Professional Liability in the Medical Arena

Whether a patient, a health care provider or an insurer, everyone seems to be aware of what is going on in the medical world these days. There is general agreement that health care costs are rising, more people are going without insurance, and doctors are looking over their shoulders at the lawyer down the street. When numbers to explain these cost and liability trends are tossed around, not everyone agrees on whom or what trends to to believe.

For all of these reasons and more, providing professional liability (PL) coverage for those taking care of the world’s sick can be more challenging than diagnosing a patient’s problem. However, several recent surveys and opinions from experts indicate the medical malpractice insurance scene may be on the mend to some degree.

A study unveiled by Aon risk services experts said that the trend of large insurance rates experienced by hospital professionals and physicians during the past three years shows signs of slowing in the coming year. Aon’s Hospital Professional Liability and Physician Liability 2004 Benchmark Analysis reveals that claims costs in 2004 are trending at 8 percent—the lowest level in the study’s five-year history.

Using 10 years of loss data and measuring trends in loss costs, claims frequency and claims severity, the study reveals that trends in both the frequency (0.5 percent) and severity (7.5 percent) of claims are contributing to an overall 8 percent annual trend rate, a significant decrease from prior studies. In the last three successive benchmark studies, the claim cost trend had been steady at 10 percent. The reduction in the 2004 measurement is largely based on frequency.

At the same time, against the backdrop of reports that growing malpractice premiums are sending doctors in Ohio packing, the population of doctors in the Buckeye State has actually risen slightly the last three years, according to The Cincinnati Enquirer. According to the report, the number of doctors maintaining active medical licenses in the state and the volume of new licenses issued rose in 2003 from 2001 numbers.

So, is there hope around the corner in the medical field?

According to Tom Heim, Partner Casualty and Risk Financing Practice, Palmer & Cay, after a difficult period there are some hopeful signs in current market activity in professional liability coverage for hospitals, home health care, and nursing homes in general.

“Of the top 20 largest med-mal writers in 1998, only seven remain viable (reflecting ratings of “A-” or better) to this day, with the majority of damage occurring during 2001, 2002 and 2003. Actually, we’ve seen a few carriers begin to expand their offerings back into the primary marketplace particularly for rural hospitals and nursing homes in selected states,” Helm noted.

Helm sees more attention to the long term. “After three years of the hard market and collapse of the domestic primary marketplace, much of the industry is now focusing its efforts on retention management, limits management, and balance sheet protection as they seek the availability of coverage limits that are reasonably priced from a carrier with a long-term commitment to the marketplace,” Helm said.

Paul Greve, senior vice president/senior consultant of Willis Healthcare Practice, also sees a more stable medical liability market. “Clearly the institutional (hospitals, nursing homes, home health, etc.) segment of the healthcare professional liability market has been stabilizing since the July 1, 2003, renewals. Pricing increases are nowhere near as dramatic as they were in the early years of this decade,” Greve said.

“We have seen a number of carriers fail or withdraw from the malpractice market in the last three years especially,” Greve said. “A large number have also seen ratings downgrades. However, there has been an influx of new capital, particularly in the excess and reinsurance market. This infusion of new capital has created competition and helped stabilize premiums in the institutional segment. The stabilization is also beginning to occur in the physician segment as well, but the pricing has moderated at unacceptable levels of affordability for many physician specialties.”

According to Greve, absent poor claims experience and an unfavorable territory, malpractice insurance buyers can expect flat to low double-digit increases at renewal.

“Many good accounts in territories with a favorable malpractice environment may possibly see decreases,” Greve said. “The physician segment is still the most troubled although pricing is beginning to level off there as well, albeit at levels that still create affordability problems for most physicians. Hospital underwriters are concerned about physicians carrying lower limits of coverage due to the increased expense. This potentially makes the hospital the ‘deep pocket’ in litigation.”

Theresa Edwards, vice president, Healthcare Practice, Palmer & Cay, also sees a stabilizing situation taking hold. “After three years of increased pricing along with corresponding increases in retentions and deductibles, I believe that we are seeing costs for PL coverage begin to flatten out for the majority of the industry,” Edwards said.

“However, pockets of rate increases continue to occur, depending on jurisdiction (such as the Philadelphia area), and level of loss retention and excess needs,” she continued. “Medical malpractice costs have increased at a steady 7 to 9 percent each year since 2000. Frequency is growing at 3 percent per year.” According to Edwards, severity is increasing at a rate of 6.5 percent per year and physician claims have been growing at a rate of 8 percent per year.

There are also signs the claims situation may be improving. According to data from the National Practitioner Data Bank for the first six months of 2004, there is some indication of a possible significant reduction in the number of reported physician claims, if the early trend continues for the balance of the year.

“It’s not known yet whether that decrease in frequency is attributable to the malpractice reform legislation enacted in some 20 states over the last three years,” Greve said.

But Greve noted that claim frequency is not the big problem. “Malpractice claim frequency is flat or only slightly up nationally, but it’s claim severity that has caused problems due to the unpredictability of the size of jury verdicts,” he reported.

Edwards has a sense of the most common kind of professional liability offenses in the medical field. “For hospitals and physicians, I suspect that ‘failure to diagnose’ and ‘failure to treat’ tend to be the most common kind of professional liability. In the nursing home industry, most lawsuits probably involve the violation of state and federal regulations by the facility, along with claims of abuse and/or neglect,” he said.

With so much of the current talk focusing on litigation and trial lawyers in the medical insurance arena, some may have been surprised by another recent report claiming that some of the problems doctors face actually rest right in the insurance community itself.

According to results from a study from Americans for Insurance Reform (AIR), based on the industry’s own countrywide data, the years 2002 and 2003 saw no “explosion” in med-mal insurer payouts to justify skyrocketing rate hikes. That finding runs contrary to what the insurance and medical lobbies have alleged.

In fact, rather than exploding, inflation-adjusted payouts per doctor have dropped for the last two years. Payouts (in constant dollars) have been essentially flat or dropping since the mid-1980s, according to this report.

Second, med-mal premiums rose much faster in 2002 and 2003 than was reportedly justified by insurance payouts, according to AIR. The study maintains that these price hikes were not connected to actual payouts, jury verdicts or the legal system. Rather, they reflect ed dropping interest rates and losses experienced by the industry’s market investments.

Joanne Doroshow, executive director of the Center for Justice & Democracy and AIR co-founder, used the results to defend the legal system. “These findings undermine one of the central claims of interest groups who seek to blame the legal system for doctors’ insurance woes,” she maintained. “In fact, the study shows that the causes of, and solutions to, this crisis lie not with the legal system (i.e., “tort reform”) but with reforming regulation of the insurance industry.”

The study by AIR, which is a coalition of more than 100 consumer and public interest groups claiming to represent more than 50 million people, makes nearly identical findings to those reached in similar AIR studies released in 2001 and 2002. Specifically, the study, Stable Losses/Unstable Rates, shows that the real reasons med-mal insurance rates have risen so dramatically in the last two years are market forces and dropping interest rates.

Author of the study, J. Robert Hunter, Director of Insurance for the Consumer Federation of America, former Federal Insurance Administrator and Texas Insurance Commissioner, said that how insurance companies have operated has much to do with how the rates impact the medical community. According to Hunter, “The current jump in prices doctors pay is a result of a combination of two insurance company practices: (1) the insurers’ aggressive under-pricing to gain market share when interest rates were high, coupled with (2) the insurers’ classification plan that charges some high-risk doctors (such as OB/GYNs and neurosurgeons) for all of the cost of the high-risk cases referred to them by all other doctors. What is crystal clear is that what did not cause this crisis was an increase in losses. There simply is no evidence of that.”

As for mending the problem, Hunter said, “There is only one way to solve this problem: reforming the insurance industry.”

As more questions arise as to how to fix the problems in the medical liability field, agents and carriers involved in providing medical professionals with liability coverage find they must ask more and more questions themselves.

“The most common questions being asked include types of surgeries being performed, loss frequency and severity, actuarial studies, what confidence level are the losses being funded to, willingness to assume risks at greater retentions, desire or need for aggregate protection, contractual bonding obligations, and mortgage or lending obligations,” Palmer & Cay’s Heim remarked.

Greve agreed that accounts are getting closer examination.

“It’s really the underwriters scrutinizing healthcare accounts as never before, especially their commitment to patient safety and clinical risk management. Underwriters want potentially compensable patient events to be reported more diligently and rapidly,” he said.

Topics Carriers Legislation Claims Market Professional Liability