Malpractice ‘ Crisis ’ : Recent Trends And The Impact Of State Tort

By many accounts, the United States is in the midst of its third medical malpractice “crisis.” Physicians in several states are facing high and rising premiums. The largest national medical malpractice carrier and some large multistate physician-backed liability firms have recently left the market. Rising premiums are traced largely to increases in claims severity. Capping malpractice payments has been advanced as one approach to slowing the growth in premiums. This analysis finds that premiums in states that cap awards are 17.1 percent lower than in states that don’t cap. At issue, however, is whether these stopgap solutions promote the goals of the U.S. liability system. B y many accounts , the United States is in the midst of its third “crisis” in medical malpractice. The medical malpractice “crises” in the mid-1970s and 1980s occurred during times of rapid growth in insurance premiums. In the 1970s rising claims frequency and severity resulted in the exit of many malpractice carriers.1 Some for-profit liability carriers were replaced by a new wave of physician-owned malpractice companies. Medical liability premiums increased sharply again during the 1980s, leading several states to adopt reforms designed to limit malpractice insurers’ costs. Indeed, the events of the 1980s led to proposals for broader, more fundamental reforms of the liability system. Both rising premiums and a reduction in the number of firms offering coverage characterize the most recent medical malpractice crisis. Depending on the specialty and state, the median increase in malpractice premiums ranged from 15 to 30 percent. Rate increases in other states, such as Pennsylvania, ranged from 26 to 73 percent in 2003.2 The St. Paul Companies, the largest insurer throughout most of the 1990s, stopped writing policies during 2002. Other large, regional carriers have also exited the market. Overall, these insurers accounted for nearly 14 percent of the national market prior to the crisis.3 In several states facing the most acute crises, carriers exiting the market accounted for a substantial (up to 40 percent) share of premiums written. While premiums have risen sharply over the past three years, there is much variation across states. The premium spikes have resulted in physician strikes in West Virginia, work slowdowns in New Jersey, and some temporary closings of hospital services (such as trauma care at the University of Nevada Medical Center). Physicians in other states, such as Connecticut, are staging rallies at their state capitol, demanding “tort” reform. A recent analysis by the American Medical AssociH e a l t h T r a c k i n g W 4 2 0 2 1 J a n u a r y 2 0 0 4 DOI 10.1377/hlthaff.W4.20 ©2004 Project HOPE–The People-to-People Health Foundation, Inc. Ken Thorpe ([email protected]) is the Robert W. Woodruff Professor and chair of the Department of Health Policy and Management, Rollins School of Public Health, Emory University, in Atlanta, Georgia. on S etem er 8, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom ation (AMA) reports that twelve states face crises in their medical liability systems, with problem signs appearing in another thirty.4 However, there does not appear to be a crisis in the remaining states, as growth in insurance premiums has been low. The spike in premiums has created much tension within the physician community. Prospects for federal tort reform limiting payments from malpractice suits have been improved by support from President George W. Bush and a lobbying campaign by the AMA. The House of Representatives recently passed the Help Efficient, Accessible, Low-Cost, Timely Healthcare (HEALTH) Act of 2003 (H.R. 5), which would limit payments from malpractice claims. However, similar legislation has not passed in the Senate. The crux of the debate focuses on the underlying causes of the most recent rise in premiums. Providers point to a rise in jury awards and rising costs of defending malpractice claims (rising severity). They also highlight the role that contingency fees paid to attorneys play in creating incentives for “frivolous” suits. Some consumer groups, however, believe that rising rates can be traced to lower returns on investments received by the medical malpractice carriers and a downturn in the economy. Such disagreements have led to a contentious debate over what, if any, changes should occur in medical malpractice liability law. This paper examines recent trends in the medical malpractice industry and estimates the impact that tort reforms could have on premiums. Trends In Key Medical Malpractice Premiums And Financial Ratios The past four years have seen rising medical malpractice premiums, declining profits, and a reduction in the number of liability carriers offering insurance (Exhibit 1). According to data collected by the National Association of Insurance Commissioners (NAIC), total medical malpractice premiums earned (those retained by malpractice insurance carriers) increased by 23 percent in 2002. These averages mask variation in the growth in premiums across states. Premium increases in several states, including Florida (more than a 50 percent premium increase for internists) and Ohio (more than a 60 percent premium increase for some internists), were substantial. However, other states such as California saw very small premium increases. The most important drivers of recent rate increases are (1) severity (awards, settlements, and defense and administrative costs); frequency (claims per insured physician); and (3) changes in investment income. In combination, these factors largely determine expenses and, when compared with premiums earned and investment income, are an indication of overall profitability. One widely used profit measure is the loss ratio (awards, settlements, and defense costs as a percentage of premium). Exhibit 2 presents data concerning the combined loss ratio, a broader measure that also includes dividends paid to policyholders and corporate income T r e n d s H E A LT H A F F A I R S ~ W e b E x c l u s i v e W 4 2 1 EXHIBIT 1 Trends In Medical Malpractice Premiums, As Percentage Change, 1998–2002 Year Premiums earned (%) OB-GYN premiums (%) Internal medicine premiums (%) General surgery premiums (%) 1998 1999 200