court of Appeal narrowly construed Civil Code §3333.2 (capping nonecomomic damages at $250,000) to be inapplicable to a medical malpractice claim which also alleges a nonnegligent act. In another case entitled Atkins v. Strayhorn, (24) the Court of Appeal established the existence of two $250,000 limits when the spouse of the malpracticed patient claimed a loss of consortium from the injury. Needless to say, whenever possible, plaintiffs' lawyers now join a spouse as a co-plaintiff and allege a non-negligence cause of action in addition to medical malpractice. Couple these developments with the fact that at least one major carrier estimates that it takes 3.5 years to get its cases to trial before a jury and costs an average of $180,000 to try each case, (25) and the cost-loss ratios are destined to rise even in California.

Third, medical malpractice insurance is now all but mandatory for the vast majority of California physicians. In point of fact, the California State Legislature, in 1999, passed the Cosmetic and Outpatient Surgery Patient Protection Act. (26) That law requires that physicians who perform "surgical procedures" (27) in an outpatient surgical setting (e.g., cosmetic surgery), must maintain malpractice insurance coverage of $1 million to $3 million. Failure to do so can result in the loss of one's medical license.

If malpractice insurance is essentially mandatory, what does that do to its supply and price? In a plentiful market, as it was in 1999 when the Cosmetic and Outpatient Surgery Patient Protection Act was passed, there was relatively little problem with both the supply and price of malpractice insurance. But in 2002, with demand a constant and supply diminishing, the price for malpractice insurance will invariably rise. Thus, unless 1) the Act is modified to no longer make insurance essentially mandatory, or 2) new sources of malpractice insurance become reasonably available, and/or 3) other alternatives (e.g., bonds, CDs, etc.) are allowed to substitute for indemnity insurance under the Act, California physicians will continue to face rising prices for malpractice coverage.

Finally, when insurers fail to zealously employ the five-point protections of MICRA, excessive losses are sure to follow. Nowhere is this failure more apparent than with the nonchalant use of binding arbitration by some California insurers. Although the cost-savings attributes of a well-administered arbitration program are beyond any serious doubt, California healthcare providers nonetheless fail to universally employ it for medical malpractice claims. (28)

Several reasons for this failure include physicians' unfamiliarity with arbitration and a belief that mandating a patient's agreement to arbitration "sets the wrong tone," defense attorneys' "sabotage" of the arbitration system due to its decrease in their attorneys fees, and the belief by some that they get a better result with a jury than with an arbitrator. (28,29) However, when arbitration is objectively weighed against ever-increasing jury awards, settlements, and costs, there can be no reasonable argument but that binding healthcare arbitration represents a superior alternative to jury trials. (16) Accordingly, those states that are now looking closely at medical malpractice reform and reducing malpractice premiums should pay special attention to the jury system — and should strongly consider adopting an arbitration program as envisioned by the framers of MICRA.

Conclusions

The price for, and non-availability of, malpractice insurance will continue to increase in all states which refuse to adopt some sort of MICRA protection for their healthcare providers. And, in those states where the five prongs of MICRA are not being effectively employed, insurance rates will rise until market factors dictate otherwise. It is respectfully submitted that, only with the zealous enforcement of all provisions of MICRA, can physicians and insurers alike hope for some stability in the pricing and supply of medical malpractice insurance during the foreseeable future.

References

  1. American Medical Association. AMA: U.S. health car, economy feel the pain of America's liability crisis. News release (August 13, 2002).
  2. See the American Tort Reform Association's website for a state-by-state analysis of tort reform and its outcome in the courts.
  3. One study notes that "the average medical malpractice award [has] increased 43%," fueling litigation-related expenses which in turn drive up healthcare costs. See, More Than Inflation Is Fueling Health-Care Increases, BestWeek Reports (A.M. Best Company, Inc.), July 8, 2002. Other contributing factors include costlier prescription drugs and medical devices, provider-related expenses, excessive state and federal regulations, the aging population's demands for healthcare services, and fraud. The situation is so critical that Congress currently had pending before it several bills designed to curb tort liability and lower malpractice premiums, most notably HR 4600. That particular bill would, in essence, require that MICRA-like legislation, adopted in California in 1975, become national standard.
  4. See, e.g., George J.: Another Delco Doc Group Threatened to Cut Out Surgery, Philadelphia Business Journal 2001; December 7, 2002, www.philadelphia.bizjournals.com; Elmer, J.C.: Malpractice Crisis Causing Shutdown of Some OB Units, State Journal (January 11, 2002), www.statejournal.com; Strawley, G.: "Insurance Crisis Could Shut Down Trauma Units" (December 22, 2001), www.post-gazette.com.
  5. Zimmerman, R. and Oster, C.: Assigning Liability: Insurers' Missteps Helped Provoke Malpractice "Crisis," Wall Street Journal (June 24, 2002), p 1.
  6. Albert, T., and Adams, D., Professional Liability Insurance Rates Go Up, Up; Doctors Go Away, American Medical News (January 7, 2002).
  7. "Current Award Trends in Personal Injury," Jury Verdict Research, 2001; see also George, T., Malpractice Awards Pushing Insurance Premiums Higher, American Medical News (March 5, 2001); Singer, R.L., Malpractice Suits Driving Up Cost of Insurance, Driving Out Doctors, www.heartlung-doc.com.
  8. Medical Economics, Jury Verdict Research (April 23, 2001).
  9. Current Award Trends in Personal Injury, Jury Verdict Research, 1999.
  10. Crane, M., A New Medical Malpractice Crisis? Why Premiums Are Soaring Again. Medical Economics, 2001.
  11. American Association of Health Plans, Medical Malpractice by the Numbers, (2002), www.aahp.com
  12. Note that prior to the 1990s, there was a significant rise in malpractice premiums throughout most of those states where MICRA-like legislation was not in force. See reference 14, and related text.
  13. Holzer, J., Hard Times Ahead for Doctors and Carriers, OMIC Digest (2002), www.omic.com
  14. See Californians Allied for Patient Protection (CAPP), The California Story MICRA: A Successful Model for Affordable and Accessible Health Care, (2002), www.micra.org (CAPP Study).
  15. California Civil Code §3333.2
  16. California Business & Professions Code §6146. Some have argued that the California State Legislature discriminated against plaintiffs' attorneys by limiting their fees. However, the Legislature also enacted Code of Civil Procedure §1295, allowing for binding arbitration, which — if properly employed — should result in the diminution of defense attorneys' fees as well. California Association of Health Plans, Settling Disputes Through Arbitration: A Superior Alternative to Court, Issues Brief (February 16, 2002): CAPP Study.
  17. California Civil Code §3333.1.
  18. California Code of Civil Procedure §667.7.
  19. California Code of Civil Procedure §1295.
  20. California Department of Insurance, 1991-2001 California P & C Historical Premium and Loss: Line of Business: Medical Malpractice (California Department of Insurance Study),www.insurance.ca.gov.
  21. Cf., California Department of Insurance Study with California Department of Insurance, 2000 California P & C Premium and Loss Summary: Licensed Insurers, www.insurance.ca.gov.
  22. California Department of Insurance, 2001 California P & C Market Share Report; Line of Business: Medical Malpractice,www.insurance.ca.gov.
  23. (2001) 88 Cal. App. 4th 658.
  24. (1990) 223 Cal. App. 3d 1380.
  25. Practicing medicine may be dangerous to your livelihood. Napa, CA: Doctors Company, 2002, p 13.
  26. California Business & Processions Code §2216.2.
  27. The term "surgical procedures" is not defined in the Act, but cases construing similar terminology have given a very broad interpretation to such terms. See, e.g., People v. Fowler (1938) 32 Cal. App. 2dSupp. 737, 750, in which "surgery" was defined to include "the severing or penetration of the tissues of human beings."
  28. Research Brief: Binding Arbitration Is Not Frequently Used to Resolve Health Care Disputes, Rand Institute for Civil Justice, (1999), www.rand.org/publications/RB/RB9030.
  29. Zuetel, K.R. "Using arbitration effectively in your practice." Orthop Technol Rev 2002;4(1):2-3.