Medical Professional Liability
Malpractice Coverage News Room

Medical Malpractice

THE TOPIC
JANUARY 2003
Medical malpractice insurance covers doctors and other professionals in the medical field for liability claims arising from their treatment of patients.

The cost of medical malpractice insurance has been rising. The hard market began in 2000, after almost a decade of essentially flat prices. Rate increases have been precipitated in part by the growing size of claims, more frequent claims in some urban areas and soaring defense costs. Losses are growing at a time when investment income, the cushion against losses, is declining, thus widening the gap between revenues (premiums) and claims. In addition reinsurance, insurance for insurers, has become much more expensive, pushing up insurers' costs. Among the other factors driving up prices is a reduced supply of available coverage as insurers exit the medical malpractice business because of the difficulty of making a profit.

California, which has had a $250,000 cap on noneconomic damages since 1975, is one of the handful of states where rates are stable because losses are more predictable.

KEY FACTS

• The size of median medical malpractice jury awards rose to $1 million in 2000, a 110.7 percent jump from $474,536 in 1996, according to Jury Verdict Research.
• Doctors are dropping risky procedures, prematurely retiring, practicing without insurance and leaving litigious areas in an effort to deal with the price of liability coverage.
• Society must balance a citizen's right to sue as a result of errors in medical treatment against the cost of lawsuits and ensuring continued access to medical practitioners.

CURRENT DEVELOPMENTS
Financial Results: The insurance market for business insurance, including medical malpractice, tends to be cyclical. The current hard market has been exacerbated by the shortage of reinsurance, insurance for insurers, which is pushing up insurers' costs, and also by soaring awards in medical malpractice cases. Although the severity of the problems differ from one state to another and even within states, most are seeing higher jury awards and consequently higher settlements because award amounts influence demands and settlement negotiations. The drop in investment income generated by the stock and bond markets widens the gap between premium income and claims payouts. There are also a greater number of lawsuits as well as higher awards in some urban areas.

The medical malpractice combined ratio, a measure of profitability, reached 153.3 in 2001, compared with 115.7 for all lines combined. This means that insurers on average have been paying out $1.53 for every dollar they collected in premiums. In most of the 1990s, when the bull market and higher interest rates generated higher earnings on securities, investment income helped offset underwriting losses. In addition, insurers were keeping rates artificially low by using reserves accumulated in earlier years, but reserves are now depleted. The combined ratio hit the 160 percent mark for several years at the height of the last medical malpractice crisis in the mid-1980s. Several states, following California’s lead, enacted substantial tort reforms as a result of that crisis (See Background).

Also contributing to the problem of the ever-increasing size of claims are health care costs. In the 1990s, managed care helped keep costs low but most of the available savings have now been realized. Health care costs have been rising for several years and a jump of as much as 15 percent is forecast for 2003. A small portion of the rise is attributable to medical malpractice insurance rate increases. Medical malpractice premiums contribute about 1 percent to the overall cost of health care. During the last crisis, doctors could pass on their higher insurance costs to patients but now that is more difficult because in many cases prices are controlled by contracts negotiated with health maintenance organizations.

Rates: Obstetricians and gynecologists (OB GYNs) are among specialists that have been most seriously affected by rate increases. Obstetricians are among the most vulnerable to lawsuits. Medical Liability Monitor newsletter reports that OB GYNs’ medical malpractice insurance premiums rose by an average 9.2 percent in 2001 and are expected to rise by 19.3 percent in 2002.

A recent survey from the Council of State Neurosurgical Societies showed that in more than half the states the threat of lawsuits has risen and as many as 43 percent of neurosurgeons, a high-risk group, have either restricted their practices or are considering taking other steps to avoid the high cost of insurance.

Availability: As the cost of claims soars, medical malpractice insurers are leaving the market and many in the medical community are experiencing difficulties finding affordable insurance. A recent 50-state analysis released by the American Medical Association shows medical liability has reached crisis proportions in 12 states with more than 30 others seeing problem signs. The states where conditions are critical are Florida, Georgia, Mississippi, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, Texas, Washington and West Virginia.

Some companies have withdrawn from the market completely; others in poor financial condition have been forced to stop selling policies by state regulators. The St. Paul Cos., the largest writer of medical malpractice in the United States, announced in December 2001 that it was leaving the market because underwriting losses threatened its solvency. St. Paul insured some 40,000 physicians (about 6 percent of that market), 72,000 other health care professionals, 750 hospitals and other facilities. Close to 60 percent of malpractice insurance is provided by doctor and hospital-owned insurers.

In August 2002 New Jersey regulators approved the restructuring of Lawrenceville, New Jersey-based MIIX Insurance Co., a medical malpractice insurer that covered some 37 percent of New Jersey doctors. Regulators had cited the deteriorating financial base of the insurer. In Texas, the department of insurance reports that over the past three years seven of the 17 medical malpractice insurers operating in the state have gone bankrupt or left the state.

Coverage is also available from surplus lines companies, insurers that are not subject to the same rate regulation as state-licensed companies, and some hospitals or hospital groups have formed captives, insurance companies that service their owners' insurance needs. Some of these insurers are seizing the opportunity to expand. In addition, new insurers are entering the market on a limited basis and some established companies are now selling coverage in additional states such as New Jersey.

Concern about Lawsuits: A Health Care Liability Alliance (HCLA) survey released in June 2002 indicates that Americans are increasingly concerned about the frequency and severity of medical liability lawsuits. Furthermore, they agree that litigation is one of the primary factors behind rising medical costs and reduced access to care. By overwhelming margins, the HCLA poll shows that Americans favor legislative reforms such as limiting trial lawyer fees and guaranteeing patients full payment for medical expenses and lost wages while placing reasonable controls on awards for noneconomic damages, such as "pain and suffering." Nearly four out of five Americans (78 percent) express concern that skyrocketing medical liability costs could limit their access to care, as doctors in many parts of the country, particularly those providing specialized care, scale back services or abandon their practices.

Federal Legislation: In April 2002, the Help Efficient Accessible, Low-cost Timely Health Care bill (H.R. 4600) was introduced in the U.S. House of Representatives. Supporters of the bipartisan bill say it is intended to restore balance to the medical liability system by imposing a $250,000 cap on noneconomic damages, such as pain and suffering, establishing criteria for awarding punitive damages, and eliminating the joint and several liability rule that allows plaintiffs to recover the total award from an entity only minimally to blame for the accident. It also includes a collateral source provision to prevent double recoveries for the same injury, establishes periodic payments that allow payments to be spread out over a long period instead of paid in one lump sum, and institutes a sliding scale for attorneys' fees. The bill, which was modeled on California legislation, was passed by the House of Representatives in September 2002, but no action was taken in the Senate. Now with Republicans controlling both Houses, the odds of passing significant tort reform legislation this session are higher.

State Reform Proposals: West Virginia has been exploring many different options in response to premium increases of 30 percent or more for high-risk, lawsuit-prone procedures in obstetrics and neurosurgery that are forcing doctors to withdraw from these practices. The State Medical Association says that approximately 100 doctors, representing 5 percent of those practicing in the state, have retired or relocated to another state in the past two years. In December 2001 state lawmakers passed a measure that allows doctors having problems finding insurance to obtain coverage through an existing liability program set up for university faculty members who are state employees. Known as the Board of Risk and Insurance Management (BRIM), the program is serving as an insurer of last resort, providing a temporary solution to availability problems that are developing following the withdrawal of several medical malpractice insurers. But BRIM will not mitigate the high costs of insurance. Its rates are based on the highest in the private market and doctors in the program must leave it as soon as private market coverage becomes available. The state’s failure to successfully address the problem of the escalating cost of medical malpractice insurance boiled over on January 1, 2003 when nearly all surgery at four hospitals in the Northern Panhandle of West Virginia was canceled as over two dozen surgeons staged a strike to protest the cost of malpractice insurance.

In Pennsylvania, where medical malpractice rates in some parts of the state are among the highest in the nation, lawmakers passed a medical malpractice bill in March 2002 that combines some tort reform with provisions to lower premiums and improve patient safety. The combined ratio, a measure of profitability for medical malpractice insurers in the state, reached 160 percent in 2000. This means that Pennsylvania insurers paid out $160 for every $100 collected in premiums, compared with $133.5 nationally. The state has a medical malpractice Joint Underwriting Association, an insurance pool of last resort.

In the area of tort reform, claims must be filed within seven years of the injury under the new law, except in the case of children who can file up to their 20th birthday. Now claims must be filed within two years of the discovery of the injury. This change, designed to reduce the number of claims that allege current injuries stemming from treatment at birth or in childhood, will especially benefit pediatricians and obstetricians.

The state has no cap on noneconomic damages, because this would require a constitutional change, nor any modification of venue rules which govern where a lawsuit may be filed. A venue commission has been set up to study this issue. Reform of venue rules has gained urgency as more and more medical malpractice cases are filed in Philadelphia and claims filed there are much higher than in the rest of the state. The city and its surrounding counties represent only 13 percent of the state's population but generated $336 million in verdicts in 2001, almost 90 percent of the state's total. Soaring jury awards raise the bar for settlement values in the Philadelphia area and across the state.

The bill also reduces mandatory medical malpractice coverage from $1.2 million to $1 million and makes changes to the state-run Medical Professional Liability Catastrophe (CAT) Fund to lower rates. The CAT fund provides a layer of malpractice insurance above the minimum limits required by the state.

On December 31 a strike organized to protest the high cost of medical malpractice insurance was averted after state officials vowed to take action to rein in costs at least temporarily. Governor-elect Ed Rendell promised to pressure the state legislature to enact measures that would reduce insurance costs for physicians in the riskiest practices by as much as 40 percent and significantly reduce the cost for all doctors. The plan calls for the state to assume half of the $1 million cost of insurance coverage for doctors in obstetrics, neurosurgery, orthopedic surgery and general surgery; grants to help the state’s trauma centers pay for insurance; and includes a measure that would require malpractice lawsuits to be certified by another doctor. Health insurers would be required to make up for shortfalls in the state insurance fund.

Other states where medical malpractice reform is on the legislative agenda are Nevada, Mississippi and Florida, the state where rates are among the highest in the country and where twice as many doctors get sued as in other states, one in six compared with one in 12 nationwide. In July 2002 Nevada passed a bill limiting noneconomic damages to $325,000, adopting new joint-and-several liability standards for economic damages, limiting physician liability in government and nonprofit trauma facilities to $50,000, and other provisions.

Florida passed a nursing home liability bill that limits awards and raises the standards of care. The measure, which went into effect in January 2002, caps punitive damages at three times the amount of compensatory damages or $1 million, whichever is greater. If the wrongful conduct was motivated primarily by unreasonable financial gain, the cap is four times the amount of compensatory damages or $4 million. Nursing homes are required to increase the hours of nursing care per resident and develop quality assurance programs. The reforms seem to be making an impact. Only 20 claims were filed against nursing homes in the state in October 2002, compared with over 60 for the same month in 2001. In the fall of 2002 Gov. Jeb Bush set up the Select Task Force on Healthcare Medical Professional Liability Insurance to study how the state’s high medical malpractice rates are affecting health care.

In Texas, Governor Rick Perry has proposed several reforms to cut down on litigation costs. He has called for capping noneconomic damages at $250,000 and limiting lawyer fees to fixed percentages of awards and settlements. He has also suggested special courts or the designation of special judges to hear medical malpractice cases, strengthening the ability of the Board of Medical Examiners to police the profession, development of clear procedures for reducing medical errors and swift disciplinary actions against violators, extending tort immunity to doctors who serve the poor under contracts with the state, the provision of emergency coverage by the state to doctors unable to obtain medical malpractice insurance, and increased regulatory oversight. On April 8, 2002 hundreds of doctors and other health care professionals in Texas went on a one day strike to protest against malpractice lawsuits and the effect they have had on their insurance premiums.

On August 22, the Texas Association of Business asked state lawmakers to support its eight step medical malpractice tort reform plan. The plan’s steps include limiting noneconomic damages and attorneys’ fees, strengthening expert witness requirements, establishing immunity for health care providers engaged in charitable health care, and creating special medical malpractice courts. Texas doctors are facing medical malpractice insurance premium increases of as much as 60 percent this year.

In October 2002, Mississippi passed a law capping noneconomic damages at $500,000, requiring cases to be filed only in the county where the cause of action occurred, shortening the statute of limitations for suing nursing homes from three to two years, and other provisions.

Even in states that have so far avoided a crisis situation, such as Connecticut, doctors are anticipating problems. A recent survey by the American College of Obstetricians and Gynecologists found that 11.5 percent of doctors in the state had dropped the specialty.

Although the vast majority of states are grappling with medical malpractice problems on some level, a handful of ‘safe haven’ states including California, Colorado, Vermont, Minnesota and South Dakota have so far escaped a crisis. All are characterized for having a good litigation climate, low and stable premiums, low median malpractice payments for both awards and settlements.

Claims: According to closed claims data, 1985-1999, reported by 20 companies that belong to the Physicians Insurer's Association of America, of the 155,671 claims examined, 29.4 percent were settled in favor of the plaintiff. There were court verdicts in only 6.7 percent of medical malpractice cases and, of those, 19.1 percent were decided in favor of the plaintiff. The vast majority, 62.3 percent, were dismissed, dropped or withdrawn in favor of the defendant.

Jury Awards: Jury Verdict Research data show that the median medical malpractice jury award in 2000 (the latest year for which complete data are available) was $1 million, a 43 percent increase over the 1999 figure of $700,000. Medical negligence in childbirth resulted in the highest median award. These statistics are drawn from the original award. About 52 percent of all medical malpractice awards, based on Jury Verdict Research data, now are over $1 million, compared with 34 percent during the period 1994-1996. However, medical malpractice awards are subject to considerable volatility and very large awards are often reduced on appeal. Jury Verdict Research data also show that while death was the most frequent claim, brain injury was the second most frequent and by far the most costly, with the median award at $4.3 million and the probable range of awards from $1.5 million to $12 million.

In California, two lawsuits threaten to undermine the Medical Injury Compensation Reform Act of 1975 (MICRA) that caps noneconomic damages in medical malpractice lawsuits at $250,000. The two suits were both won by plaintiffs against Health Care Partners Medical Group (HPMG) and, in both cases, pain and suffering verdicts that far exceed the cap imposed by MICRA were awarded. Lawyers for the plaintiffs argue that the awards should stand since HPMG is a corporate entity, not an individual health care provider. The California Medical Association has filed a brief in support of HPMG arguing that MICRA was intended to protect physicians groups as well as individual doctors.

Impact of Managed Care: According to a 2001 study of the medical malpractice insurance business by Conning & Company, managed care has changed the focus of medical malpractice from "committed medical acts to omitted ones, largely as a result of the increased rationing of medical services." The Conning study also points out that heightened attention to patient safety and publicity surrounding the incidence of hospital errors is likely to push up medical practice claims.

Medical malpractice insurers also face an array of other issues that arise in managed care situations, such as claims stemming from the contractual relationship between doctors and managed care companies. Managed care organizations review the treatment plans of physicians in their networks or clinics at various stages of patient treatment. The use of increased peer review exposes doctors to lawsuits when there is an adverse outcome to treatment. Specialty insurers have begun to offer coverage for this risk.

Lawsuits Against Health Care Plans: The U.S. Supreme Court ruled in June 2000 that HMOs cannot be sued for giving doctors financial incentives to hold down medical care costs. The plaintiff in the case, who won a $35,000 judgment under Illinois malpractice law, sought to prove that by giving doctors financial incentives, the HMO pushed doctors to put their own interests ahead of the interests of patients, thereby violating its duty to members of the employee benefits plan to whom it was obligated to provide medical care. So far, Congress has not passed legislation regulating health care plans provisions that would give patients and their families the explicit right to sue these organizations. Lawmakers have not been able to agree on key provisions to be included in patients' bill of rights legislation. Already more than half the states have enacted legislation creating new causes of action based on patients' rights.

Federal courts in several jurisdictions and the supreme courts of Pennsylvania and New York have ruled that patients may sue their health care plans for negligence, following a decision by the U.S. Supreme Court in 1995 on the Employee Retirement Income Security Act (ERISA), a federal statute protecting employees. Until the U.S. Supreme Court ruling, courts had generally held that health care plans were covered by ERISA because the services they provided were part of a company's employee benefit plan. But the high court said ERISA was only meant to ensure that benefit plans were administered uniformly. It was not intended to remove the states from general health care regulation which, it said, had historically been a matter of local concern. However, industry observers say suits against health care plans will not necessarily reduce awards against doctors and hospitals. Managed care organizations that are being sued are likely to make doctors and hospitals co-defendants.

In June 2000 the Supreme Court upheld the right of states to use independent review boards to make final decisions on the medical treatment that HMOs provide to their members. Most states now allow patients to appeal decisions from HMOs denying coverage for treatment to an independent review board. In its ruling the court decided that ERISA does not preempt the review boards set up by the state to provide second opinions on decisions about medical coverage.

BACKGROUND
Brief History: The medical malpractice insurance system experienced a period of crisis in the early 1970s, when several private insurers left the market because of rising claims and inadequate rates. The exodus of capacity resulted in an availability crisis. Over the next fifteen years, various attempts were made to ease the explosion in claims costs — tort reform, increased diagnostic testing, improved peer review, and increased communication between doctors and patients. These efforts appear to have had a positive impact. The number of claims dropped. However, the size of claims — the dollar amount — has continued to grow, although initially not at the fast pace reported earlier in the decade.

Aggressive campaigns to reform state laws governing medical liability lawsuits began in the 1970s. Every state except West Virginia passed reforms. New Hampshire's entire reform act was subsequently struck down as unconstitutional by its Supreme Court, but Indiana's, which was the most comprehensive in the nation when it went into effect in 1975, has been found constitutional in all challenges and has helped to keep physicians' premiums down in that state. California's Medical Injury Compensation Reform Act (MICRA), also enacted in 1975, which caps noneconomic damages and modifies the collateral source rule, is also considered a model law, see below.

Responding to the problem of availability, physicians formed doctor-owned malpractice insurance companies to provide coverage. These companies now write about half of all the medical malpractice insurance in the nation. Since these new companies had not experienced any losses, they could initially charge much lower rates. Later they suffered the fate of their private insurer predecessors, having to pay claims of increasing frequency and size as prior malpractice incidents of those they insured came to light. This, in turn, necessitated charging higher insurance rates.

Reasons for the increased incidence of malpractice claims are not entirely clear, but several contributing factors have been suggested. In addition to the fact that people became more litigious than in the past, the crisis of the 1970s, which was extensively reported by the media, may have made people more aware of physicians' vulnerability to malpractice suits. Other factors were the loss of an intimate relationship between families and their doctors and the use of medical experts to testify in malpractice cases. Physicians have also accused lawyers of being excessively eager to bring malpractice suits because of the high fees the lawyers can collect when their clients win.

More recently, there has been a rise in public distrust of the medical profession and publicity about the number of medical errors which has led the public to believe standards are declining when in fact the reverse is true. In addition, changes in the judicial environment are increasing costs. It is easier to litigate, to find counsel and build a case using information on the Internet, for example. Some industry observers say that juries have become desensitized to large numbers. While awards do get reduced, the results of appeals are not publicized, which leads to higher claim demands and settlements. Others cite a growing resentment to large for-profit health care firms, the caliber and strength of the plaintiffs' bar and a greater willingness on the part of physicians to testify against another physician.

Prevalence of Medical Malpractice: A study (generally known as the Harvard study) commissioned by New York State in 1986, and released in 1990, showed that actual malpractice is relatively rare. Of the New York hospital cases examined, the incidence of adverse events, or injuries resulting from medical "interventions" or treatment, was 3.7 percent. The percentage of adverse events due to what the physician team characterized as "negligence" (not necessarily a legal definition) was 1 percent. However, only one in eight who suffered from an adverse event due to negligence filed a medical malpractice claim, and only one in 15 received compensation. Most adverse events resulted in only minimal and transient disability and most of the patients' medical care expenses were paid for by health insurance. This helps to explain why only a small percentage of patients who are injured as a result of negligence file medical malpractice claims. However, a significant portion (22 percent) of patients who did not file medical malpractice claims suffered moderate or greater incapacity. In a second phase of the study, researchers confirmed that some of the tort claims filed provided little or no evidence of medical malpractice or even an adverse event, suggesting that the tort system is "very error-prone," at least in its initial stages.

Effects of Tort Reform: Between February 1986 and May 1987 the General Accounting Office issued five reports on medical malpractice. The third, published in December 1986, "Medical Malpractice: Six State Case Studies Show Claims and Insurance Costs Still Rise Despite Reforms," singled out the reforms enacted in California in 1975 as among the most effective in moderating increases in the cost of malpractice insurance and the size of awards.

California’s reforms have helped stabilize the medical malpractice environment in that state, making the coverage more affordable than in many other urban areas. MICRA has seven major elements: a collateral source rule which requires that juries be told when plaintiffs have other sources of compensation for their injuries, a cap of $250,000 on noneconomic awards such as compensation for pain and suffering, and periodic payments rather a lump sum for awards of more than $50,000. It also requires lawsuits generally to be filed within three years of the injury, includes a specific scale for attorney’s fees, requires that plaintiffs' attorneys give 90 days advance notice to the defendant of their intention to file a lawsuit, and stipulates that contracts for medical services may include provisions for binding arbitration.