Condition Critical: Med Mal Liability Markets in Dire Need of Rescuscitation

By | September 30, 2002

By now, it’s hardly an exaggeration that medical-malpractice liability insurance markets in several states are in crisis.

As is the case with so many other insurance lines, the exodus of medical liability carriers leaves physicians and other health care providers—especially those in rural or medically underserved areas—scrambling for new policies that often prove prohibitively expensive. As a result, physicians in some states are faced with either relocating to areas with more affordable coverage, or simply closing their practices.

In most cases, non-economic damages awarded by juries in malpractice lawsuits are singled out as the primary culprit driving away carriers and increasing rates—an argument once again pitting insurers against plaintiff attorneys and consumer advocacy groups. Accordingly, carriers and their representatives cite tort reform as absolutely essential to restoring stability in medical malpractice liability markets, while trial lawyers and advocacy groups warn against curtailing patients’ ability to take action against negligent health care providers.

Capitol attention
The medical malpractice liability issue has reached such a point that both the U.S. House of Representatives and President Bush have taken notice. Earlier this month, the House Judiciary Committee approved a bill that would limit the amount of awards juries may assess to injured patients in malpractice cases. The House action comes after the President’s call in July for legislation to cap such awards.

Echoing the arguments between insurers and plaintiff attorneys, House Republicans contend such caps would help slow increases in health care costs, while Democrats assert the bill would hold health care providers less accountable for errors.

Specifically, the bill would cap non-economic damages such as pain and suffering at $250,000, and punitive damages would total no more than either twice the amount of economic damages or $250,000, depending on which figure is larger. The legislation would also limit both lawyers’ fees and patients’ ability to sue for old cases.

American Medical Association President Yank Coble praised the House legislation, declaring it would allow more doctors to continue practicing.

A similar bill was rejected in the Senate last July. The House bill requires approval by another committee before a full vote can be held.

The St. Paul pulls out
Late in 2001, The St. Paul Group of Companies announced plans to withdraw completely from its global malpractice liability business, signaling just how widespread and costly writing such coverage had become.

St. Paul communications manager Andrea Wood explained the circumstances that led the company to exit the business. “To begin with, we lost nearly $1.5 billion in this line of business over the last four years,” she said. “As a result of the magnitude of these losses, as well as our analysis of the market trends that suggest that these losses would continue—despite our best efforts—we made the difficult decision to exit the business entirely.”

Wood identified litigation as a primary cause of those losses: “Litigation certainly has played into the losses. Jury verdict research probably is one of the most widely used statistics on jury awards. The median medical malpractice jury award … in 1996 was just under $500,000. By 2000, that had grown to $1 million. So in just that short period of time, it doubled. The loss ratios that we were seeing—and not just at The St. Paul, I think most in the medical malpractice insurance business—have been greater than 100 for the past four to five years.”

Nevada sets new limits
Like many other states, Nevada’s malpractice liability market was already unstable when St. Paul announced its withdrawal from the coverage. Legislation similar to the U.S. House bill was passed by Nevada lawmakers and signed into law by Gov. Kenny Guinn in early August. The Legislature’s action came after the University Medical Center in Las Vegas shut down for 10 days when 58 doctors walked off the job, citing unaffordable malpractice liability insurance.

According to the Las Vegas Sun, the Nevada legislation places a $350,000 cap on non-economic damages, as well as a $50,000 liability cap on trauma centers and emergency rooms throughout the state. Hailed by both the Governor and by Nevada health care providers, the new law was met less favorably by the Nevada Trial Lawyers Association, which is considering challenging it on constitutional grounds. The association noted that caps on damages in some other states have been ruled unconstitutional.

But Larry Matheis, executive director of the Nevada State Medical Association, explained how he believes the new law will stand up to such challenges, even though it’s still to nascent to be declared an outright success. “We’re in this zone now for a few years where California was when they passed MICRA (the Medical Injury Compensation Reform Act of 1975),” he said. “Nothing changed immediately when they passed MICRA. Insurers didn’t move into the state, premium rates didn’t decline. There was uncertainty whether all parts of the law would have the desired effect. It was obvious that as cases came along, various parts of the law were going to be challenged in the courts. That’s exactly where we’re at.”

Matheis continued, “So far, no insurers have moved into the state. A couple look like they may even be continuing to consider leaving or not increasing the number of policies they’ll be writing, particularly on OB services. But we’ve got a new statute of limitations that have been put in that shorten the timeline a little bit.

“The law only starts in October, so everybody is speculating,” Matheis said. “I’m cautiously optimistic. The ($350,000) cap on non-economic damages, I think, will be sustained under any challenge. The question it raises is that there are two exceptions.

“One exception is that (the cap) doesn’t apply if there’s been gross negligence,” he elaborated. “The second exception to the $350,000 non-economic damage cap is the one that I think protects its constitutionality, but may create an opening. That’s the one that allows the court that has heard the case to issue a finding that they had clear and compelling evidence that justifies setting aside the $350,000 cap in that case. Clearly, this actually gives the court enhanced authority to make a determination of whether-or-not the statute should be abrogated—so I think that will protect it against constitutional challenges.”

Fundamentally, Matheis explained, the new law represented Nevada lawmakers’ best attempt to stabilize its malpractice liability market: “I think having the cap there will send a signal as to what to set as an appropriate settlement level. We wanted to bring some predictability into the system—I think (the new law) will do it.”

Texas: ready to tackle the issue
Texas, another state reeling from malpractice liability market upheavals, is considering measures similar to those included in Nevada’s new law. According to the Texas Medical Examiners Board, more than half of all physicians in Texas had medical malpractice claims filed against them in 2000. The Texas Department of Insurance reports that malpractice liability carriers in the state paid more than $380 million in claims that same year.

The crisis shows no sign of abating on its own, and 2002 is an election year in Texas; along with other insurance issues, malpractice liability is shaping many political debates as November approaches. The Texas Legislature, however, won’t convene again until January (barring a special session), so various parties involved in the debate are still honing their arguments.

Kim Ross, vice president for Public Policy at the Texas Medical Association, explains that while a number of measures are needed to reform the state’s health care system, any serious attempt to alleviate the situation must include a cap on non-economic damages. “It will require a comprehensive approach, but the way you add up the math—if you look at the variants, how deep is the hole we’re in with regard to medical loss ratio—if you look at all the factors you can stack up (preventing medical errors, insurance underwriting cycles, rate of return on capital, frequency of claims and cost of defending them, severity of those claims), the single largest component is the alarming growth in the size of an adjudicated or settled claim,” he said. “Everything else is far less significant.”

Ross continued, “That doesn’t mean they shouldn’t be debated or addressed—you want to approach this comprehensively—but as a practical matter, this is a severity crisis, not a frequency crisis. There’s a lot of confusion among the layreaders and the public officials that confuses other forms of insurance … with medical malpractice, and they’re very, very different.”

Ross also explained what sort of legislation fashioned to address the crisis he’d like to see: “You’re going to have to look at finding some constitutionally sustainable way of limiting what can be awarded with regard to the non-economic damage component of a claim. This is totally discretionary to the jury—it’s kind of left up to them, and it’s pretty much out of control. It’s the single largest component of awards in the aggregate … At the end of the day, we’re going to have to provide better guidelines as to how a jury calculates the value of those losses that are, while legitimate, entirely speculative and intangible, like pain and suffering. That will, of course, be the centerpiece of our initiative.”

But while the Texas Medical Association and others advocate caps on damages, some consumer advocacy groups argue in the opposite direction—that more effective regulation of the insurance industry is necessary to stabilize the market.

Dan Lambe, executive director of Texas Watch, noted that premium increases for malpractice liability coverage fall in line with the trend of rising rates across all coverages: “There’s no question that insurance rates are going up for doctors … Unfortunately, it’s a trend we’re seeing along all lines of insurance—homeowners, auto, health, small business liability, workers’ compensation. Every single line of insurance is seeing rate increases. Doctors are part of the crowd.”

Lambe explained, “What it gets to is a need to fundamentally rethink the way we regulate insurance in the state of Texas. Right now, medical malpractice insurance rates in the state of Texas are completely un-rate regulated. Nobody knows whether or not what insurance companies are charging today is justified. Nobody knows how the insurance companies came up with the rates that they’re charging.”

To comment on this story, e-mail: seisenhart@insurancejournal.com.

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Insurance Journal West September 30, 2002
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