The Florida Auditor General's Office recently released a critical report that found the state's Office of Insurance Regulation (OIR) is failing to adequately monitor the medical malpractice insurance market by not ensuring that all insurers and self-insured health-care providers are submitting information on closed claims. The auditor general's report came as the OIR published a report that shows the market financial trends have grown increasingly positive after the enactment of the 2003 reforms. Among other things, the report found that between Jan. 1, 2004, and Oct. 1, 2005, 18 new companies have entered the market.
Claim Reporting
One of the major findings coming out of the 2003 med-mal reforms was that, in some ways, lawmakers were working in the dark due to a lack of solid data. As a result, lawmakers focused on such topics as rates and litigation, which are typically the starting point for all legislative reform efforts. After a regular session and three special sessions, lawmakers finally agreed on a number of issues, which included a health-care-provider backed cap on damages. Specifically, lawmakers placed a $500,000 cap on non-economic damages against individual physicians and a $1 million cap on non-economic damages that in certain cases could be collected against multiple physicians.
Florida voters also moved to restrict lawyers' fees by approving a constitutional amendment sponsored by the Florida Medical Association, the Florida Hospital Association, and others who would award plaintiffs suing under contingency agreements at least 70 percent of the first $250,000 awarded and 90 percent of any additional awards. The amendment was intended to stop lawyers from taking up to 40 percent of damage awards. However, that amendment and other legislative actions have faltered due to a number of factors, including arguments by lawmakers over how the provisions should be implemented. Additionally, the constitutional cap on fees was essentially rendered moot since the law still allows plaintiffs and lawmakers to negotiate a fee level.
As the 2003 battle between health-care providers and trial lawyers waged on, lawyers, regulators, and other stakeholders looked to the OIR to determine if the number and dollar value of claims were rising or falling. The OIR operates a professional liability claim-reporting system where insurers and self-insureds are required by law to report information about a medical malpractice claim within 30 days of the claim being closed, even if no payment was made to an injured patient. The insurer's disclosed claim data must include the name of the institution where the injury occurred, the cause of the injury, any diagnoses and treatment, and the legal disposition of the case. Looking at closed claims, regulators can review how much hospitals and doctors are paying out in "confidential agreements" to resolve claims.
Auditor's Report
But the professional claim-reporting system has been red flagged before for its poor performance. The January report is the second report in three years by the auditor general that has been critical of the OIR's procedures when it came to collecting data. In 2004, auditors reviewed the system and found a number of places where the lack of complete information skewed the system's results. A review of the database, which included claims against doctors, hospitals, and other providers, showed some hospitals reporting a high number of claims, while other hospitals and hospital chains reported almost no claims in the past few years. Auditors in 2004 analyzed more than 8,000 closed claims and found the following problems:
There were 1,000 cases in which insurers failed to list the medical procedure that resulted in an injury.
In 126 cases, insurers failed to report a patient's diagnosis.
In 88 cases, the insurer failed to list the primary injury that triggered a claim.
There were 17 cases in which the insurer failed to list the doctor's license number.
In response to the 2004 findings, OIR began requiring entities that fail to report any claims for the prior year to submit a notification verifying the status of any closed or open claims. The OIR is also trying to work with the state department of health to discover any unreported claims. Even with those changes, however, the auditor general's office still uncovered a number of problems with the professional claim-reporting system.
While OIR officials promised in 2005 that it would do a better job reviewing the accuracy of its closed-claims database, the auditor general's office found some more evidence of slipshod work in its latest audit. For instance, the latest audit found that OIR was not maintaining tracking logs to determine which insurers were reviewing the data they provided to the OIR. In response to the most recent audit, OIR officials said that they would keep trying to implement procedures to better detect under-reported claims. "This office will pursue a revised approach to accomplish the historical claim updates," the OIR said.
Market Results
The med-mal claim-reporting system is important because it provides information on closed claims and gives a truer picture of the cost of med-mal cases. For example, OIR hired the actuarial firm of Deloitte & Touche to estimate a presumed savings factor based on the 2003 reforms. The actuarial firm came back with a savings factor of 7.8 percent, but it also added a number of significant caveats. As spelled out in the report, "Due to the volatility of the loss exposures reviewed, the historical tracking of data by claim and not by claimant, and the limited amount of historical jury verdict data quantifying economic versus non-economic damages, no assurance can be offered that actual savings will emerge according to the estimates contained in this report."
There is evidence that the medical malpractice market is substantially improving since the 2003 reforms. In January, the OIR held a public hearing on the savings passed on to health-care providers as a result of the 2003 law changes. Based on that hearing, in April, the OIR issued a report looking at the most recent industry trends. The study noted that 188 new companies entered the market between Jan. 1, 2004 and Oct. 1, 2005. At the same time, the Florida Medical Malpractice Joint Underwriting Association's population decreased from high of 1,114 policies to around 300 policies.
Two other major trends that have a bearing on the market include the change in pure loss ratios and the earned premium versus incurred losses. Based on data from the National Association of Insurance Commissioners, Florida's earned premium has held steadily around $850 million. At the same time, however, the incurred losses in the state have dropped off significantly in the last five years. In 2002, the incurred losses matched the earned premium at around $800 million. Since then, however, the state's incurred losses have dropped to just about $300 million in 2005 and 2006. Florida's pure loss ratio has also declined from 100 percent in 2002 to 40 percent in 2005 and 2006. It is figures like these that have some industry professionals questioning if policyholders are not seeing enough savings.
The state's former consumer advocate Steve Burgess — who was recently replaced by former state comptroller Bob Milligan — argued that insurers were not passing on the savings to policyholders. First Professional Insurance Corp., Florida's largest med-mal carrier, agreed that the market has improved due, in part, to the decline in the number of claims and legal costs. Plaintiffs lawyers are concerned about taking cases that promise lower payoffs, and fewer claims has meant that carriers face lower legal costs, which in turn has led to higher profits.
The Jacksonville-based FPIC cut rates by eight percent last year following a 42 percent surge in corporate profits. At about the same time last September, rival ProNational Insurance Co. was approved to give a nine percent cut in premiums to doctors. But Burgess said that ProNational should have been cutting premiums by up to 40 percent. He further noted that the state's 15 largest med-mal carriers made a combined profit of $800 million last year because of lower claim volume. The carriers' legal costs last year plummeted to $557 million in 2006, compared to $969 million in 2003.
Predictably, FPIC and other insurance carriers rejected Burgess' claims that they haven't gone far enough in lowering premiums. FPIC officials said that they still have a backlog of cases that pre-date the 2003 med-mal reforms. The Florida Medical Association surprisingly issued a muted response to Burgess' comments. "We support as big a cut as possible," said FMA President Patrick Hutton. But he quickly added, "These rates need to be actuarially sound to ensure liability insurance markets remain stable."
But critics note that the FMA has had a long-standing partnership with FPIC. The doctors' lobby has thus rarely criticized the insurance industry, even though Florida doctors pay among the highest med-mal insurance rates in the United States.
To see the full auditor general's report, go to www.state.fl.us.
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