U.S. Department of Health and Human Services
This paper was prepared by the Office of Disability, Aging and Long-Term Care Policy within the U.S. Department of Health and Human Services. For additional information, you may visit the DALTCP home page at http://aspe.hhs.gov/daltcp/home.htm or contact the office at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201. The e-mail address is: webmaster.DALTCP@hhs.gov.
Interest groups supported by trial lawyers argue that the recent crisis in the medical litigation system is only a reflection of an "insurance cycle": they claim that the management practices of the insurance industry have caused the crisis. But their claims are not supported by facts. Comparisons of states with and without meaningful medical liability reforms provide clear evidence that the broken medical litigation system is responsible.
While it is true that high levels of investment income and competition kept premium rates lower in the 1990's, it is not true that the current crisis is caused by the insurance cycle. If that were so, then all states would be equally experiencing a crisis. In fact, some states that have enacted reforms have seen decreases in malpractice premiums.
The issues today are similar to those 15 years ago, and the many states that failed to heed the call to reform continue to suffer from higher litigation costs and reduced access to care. For example, in states such as Pennsylvania, Nevada, West Virginia and Mississippi, qualified physicians are retiring early or relocating to states that have reformed their litigation systems.
Insurance premiums are largely determined by the expensive litigation system. Although most cases do not actually go to trial, it costs a significant amount of money to defend each claim--an average of $24,669. The most dramatic cost driver, however, is the effect of the few cases that result in huge jury awards. Even though very few cases result in these awards, they encourage lawyers and plaintiffs in the hope they can win at the litigation lottery, and they influence every settlement discussion as well.
According to the American Academy of Actuaries, insurers' costs began to increase in the late 1990's, fueled by increases in both the size and frequency of very large claims and in the costs of defending lawsuits. Case in point: the size of the median jury award more than doubled from $475,000 in 1996 to $1 million in 2000. This means that half of all jury awards are currently above $1 million.
In 2001, the average loss ratio (the ratio of claims paid to premiums collected by insurers) in states without caps was 100.86 compared to 68.98 in states with reasonable limits on non-economic damages. Simply put, claims have outstripped premiums in states without such reforms. With no limits on further increases in enormous jury awards and hence in future liability costs in sight, insurers in non-reform states are raising premiums dramatically, limiting coverage, or eliminating coverage altogether.
|TABLE 1. Medical Malpractice Loss Ratios: States with $250,000 Caps on Non-economic Damages|
|State||2001 Loss Ratio|
|Average: 6 states with caps||68.98|
|Average: 44 States without caps||100.86|
|Source: Medical Malpractice Insurance Net Premium and Incurred Loss Summary,National Association of Insurance Commissioners, 2001 data.|
This crisis has not been "caused" by poor management practices by insurers or losses from investment income. In fact, investments by medical malpractice companies have been relatively conservative. Most states have laws that specifically limit the percentage of assets an insurance company can put in speculative or volatile investments. According to the NAIC, only 1/4 of the assets of property and casualty insurers were invested in stocks in 2001, compared to over 50% in bonds. Even with reductions in equity values, insurers' investments in equities, as a percentage of total assets, is in line with prior years (i.e. less than 10%).
5 Year Historical Asset Allocation
P&C - Size: All, Type: All, Line: Medical Malpractice, Weight: Market Value
|TABLE 2. Asset Class|
|©2002 Brown Brothers Harriman & Co.|
Of course, premiums would have to be increased less if insurers were able to earn more investment income. Investment income helps pay claims.
It is significant, moreover, that the insurers are not leaving other markets. If the crisis were caused by lower investment returns, these companies would be exiting the property-casualty market, for example. But they are not. They are leaving the medical liability market because of the risk of unbounded payouts in that sector, particularly in non-reform states.
Doctors and patients benefited from the fact that a number of companies entered the malpractice insurance market in the 1990s. The increased competition and the efforts of the new companies to attract business kept premiums lower than they would otherwise have been. But the companies underestimated the extent to which the costs imposed by the litigation system would increase, particularly in non-reform states. Many lost money and exited the market.
The fact that companies entered and then left the market does not mean the litigation system has not caused the problem. On the contrary, the departure of insurers demonstrates how badly the litigation system is broken. Illustrating this fact, several major carriers have stopped selling malpractice insurance.
Doctors Insurance Reciprocal stopped writing group specialty coverage at the beginning of this year.
It should be noted that commercial insurance companies do not provide most medical liability insurance. Approximately 60% of doctors are covered by physician-owned companies, which were developed because commercial carriers had left the market or offered unaffordable policies. Physician-owned insurers are often the ones that fill the void left by exiting insurers.
The simple fact is that, because of the unprecedented size of jury awards in some states, malpractice insurance is too risky to be a profitable activity for many insurance companies. As a result, the number of insurers that have left or are contemplating leaving the medical malpractice market has reached crisis proportions in the last three years.
This directly affects patients' ability to get care not only because many doctors find the increased premiums unaffordable but also because insurance is increasingly difficult for doctors to obtain at any price, particularly in non-reform states. This forces them to give up their practices, restrict what patients they accept, or move to states that have reformed their system.
Reform of medical liability systems in several states convincingly demonstrates that tort reform works. California's MICRA-Medical Injury Compensation Reform Act-is one such example. It reduces the cost of insurance premiums and provides that truly injured people get properly compensated for their injuries.
For example, premiums for specialists in Los Angeles are substantially less than for specialists in metropolitan areas in states without reforms such as Florida, Illinois and Nevada.
|TABLE 3. Malpractice Liability Rate Ranges by Specialty by Geography as of July 2001|
|California (Los Angeles area)||$250,000||7,900||13,000|
|Pennsylvania (Urban Philadelphia area)||No cap||10,700||11,800|
|Nevada (Las Vegas area)||No cap||11,600||15,800|
|Illinois (Chicago area)||No cap||16,500||28,100|
|Florida (Miami and Ft. Lauderdale areas)*||No cap||17,600||50,700|
|California (Los Angeles area)||$250,000||23,700||42,200|
|Pennsylvania (Urban Philadelphia area)||No cap||31,500||35,800|
|Nevada (Las Vegas area)||No cap||40,300||56,900|
|Illinois (Chicago area)||No cap||50,000||70,200|
|Florida (Miami and Ft. Lauderdale areas)*||No cap||63,200||126,600|
|California (Los Angeles area)||$250,000||46,900||57,700|
|Pennsylvania (Urban Philadelphia area)||No cap||45,900||66,300|
|Nevada (Las Vegas area)||No cap||71,100||94,800|
|Illinois (Chicago area)||No cap||72,500||110,100|
|Florida (Miami and Ft. Lauderdale areas)*||No cap||108,000||208,900|
|Source: Medical Liability
Monitor, Vol.26, No.10, October 2001: Shook, Hardy, Bacon, L.L.P., October 9,
* Florida reform legislation went into effect in 2001. It imposes caps of $250,000-350,000 unless neither party demands binding arbitration or the defendant refuses to arbitrate.
Malpractice reforms in the 1980s led to a 34% decline in malpractice premiums in those states that enacted reforms compared with states that did not enact reforms.
For more information on this subject, go to the Office of Disability, Aging and Long-Term Care website at http://aspe.hhs.gov/daltcp/reports.htm.