Medical Malpractice

 Manjesh Singh
  1st-Aug-2007
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 began to rise at the beginning of this decade, after a period of essentially flat prices. Rate increases were precipitated in part by the growing size of claims, particularly in urban areas. Among the other factors driving up prices was a reduced supply of available coverage as several major insurers exited the medical malpractice business because of the difficulty of making a profit.

New research suggests that premium increases may be moderating but for any turnaround to take root significant reforms in the delivery of medical care that focus on patient safety need to occur, industry observers say.
Related Information
RECENT DEVELOPMENTS
  • Market Conditions: Although the cost of medical malpractice insurance has stabilized or decreased for most specialties in most geographical areas, it is still much higher than it was five or six years ago and doctors who reduced their coverage at the height of the crisis are not yet rushing to raise it again, according to Medical Economics. Doctors who left the traditional market for a captive or risk retention group are for the most part still there. A survey by the Risk Retention Reporter, published in February 2007, shows that, despite the growing availability and affordability of coverage, physicians are continuing to form risk retention groups (RRGs), insurance companies set up to assume the liability risk of their members. Fifty doctor-owned RRGs were formed from 2001 to 2006, representing 25 percent of total RRG formations during that period, compared with seven from 1990 to 2000, representing 12.5 percent of the total formed over that decade. Twelve doctor-owned RRGs were set up in 2006 alone.
  • A 2006 Medical Liability Monitor survey of medical malpractice company rate changes for three specialties suggests rates are holding steady or dropping. About 70 percent of the 837 rates quoted showed no rate change or a rate decrease.
  • A 2006 survey by Medical Economics shows that the median medical malpractice premium in 2005 was $15,000, up from $13,000 in 2003. Primary care physicians paid about $1,000 less. Reports from various states also show that new medical malpractice insurers are entering the market, expanding competition. Because new companies are starting from scratch and do not have to pay out on earlier policies, they can offer more favorable rates. The heightened focus on defense, greater investment in plant and equipment to reduce adverse outcomes and tort reform in some states are among the reasons given for the moderating trends. In addition, investment income has grown since the early part of the decade.
  • Fewer medical malpractice claims are being filed, but the dollar amount of each claim is increasing. In its Hospital Professional Liability and Physician Liability 2006 Benchmark Analysis, which examined more than 47,700 claims representing more than $4.4 billion of incurred losses, the insurance broker Aon found that the overall frequency of medical malpractice claims has not increased for the second consecutive year. But while claim frequency is stabilizing, according to the study, the average size (severity) of malpractice claims continues to increase at a rate of 6 percent. The average amount paid to plaintiffs increased only 3 percent, while amounts paid to defend against liability claims rose 17 percent as hospitals mount a more aggressive defense of claims.
  • A Conning Research & Consulting Inc. study, "New Opportunities Emerging? Or the Eye of the Hurricane?" suggests that the turnaround is due to a series of rate increases over the past four years that have allowed insurers to catch up with losses. Tort reform, particularly caps on noneconomic damages at the state level, is also playing a role.
  • The financial results of medical malpractice insurers show the crisis in medical malpractice insurance is lessening as premiums reach acceptable levels relative to costs. According to the National Underwriter Data Services, the medical malpractice combined ratio, a measure of profitability, was 100.1 in 2005. This means that in 2005 for every medical malpractice premium dollar collected, insurers paid out a little over one dollar in claims and expenses. This represents a significant drop from 2003, when the combined ratio was 138.8, and from the five previous years. The combined ratio does not take account of investment income.
  • Claims, Jury Awards and Settlements: In a study of medical malpractice claims closed between 2000 and 2004 in seven large states, published in March 2007, the U.S. Department of Justice’s Bureau of Justice Statistics found that most were closed without payment. The seven states selected, Florida, Illinois, Maine, Massachusetts, Missouri, Nevada and Texas, have comprehensive databases, some of which extended back to the 1990s. Not surprising, medical payouts increased for claimants with the most serious and permanent injuries and as claims advanced through the legal system to jury trial. Nearly 10 percent of claims in Florida, Maine, Missouri and Nevada closed with payments of $1million or more while 33 percent in Florida, Maine and Missouri closed with payments of less the $250,000. Median damages increased, sometimes significantly, depending on the state and the length of the period for which data exists. In Missouri, for example, the median grew from $33,000 in 1990 to $150,000 in 2004, but in Texas and Nevada increases were 26 and 27 percent respectively.
  • The most recent research from Jury Verdict Research shows that after two years of median medical malpractice jury awards holding steady at about $1,000,000, in 2004 the median rose slightly to $1,045,000. The average award in 2004 rose from about $4.1 million in 2003 to $4.8 million in 2004. Settlements too have shown a steady increase, from a median of $300,000 in 1998 to $1,000,000 in 2004.
  • Medical Errors/Patient Safety: Studies have shown that prompt disclosure of medical errors can lead to lower litigation costs. A three-pronged program set up by the University of Michigan realized significant savings when errors were disclosed and compensation for injury was paid quickly and fairly; cases without merit were aggressively defended; and adverse events were studied to determine how procedures could be improved. Between 2001 and 2005 litigation costs dropped from $3 million to $1 million; the average time it took to settle claims and lawsuits decreased from 20.7 months to 9.5 months; and the number of claims and lawsuits fell from 262 to 114. Legislation, the National Medical Error Disclosure and Compensation (MEDiC) bill, based on the concept of full disclosure and open communication between patients and medical providers, was introduced in the last Congress by Senators Clinton and Obama, but it was never moved out of committee. The measure would have provided grants and technical assistance to insurers, hospitals, doctors and health care systems to implement such programs.
  • At the end of July 2005, Congress passed legislation that creates a network for reporting and analyzing medical errors. Reporting of mistakes by hospitals is voluntary, the information is confidential and information cannot be used in medical malpractice cases. There are currently at least 23 similar state programs, all of them but one with mandatory reporting.
  • Conning researchers say that for any improvement to take root, reforms on several levels must take place, including judicial reform that would more clearly link compensation with avoidable errors, government support for a national response to the cost of medical errors, state and local support for more uniform model laws and regulations, and the development by the health care and health insurance industries of incentives to reduce avoidable errors.
  • Tort Reform Initiatives: On May 8, 2006 Congress voted against two measures to limit jury awards in medical malpractice lawsuits sponsored by Senate Republicans. The major bill was based on a Texas law passed a few years ago that supporters say has improved the medical malpractice environment greatly in that state. Proponents of the Texas reform claim it has caused insurance premiums to decline significantly and brought new doctors to the state. S.22 would have set a $250,000 cap on noneconomic damages for individual health care providers involved in malpractice claims, a $500,000 cap when more than one provider is involved and a $750,000 total cap. The vote represents the fourth time in the past three years that the Senate has rejected Republican-sponsored legislation involving medical malpractice.
  • In April 2007, Oklahoma Gov. Brad Henry vetoed S.B. 507, a comprehensive civil justice reform bill that included provisions on class actions, expert testimony, damage limits and frivolous claims. Gov. Henry said he was opposed to the cap on noneconomic damages and the opt-in provision in the section on class action lawsuits.
  • In late March 2006 Wisconsin Governor Jim Doyle signed into law a medical malpractice liability bill that caps noneconomic damage awards at $750,000. The state supreme court struck down an earlier cap in July 2005, finding that those caps were arbitrary and unconstitutional.
  • In early March 2006 Washington State Gov. Chris Gregoire signed into law a measure that, among other things, will allow doctors to apologize for medical mistakes they have made without allowing the admission to be used against them in court. About half the states have passed similar laws, according to the American Medical Association. In 2007, Nebraska and more than half a dozen other states were considering so-called “I’m sorry” laws.
  • State-Run Programs: During the peak of the medical malpractice crisis several states, including Pennsylvania, New Jersey and Maryland, enacted legislation to help medical professionals purchase insurance coverage.
  • In Pennsylvania, the insurance commissioner announced in November 2006 that the Mcare abatement program would be phased out as soon as the Mcare program can be taken over by private insurers, which is expected to occur by 2011. Most health care providers in Pennsylvania are required to purchase at least $1 million in medical malpractice liability coverage, a portion of which can be obtained from the state-administered Mcare excess insurance program. The Mcare program, which took over a state-run catastrophic loss program with huge unfunded liabilities, is being phased out. The various taxes that now finance the abatement program will be used to retire these unfunded liabilities. The abatement program was established in 2003 to encourage health care providers to stay in the state. It has spent nearly $1billion to help defray the cost of medical malpractice coverage. The decision to phase out the abatement program was based on the recommendations of a commission set up to study the Mcare program and address its unfunded liabilities.
  • In New Jersey, the Medical Malpractice Insurance Premium Assistance Fund established in 2004 for a three-year period began to distribute subsidies to doctors in specialties with the highest medical malpractice insurance premiums in October 2005. Subsidies under the program will terminate this year.
  • In Maryland, the subsidy program is funded by a 2 percent HMO premium, which is distributed to medical malpractice insurers in return for keeping rates down. Premiums to medical providers in high-risk specialties may not exceed more than 5 percent of premiums for the previous 12-month period. Part of a broader medical malpractice measure, the subsidy ends in 2008. The state allocated $35 million to the program in 2007.
  • Costs to the Public: In March 2006 Towers Perrin released its U.S. Tort Costs: 2005 Update. The study found that over the 29 years since 1975, when medical malpractice insurance data were first separated out from other types of liability, medical malpractice cost increases have outpaced other tort areas, rising at an average of 11.7 percent a year, compared with 9.0 percent for all other tort costs. In 2004 medical malpractice costs totaled over $28.7 billion, up from about $26.5 billion the previous year.
  • A February 2006 study, prepared by PricewaterhouseCoopers for America’s Health Insurance Plans, examined the factors contributing to rising health care costs and analyzed where the health care dollar goes. It found that medical liability costs and defensive medicine account for 10 percent of medical care costs. Defensive medicine is when doctors order more tests, prescribe more medication and make more referrals than they believe are necessary to protect themselves from being accused of negligence. The study, “The Factors Fueling Rising Healthcare Costs 2006,” also estimates that health insurance premiums rose 8.8 percent between 2004 and 2005.
  • Proposals to Make Medical Malpractice Liability Insurance More Affordable: Litigation costs are high. Figures for 2005 from Highline Data put defense and cost containment expenditures in medical malpractice cases at 48 percent of the total costs to the medical malpractice insurer of settling a claim. Claims typically take about five years to resolve from the date of injury to the date of settlement. Increasingly, insurers and public policy leaders are examining ways to speed up compensation and reduce the cost of the system that provides it. Here is an overview of some of them:

    (1) Continue efforts to expand the number of states that have pretrial screening panels

    (2) Emphasize risk management: The effectiveness of risk management measures, such as developing practice standards, is exemplified by the success of steps taken by anesthesiologists. After identifying the cause of most claims and establishing standards to avoid them in the 1980s, the specialty saw a significant drop in medical malpractice claims and awards and a corresponding drop in the cost of medical malpractice insurance. Other risk management proposals include requiring doctors to study medical malpractice prevention as part of their licensing requirements (Massachusetts has such a program in force); increasing the number of states that require mandatory reporting of medical errors by health care facilities; and helping doctors invest in new health information technology, such as electronic health records, electronic prescribing and experimental safety software.

    (3) Take action against the small proportion of doctors with multiple judgments against them and who drive up the cost of insurance for all: In Florida, when a constitutional amendment that that would take away medical licenses from those with three or more medical malpractice judgments against them was proposed, a study found that about 7 percent of the state's practicing doctors would be affected.

    (4) Encourage the disclosure of medical errors and open communication between health care providers and their patients when there is an unexpected adverse outcome so that claims can be resolved more quickly.

    (5) Create special courts of law to handle medical malpractice cases or design a compensation system similar to workers compensation, a no-fault system that exists in all states to compensate for on-the-job-injuries. Some suggest that a standard of avoidability or preventability be used instead of a standard of negligence.

BACKGROUND

Brief History: The insurance industry tends to be cyclical. The medical malpractice insurance segment 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 15 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 the patients of the doctors insured filed malpractice claims. 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 the possibility of suing for damages. 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.

A 2004 study conducted by the RAND Corp.’s Institute of Civil Justice in Santa Monica, California, confirmed the success of California’s tort reform initiative. It found that the 1975 California Medical Injury Compensation Reform Act (MICRA) has reduced the damages that doctors and their insurers are ordered to pay in medical malpractice lawsuits by 30 percent. MICRA limits jury awards for pain and suffering to $250,000 and also limits attorney fees. The study, which reviewed 257 plaintiff verdicts, also showed that compensation to injured patients declined by 15 percent while the fees for plaintiffs’ attorneys fell by 60 percent. Caps on noneconomic damages were imposed in 45 percent of trials that ended in a victory for plaintiffs. Those with the highest percentage loss as a result of caps on noneconomic awards were often those with injuries that caused relatively little economic loss but a significantly lower quality of life, according to the study. A major effect of the law was to make plaintiffs’ lawyers accept more of the cost of the litigation. The law, which was enacted when California was facing an insurance crisis, is being considered as a model for medical malpractice reform in other states.
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