Medical malpractice insurance reform: A regulator’s perspective

Since St. Paul Travelers, one of the largest commercial medical malpractice companies, decided to exit the marketplace, the debate about medical malpractice reform has been raging in state capitals throughout the country. Physicians, attorneys, insurance companies, consumer groups and government officials have divergent opinions on what is causing the medical malpractice crisis, with each group having disparate viewpoints and statistics to support its position. Physicians believe attorneys are encouraging patients to file suits; attorneys believe insurance companies are using actuarial reserving methodology to overcharge physicians, and consumer groups believe insurance companies want to limit the awards and settlements to the injured party for medical errors caused by physicians. Although each group has a different point of view, each also agrees on one fact–medical malpractice premiums charged to physicians have increased dramatically since 2001.

The increase in premiums has affected physicians in all jurisdictions. However, the impact is greater in jurisdictions that have not enacted any tort reform legislation. The District of Columbia and Delaware are the only two jurisdictions that have not enacted tort reform. As a result, the average cost of medical malpractice insurance in these jurisdictions is higher than what physicians in neighboring states pay. Both Virginia and Maryland have enacted tort reform and have lower average premiums than the District of Columbia.

The higher insurance costs have caused some District physicians to consider relocating their practices outside the District. In addition, physicians are looking at other methods to reduce medical malpractice premiums such as scaling back the number of patients they serve or limiting the services they provide to patients. In the extreme cases, some physicians have simply stopped practicing medicine altogether. Any significant reduction in the number of practicing physicians, especially those providing primary care, will have an adverse effect on the District’s health care delivery system.

Two D.C. proposals
Acknowledging that physicians are paying more for medical malpractice insurance coverage is easy. The more difficult and perplexing issues relate to the cause of the increase and the mechanism to stabilize or reduce these premiums quickly. In December 2005, the Council of the District of Columbia held a hearing on two medical malpractice reform bills, the Health Care Reform Act of 2005 and the Medical Malpractice Reform Act of 2005.

These bills have different approaches. The Health Care Reform Act of 2005 focuses on establishing a cap of $250,000 for non-economic damages for each claimant and a payment schedule that limits contingency fees paid to attorneys. The bill also requires a claimant to provide a Certificate of Merit from a physician licensed to practice in the District of Columbia with the notice that a suit is possible.

The Medical Malpractice Reform Act of 2005 requires individuals to submit a 90-day notice of intent to file suit. It also requires that current premium rates be made public, and that insurance companies and self-insurers offering medical malpractice insurance disclose redacted information on claims, settlements and judgments.

While the two legislative proposals may serve a public benefit, neither will have a direct correlation on the premium rates. Consequently, there will not be an immediate reduction in rates for physicians upon enactment of either of the two legislative initiatives. The simple reason is that premiums are based primarily on the losses and expenses incurred by the insurance company.

Earlier in March, the Council held another hearing on the Medical Malpractice Insurance Reform Act of 2005. Although the D.C. Department of Insurance, Securities and Banking agrees that it has a legal responsibility to deny medical malpractice insurance rates that are excessive or unreasonable, the agency disagrees with a amendment stating that the commissioner should not approve a rate increase until he determines that the total capital of the insurer is no longer excessive. There is a small correlation between total adjusted capital, which includes the company’s capital and surplus balance of an insurance company, and the premium rate being charged for insurance coverage in the District. That is why DISB does not believe that the risk-based capital balance as determined by the commissioner is the best way to determine whether a company is charging excessive rates leading to overly high profits. The agency currently denies any premium rate requests that are determined to be unreasonably high based on the documentation submitted.

Cost drivers
The cost drivers of rate increases are the actual and anticipated losses incurred, the expenses incurred to operate the company, and the need to earn a profit. Insurance rates are reviewed by actuaries in the state insurance regulatory agency for compliance with actuarial standards. Those filings generally include actual losses incurred by the company and the anticipated losses for the future period with an inflation factor. The process for approving rates is not a perfunctory exercise, but is a comprehensive review in accordance with principles detailed by the American Academy of Actuaries.

A jurisdiction’s decision to include factors other than actuarial sound principles in the rate analysis process, even when the analysis suggests a rate increase is warranted, could have an adverse financial effect on a company. This process may cause other companies to evaluate whether to continue to write business in a market where they are restricted from charging sufficient premiums.

A proposal to exclude expected future payments on existing claims from the rate filings is based on a lack of understanding of the nature of malpractice claim payments and actuarial principles and practices. Policies are sold primarily on a claim-made basis, which requires that claims for a contract period only to be paid if they are reported to the company during that period. Because of litigation, it may take several years after a claim has been filed before any payment is made. To ignore these payments from the rate-making process would definitely lead to insolvencies and subsequently increase premiums from remaining companies.

Limit recoveries
Real reductions to the cost of claims can be brought about by enacting reforms that limit the recovery associated in medical malpractice cases. Jury awards and civil settlements are based on three components: (1) lost wages and opportunity; (2) medical costs; and (3) pain and suffering. The first two are characterized as economic damages. The third component represents non-economic damages. Insurance companies can reasonably estimate their economic damage costs based on trends and previous payments to insureds. On the other hand, it is very difficult to estimate the amount of pain or suffering damages that a jury might award. However, if those variable damages were capped, a company could more accurately predict future losses. That would reduce and stabilize the company’s future insurance rates.

Also, caps on non-economic damages would reduce the number of people who meet the financial threshold for an attorney to take the case on a contingency basis. For example, two individuals who experienced the same medical negligence and suffered the same injury may not get an attorney willing to accept the engagement if a cap is placed on non-economic damages. This was documented in a Wall Street Journal article published in 2005, on the effects of the California Medical Injury Compensation Reform Act. The article found that attorneys were less willing to represent clients who had alleged injuries from medical negligence if these same clients did not have substantial economic damages. Thus, an individual with an income of $100,000 would receive representation where it was difficult for an individual with an income of $20,000 to get representation.

Conclusion
One of the primary objectives of insurance regulators is to monitor and maintain the financial solvency of insurance companies. When an insurance insolvency occurs or an insurance company with a significant market share decides for financial reasons to discontinue writing a particular line of business, these events have a detrimental impact on the community. We all recognize physicians are human and medical errors will occur. Enacting laws that require patient-safety initiatives and establish alternative dispute-resolution requirements may reduce the cost of settling cases. However, those types of initiatives alone will take a long time to translate into lower insurance company costs and thereby reduced rates. Rather, any medical malpractice reform, to be effective, must have restrictions on non-economic damages, such as pain and suffering, and limits on attorney fees.

Hopefully, we can develop a solution to this problem before physicians take drastic measures similar to those taken by physicians in New Jersey, Pennsylvania, and other states with high medical malpractice costs.

Acting Commissioner Thomas E. Hampton is from the Government of the District of Columbia Department of Insurance, Securities and Banking.

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