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Bankruptcies and health care inflation primary causes
of Med Mal cost increases; New study also points to industry business cycle |
A new study released Jan. 14 by PaTLA cites three primary causes for the rising costs of medical malpractice insurance. The report states, �Normal long-term trends in the insurance business cycle, as well as changes to the Pennsylvania medical malpractice delivery system may explain much, if not all, of the premium increases in 1999, 2000, and 2001.�
Authored by Alfred E. Hofflander, Ph.D., Blaine F. Nye, Ph.D., and Jane D. Nettesheim of Stanford Consulting Group, Inc., the economic analysis was designed to determine the underlying causes for the increases in both medical malpractice insurance premiums and CAT Fund surcharges. Sixteen years ago, Hofflander and Nye were commissioned by a coalition of medical and legal organizations to prepare the benchmark study of the Commonwealth�s medical malpractice system. Part of the funding for their earlier research was provided by the state, but most of their 1985 recommendations were �ignored.�
It is true that medical malpractice claims payments are rising, but the study found that on average, year-to-year claim payments are increasing in line with the medical cost index. The average annual increase in CAT Fund payments in Pennsylvania has been 10.1 percent from 1990 through 2000. However, insurance carriers, as well as the medical community, should expect settlements to rise commensurate with health care cost inflation even though it is significantly higher than inflation for the rest of the economy.
The report also discusses the high level of competition in medical malpractice insurance and the effect this has on the industry�s business cycle. Buyers are extremely sensitive to costs, leading carriers to be �reluctant to increase rates and sacrifice market share.� As a result, insurance companies forego small annual rate increases preferring to wait for a few years before instituting larger rate changes. The authors characterize this as a �lumpiness� in the business cycle. What doctors and hospitals perceive as �sudden� price increases are actually deferred costs being passed on when premiums no longer cover payments plus profit. Once premiums reach actuarially sound levels, profits rise, new insurers enter the market with lower rates, competitive pressures return and the cycle begins all over again.
PaTLA President Clifford A. Rieders said: �Medical malpractice premiums are rising nationally. Their insurance cycle is not limited to Pennsylvania.�
The risks associated with this business practice are best illustrated by the failures of two medical malpractice insurance carriers, The Physicians Insurance Company (PIC) and P.I.E. Mutual Insurance Company. Based on their earlier findings, Hofflander and Nye�s 1985 study actually predicted the eventual demise of the Physicians Insurance Company.
Before they became insolvent in 1997, their combined market share was as high as 20 percent, or about one-in-five medical malpractice policies in Pennsylvania. The liquidations of PIC and P.I.E. left an unfunded liability estimated by the CAT Fund at $30 million per year. Consequently, all Pennsylvania doctors receive an additional assessment in their CAT Fund surcharge bills each year to cover the claims abandoned by PIC and P.I.E. The authors state that, �This alone could explain the majority of increases in losses paid by the CAT Fund� in recent years.
PHICO, one of Pennsylvania�s largest medical malpractice underwriters (15.9 percent market share in 1999), was taken over by the state last August and is now in rehabilitation. PHICO�s unpaid claims. according to Hofflander and Nye, �will no doubt increase the CAT Fund�s liabilities.�
As to tort reform, the authors conclude that the accusations of doctors and hospitals�that jury awards are out of control�are both �anecdotal� and �not verified.� They point out that regardless of the size of any given jury award, the total coverage per insured is limited to $1.2 million. Since no injured victim can collect more from a policy than the limit of its coverage, any amounts awarded by juries in excess of $1.2 million are not payable by the insurer and therefore have abso1utely no impact on premium rate increases.
They also reviewed the number of trial court filings for Pennsylvania and found them to be �roughly the median for the country.� And examination of the National Practitioners Bank, which records medical malpractice payments across the country, found that the average claims cost for Pennsylvania physicians is less than $2,000 higher than the national average of $248,947. In other words, Pennsylvania�s claims payments are less than one percent above the norm.
In 1985, Hofflander and Nye recommended the implementation of experience ratings for medical malpractice premiums. But Pennsylvania doctors with good records still pay disproportionately higher rates based on their histories while those with poor records pay disproportionately lower rates.
They also recommended establishing a comprehensive, state-administered medical malpractice database so competing insurers would have information to effectively implement experience ratings. The data shou1d also be available to help Pennsylvania�s disciplinary board identify problem physicians.
The Pennsylvania Trial Lawyers Association continues to support both recommendations but also wants the data bank accessible to the public so patients can better choose doctors with good records and avoid those with a history of injuring patients. This additional provision is similar to Massachusetts� patient safety law.
Rieders added, �Tort reform cannot reduce the cost of medical errors. If insurers and defendants do not bear the financial responsibility, these costs, which continue to grow each year, will ultimately be paid by the injured, their families, employers and/or taxpayers.�
Researchers have counted medical errors as the third leading cause of death in this country as a resu1t of 100,000 fatalities each year.
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