Tort Reform Would Cure Med Mal Crisis

Because most doctors are locked into HMO or PPO plans that prescribe fixed costs for services, there is not much wiggle room for doctors to charge their patients higher medical fees that reflect increased overhead expenses, such as insurance. Doctors are now resorting to dropping risky procedures, fleeing heavily litigious states, practicing without insurance, or deciding they can no longer afford to practice medicine.

Insurers also are backed into a corner. Unless they pass on the cost of the exorbitant jury awards, insurers transacting professional liability coverage in the medical field will be looking for more commercially viable business. If the medical malpractice insurance market contracts as insurers look for more lucrative areas in which to allocate capital, it could force some medical professionals to refrain from practicing or to affiliate with large firms with pre-existing insurance coverage.

Ultimately, the cost of medical care will go up if malpractice coverage becomes scarce. If the cost of insurance dissuades some from practicing medicine, those communities will have fewer choices among physicians.

The remedy? State legislatures must focus on the cause of higher medical malpractice premiums by controlling escalating loss costs instead of merely treating the symptoms by artificially suppressing rates.

During the nations last medical malpractice insurance crisis 20 years ago, obstetricians, surgeons and other physicians across the country threw in the towel, along with their scalpels and stethoscopes, because they could no longer find or afford insurance. This sent residents of some states across county and even state lines to seek medical care.

Some states curtailed the pandemonium over insurance availability and affordability issues by limiting non-economic damage awards handed down by juries and enacting other tort reforms. California, a pioneer for tort reform, is among the 10 states that today enjoy a combined ratio under 100 for medical malpractice because losses in that state are more predictable.

Even though West Virginia is one of 14 states that placed limits on pain and suffering malpractice awards, it has one of the nations highest caps. Moreover, the frequency of malpractice claims in the states and the need to defend even the most frivolous lawsuits drives loss costs–and insurance rates–up further.

Clearly, capping the amount of non-economic losses isnt enough in some states. For medical malpractice to remain a viable line, states must enact laws that eliminate the incentive to sue in questionable and spurious cases.

Lawmakers, doctors and insurers must join forces to balance consumer protection with the need to preserve the practice of medicine. Legislators must balance the citizen's right to sue for damages as a result of mishaps during medical treatment, against the resulting costs of those lawsuits. The money to pay those judgments is reflected in medical malpractice rates, which doctors must pass on to patients. Ultimately, the cost of litigation does the most damage to the people who can least afford to pay.

With few exceptions, medical malpractice is not a profitable venture for insurers. In Texas, insurers pay out $1.65 in losses and expenses per $1 received in malpractice premiums. In Connecticut, that ratio is more than 180 percent. The national average is a 126 combined ratio–not exactly the type of lure that will drive insurers to pick up the 10 percent marketshare St. Paul is leaving behind.

Some argue that medical malpractice insurers are suffering because they either under-priced rates during the long bull stock market or are attempting to recoup lost investment income. But insurers, required to invest very conservatively, have averaged only a 10 percent return on policyholder surplus during the past 10 years. Such results cannot jump-start companies that experienced a huge leap in losses in the past couple of years.

Those companies include two of the nations top-10 medical malpractice underwriters that left the market during the past four months. Increasing rates by an average of 24 percent this year in 27 states couldnt save St. Paul, the nations largest malpractice underwriter. St. Paul chose to cut its losses because it anticipates a 271 combined ratio for this book of business–translating into a 2001 underwriting loss of nearly $1 billion.

Meanwhile, in August, the Pennsylvania Insurance Department placed PHICO into rehabilitation after its surplus dropped from $127 million to $6 million in just six months. Both companies failed medical malpractice business–which leaves between 50,000 and 100,000 doctors across the country without coverage–are high-profile symptoms of a high-stakes problem.

West Virginia is clearly the state with the most obvious need for reform. With St. Paul and PHICOs departure, more than 33 percent of the states medical malpractice market is up for grabs, leaving about 1,300 doctors scrambling for coverage.

Instead of taking a lesson from the medical malpractice insurance hysteria of the 1980s and addressing the number of medical malpractice lawsuits and the size of jury awards, state lawmakers are attempting to treat the crisis with a new stopgap, state-managed liability insurance plan. The plan, signed into law hours after St. Pauls announcement, provides coverage for doctors who are denied insurance because of the level of risk in procedures, among other reasons.

However, this is not a long-term solution for insurance availability because it does not solve the problem of collecting enough premiums to cover losses. Premiums are held artificially low, which is a recipe for disaster and could expose residents of the state to higher taxes if the states insurance plan loses money.

West Virginia has two backup plans that could be just as bad or worse. The new law allows lawmakers to trigger a doctor-run mutual insurance plan–in which doctors have shown little interest–and a joint underwriting association that would assess all liability insurers in the state to make up premium shortfalls and cover some of the cost of medical malpractice insurance. This means that every business and auto owner will see liability premiums rise even faster to cover assessments for medical malpractice.

To keep West Virginias medical malpractice market off life support, and to keep other states from getting deeper in the red, insurers must work with medical societies and business groups to put pressure on legislators to resist the self-serving solution offered by the trial bar.

If they do not, doctors will continue to pay higher premiums and their patients will face higher service fees as insurers pass through the higher cost of lawsuits and settlements.

Suppressing insurance rates will not address the loss costs that drive premium hikes. The real antidote to more costly medical malpractice insurance and an ailing insurance market is meaningful tort reform.

Terry E. Tyrpin is senior vice president of insurance and research services at the National Association of Independent Insurers in Des Plaines, Ill.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 28, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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