Insurers: Big Claims Push Up Med-Mal Cover Costs

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By Steven Brostoff, Washington Editor

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NU Online News Service, Feb. 12, 3:13 p.m. EST,Washington?Claim costs, not insurance industry investmentexperience, is the main factor driving up the cost of medicalmalpractice insurance, industry representatives said.

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At a press conference here yesterday, industry representativescharged that those who accuse insurance companies of manufacturinga malpractice insurance crisis as an excuse to raise rates andrecoup investment losses are flat wrong.

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"We are well aware that opponents of reform will attempt toblame insurers for the current state of affairs," said RodgerLawson, president of the Downers Grove, Ill.-based Alliance ofAmerican Insurers. "They've done it before."

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However, Mr. Lawson noted, most commercial insurers have alreadyleft the medical liability market because of too many claims costschasing too few dollars.

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"Any objective analysis will demonstrate that physicians andhospitals have themselves been trying to manage this situation asbest they can, but they, too, have reached a fork in the road," hesaid.

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Lawrence Smarr, president of the Rockville, Md.-based PhysicianInsurers Association of America, which represents professionalliability companies owned or operated by providers, said that theproblem facing the nation today is a medical liability crisis, nota medical liability insurance crisis.

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Both at the press conference and at a later Capitol Hill hearingon medical malpractice, Mr. Smarr dismissed accusations thatinsurance companies raised rates on medical malpractice not becauseof liability issues, but to recoup stock market losses.

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In fact, he said, medical liability insurers are primarilyinvested in high-grade bonds and have not lost large amounts in thestock market.

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Indeed, he said, PIAA statistics indicate that members have onlyabout 11 percent of their portfolios invested in stocks, thusprecluding major losses due to market swings.

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The primary driver of medical malpractice insurance costs hasbeen paid claim severity, Mr. Smarr said.

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The mean payment amount has risen by a compound annual growthrate of 6.9 percent since 1988, compared with 2.6 percent for theConsumer Price Index, he said.

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Moreover, Mr. Smarr said, payments exceeding $1 million nowcomprise almost eight percent of claims, doubling in fouryears.

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"The unavoidable consequence is that physicians are moving awayfrom crisis states, reducing the scope of their practices orleaving the practice of medicine altogether," Mr. Smarr said.

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But at the hearing, former Missouri Insurance Commissioner JayAngoff, now a lawyer in private practice, said investment income isa major reason for the malpractice insurance crisis.

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He said that in Missouri, the number of claims actuallydecreased over the years 1993 to 1998, but malpractice insurancerates have been increasing.

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One reason, he said, is that stocks have crashed and interestrates are near 40-year lows.

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"The drop in insurers' investment income today can thereforedwarf the decrease in their claims payments, and thus createpressure to raise rates even though claims are going down," Mr.Angoff said.

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At the same time, he said, reinsurance rates have beenincreasing due to the Sept. 11, 2001, terrorist attacks, eventhough terrorism is unrelated to medical malpractice.

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Third, Mr. Angoff said, statutory accounting principles createincentives for insurance companies to inflate estimates of incurredlosses.

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Finally, he said, the industry's antitrust immunity under theMcCarran-Ferguson Act allows insurance companies to collectivelyraise prices without fear of prosecution.

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Legislation that would limit non-economic damage awards inmedical malpractice cases to $250,000 has been introduced in theHouse of Representatives. The legislation is H.R. 5.

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