Troubled line nears profitability after huge losses, but will the good times last?

With the medical malpractice industry once again near profitability, and doctors and nurses walking picket lines no longer a staple on the evening news, has one more crisis vanished into thin air? It depends on who you ask.

Stability seems to be the favorite word describing medical malpractice conditions, whether you are talking about capacity or rates. That is no small triumph for an industry where soaring premiums a couple of years ago prompted cries of alarm along with urgent calls for action in statehouses across the nation.

One thing is certain. The net combined ratio has fallen sharply in recent years.

According to a historical analysis prepared using data from the National Association of Insurance Commissioners database available through National Underwriter Insurance Data Services, the industry's medical malpractice net combined ratio rose to over 150 in 2001, and dropped to just under 140 in 2002 and 2003. Preliminary industry results for 2004 show an estimated net combined ratio of just under 110 last year.

Along with expected profitability next year, that is good news in general, especially if it translates into stabilizing rates.

But what lies behind those numbers?

Standard & Poor's Analyst Jieqiu Fan said that tort reform, among other factors, has helped promote favorable loss-cost trends. “Reserve strengthening has been leveling off, so they don't need to pay for last year's mistakes,” she said.

In addition, companies have been tightening underwriting standards after some hard lessons several years ago.

J. Robert Hunter, the former Texas insurance commissioner and current insurance director for the Consumer Federation of America, sees a much simpler explanation. “It is becoming increasingly obvious that what is happening is a classic cycle,” Mr. Hunter said.

He added that tort reform just does not play all that important a role in the overall scheme of things. “If you look at the paid losses over the past 25 years and adjust them for inflation, they are as flat as a pancake,” he observed.

Thus, the debate in Washington and state legislatures is framed with plenty of statistics and white papers.

In Washington, despite President George W. Bush's personal effort, industry observers–including American Insurance Association Vice President Melissa Shelk–see little prospect of national medical malpractice reform passing hurdles in the U.S. Senate.

While Ms. Shelk expects the House to once again pass the measure this year, “the Senate has yet to even get 50 votes for it, so getting 60 to close debate [thus avoiding a filibuster by Democrats] seems highly unlikely this year,” she said.

Other analysts noted that GOP backers' refusal to budge from a $250,000 non-economic damages cap makes the bill a non-starter, even for some Republicans this year.

While President Bush was successful in obtaining class-action litigation reform near and dear to the insurance industry, Ms. Shelk noted that issue has been percolating on the Hill for a much longer time and is not quite the red cape to a charging plaintiffs' bar bull that caps are.

Thus, the caps battle will be mainly fought in the states. The eyes of the nation will be upon Texas, where the impact of 2003 reforms is now the focus of sharply diverging interpretations.

Earlier this year, then Insurance Commissioner Jose Montemayor hailed the 16.4 percent rate reductions of the Texas Medical Liability Trust for 2004, covering 13,000 doctors, and this year's Joint Underwriting Authority's 10 percent decline. “The rate reduction is further evidence that the medical malpractice reforms of 2003 are working,” he said.

However, Birny Birnbaum, director of the Austin-based Center for Economic Justice, said that after rate increases of 50-to-100 percent, reductions just barely into the double digits don't really cut it.

“These changes would have occurred without tort reform,” he said. “For example, investment income, which virtually disappeared in 2000 and 2001, has returned to significant levels.”

Mr. Hunter said it will take at least 10 years to judge the impact of tort reform on medical malpractice rates.

Fort Wayne, Ind.-based Medical Protective late last month announced an 8.7 percent statewide reduction for doctors in Florida–a state that enacted reforms including $500,000 caps last year. “Time will tell whether such reduced loss trends are the result of recent Florida reforms, and whether such reforms will help contain previously out-of-control issues,” according to Mr. Hunter.

Medical malpractice reform has sometimes proved problematic to the insurance industry. In Maryland, Republican Gov. Robert Ehrlich allowed a medical malpractice reform bill to become law without his signature after vetoing a marginally more unpalatable one. HMO tax subsidies of malpractice premiums without meaningful legal reform are not the answer, he asserted.

In Illinois, Democratic legislative leaders tacitly approved caps of $500,000 on non-economic damages they had long opposed in a bill that the Democratic governor promised to approve but has yet to sign into law. However, the bill came with such new rate regulatory powers that the insurance industry has remained neutral on it.

In Connecticut, the Property Casualty Insurers Association of America urged Republican Gov. Jodi Rell to veto a medical malpractice reform measure for its failure to limit non-economic damages.

“The bill also contains additional costly and unnecessary regulatory requirements, such as public hearings and expansive reporting of medical malpractice insurers,” noted Don Cleasby, PCI regional manager.

However, the industry and the American Medical Association can take heart from Missouri, where a Republican takeover of the governor's chair last November paved the way for passage of a $350,000 non-economic damage cap without the regulatory baggage some other states have seen fit to impose.

Such arguments are more than mere abstractions for those communities where pregnant women must travel for miles to see an ob-gyn specialist.

Gauging those kinds of metrics is a lot more challenging. The AMA's list of crisis states has remained stable at 20 over the past few years. Some comfort can be taken by the removal of one of the nation's largest states–Texas–and its replacement with the smallest state, Rhode Island.

Stephan Christiansen, co-author of a study published by Hartford-based Conning Research and Consulting last month, said stabilizing rates are key to the ultimate solution. “If things level out, I think there is a large percentage of physicians that can ultimately cope,” he noted.

In addition, states such as Maryland and Pennsylvania have offered assistance to doctors in paying their insurance premiums.

“It is very hard to get good, solid data on this, but I think there is a move on the part of specialties to being covered under hospital coverages or collecting into captives and risk retention groups,” Mr. Christiansen added.

However, those alternative solutions might be short-term. “The nature of the business is that the build-up of losses happens over time…the build-up of loss reserves and the requirement to pay settlements and the like is a slow-moving process,” he said.

Both Conning and S&P analysts see the line breaking into profitability in 2006.

Measuring a line's capacity at any given moment is more of an art than a science, but it is critical for a peak at future rates.

Matt Dolan, president of Avon, Conn.-based OneBeacon Professional Partners, said he has not seen all that much new capacity entering the market, and the fact that his company recently purchased the renewal rights of Chubb's medical malpractice book makes for one less player in the field.

Fran O'Connell, vice president of Chicago area-based Shand Morahan Inc.–who has been in the medical malpractice underwriting field for 23 years–said she believes hospitals and allied medical individuals are starting to see some price breaks for coverage as a result of new capital coming into the market.

“Some carriers are betting on the [future] effectiveness of tort reform, but we still feel that has yet to be tested,” she said.

Alternative risk-transfer mechanisms and the surplus lines market are playing an increasingly important role, but reductions of as much as 20- or 25 percent can often prove illusory in the long run because many of these entities might cut and run if losses mount too quickly after price-cutting.

“We have been in this market for 35 years, and I don't know of any surplus lines writer that has [been here that long],” said Ms. O'Connell.

Caption For pix of scary surgeon:

Covering doctors is no longer frightening the insurance industry, where stability seems to be the favorite word these days, whether you are talking about capacity or rates.

Quotebox, if needed, with mug of Birnbaum:

“These changes would have occurred without tort reform…Investment income, which virtually disappeared in 2000 and 2001, has returned to significant levels.”

Birny Birnbaum, Director

Center for Economic Justice

Graph Information:

Flag: Nearing Profitability

Head: Medical Malpractice Combined Ratios

Caption:

Preliminary results for the industry show an industry net combined ratio of less than 110 for 2004. Premiums, losses and expenses used to calculate the 2004 result do not include several large writers in American International Group, including Lexington Insurance, the third largest med mal writer in 2003 based on net premiums.

Source: NAIC Annual Statement Database via National Underwriter Insurance Data Services/Highline Data (Insurance Expense Exhibit, Net of Reinsurance). For information contact Chris Rogers at 617-441-5976.

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