Med Mal Fever: When Doctors Walk Out, Politicians Notice

They’re baaack. High-flying medical malpractice liability claims losses, that is. The availability crisis of the 1970s and the affordability crisis of the 1980s may be nothing compared to the crisis insurers and doctors face this time around.

Almost 8 percent of claims now result in payments of $1 million or more, according to the Physicians Insurers Association of America (PIAA), and medical liability insurers now post a staggering combined ratio of 153.3. In addition, the jury award median in medical liability cases doubled from $500,000 in 1995 to $1 million in 2000, according to Pennsylvania-based Jury Verdict Research (JVR). Even when the sides settle, the median award was $500,000 in 2000.

Since 1998, four companies specializing in medical malpractice—Associated Physicians Insurance Co., PHICO Insurance Co., Physicians Insurance Co. and PIE Mutual Insurance Co.—have become insolvent, and industry giant The St. Paul Cos. pulled out of the market in the 48 states where it had offered coverage. The company claimed medical liability losses of $1.5 billion in the last four years.

Consumer groups and trial lawyers say industry greed and mismanagement are to blame, but in state houses across the country and on both ends of Pennsylvania Avenue blame for the crisis is being pinned on soaring litigation costs.

Outcries from physician groups and hospitals have played a big part in turning the tide of opinion. Doctors in New Jersey, Pennsylvania, West Virginia and Washington have employed work slowdowns, strikes and public rallies in an attempt to demonstrate the severity of the situation.

The American Medical Association has declared a dozen states to be in crisis, including Texas, where Gov. Rick Perry has called medical malpractice reform an “emergency issue.”

States on the march
From 1998 to 1999, Texas saw a 500 percent increase in the size of judgments in health care cases, according to John T. Thomas, general counsel for the Baylor Health Care System in Dallas and president of the Coalition for Affordable and Reliable Health Care.

In 1999, 70 percent of the average judgment went to non-economic damage (or “pain and suffering”) payments, Thomas said, making it extremely difficult for insurers to actuarially predict their losses. The JVR reported that the jury award median in the state was $725,000 in 2001.

Eleven companies have pulled out of the state’s medical liability market, affecting at least 6,455 doctors, according to the Texas Department of Insurance. And average claims cost per physician has gone up 15 percent from 1996 to 2000, while malpractice liability carriers in the state paid more than $380 million in claims in 2000.

The Lower Rio Grande Valley, in particular, has been hit hard by venue-shopping lawyers who’ve hit upon some friendly judges. The area has seen the number of claims grow by 60 percent a year, mainly in Hidalgo County, a TDI report said.

A bill in the Texas Senate sponsored by Sen. Jane Nelson would imitate California’s 1975 Medical Injury Compensation Reform Act (MICRA) and cap non-economic damages at $250,000; place a two-year statutory limit on claims; allow collateral sources of compensation such as health, disability, homeowners’ and auto insurance to be factored into the award; allow period payment of claims rather than a lump sum; and limit lawyers’ contingency fees.

Thomas said these proposals “can be an effective solution,” but must withstand scrutiny from the Texas courts, which disemboweled many of then-Gov. George W. Bush’s mid-’90s tort reforms, including caps, on constitutional grounds. Thomas said it would take three to four years for the matter to play out in the courts before any medical liability tort changes would have an impact on premiums.

Washington faces a similar crisis and a similar constitutional dilemma. Since 1998, the Washington State Medical Association has noted a 31 percent increase in doctors leaving the state. In 1997, CNA exited the Washington market, leaving about 1,100 physicians seeking coverage, and 1,300 more had to turn elsewhere in late 2001 when the state’s second largest medical liability carrier, Washington Casualty Co., decided to pull out of the physician market.

It’s no wonder—2001 saw seven medical malpractice verdicts or settlements of more than $1 million in Washington, with a total of $44.7 million, and individual awards ranging from $1.2 million up to $16.2 million.

A bill being considered by the Washington legislature also calls for MICRA-style changes, but faces an uphill battle. Not only must two-thirds of both houses approve the bill, but since Washington has already declared award caps unconstitutional, the issue must be put directly before the voters, meaning the earliest hope for relief is 2004. It may not matter anyway, say observers close to the situation.

“I don’t think we have the votes in the legislature,” said Gary Morse, vice president and general counsel of Physicians Insurance, Washington’s largest bedpan mutual.

Nevada, meanwhile, placed caps of $350,000 on malpractice liability and $50,000 on trauma centers and emergency rooms last fall after the University Medical Center in Las Vegas shut down for 10 days when 58 doctors walked off the job.

But the caps came without comprehensive MICRA-style changes and won’t have an immediate effect, said Larry Matheis, executive director of the Nevada State Medical Association (NSMA).

“It’s obviously difficult to link premium reduction to the adoption of statutes,” Matheis said. “The inability of the insurance industry to make that kind of commitment is one reason we weren’t able to get more substantial reforms.”

Trotting out the arguments
Most insurers have increased rates since the Nevada legislation passed, Matheis said, and the phenomenon of rates remaining high and even increasing in spite of caps is one that trial lawyers and their allies have latched on to in their argument that insurance industry greed and mismanagement is the true source of this crisis.

“Caps don’t work,” said Chris Munley, partner in the Scranton, Pa., plaintiffs’ law firm of Munley, Munley & Cartwright. “Insurance companies have said that even with caps they won’t guarantee a rollback. Caps have not been a successful solution. They have only succeeded in limiting plaintiffs’ access to the courtroom. They have really failed.”

For example, a report issued by the West Virginia legislative committee studied the relationship between damage caps and malpractice insurance rates for a full year. The report found that in states such as Nevada and Missouri, where malpractice lawsuit damage caps were recently instituted, such actions yielded no short-term reductions in coverage rates.

American Trial Lawyers of America (ATLA) President Mary Alexander asserted that based on the report’s findings, the insurance industry itself needs reforming. ATLA spokesperson Carlton Carl said such reforms would include “mandatory pre-filing of rates with explanations and permission for consumers—including doctors—to challenge rate settings … and serious limitations on the types of investments that insurance companies can make.”

Carl claimed that much more so than malpractice lawsuits, falling investment incomes are driving up malpractice rates the same way these losses are affecting other lines of insurance.

An October 2002 study by J. Robert Hunter, director of insurance for the Consumer Federation of America and a former Texas insurance commissioner, is often cited by opponents of caps and purports to show how malpractice premiums track more closely with ups and downs in the industry’s investment fortunes than with claims losses.

The study, “Medical Malpractice Insurance: Stable Losses/Unstable Rates” was reviewed last January by Raghu Ramachandran of the insurance asset management firm Brown Brothers Harriman & Co. He pointed out that in 2001 only 9 percent of medical malpractice carriers’ investments were allocated in equities, compared to 16 percent for the property and casualty industry as a whole. Eighty percent of medical malpractice carriers’ investments are in bonds.

But did the industry manage its equity investments poorly? Ramachandran maintains that medical malpractice carriers earned a negative 22.4 percent return in the equity market, while the S&P return was negative 22.2 percent. Both did miserably, but Ramachandran asserts that this does not show an industry mismanaging its investments.

Ramachandran goes on to write, “Over the last 27 years, the average paid loss ratio was 47 percent and the minimum paid loss ratio was 16 percent. In 2001, the industry paid loss ratio was nearly 75 percent. In other words, for every dollar that comes in the door, 75 cents is paid out.

“It is clear that it has been extremely difficult—if not impossible—for insurance companies to earn a profit writing medical malpractice insurance. Further, at this rate of expenditure, after the company pays its losses and expenses, there is very little ‘float’ on which they can earn investment income.”

About 60 percent of doctors are covered by physician-owned or controlled insurance companies, according to PIAA President Larry Smarr. This first-hand experience has taught doctors the painful consequences of uncontrolled non-economic damage jury awards, Smarr said.

“Doctors know the truth,” Smarr said. The average claim paid on behalf of practitioners in 2001 was $310,000. And MICRA has had an effect in California, he argued, spointing to data from the National Association of Insurance Commissioners and Medical Liability Monitor, which show that since 1976 medical liability premiums have grown by 505 percent nationally, but by only 167 percent in the Golden State.

For their part, insurers and physician groups admit that caps are not a magic bullet. “You can’t just go in with a cap,” said Rita Nowak, a policy analyst for the Alliance of American Insurers, an industry trade group. “You have to have all the bells and whistles. If a state just implements a cap, that’s positive, but that’s not going to be a cure-all. You’ve got to have the whole program.”

Med mal goes to Washington
That may be why some are pinning their hopes on federal legislation, which would pre-empt the 15 states that have ruled caps unconstitutional and provide a one-shot, national solution to emulate California’s success in the last quarter century.

Conventional wisdom in the insurance industry has long been, as Nowak, put it, that “state legislative actions can move quicker than a federal initiative,” but given the wild card many states face in getting their reforms to pass constitutional muster, some say it may be time for the focus to move to the nation’s capital.

“My thoughts vary from day to day, if not hour to hour,” said Morse of Physicians Insurance. “Because we are very serious about accomplishing at the state level. … At this instant in time, I’m more encouraged about possibilities at the federal level.”

NSMA’s Matheis said The St. Paul’s decision showed the problem was national in scope.

“It would seem that if there were a national law that set a basic standard it would take away from the insurance industry this sense of unpredictability and might discourage them from coming into and leaving markets as we’ve seen in this crisis,” Matheis said.

President George W. Bush proposed MICRA-style reforms last year, including a $250,000 cap on non-economic damage awards, and a bill co-sponsored by Reps. James Greenwood (R-Pa.) and Christopher Cox (R-Calif.) passed the House last year but died in a Democrat-controlled Senate.

Not only has the Senate changed into more favorable Republican hands, but new Senate Majority Leader Bill Frist is a surgeon, leading some to believe he’s more sympathetic to the problems doctors face in accessing malpractice liability coverage. And President Bush has made the issue a priority, traveling to Pennsylvania to unveil his proposal and mentioning it in his State of the Union address in January.

The House has passed legislation similar to the Cox-Greenwood bill six times since Republicans took control in 1995, but the Senate has never gone along. However, Sens. Orrin Hatch (R-Utah) and Judd Gregg (R-N.H.) began an offensive earlier this month. Hatch chairs the Senate Judiciary Committee and Gregg is chair of the Health, Education, Labor and Pensions Committee and the two will hold joint hearings on the medical liability crisis. Hatch and Gregg blamed “out-of-control medical litigation” for soaring premiums.

“The situation this year is certainly more favorable,” said Gary Karr, a spokesperson for the American Insurance Association. “It’s not just the change in the Senate…more and more legislators on both sides of the aisle are seeing this is a problem.”

Stewart Eisenhart contributed to this story. To comment, e-mail koreilly@ insurancejournal.com.

Topics California Carriers Texas Legislation Profit Loss Claims Virginia Washington Pennsylvania Market West Virginia Nevada Medical Professional Liability