Cover Story

A NEW "MALPRACTICE CRISIS"?

Why premiums are soaring again

Gasoline prices are in the stratosphere—and it looks like malpractice rates could head there, too. Here's why doctors are paying more for professional liability insurance.

By Mark Crane
Senior Editor

You probably didn't realize just how "cheap" your malpractice insurance has been these past few years. Believe it or not, insurers across the country say you were being undercharged for most of the 1990s.

But bargain days for doctors are over. Dramatic rate hikes—in some locales, double the tabs of two years ago—have already been posted, and more are on the way. Primary care physicians will be hardest hit.

In most areas, physicians can expect premium increases of between 8 and 18 percent this year and next, says James D. Hurley, an actuary who follows the malpractice market for Tillinghast-Towers Perrin, a consulting firm in Atlanta.

A survey by the newsletter Medical Liability Monitor shows a similar trend. Most malpractice insurers intend to raise premiums this year, if they haven't already, by an average of 15 percent. Carriers raised average premiums by about the same rate last year, and by about 10 percent in 1999. The year before that, most insurers either lowered premiums or kept them level. "That won't happen again for a while," predicts MLM editor Carol Golin.

Other carriers will impose de facto rate hikes by slashing discounts routinely given for such common qualifications as board certification and affiliation with JCAHO-accredited hospitals. Instead, they'll limit discounts, by requiring doctors to demonstrate such things as a favorable claims history or concrete risk-management efforts.

"Younger physicians will be especially unnerved by the rate hikes because they're accustomed to premiums that are stable or even declining," says Hurley. "The pressure on these doctors has to be unsettling."

And in some hot spots of the country, the malpractice situation will reach crisis proportions. In Pennsylvania and West Virginia, for example, many doctors are seeing rate increases of 35 percent or more.

Few observers are forecasting a widespread malpractice crisis similar to the one in the mid-1970s, when commercial carriers bailed out of the market and physicians struggled to find coverage at any price. However, some see the potential for a repeat of the mid-1980s, when physicians were hit with double-digit premium hikes several years in a row. Those increases will be harder than ever for doctors to absorb, as managed care continues to hold down reimbursements.

In fact, you might be tempted to blame the rate hikes on managed care, as well as on the other usual suspects: rapacious plaintiffs' attorneys, activist judges, and the media. Although each certainly played a role in creating a climate where juries act like lottery commissions, the reality is more complex.

It's the insurance companies themselves that share culpability, because they kept premiums artificially low for years. They either miscalculated how much money they'd need to pay future claims, or engaged in low-ball price competition to win market share, or used investment income to offset losses in the courtroom.

But the investment picture has soured, to put it mildly, and the cost of closing claims has risen to the point where the bill has now come due. Insurers say they must raise rates to maintain their financial viability.

Why the inflated verdicts? Blame it on Regis

More than 70 percent of malpractice suits are either won by physicians, dismissed, or dropped. When cases go to trial, physicians prevail 80 percent of the time. So juries and judges are still willing to give physicians an even break, notes Lawrence E. Smarr, president of the Physician Insurers Association of America.

But sympathy for plaintiffs is playing an increasing role in the size of malpractice awards and settlements. "Some jurors freely admit that they'll overlook whether the doctor violated the standard of care if they feel sorry for the plaintiff," says Sarah H. Lawhorne, president of PMSLIC, a malpractice insurer in Pennsylvania. "Jurors want to compensate the injured plaintiff, and the amounts they award are staggering."

Median jury awards in malpractice cases rose 76 percent between 1996 and 1999 to $800,000, according to Jury Verdict Research of Horsham, PA. (That figure includes awards against hospitals as well as physicians.) Equally disturbing is the increase in the amount of million-dollar awards. St. Paul Companies, the nation's largest malpractice insurer, says the number of such claims doubled from 27 in 1999 to 54 one year later.

"A million dollars doesn't seem like so much money anymore," says actuary James Hurley. "We live in an environment where there are Powerball lotteries, where Regis Philbin offers $1 million every other night on TV, and where sports figures get astronomical salaries. And when there's a giant malpractice award, it makes for a splashy headline, and that drives up the cost of settling cases."

That, in turn, drives up premiums, especially for modest insurers in small or medium-sized states. Also driving up premiums is the fact that claims cost more to resolve these days because of steadily rising legal and expert witness fees.

All these factors contribute to a measurement insurance companies call "severity," which is the ultimate cost to settle or close a claim, including defense fees. Severity dipped somewhat during the late 1980s and early 1990s, prompting insurers to lower premiums. But the decline was short-lived. "The long-term trend has always been heading up," says Smarr. "Without serious tort reform, that will continue."

Bad pricing means insurers must recoup losses

Costlier claims get most of the press, but insurance companies' business decisions may have just as much to do with rising premiums. "Rates are going up because too many companies were shortsighted and depended on investment income in a strong market to keep prices low," says Donald J. Zuk, president of SCPIE, an insurer based in Los Angeles. "Now the chickens have come home to roost.

"I'm glad rates are going up, and I'd like to see them go up for the next two years as well," he says. "We don't like raising premiums, but we did it seven times in the past 10 years. It's necessary to maintain our solvency. A company isn't doing physicians any favors when it underprices a product. Eventually, the bill comes due."

FPIC (Florida Physicians Insurance Company), which covers about 25 percent of that state's physicians, is likewise unapologetic. It raised rates an average of 15 percent in June 2000, and another 12 percent in January 2001.

"We've always charged more than anyone else in Florida, and that's because we have more data and a closer handle on what the true picture is," says David Rader, president of FPIC. "Some of my competitors were 40 percent under our rates. They're just not in the real world."

Pricing malpractice insurance is an inexact science. "It's hard to predict trends when a claim is paid five years or more after an incident occurs," notes PIAA's Lawrence Smarr. "When the insurance outlook appeared favorable, there was a lot of profit to be made," he notes. "That encouraged competition. More carriers came in, and that kept premiums artificially low. But insurance is cyclical, and the cycle has turned. Companies can't live off their surpluses any more, so rates have to go up."

Actuary James Hurley elaborates: "The strong market of a few years ago encouraged companies to expand into new areas, where they didn't have enough solid information about the legal environment to set reasonable rates. Now that investment income is down and the true severity picture is clearer, rates have to rise."

Primary care is a primary target

Premium increases are hitting primary care doctors harder than surgical specialists. For instance, rates for ob/gyns went up by a median of 7 percent last year, while internists faced a 15 percent hike, according to Medical Liability Monitor.

One reason for these rate hikes may be the steady increase in the number of suits against primary care physicians for medication errors and failure to diagnose. Also, the cost of settling them has increased.

"Until recently, a delay in diagnosis had to be significant enough to make a real difference in the outcome to the patient," says Donald J. Fager, vice president of New York's Medical Liability Mutual Insurance Co. "Now, even when a delay is relatively short, more plaintiffs' attorneys will take a chance on the case. If the patient lost even a slight chance for a better outcome, lawyers will go for it."

Tempting as it may be to blame managed care or publicity about medical errors, experts say the data don't support that argument. "To lay the blame solely at the doorstep of managed care, we'd expect to see a big increase in the overall number of suits, and that isn't happening," says James Hurley.

Nor can you blame the publicity surrounding the Institute of Medicine report, which concluded that medical mistakes result in thousands of deaths each year. "Perhaps more patients have talked to attorneys, but we just haven't seen any major jump in frequency," says Hurley.

Still, some believe there's anecdotal evidence that the backlash against managed care has an impact. "There's a subtle shift in juror thinking," says Frank O'Neil, senior vice president of Medical Assurance, an Alabama-based carrier. "There's this pervasive feeling that the cloud hanging over managed care may cause jurors to feel that medicine is more about money than healing."

Some believe that primary care doctors themselves bear partial responsibility for the latest round of premium hikes. "Physicians just don't have as much time to spend with patients, and they cut some corners," says Donald Zuk of SCPIE. "Maybe they aren't doing all the tests they should because Big Brother is always looking over their shoulders. Maybe they're succumbing to the pressure not to make referrals, and they're practicing beyond their training. Some specialists say that because primaries delay referrals, they're seeing more advanced cancers that could have been treated earlier."

Where the hikes are hitting doctors hardest

Premiums aren't going up uniformly across the country. Nor are awards. "A few huge awards in some particularly plaintiff-friendly areas doesn't necessarily mean that this is a national phenomenon," says Carol Golin of Medical Liability Monitor.

California, for example, caps awards for pain and suffering at $250,000. "Even so, we're seeing some erosion in that line of defense as attorneys attack the caps," says James Hurley. "So companies are raising rates there also, but not as high as in the rest of the country."

New York, where physicians still pay among the highest premiums in the nation, is also relatively calm. The number and severity of cases filed against physicians have been generally flat in recent years. "We haven't had a rate increase in three years, and we don't need one this year, either," says MLMIC's Donald Fager. "The average cost of a claim actually declined somewhat between 1999 and 2000.

"We obviously still have some horrific verdicts," he adds. "But a few years ago, the state did away with jury waivers, meaning that lawyers, doctors, business people, and other professionals aren't automatically excluded from jury service. As a result, some attorneys say we have a higher caliber of jurors who are willing to listen to the facts rather than be swayed by sympathy."

The story is quite different in Pennsylvania, where jury verdicts against physicians and hospitals have skyrocketed. Rates for some internists have shot up 40 percent, while other specialties have seen 100 percent increases.

The culprit? Severe shortfalls in the state's catastrophic loss fund, which kicks in after a physician's basic coverage of $400,000 (recently raised to $500,000) is exhausted. The fund has a huge backlog of unresolved claims, and the state covers them by assessments on physicians. As a result, many physicians are closing or limiting their practices and avoiding high-risk procedures. Others are laying off employees and postponing the purchase of new equipment.

Another trouble spot is West Virginia, where physicians have been hit with average premium hikes of 35 percent for each of the past two years. (See "Where a war on doctors has already begun") "Our state supreme court is blatantly pro-plaintiff," says otolaryngologist Phillip R. Stevens, past president of the state medical association. "It's sending a message to lawyers that it's hunting season on doctors."

Back to the basics of loss prevention

What can doctors in hard-hit states do? Not a great deal, say experts. Strategies to reduce errors and build patient rapport are still the best defense. "All the basic tenets of risk management are boring, but effective," says Sarah Lawhorne of PMSLIC. "Communicate with patients, document your efforts, make timely referrals."

PIAA's Lawrence Smarr urges physicians to lobby Congress. "With the change in administrations, this year holds the best prospect in a long time for passage of serious tort reform," he says.

One thing physicians shouldn't do is drop a reputable carrier and go for the cheapest malpractice policy they can find. Thousands of physicians found themselves bare in recent years when their carriers went broke. And tail coverage is extremely expensive—if you can even find a company willing to write it.

Before switching companies, check with your state insurance department about the company's financial strength. Or look up reports by independent insurance analysts, such as A.M. Best. You can find these in any good medical or public library.

Bad as things are, they could get worse

There's a good possibility that underwriting criteria will get tougher as insurers cut loose riskier physicians. And physicians with poor records will likely face surcharges or even nonrenewal. Other predictions depend on a series of "what ifs."

Insurers worry that liability could be expanded into new areas. "The plaintiffs' bar is flush with money from the big tobacco settlements," says Florida insurer David Rader. "We expect a well-financed assault on health care institutions, especially nursing homes."

A federal law allowing patients to sue their HMOs for malpractice is the real wild card in the liability picture. "It's difficult to imagine a situation where the HMO is sued but the individual physician isn't," says James Hurley. "The number of claims could rise significantly, and severity could grow as well, since the HMO is a deep pocket."

Predicts Lawrence Smarr of the PIAA: "An unrestricted right to sue could cause malpractice premiums to rise by 4 to 8 percent a year because doctors will be drawn into denial-of-benefits cases. Unless serious tort reform is part of HMO reform legislation, these increases could hit physicians hard."

 

Mark Crane. A New "Malpractice Crisis"? Why premiums are soaring again. Medical Economics 2001;13:132.