As the economic boom of the'90s slows down, more and more insurance companies are realizing less profit. As a result, physicians find it more difficult to get the malpractice insurance they need; when they do find it, it is usually at a higher cost.
If the recent crisis over malpractice (or, more precisely, professional liability) insurance seems vaguely familiar, it is because the crisis is not new. Rather, this year's round of premium rate increases, hospital service curtailments and physician anguish is only the latest struggle of a protracted war between the insurance industry and the segment of the legal community once known as trial lawyers but now self-named as the plaintiffs' bar.
As in previous years, the victims are patients, who have virtually no control over the events that affect their ability to obtain medical services, and health care professionals, who must either find the means to absorb ever-larger premiums for their liability insurance or seek other careers.
According to the American Hospital Association (AHA), physicians' premiums have increased as much as 81% in Pennsylvania, 67% in West Virginia, 58% in Indiana and Montana, and 57% in Texas. The U.S. Department of Health and Human Services (HHS) reported that premiums increased as much as 113% in Virginia and 112% in Arkansas this year.
Even more devastating, however, has been an exodus of carriers from the professional liability marketplace, making it difficult for physicians and hospitals to find coverage at any price. The St. Paul Group of Companies, with a 9% share of the market, announced last year that it intended to stop writing malpractice insurance. A spokesperson told the trade magazine Insurance Journal that St. Paul had lost nearly $1.5 billion on professional liability in the preceding four years.
Other companies were overexposed in professional liability, and several of them were forced into insolvency. Physicians Insurance Company and PHICO in Pennsylvania, PIE in Ohio, and Frontier Insurance in New York were taken over by regulators. Another insurance company, MIIX, withdrew from 11 states to concentrate on its home market of New Jersey, and SCPIE Holdings dropped out of the malpractice market in Texas and Florida to concentrate on its home market in California. Other carriers have been downgraded by ratings agencies--usually a sign of financial weakness--or have followed St. Paul's lead and left the market.
Members of the American Psychiatric Association got a taste of the impact of the country's malpractice crisis in May when Legion Insurance Company was taken over by Pennsylvania regulators. Legion provided coverage for over 7,600 APA members. A new plan underwritten by commercial insurance giant American International Group will cost 30% more per year.
Psychiatrists generally pay significantly smaller premiums than high-risk specialists. One comparison study showed that the average premium for psychiatrists in Dade County, Fla., who do not utilize electroconvulsive therapy was $29,045--a fraction of the $200,000 plus for cardiovascular surgeons, neurosurgeons and obstetrician-gynecologists.
Because insurance is regulated by states, rates can vary widely based on location. For example, a psychiatrist in Los Angeles could pay as little as $7,000 a year for $1 million to $3 million in coverage. Earlier this year, similar coverage would have cost $6,724 in Long Island, N.Y.; $16,559 in Wayne County, Mich.; and $11,981 in West Virginia.
"It becomes difficult to talk about rates in general because there are so many variables," according to Martin Tracy, president of Professional Risk Management Services Inc., which manages the APA-endorsed professional liability program. Tracy told Psychiatric Times, "There is a 'book rate,' but the rate an individual doctor actually pays depends on [their] claims history, what subspecialties [they] may have, and what state they're located in. Most companies give a premium credit to doctors who are in the early years of their careers. It's possible that two psychiatrists with the same kind of practice in the same building could wind up paying different premiums."
Psychiatrists can reduce their premiums in many states by taking an approved risk management course.
"Most states do recognize that doctors who receive some kind of risk management education are better risks," Tracy said.
Some carriers also charge a higher premium for psychiatrists who utilize ECT. "Some companies perceive ECT as being a higher-risk procedure," Tracy explained. "The carrier that we have used over the years and the carrier we have switched most of the business to have accepted our perception that ECT is not a high-risk procedure. They do not charge any additional premium, but it's not unusual to see it with other carriers."
Norman E. Alessi, M.D., a professor in the department of psychiatry at University of Michigan, sees another potential fallout from the emphasis on malpractice insurance.
"Many of my colleagues live in a state of not wanting to push the envelope that far, because they fear the consequences if they're not successful," he told PT. "People feel an enormous sense of vulnerability. We're not even allowed to develop relationships with patients anymore in the managed care environment, which is what psychiatry was all about. People aren't taught those skills anymore. I believe that's one of the contributing factors to the lawsuits--we don't get to know our patients," he added.
Claims Frequency Increasing
"With many of the big commercial carriers fleeing the market, the carriers that are left have more new business than they can take," Lawrence E. Smarr, president of Physician Insurers Association of America (PIAA), told PT.
Twenty-seven percent of hospitals responding to an AHA survey said that physicians were retiring or moving out of state because of premium increases or a shortage of coverage. One hospital in five reported curtailing some services due to liability insurance problems.
The current crisis is, in some ways, a replay on a national scale of the events of the mid-1970s in California. Doctors in the southern part of the state stopped accepting new nonemergency patients as malpractice rates soared. That crisis ended with the passage of legislation limiting the amount of noneconomic damages that could be awarded in malpractice cases and with the creation of physician-owned mutual insurance companies--known in the trade as bedpan mutuals--to fill the gap left by the departure of commercial insurers from the professional liability market.
The next major skirmish occurred in the early 1980s when rates began to increase across the country. Eventually, 46 states passed tort-reform legislation designed to hold down damage awards, and by 1985 the number of claims being tried had begun to decline. Companies such as St. Paul recognized the need in the market for new capital and rushed to fill the breach. Some bedpan mutuals, such as SCPIE, began writing business outside their traditional home bases.
"About 1984, there was a drop-off in claims frequency, but because it takes five years on average for a claim to be paid after it surfaces, carriers were reluctant to say that there was a reversal in the trend," according to Smarr. "As a result, rates stayed at a higher level in the late 1980s. The companies didn't know they were making higher profits until the coverage losses paid themselves out."
The economic boom of the 1990s meant insurers were receiving high returns on their investments, largely in high-grade corporate bonds. As a result, companies relied less on premium income to realize a profit. They made their earnings goals on the interest income on their cash flow. "We had a very competitive marketplace during the latter half of the '90s," Smarr said, "and carriers lowered rates to unprofitable levels in order to get business."
At the end of the decade, as the Federal Reserve began cutting interest rates to stimulate the economy, insurance company portfolios yielded lower returns, which as Smarr told a congressional hearing last June, increased the need for premium revenues.
An AHA study found that the return on investments for the property and casualty insurance industry--which includes malpractice insurers--declined from a high of 11.5% in 1997 to an estimated 4.3% in 2000.
At the same time, claims frequency began returning to its previous levels. More damaging, however, was an increase in claims severity--the amount of money paid out. "Severity has been rising at 5% to 8% a year since the 1980s," Smarr explained. "The average paid claim has risen by 6.9% a year through the 1990s, compared to an inflation rate of 2.6% during that period." Combined with declining interest rates and price competition, the increasing claims costs made malpractice an unprofitable line for many companies.
Insurers' combined ratio--a figure that consists of paid losses and overhead expenses divided by premium income--for medical malpractice was 140% in 2001, according to Pete Moraga of the Insurance Information Network of California. In other words, for every dollar of premium income, malpractice carriers paid out $1.40 in claims and overhead.
"The higher claims costs come from higher jury awards," Moraga told PT. "The median jury award in malpractice cases reached $1 million in 2000. That's up 110% from 1996, when the median was just $474,536. That also raises the bar on those cases that get settled. A lot of cases are settled before ever going to the jury."
According to a study released in July by HHS, the cost of litigation is a principle driver in the malpractice crisis. But only a handful of cases ever get to court. The HHS found, "Only 1.53% of those [patients] injured by medical negligence even filed a claim. Most claims--57-75%--result in no payment to the patient. When a patient does decide to go into the litigation system, only a very small number recover anything. One study found that only 8-13% of cases filed went to trial; and only 1.2-1.9% resulted in a decision for the plaintiff." The HHS termed the current legal system a litigation lottery.
Cap on Damage Awards?
Insurers believe the cure for the malpractice woes is a cap on noneconomic damages. They point to California, which enacted a cap in 1975. According to a study by the National Association of Insurance Commissioners, malpractice premiums in California have increased 167% since 1976, when the state's cap went into effect, compared with an increase of 505% for the rest of the country during the same period.
"It makes no sense to deprive American citizens who have had the right to trial by jury for 225 years of that right," countered Carlton Carl, a spokesperson for the Association of Trial Lawyers of America, told PT. "What makes sense is having insurance companies resolve more claims without contesting them. Insurance companies go to court every day to fight the payment of legitimate claims in malpractice cases, auto cases and all sorts of cases. What does it profit anyone to deny people who have been injured, through no fault of their own, reasonable compensation for their injury?"
According to the lawyers, insurance company mismanagement and the quest for higher profits have contributed to the country's malpractice woes. "St. Paul lost $108 million with the collapse of Enron," Carl said. "There's a group of doctors in West Virginia who have filed suit against St. Paul for allegedly illegally transferring assets to subsidiaries that supposedly were reserved for claims. We're seeing potentially the same kinds of accounting shenanigans as we've seen in other corporations. Not to mention the industry's track record: They made their greatest profits through most of the'90s through medical malpractice premiums--earning a windfall in the stock and bond markets. As soon as the economy turns sour, they decide to raise rates. The same thing happened in the '80s and back in the '70s."
The Center for Justice and Democracy, argued, "To buy [the insurers'] position, one would have to accept the notion that jury awards were high in the mid-1970s, then low for a decade, then high in the mid-1980s, low for 17 years and are now high again. This is ludicrous The average claims payout by medical malpractice companies is about $30,000 per claim and has been virtually unchanged for the last decade."
So far, the lawyers are finding little support for their position. Legislators in several states are considering caps on pain and suffering awards, and in the U.S. Congress the House passed a bill that mirrors California's 25-year-old law. In a press statement, the PIAA said the Congressional Budget Office believes the House measure would save the federal government $14.1 billion over the next 10 years in lower payments to providers. Proponents of the House-passed measure concede that it probably will take another year to get it through the Senate. "We're not going to let up," Richard Corlin, M.D., immediate past president of the American Medical Association, told the press. "If it doesn't have a cap on pain and suffering, it's not tort reform."
(On Oct. 9, Mississippi Gov. Ronnie Musgrove signed a bill that sets caps on pain-and-suffering damages for malpractice suits in that state--Ed.)