Volume 1, Number 5 Fall 2000 Is Malpractice Tort Reform Working? By Rick Mortimer and Bob Westin There isnÕt any doubt that malpractice claims against health care providers in the US are rising. According to A.M. Best, US insurersÕ adjusted loss ratios climbed from 69.1% in 1998 to 77.6% in 1999 on net premiums of $6.038 billion and $6.012 billion respectively. Without looking behind the numbers, one might assume that loss ratios are rising because premiums are being kept low by the intense competition between underwriters for market share. It follows that when premiums go down and losses remain relatively unchanged, loss ratios go up. The fact is, the dollar amount of claims has increased dramatically. A little simple arithmetic translates the increase in loss ratios to an increase of over $493 million in paid and reserved claims in just one year! When the California legislature passed the Medial Injury Compensation Reform Act (MICRA) of 1975, it put into place certain tort reforms designed, among other things, to prevent the filing of non-meritorious suits and to put a cap on the unwarranted awards of huge amounts for pain and suffering. Other states followed suit and enacted similar tort reform legislation. Based upon a recent study by the Texas Medical Association, it appears the effects of tort reform, at least in Texas is not having the same effect as MICRA did for California doctors. The TMA study was based upon data collected from the Texas Medical Liability Trust, American Physicians Insurance Exchange and Medical Protective Company. Collectively, these three write over 75% of the medical malpractice premiums in Texas. Together, their losses in net cash from operations increased from a little over $20 million in 1997 to over $40 million in 1999 on a 10 point swing in loss ratios from just under 120% to about 130%. The data revealed: - the number of claims had climbed to a new high of 27 per 100 insureds - the average indemnity paid per claim increased from $140,000 in 1997 to $180,000 in 1999, an increase of 28.5% - the average cost to settle each paid claim increased from $40,000 in 1993 to $60,000 in 1999, and - the average adjustment expense for claims closed without indemnity increased from $9,000 in 1995 to $11,000 in 1999. TMA points the finger of blame for the higher claims frequency and rising costs of defense at plaintiff lawyers who are filing more complex lawsuits and seeking bigger awards. David Bernstein, assistant professor at George Mason University School of Law, appears to share TMAÕs view. In an article titled ÒProcedural Tort Reform, Lesson from Other NationsÓ appearing in a recent issue of Regulation published by The Cato Review of Business & Government, Bernstein opined: ÒBy all reasonable measures, the American tort system is a disaster. It resembles a wealth-redistribution lottery more than an efficient system designed to compensate those injured by the wrongful actions of others.Ó He accuses attorneys of engaging in fishing expeditions hoping to find smoking gun evidence of some wrong doing. If they perceive a 20% chance of victory, there is a 20% chance the defendant actually caused harm to the plaintiff and the 20% chance of success is the result of a 20% chance of finding an ignorant or prejudiced jury or being able to coerce a settlement through intimidation of the defendant. Assuming plaintiff lawyers are eroding the effects of tort reform, what can be done to rebalance the scales of justice? Some argue that medical malpractice is not a doctor or hospital problem, it is a social one that can only be fixed by implementing a no fault system to compensate injured patients. Advocates of no fault recite the results of New ZealandÕs experiment started 27 years ago and updated in 1991. During a recent ÒInternational Symposium on Medical Malpractice Trends and Differences Around the WorldÓ held at the Royal College of Physicians in London, a supporter compared the tort system to a Rolls Royce that only a few can drive and no fault to the VW Beetle that everyone can afford. The analogy makes the point that under the tort system only a few of the many injured win their claims because most cannot prove malpractice. The outcome leaves injured patients or their grieving families uncompensated. Under no fault, anyone who suffers a medical accident gets compensated by the government out of funds provided by tax payers. ItÕs easy to understanding why no fault can work in other countries. Civil jury trials are rare outside the US. England began to restrict the use of juries in civil trials in 1933. Today, less than 1% of all civil cases are tried before a jury. Scotland, Australia, and Canada are other countries that limit the use of juries. Proponents of the jury system argue that juries protect litigants from rulings based on theories that are accepted by the scientific mainstream but that are not actually scientifically justified. Proponents of no fault take the position that the typical juror does not understand the scientific evidence and pay little attention to it. They are concerned that juries are all too prone to award damages out of sympathy and a desire to punish regardless of fault. No one believes there are enough politicians willing to risk their political careers by proposing legislation that will replace our tort system with a no fault system to settle malpractice or other civil claims. Bernstien offers a way we can maintain the jury system. He suggests that legislators can minimize the magnitude of civil damage awards by taking the decision out of the hands of jurors and placing the award of damages solely in the hands of judges. He argues that because almost no one thinks itÕs unfair for judges to set the sentencing of criminal defendants convicted by juries, it follows that they should also determine the amount of damages owed by civil defendants. One can only speculate whether such a change would discourage lawyers from filing non-meritorious claims. Some defendants exonerated at the end costly litigation proceedings have fought to recapture their reputations and the costs of defending themselves by suing the plaintiff lawyers alleging frivolous prosecution. Because the tactic is not widely used and has not borne the expected fruit it is not looked upon as an effective deterrent. Bernstein advocates the implementation of a loser-pay rule and observes that Oregon and Oklahoma are currently experimenting with loser-pays systems. In 1995 the Law Society of England and Wales, counterpart to our American Bar Association, came up with a solution to the concern that EnglandÕs loser-pays rules reduce access to the civil justice system. The fear is that many potential plaintiffs would not pursue their claims because they cannot afford the cost of litigation or they are unwilling to risk their savings on anything less than a sure thing. The Society launched an insurance scheme designed to protect personal injury plaintiffs from liability for their opponentsÕ legal bills. For a nominal premium of about $135, plaintiffs can be insured against having to pay the defendantsÕ legal fees, court costs and other expenses. The downside is that the insurance plan may actually encourage plaintiffs to pursue speculative litigation because they can avoid the consequence of losing by paying a relatively small fee. Bottom line the ultimate question is: are there any changes that can be made to our existing judicial system to reduce the financial costs of medical malpractice that we are willing to accept? Clearly, changes can be made. Even some minor tweaking of existing laws can produce favorable results for all parties. As long as affordable third-party liability insurance remains readily available, no major changes seem to be warranted. The magnitude of the changes depends upon our willingness to sacrifice some more of our civil rights and move closer to complete socialism. While some may be abusing and others failed by our present judicial system, it ainÕt broken yet. Rather than throw it out and replace it, a little renovation will keep it in good working order for all of us. The Old MIEC Large Loss Survey CA Average Large Loss* 1991 $ 997,343. 00 1992 $ 734,665. 00 1993 $ 623,131. 00 1994 $ 818,400. 00 1995 $ 957,717. 00 1996 $ 840,219. 00 1997 $ 870,523. 00 1998 $ 890,917. 00 1999 see below... The New MIEC Large Loss Reality Check MIEC made a big change in this 27th survey of California medical malpractice verdicts, settlements and arbitration awards. They decided to limit the study to cases involving awards of $1,000,000 or more. They began the Large Loss Trend Study in 1973, when they reviewed cases with $50,000 indemnity. About ten years later they increased the threshold to $100,000. That was the pattern until last year, when they analyzed 137 cases, including 33 that exceeded $1,000,000. For a complete copy of this report visit www.miec.com. [graphic] Playing Musical Chairs: The Shifting US Medical Malpractice Insurance Marketplace by Rick Mortimer Each year I take a gander at the annual statistics published by A.M. Best and other insurance financial analysts to take the pulse of whatÕs happening in the US medical malpractice insurance market place. If anything, I feel safe saying itÕs pretty much the same as it has been during the past decade. Despite the pool of red ink, prices havenÕt risen materially because there are still just too many carriers grappling for a piece of the $6+ billion pie. Remarkably, the total premiums written by the top 100 US carriers in 1999 dropped to $6.012 billion, down $26 million from the 1998 all time high of $6.038 billion! What is noteworthy is how the musical chairs played by carriers changed the occupants of the top 20 seats (see chart to the right). Fifteen of the top 20 chairs are med-mal specialty companies, yet St. Paul retained the first chair by increasing its writings from $367.6 million to $411.6 million. St. Paul is expected to post another gain in 2000 as the result of its acquisition of 9th ranked American Continental Insurance a/k/a MMI. Although Employers Re US Group seems to have appeared out of nowhere to grab the 3rd chair, itÕs actually a part of the G.E./General Electric group that ranked 6th in 1998. Lead by ERC and the former Medical Protective (ranked 6th in 1997), GE/Employers moved up because GE bought Medical Protective of Fort Wayne, Indiana. Frontier lost its seat and Farmers Insurance Group and Allianz of America joined the top 20 by grabbing the 19th and 20th chairs. Most underwriters can enjoy an underwriting profit on their medical malpractice account if they can keep their adjusted loss ratios below 70%. For the first time in the past four years, the 1999 combined adjusted med-mal loss ratio for all US companies exceeded the threshold. In 1996 the combined ratio was 61%, dropped to 54.9% in 1997, and climbed progressively thereafter to 69.2% in 1998 and 77.6% in 1999. Significantly, in 1999, eight of the top 20 suffered loss ratios in excess of 70%. Five of the eight were in the top 10 with 9th ranked Phico Group tanking at 126.5%. While some hardening in underwriting and pricing is being observed in some states, on a broad base, only those larger provider groups with adverse loss histories and a members of a few specialty classes such as OB and EP are feeling the pinch. Texas physicians may be the exception. A precipitous increase in claims frequency and settlement costs in Texas has triggered an across the board increase in premiums by the StateÕs leading underwriters and non-renewal notices to doctors that no longer qualify as preferred or standard risks. Given the continuing industry trend of deteriorating loss ratios, itÕs not a matter of if the tightening will spread to other states, but when. [graphic] 10 THINGS YOUR HMO DOCTOR WONÕT TELL YOU By Carol Marie Cropper 1. ÒIf I order expensive treatments for you, the cost might come out of my pocket.Ó 2. ÒOn the other hand, if I order up less care, your HMO might send me a bonus check.Ó 3. ÒThat cheap HMO you signed up for pays me only $8, or maybe $10 to $12 a month to treat you, so I hope you donÕt come around too often.Ó 4. ÒIf you become too much of a financial drain, I have ways to make you walk. 5. ÒIf I treat you too aggressively, I could get kicked out of the HMO.Ó 6. ÒHMOs have sophisticated computer programs that let them track exactly how much my patient care is costing them. And they let me know.Ó 7. ÒOrdering expensive treatments for you could tie me and my staff up on the phone for hours with your HMO to get approval.Ó 8. ÒYou might rate less of my time if youÕre with one of those penny- pinching HMOs.Ó 9. ÒThe drug I prescribe may not be the best one for you, but itÕs what your HMO will cover.Ó 10. ÒIf you have to go to the hospital, I may turn your care over to a doctor who works directly for the HMO.Ó Food For Thought: This is an example of the mediaÕs take on managed care. Is this attitude influencing the number and cost of medmal claims? We will examine this in our next issue of Frontline News. How to reach us: HealthCare Professionals' Insurance Services Risk Finance Consulting & Insurance 475 S. State College Blvd. P.O. Box 9699 Brea, CA 92822-9699 714.990.4430 714.255.0872 Fax HEALTHPROS@aol.com E-Mail Publisher: R.W. Mortimer & Associates Insurance Agents and Brokers, Inc. DBA: HealthCare Professionals' Insurance Services Rick Mortimer, Editor