The Government Weighs in: What’s Causing Increased Medical Malpractice Premium
Rates
October 2003
The Governmental Accounting Office (GAO) recently
completed an extensive study of the medical malpractice insurance industry and
the factors that have caused premium rates to increase. The study found this
business line to be unprofitable mainly on account of a persistent upward trend
in claims costs. Due to its thoroughness and the lack of bias of its authors,
the GAO report should be the basis for discussion on issues effecting medical
malpractice insurance, including tort reform.
by Charles
Kolodkin
The Cleveland
Clinic
Anyone seeking a comprehensive, insightful, and impartial discussion of medical
malpractice insurance can find it by simply contacting the federal government.
This is not sarcasm, but true! The General Accounting Office (GAO), the audit,
evaluation, and investigative arm of Congress prepared perhaps the best analysis
that has recently been done of the factors influencing medical malpractice insurance.
The report issued on June 29, 2003, GAO-03-702, "Medical Malpractice Insurance: Multiple Factors Have Contributed
to Increased Premium Rates," focuses exclusively on physician medical malpractice
insurance; it does not address liability insurance for hospitals and nursing
homes.
It is regrettable that this excellent research has received such little fanfare
or publicity. Senator Richard Durbin (D-IL) along with eight Democratic congressmen,
including Representatives John Conyers (D-MI) and John Dingell (D-MI) requested
the GAO conduct a study on why medical malpractice insurance rates increased
so much in the past few years and what, if anything should be done in response.
The report, the result of over a year of research, concludes that multiple
factors contribute to the rise in rates, but the chief culprit is increased
losses. Perhaps because the GAO did not conclude that insurance company mismanagement,
malfeasance, or misconduct caused the current medical malpractice insurance
problems and the agency did not make significant recommendations for alleviating
the problems, the study’s sponsors felt it did not merit further attention.
Unfortunately the media has not publicized the GAO findings widely, even as
debate about tort reform amplifies and the need for unbiased information increases.
Methodology
In studying the rather complicated subject of medical malpractice insurance,
the GAO selected a sample of seven states, California, Florida, Minnesota, Nevada,
Pennsylvania, Mississippi, and Texas, for in-depth review. These states represent
a valid mix of locations that are considered in "crisis," have had a rapid rise
in premium rates and/or have non-economic damage caps.
As part of its research the GAO interviewed insurance regulators, medical
malpractice insurers, actuaries, consumer advocates, medical professionals,
and trial attorneys. Data provided by insurance companies, state insurance departments,
the National Association of Insurance Commissioners (NAIC), and A.M. Best Co.
was also evaluated. In its assessment of premiums, the GAO focused on base rates
charged to three medical specialties—internal medicine, general surgery, and
obstetrics/gynecology. Rates examined were for one of the most common policies
purchased, a mature claims-made policy with coverage limits of $1 million each
event and $3 million in the aggregate.
Findings
As the title indicates, multiple factors have contributed to increased medical
malpractice insurance rates for physicians, but the principal contributor has
been the rapid growth in insurers’ losses from claims. Claim losses include
not only the settlements and judgments paid by carriers to the claimants on
behalf of their physician-insureds, but also most of the expenses incurred in
the defense of a claim.
The swift rise in loss costs has become more pronounced since 1998. After
adjusting for inflation, the GAO found paid losses rose approximately 3.0 percent
annually from 1988 to 1997, but rose 8.2 percent annually from 1998 to 2001.
The trend for incurred losses was even harsher: from 1988 to 1997, incurred
losses rose approximately 3.7 percent annually, but from 1998 to 2001 the annual
increase was 18.7 percent.
Interestingly, the GAO found wide disparities in rates of increases among
the seven states, with some states experiencing significantly higher increases
in losses than others. For example, during the period 1998 to 2001, paid losses
in Pennsylvania and Mississippi rose approximately 76.9 and 142.1 percent, respectively,
while paid losses during the same period in California and Minnesota increased
only 38.7 and 8.7 percent, respectively. Thus, it is not really surprising that
Pennsylvania and Mississippi physicians are having more difficulty finding affordable
insurance coverage than are their peers in Minnesota and California.
Figure
4
Incurred losses are the largest cost component for medical malpractice insurers.
The GAO examined the 15 largest insurers of medical malpractice coverage for
2001 and found incurred losses, including payments to claimants and the expenses
associated with defending claims, comprised around 78 percent of the insurers’
total costs. Since insurance companies calculate their premium rates based on
their expected costs, anticipated losses are the key determinant of premium
rates.
Investment Income
Another factor that has created an upward spiral in pricing is the decrease
in investment income experienced by medical malpractice insurers. Generally,
insurers are required by state insurance regulators to reflect expected investment
income in their premium rate calculations, so bad investment performance will
put upward pressure on rates. The fall in investment returns suffered by insurance
companies over the past 3 to 4 years is a circumstance that has been poorly
understood and explained. A number of commentators attribute the decline in
insurance company investment income to equities, mention the stock market bust,
and then point to the Dow Jones Index as evidence.
In actuality, state laws restrict medical malpractice insurers to conservative
investments, primarily bonds. On average, the 15 largest writers of this insurance
had about 79 percent of their assets invested in bonds, usually a combination
of U.S. Treasury, municipal, and corporate bonds. Yields on bonds have certainly
dropped over the past couple of years, but according to the GAO, declines in
investment returns have probably caused premium rates to increase just 7.2 percent
from 2000 to 2002. Thus, the decline in investment income has had only a modest
influence on premium rates, far less than the adverse claim payment trend.
Reinsurance
Almost all medical malpractice insurers purchase reinsurance to protect themselves
against large, unpredictable losses. This is particularly true of the smaller
physician-controlled insurers who are typically members of the Physician Insurers
Association of America (PIAA), and sometimes warmly referred to as "bedpan mutuals."
The GAO found physician-owned insurers now cover about 60 percent of the marketplace.
These insurers depend significantly on reinsurance to help stabilize their income
statements and cash flow since a few large claims will have a measurable impact
on their surplus.
Reinsurance costs incurred by medical malpractice insurers have noticeably
risen the past couple of years. The GAO identifies two reasons: (1) overall
reinsurance rates have increased as a result of reinsurers’ losses from the
September 11, 2001, terrorist attacks, and (2) reinsurers have seen higher losses
from medical malpractice than other lines of insurance and are raising their
rates to compensate for the increased risk associated with medical malpractice.
Accordingly, medical malpractice insurers are passing along these higher reinsurance
costs to their physician-insureds.
Profitability
The GAO report confirms that since 1999, the profitability of the medical
malpractice insurance market as a whole has declined. This has occurred even
in an environment of rising premium rates. The effect on insurance companies
has been pronounced as depicted in Figure 7 from the GAO report. Profitability
declines have caused a number of insurance companies to exit the marketplace,
which in turn reduces the competition and minimizes any downward pressure on
premium rates. The negative trend in profitability has occurred in all of the
states studied by the GAO, however, it is less evident in California, which
helps explain why California premium rates have not been as volatile as other
states.
Figure
7
Scarcity of Data
A continuing source of frustration to anyone wishing to do an in-depth analysis
of medical malpractice claims frequency and claims severity patterns is the
lack of comprehensive claims data. The GAO experienced this during its research.
Data submitted by insurers to the NAIC regarding number of claims is not broken
out by state, and the NAIC only began collecting data measuring case severity
in 2000.
Furthermore, assuming insurers actually track their losses to identify the
amount of payments attributable to settlements versus judgments, and non-economic
damages versus economic damages, this data is not provided to the NAIC or state
insurance departments. The GAO fittingly observed that comprehensive information
is vital to effectively study losses and for a better understanding of the causes
of increased premium rates.
In fact, the only recommendation made in the GAO report is to have Congress
consider encouraging the NAIC and state insurance regulators to identify and
collect additional data necessary to evaluate the frequency, severity, and causes
of losses on medical malpractice claims.
Conclusion
The General Accounting Office recently completed an extensive study of the
medical malpractice insurance industry and the factors that have caused premium
rates to increase. The study found this business line to be unprofitable mainly
on account of a persistent upward trend in claims costs. Due to its thoroughness
and the lack of bias of its authors, the GAO report should be the basis for
discussion on issues effecting medical malpractice insurance, including tort
reform. The only action the GAO recommends is a implementing a better process
for gathering data necessary to evaluate the medical malpractice market.
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