| HOT TOPICS & INSURANCE ISSUES |
Medical Malpractice
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THE TOPIC JUNE 2004 Medical malpractice insurance covers doctors and other professionals in the medical field for liability claims arising from their treatment of patients. The cost of medical malpractice insurance has been rising. The hard market began in 2000, after almost a decade of essentially flat prices. Rate increases have been precipitated in part by the growing size of claims, particularly in urban areas. Among the other factors driving up prices is a reduced supply of available coverage as insurers exit the medical malpractice business because of the difficulty of making a profit and rapidly rising medical care costs. Depending on plaintiffs’ age and degree of medical impairment, medical costs may continue for decades. | 
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KEY FACTS
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CURRENT DEVELOPMENTS Federal Legislation: On April 7 the Senate rejected its Republican leaders’ third attempt at legislation limiting medical malpractice lawsuits. This version of the bill narrowed the breadth of reform to focus on two of the areas the most affected by the crisis: the obstetrics/gynecology and emergency/trauma care sectors. The bill would have limited noneconomic damages to $250,000 and established a fee schedule to limit lawyers’ contingency fees. Majority Leader Bill Frist vowed to continue pressing for malpractice reforms. Claims: The cost and frequency of claims, the most reliable source of data on the state of the medical malpractice situation, continue to rise. A study by Aon Risk Services, released at the beginning of 2004, finds that medical malpractice claims costs have increased at a steady 9.7 percent since 2000 and are likely to rise at the same rate in 2004. Frequency, or the number, of claims is growing at 3 percent a year; claim severity (the dollar amount) is increasing 6.5 percent annually. Hospital liability claim costs for 2004 are expected to reach almost $150,000 per claim, compared with $79,000 per claim in 1996. The average claim against a physician is expected to reach $178,000, compared with $120,000 in 1996. An analysis of data from the National Practitioner Data Bank and the Physician Insurers Association of America (PIAA) Data Sharing Project confirms the findings of the study mentioned above, indicating that medical malpractice claim payments have been drastically rising and continue to do so. From 1999 to 2003 the Data Bank shows that total payments to plaintiffs shot up over 30 percent — from $3.69 billion in 1999 to $4.9 billion in 2003. In 2003 they rose 8 percent from the previous year. The data from PIAA, a group representing physician-owned mutual companies, also indicate that the average claim payment jumped 40 percent between 1998 and 2002 — from $232,156 in 1998 to $323,975 in 2002. Jury Awards and Settlements: A host of sources report figures showing high jury verdicts and settlements in medical malpractice cases. An April 2004 report by the U.S. Department of Justice, entitled Medical Malpractice Trials and Verdicts in Large Counties, 2001, found that the median award of $425,000 in medical malpractice trials was nearly 16 times greater than the overall median award in all tort trials ($27,000). However, more recently, the rise in awards has stabilized or even reversed. The National Law Journal reports that of the top 100 jury awards in 2003, 15 were for medical malpractice; they totaled $545.5 million, nearly $178.6 million less than the 13 medical malpractice awards in the top 100 in 2002. New research from Jury Verdict Research shows that jury awards are stabilizing, but the range of awards is moving upwards. While median medical malpractice jury awards may have stabilized at about $1 million over the three years 2000-2002, in 2002 awards ranged from a low of $11,000, almost double the amount the previous year, to a high of $95 million. The explanation may be found in higher medical costs that are driving up even the smallest awards, with the result that the average award in 2002 hit $6.25 million, up from $3.91 million in 2001. Other findings show that the median award for childbirth cases, at $2,252,645, was the highest of all types of medical negligence awards. Award medians for death, brain damage, cancer and spinal injuries were all at or above $1 million. The percentage of $1 million or more verdicts remained the same from 1999 through 2002 at 52 percent. Jury Verdict Research also found that although doctors still win most cases, the percentage of cases won by patients in 2002 rose to 42 percent from 40 percent the previous year. The PIAA reports that in 2002, 68 percent of malpractice suits were dropped or dismissed, 27 percent were settled; 4 percent went in favor of the doctor and 1 percent were decided in favor of the patient. However, the PIAA says that even when a suit is dropped it costs insurers on average over $16,000 in legal expenses. The Role of Health Care Costs: As noted above, contributing to the problem of the ever-increasing size of claims are health care costs. In the 1990s, managed care helped keep costs low but most of the available savings were eventually realized. A Towers Perrin survey predicts that health care costs will rise by 12 percent in 2004. The 12 percent rise, added to an estimated 16 percent increase in 2003, would represent a 100 percent health care cost increase for employers from 1999 to 2004. A small portion of the rise is attributable to medical malpractice insurance rate increases. Medical malpractice premiums contribute about 1 percent to the overall cost of health care. During the last crisis, doctors could pass on their higher insurance costs to patients but now that is more difficult because in many cases prices are controlled by contracts negotiated with health maintenance organizations. Exacerbating the problem is the staggering number of Americans — over 43.5 million —who are uninsured. A Department of Health and Human Services report suggests that health care costs could be reduced by 5 percent to 9 percent if awards for noneconomic damages were limited. It estimates that such limits would save $60 billion to $108 billion in health care costs each year, thus lowering the cost of health insurance and allowing an additional 2.4 to 4.3 million Americans to obtain insurance. New Studies: Several recent studies confirm the need for tort reform in the area of medical liability. Tillinghast-Towers Perrin’s “U.S. Tort Costs: 2003 Update” found that since 1975 (the first year that insured medical malpractice costs were separately identified), the increase in medical malpractice costs has exceeded increases in overall U.S. tort costs, rising an average 11.9 percent a year, in contrast to an average annual increase of 9.3 percent for all other tort costs. In other words, medical malpractice costs have increased by a factor of 21 since 1975, while other torts costs have grown by a factor of 11. At nearly $25 billion in 2002, medical malpractice costs translated to $85 per person. This compares to $5 per person in 1975, or almost $17 in 2002 dollars. The study also found that in 2002 total medical malpractice tort costs amounted to $24.6 billion. In January 2004 the Congressional Budget Office released “Limiting Tort Liability for Medical Malpractice.” The study found that on average premiums for all physicians nationwide rose by 15 percent between 2000 and 2002, almost twice as fast as total health care spending per person. The increases during that period were even more dramatic for certain specialties such as obstetricians/gynecologists (22 percent) and internists and general surgeons (33 percent). Average claim payment rose from $95,000 in 1986 to $320,000 in 2002, representing an annual growth rate of almost 8 percent. However, while costs are rising steadily the rate of claims has remained more or less constant, with about 15 claims filed per 100 doctors, about 30 percent of which result in insurance payouts. The study also found that insurers faced reduced income from investments, which in the past helped offset underwriting losses. State Reform: Tort reform proposals that address the current medical malpractice liability crisis are making their way through the legislatures of a number of states with varying degrees of success. According to the U.S. Department of Health and Human Services, in 2003 bills that include caps on noneconomic damages were signed in Arkansas, Florida, Ohio and Texas, bringing the total to 26 states. The others are Alaska, California, Colorado, Hawaii, Idaho, Indiana, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Mexico, North Dakota, South Dakota, Utah, Virginia, West Virginia and Wisconsin. Over the past several months there has been some indication that reform measures are working and the crisis may be easing in some states. In Ohio, executives with five insurers that write a total of 72 percent of the state’s medical malpractice liability insurance said that the market was stabilizing and they were poised to make profits for the first time in five years. In Missouri, the department of insurance recently announced that medical malpractice claims and paid claims dropped to all time lows in 2003, with insurers paying out just 38 cents of every premium dollar collected, although those figures have been disputed as incomplete. Nevertheless, in April 2004 for the second year in a row, Missouri Governor Bob Holden vetoed a bill that would have lowered caps on punitive damages. Holden cited the Department of Insurance study as the basis for his contention that the legislation was unnecessary. A sharp drop in the number of medical malpractice suits filed in Harris County, Texas, since the passage of legislation putting a cap on pain and suffering awards and punitive damages has been recorded. Some personal injury lawyers there say they are turning away valid cases because the costs of the case would exceed the potential award and few hospitals or doctors have seen cuts in their insurance costs. In 2003, Texas Governor Rick Perry signed a medical malpractice bill that caps noneconomic damages cases at $250,000 per defendant, for a possible total of $750,000. In Pennsylvania, preliminary figures released by the Supreme Court show a decrease in lawsuits. In 2003, 1,989 medical malpractice suits were filed in state courts, down about one third from the 2,957 cases filed the year before. The figures also show that only a tiny percentage of cases reached a jury verdict and that in almost 75 percent of those cases juries ruled in favor of doctors and hospitals. However, Pennsylvania, one of the states most seriously affected by the medical malpractice liability insurance crisis, continues to grapple with the problem. In spite of the decreasing numbers of lawsuits, the state still has one of the highest malpractice payouts in the nation and experts say reforms could take several years to have a significant effect. In the meantime, Governor Ed Rendell is seeking $600 million over the next three years to reduce doctors’ annual surcharge for the state’s catastrophic insurance fund, MCARE. Proposals include a $0.25 tax on cigarette sales, which would raise $81 million per year. Doctors in the state buy the first $500,000 of coverage from private insurers and the second $500,000 from the MCARE Fund. In Florida, where rates are among the highest in the country and where twice as many doctors get sued as in other states, one in six, compared with one in 12 nationwide, Governor Jeb Bush pushed through a bill to reduce medical malpractice insurance costs. The law limits a doctor's liability for noneconomic damages in most cases to $500,000 and a medical facility's liability to $750,000 in most cases. Multiple victims can receive more with multiple lawsuits, but no group of victims can win more than $2.5 million. Economic damages are not capped. Moves are under way to get an amendment before voters in November that would ensure that 70 percent of the first $250,000 of an award goes to the patient and that would limit the amount of compensation that lawyers receive. New Jersey has been particularly active on the medical malpractice reform front in recent months. In April 2004 Gov. McGreevey signed into law a measure that requires hospitals and other health care facilities to report medical errors. At the same time, the law prohibits these errors from being used in medical malpractice cases. Officials say the law will enhance medical safety without running the risk of increased litigation. In May 2004 the New Jersey Assembly approved a measure that would create a $78 million fund to help offset the cost of medical malpractice liability insurance for doctors and hospitals over the next three years and would stiffen requirements to bring lawsuits but does not impose caps on noneconomic damages. The bill, which has not yet been signed by Gov. McGreevey, reflects a shift in position by New Jersey Insurance Commissioner Holly Bakke, who several months earlier said that she favors dropping, for the time being, any attempt to cap noneconomic damages in medical malpractice cases and supports subsidies to help doctors pay for their insurance. She also suggested that reimbursement for doctors needs attention, noting that while doctors used to be able to pass their insurance costs along to patients in the past, they can no longer do so because most are under contracts with HMOs. And she wants insurers to look more carefully at the fact that a small percentage of doctors are responsible for a disproportionate number of claims and that doctors in particularly risky specialties, e.g., obstetrics and neurosurgery, are penalized for taking on the risks. She noted that the medical malpractice insurance crisis has been slightly alleviated by the increasing number of claims-made policies now available in the state. A study commissioned by the Massachusetts Medical Society and conducted by Milliman USA determined that medical malpractice insurance premiums could fall in Massachusetts by 25 to 30 percent with the adoption of the society's legislative proposals. They include a reduction of the pre-judgment interest rate to market rates instead of the present 12 percent. Settlements in excess of $50,000 would be paid over time, not in a lump sum. Judgments would be reduced by amounts collected from collateral sources. Joint and several liability would be eliminated, and noneconomic damages would be capped at $500,000. That cap is already in place in the state, but the law allows judges and juries to override it in extreme malpractice cases. In Texas in 2003, Governor Rick Perry signed a medical malpractice bill that caps noneconomic damages cases at $250,000 per defendant, for a possible total of $750,000. The legislation was upheld in a voter referendum in September of that year, which allowed the reforms to be incorporated in the state constitution. In the months since its passage the impact of the change is beginning to be felt. As of January 1, 2004 the Texas Medical Liability Trust, which insures 42 percent of the state’s doctors, lowered its rates by 12 percent. Another major insurer, the Doctors Company, says that the recent limits enacted by the state legislature will allow it to continue offering coverage without having to increase rates. Availability: The American Medical Association now identifies 19 states where medical liability has reached crisis proportions because of high malpractice insurance rates, the insufficient number of insurers that operate in the state and the effect those issues have on the availability of certain high risk medical specialties. The states where conditions are critical are Arkansas, Connecticut, Florida, Georgia, Illinois, Kentucky, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Washington, West Virginia and Wyoming. While most of the efforts to solve the medical liability crisis involve tort reforms aimed at lowering costs such as caps on damage awards, other initiatives are focusing on ways to increase the insurance options that are available. One solution that is on the increase is the use of risk retention groups (RRGs), a form of captive insurance, to cover medical malpractice. In 2003 between 30 and 40 such groups were formed in the health care field. RRGs provide an attractive alternative for health care providers facing 200 to 300 percent increases in premiums for malpractice insurance from traditional insurance companies. One example is a group of Texas doctors who, in September 2003, set up a captive to offer medical malpractice coverage to the 3,000 doctors working within the Memorial Hermann Health hospital system. In this captive, policies are limited to $500,000 per claim with a $1 million in aggregate claims per year. The captive plans to write $10 million in premiums in its first year. Other initiatives to increase availability include one in Ohio, where a bill is pending that would set aside $12 million to create a Medical Malpractice Joint Underwriting Association to ensure the medical malpractice coverage availability needed to stabilize the market. Also in the state, OHA Insurance Solutions was created by the Ohio Hospital Association to sell malpractice coverage to physicians and hospitals beginning in 2004. In an effort to confront the crisis in his state, in December Washington’s Governor Gary Locke proposed increasing the Medicaid reimbursement for delivering babies, the medical specialty that carries one of the largest malpractice risks. The governor is also proposing a state insurance fund to help doctors obtain coverage against exceptionally large malpractice judgments. Types of Medical Malpractice Tort Reform: A Health Policy Report on the medical malpractice liability crisis published in the January 15, 2004 issue of the New England Journal of Medicine focuses on tort reforms, noting that they can be divided into three types: reforms limiting access to the courts, through shortening statutes of limitation, for example; reforms intended to modify liability rules, to control the number of claims and size of payouts by eliminating joint and several liability, for example; and reforms directly addressing the size of awards, through caps on damages, for example. A solution that skirts the three types of reforms mentioned above but that is being discussed with increased frequency is the creation of a medical court of law, a new court system created specifically for hearing malpractice and other medical lawsuits. Dr. Stephanie Bailey, director of Nashville's Metropolitan Public Health Department, explains that the U.S. government has patent courts and vaccine courts, recognizing that these topics are often too complex and arcane for the average citizen to truly be effective as a juror. She says a medical court system would offer the expert knowledge needed in malpractice cases, which would be heard by judges with an understanding of medicine. An opposing view comes from a two-year study of Pennsylvania’s medical malpractice insurance situation that focused on special courts, screening panels and other alternatives to address the medical malpractice liability crisis in that state. The report rejected the idea of specialized medical courts saying they could mean “serious risks of increased politicization, narrowed judicial perspective and greater costs to litigants.” Elsewhere, the Administration of Massachusetts Governor Romney and the Harvard School of Public Health are studying the possible establishment of tribunals of administrative law judges in that state. Financial Results: The insurance market for business insurance, including medical malpractice, tends to be cyclical. The current hard market for medical malpractice has been exacerbated by the shortage of reinsurance, insurance for insurers, which is pushing up insurers' costs, and also by soaring awards in medical malpractice cases. Although the severity of the problems differ from one state to another and even within states, most are seeing higher jury awards and consequently higher settlements because award amounts influence demands and settlement negotiations. The drop in investment income generated by the stock and bond markets widens the gap between premium income and claims payouts. The medical malpractice combined ratio, a measure of profitability, dropped to 140.3 in 2002 from 154.2 in 2001, compared with 107.4 in 2002 and 115.9 in 2201 for all lines of insurance combined. This means that insurers on average have been paying out $1.40 for every dollar they collected in premiums. The slight improvement recorded in 2002 was in part the result of a rise in premiums of 16 percent for the period. In most of the 1990s, when the bull market and higher interest rates generated higher earnings on securities, investment income helped offset underwriting losses. In addition, insurers were keeping rates artificially low by using reserves accumulated in earlier years, but reserves are now depleted. The combined ratio hit the 160 percent mark for several years at the height of the last medical malpractice crisis in the mid-1980s. Several states, following California’s lead, enacted substantial tort reforms as a result of that crisis (See Background). | |
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BACKGROUND Brief History: The medical malpractice insurance system experienced a period of crisis in the early 1970s, when several private insurers left the market because of rising claims and inadequate rates. The exodus of capacity resulted in an availability crisis. Over the next fifteen years, various attempts were made to ease the explosion in claims costs — tort reform, increased diagnostic testing, improved peer review, and increased communication between doctors and patients. These efforts appear to have had a positive impact. The number of claims dropped. However, the size of claims — the dollar amount — has continued to grow, although initially not at the fast pace reported earlier in the decade. Aggressive campaigns to reform state laws governing medical liability lawsuits began in the 1970s. Every state except West Virginia passed reforms. New Hampshire's entire reform act was subsequently struck down as unconstitutional by its Supreme Court, but Indiana's, which was the most comprehensive in the nation when it went into effect in 1975, has been found constitutional in all challenges and has helped to keep physicians' premiums down in that state. California's Medical Injury Compensation Reform Act (MICRA), also enacted in 1975, which caps noneconomic damages and modifies the collateral source rule, is also considered a model law, see below. Responding to the problem of availability, physicians formed doctor-owned malpractice insurance companies to provide coverage. These companies now write about half of all the medical malpractice insurance in the nation. Since these new companies had not experienced any losses, they could initially charge much lower rates. Later they suffered the fate of their private insurer predecessors, having to pay claims of increasing frequency and size as prior malpractice incidents of those they insured came to light. This, in turn, necessitated charging higher insurance rates. Reasons for the increased incidence of malpractice claims are not entirely clear, but several contributing factors have been suggested. In addition to the fact that people became more litigious than in the past, the crisis of the 1970s, which was extensively reported by the media, may have made people more aware of physicians' vulnerability to malpractice suits. Other factors were the loss of an intimate relationship between families and their doctors and the use of medical experts to testify in malpractice cases. Physicians have also accused lawyers of being excessively eager to bring malpractice suits because of the high fees the lawyers can collect when their clients win. More recently, there has been a rise in public distrust of the medical profession and publicity about the number of medical errors which has led the public to believe standards are declining when in fact the reverse is true. In addition, changes in the judicial environment are increasing costs. It is easier to litigate, to find counsel and build a case using information on the Internet, for example. Some industry observers say that juries have become desensitized to large numbers. While awards do get reduced, the results of appeals are not publicized, which leads to higher claim demands and settlements. Others cite a growing resentment to large for-profit health care firms, the caliber and strength of the plaintiffs' bar and a greater willingness on the part of physicians to testify against another physician. Prevalence of Medical Malpractice: A study (generally known as the Harvard study) commissioned by New York State in 1986, and released in 1990, showed that actual malpractice is relatively rare. Of the New York hospital cases examined, the incidence of adverse events, or injuries resulting from medical "interventions" or treatment, was 3.7 percent. The percentage of adverse events due to what the physician team characterized as "negligence" (not necessarily a legal definition) was 1 percent. However, only one in eight who suffered from an adverse event due to negligence filed a medical malpractice claim, and only one in 15 received compensation. Most adverse events resulted in only minimal and transient disability and most of the patients' medical care expenses were paid for by health insurance. This helps to explain why only a small percentage of patients who are injured as a result of negligence file medical malpractice claims. However, a significant portion (22 percent) of patients who did not file medical malpractice claims suffered moderate or greater incapacity. In a second phase of the study, researchers confirmed that some of the tort claims filed provided little or no evidence of medical malpractice or even an adverse event, suggesting that the tort system is "very error-prone," at least in its initial stages. Effects of Tort Reform: Between February 1986 and May 1987 the General Accounting Office issued five reports on medical malpractice. The third, published in December 1986, "Medical Malpractice: Six State Case Studies Show Claims and Insurance Costs Still Rise Despite Reforms," singled out the reforms enacted in California in 1975 as among the most effective in moderating increases in the cost of malpractice insurance and the size of awards. California’s reforms have helped stabilize the medical malpractice environment in that state, making the coverage more affordable than in many other urban areas. MICRA has seven major elements: a collateral source rule which requires that juries be told when plaintiffs have other sources of compensation for their injuries, a cap of $250,000 on noneconomic awards such as compensation for pain and suffering, and periodic payments rather a lump sum for awards of more than $50,000. It also requires lawsuits generally to be filed within three years of the injury, includes a specific scale for attorney’s fees, requires that plaintiffs' attorneys give 90 days advance notice to the defendant of their intention to file a lawsuit, and stipulates that contracts for medical services may include provisions for binding arbitration. | |
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