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

With the medical malpractice industry once again nearprofitability, and doctors and nurses walking picket lines nolonger a staple on the evening news, has one more crisis vanishedinto thin air? It depends on who you ask.

Stability seems to be the favorite word describing medicalmalpractice conditions, whether you are talking about capacity orrates. That is no small triumph for an industry where soaringpremiums a couple of years ago prompted cries of alarm along withurgent calls for action in statehouses across the nation.

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

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

Along with expected profitability next year, that is good newsin 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 topay for last year's mistakes,” she said.

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

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

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

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

In Washington, despite President George W. Bush's personaleffort, industry observers–including American Insurance AssociationVice President Melissa Shelk–see little prospect of nationalmedical malpractice reform passing hurdles in the U.S. Senate.

While Ms. Shelk expects the House to once again pass the measurethis year, “the Senate has yet to even get 50 votes for it, sogetting 60 to close debate [thus avoiding a filibuster byDemocrats] 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-actionlitigation reform near and dear to the insurance industry, Ms.Shelk noted that issue has been percolating on the Hill for a muchlonger 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. Theeyes of the nation will be upon Texas, where the impact of 2003reforms is now the focus of sharply diverging interpretations.

Earlier this year, then Insurance Commissioner Jose Montemayorhailed the 16.4 percent rate reductions of the Texas MedicalLiability Trust for 2004, covering 13,000 doctors, and this year'sJoint Underwriting Authority's 10 percent decline. “The ratereduction is further evidence that the medical malpractice reformsof 2003 are working,” he said.

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

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

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

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

Medical malpractice reform has sometimes proved problematic tothe insurance industry. In Maryland, Republican Gov. Robert Ehrlichallowed a medical malpractice reform bill to become law without hissignature after vetoing a marginally more unpalatable one. HMO taxsubsidies of malpractice premiums without meaningful legal reformare not the answer, he asserted.

In Illinois, Democratic legislative leaders tacitly approvedcaps of $500,000 on non-economic damages they had long opposed in abill that the Democratic governor promised to approve but has yetto sign into law. However, the bill came with such new rateregulatory powers that the insurance industry has remained neutralon it.

In Connecticut, the Property Casualty Insurers Association ofAmerica urged Republican Gov. Jodi Rell to veto a medicalmalpractice reform measure for its failure to limit non-economicdamages.

“The bill also contains additional costly and unnecessaryregulatory requirements, such as public hearings and expansivereporting of medical malpractice insurers,” noted Don Cleasby, PCIregional manager.

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

Such arguments are more than mere abstractions for thosecommunities where pregnant women must travel for miles to see anob-gyn specialist.

Gauging those kinds of metrics is a lot more challenging. TheAMA's list of crisis states has remained stable at 20 over the pastfew years. Some comfort can be taken by the removal of one of thenation's largest states–Texas–and its replacement with the smalleststate, Rhode Island.

Stephan Christiansen, co-author of a study published byHartford-based Conning Research and Consulting last month, saidstabilizing rates are key to the ultimate solution. “If thingslevel out, I think there is a large percentage of physicians thatcan ultimately cope,” he noted.

In addition, states such as Maryland and Pennsylvania haveoffered assistance to doctors in paying their insurancepremiums.

“It is very hard to get good, solid data on this, but I thinkthere is a move on the part of specialties to being covered underhospital coverages or collecting into captives and risk retentiongroups,” Mr. Christiansen added.

However, those alternative solutions might be short-term. “Thenature of the business is that the build-up of losses happens overtime…the build-up of loss reserves and the requirement to paysettlements and the like is a slow-moving process,” he said.

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

Measuring a line's capacity at any given moment is more of anart than a science, but it is critical for a peak at futurerates.

Matt Dolan, president of Avon, Conn.-based OneBeaconProfessional Partners, said he has not seen all that much newcapacity entering the market, and the fact that his companyrecently purchased the renewal rights of Chubb's medicalmalpractice book makes for one less player in the field.

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

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

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

“We have been in this market for 35 years, and I don't know ofany 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 insuranceindustry, 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 tortreform…Investment income, which virtually disappeared in 2000 and2001, 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 netcombined ratio of less than 110 for 2004. Premiums, losses andexpenses used to calculate the 2004 result do not include severallarge writers in American International Group, including LexingtonInsurance, the third largest med mal writer in 2003 based on netpremiums.

Source: NAIC Annual Statement Database via National UnderwriterInsurance Data Services/Highline Data (Insurance Expense Exhibit,Net of Reinsurance). For information contact Chris Rogers at617-441-5976.