Medical Professional Liability
Malpractice Coverage News Room

Worsening of Medical Malpractice Market Expected To Continue in 2003 - Rate Iincreases Likely

Deterioration in operating profitability weakened capitalization, inadequate loss reserves and greater retention levels continue to wreak havoc on the medical malpractice market, making it more challenging for those insurers willing to write new business, panelists told the PLUS Medical PL Symposium.

Victor T. Adamo,JD, president, ProAssurance Corporation, noted that premium increases and stricter underwriting decisions have added more pressure and more staff demands. “For the survivors in the business, there is the burden of constantly conveying bad news,” he said. “Investments no longer provide a major advantage in long-tail lines. For reinsurers, it means more business and less relationship.”

According to Adamo, rate adequacy is critical to companies avoiding price-driven markets and there are also regulatory barriers. “Unreasonable regulators are causing time-consuming approval and review processes.”

Adamo explained that there is over $1 billion of displaced premium in the market and that it is unclear whether small start-ups may be able to grow surplus enough to make a meaningful contribution to capacity “A financial crunch restricts capital growth.”

Looking at hospital medical professional liability from the excess insurers’ perspective, Judy Hart, executive vice president, Endurance Specialty Insurance, Ltd., said that volatility never seems to go away, but is increasing further. “Next to earthquake insurance, medical malpractice is the most dangerous line of insurance.”

According to Hart, for 2003, there are further rating downgrades, additional retrenchment and withdrawal from the market and continued pricing and retention increases. “There is also new capacity and greater consideration of alternative options by clients with predictable loss exposure. Increased risk financing expenditures will cause greater clinical risk management and proactive claims defense.”

Hart noted that the tort system is out of control. “Tort costs in the U.S. consumed two percent of GDP annually on average since 1990 and is expected to rise 2.4 percent of GDP by 2005,” she said. “The tort system is extremely inefficient. Only 20 percent of the tort dollar compensates victims for economic losses and at least 58 percent of every tort dollar never reaches the victim.”

Hart, who sees med mal as a market “correction” rather than a “crisis,” said that the sophistication of the plaintiff’s bar, a trial bar flush with cash and an erosion of tort reform to accept junk science have been factors driving severity. “There are some deep judicial ‘pits’ and a jury desensitization to ‘deep pockets syndrome.’ There are also some corporations that just do really dumb things.”

In order to meet the challenges, Hart says first-rate underwriting and claims management knowledge are needed. “This is a great opportunity to learn from our mistakes. World class selling and negotiation skills are critical and health care specialists with technical expertise who can rise to the top will make a difference.”

Matthew G. Fay, FCAS, MAAA, senior vice president, Converium, predicted that the medical malpractice market was going to get worse before it got better. “Loss ratios will continue to deteriorate,” he said. “Reserve deficiency will wreak havoc on income statements and hurt companies. That’s why it’s so important to stay up to date.”

Fay said that with the hardening of the market more reserve strengthening is on the way “Increases on the primary side weren’t enough and will continue to drive rates up higher,” he said. “Without tort reform, there will be a more severe second round of rate increases. The industry has done a tremendous amount of work to get us back in place, but we have to pay more attention to rates.”

Looking at the provider/captive market perspective, Anthony Mercurio, managing director, Marsh Healthcare Practice, said that there are differences in the hard market today than in the past that compound the problems. “In the past, most insurance buyers were imbedded in a cost-plus system. Today, it’s not true. We’re not going to be as elastic as we were in the past”

Mercurio said that there are alternatives in the market such as self-funding, group captives, PRUE captives and others. “While we’re not immune from increased severity and lower investment returns on funded assets, ROI expectations are lower. In addition, many have engaged in a focused effort to reduce losses, most have lean budgets and have a camaraderie among their members that is very impressive.”

Mercurio added that tort reform needs to be implemented at the grass roots level. “It has to start with doctors.”

Dramatically higher premium increases and risk retention requirements have added financial pressures to an industry segment that is already stained. Facilities are going bare, self-insuring or reducing limits of coverage. It is only through greater risk control measures, prudent underwriting and tort reform that hospital professional liability will recover, panelists told the PLUS Medical PL Symposium.

James D. Hinton, vice president, Risk & Insurance, HCA, Inc., noted that the physician malpractice crisis has had a tremendous impact on hospitals. “Hospitals are requested to lower or eliminate insurance requirements and more physicians are going bare in Texas and Florida,” he said. “Physicians are relocating, retiring early or curtailing their practice,” he added. “Hospital recruiting costs are up, service cutbacks are being made in some situations and employment of physicians is trending up again.”

According to Hinton, the market has seen dramatically higher retentions, a formation of new captives and risk retention groups and insurance costs rising faster than hospital revenues. “For buyers, there is a tremendous amount of frustration,” he said. “There is little evidence of underwriter judgment and little differentiation of risks. In addition, there are too many data requests, which are often irrelevant and there is diminished value of long term relationships.”
Hinton noted that the crisis in the medical malpractice market is not an insurance problem.

“They’re not at fault. It is the legal system and astronomical jury awards that need to be addressed.”

Going forward, the outlook for HPL underwriting should be positive, Hinton said. “Loss results will improve because of patient safety initiatives, a renewed focus on loss prevention and tort reform. Severity is impacting the market. That’s where tort reform can make a huge difference for hospitals.”

Using Ohio as a paradigm of what is happening in the med mal market throughout the county, D. Brent Mulgrew, J.D., executive director, Ohio State Medical Association, noted that malpractice insurance rates in Cleveland are among the highest in the nation. “Physicians are frustrated,” he said. “They feel the system has been unresponsive and mismanaged. We all are potential patients. If we fail, the system will crash.”

According to Mulgrew, the impact has resulted in increased expenses. “Revenue remains flat to declining. There has also been a decreased access to patient care. Ninety-six percent of doctors are discontinuing some procedures, 15 percent are leaving for less litigious areas and 51 percent are quitting the practice altogether.”

Mulgrew noted that the passage of SB 281may help. The bill, which limits non-economic damage awards in the vast majority of cases to $350,000, also requires attorney contingency fees to be reviewed by a probate court if the fees exceed the non-economic damage awards. “SB 281 removes joint and several liability. In most cases, a physician who is named in a suit will only be held liable for the portion of the claim for which the doctor maybe responsible.”
Mulgrew said that SB 179 also provides a broader base of peer review protections and allows health care entities outside the traditional hospital setting to establish peer review committees. “The activities are protected from discovery during litigation.”

The impact of these bills, according to Mulgrew will not mean a reduction in rates or trends. “There will be a selective underwriting of risks and specialties and a creation of new non-standard market options.”

Looking at the long-term care liability impact, Michael R. Walton, president, AMWINS HealthCare, noted that liability insurance availability and affordability issues are severe. “There is a continued aggressiveness of plaintiffs’ attorneys in soliciting cases and extraordinary jury awards.”

According to Walton, the “broad brush” underwriting approach being used is inappropriate. “Many suffer for the sins of a few” he said, adding, “risk assessment tools and methodologies are inaccurate, faulty and subjective. Base rates are set according to geographical location, facility size, and percentage of more acute residents. Minimal or no consideration is given toward the level of quality care or the type of ownership.”

Walton noted deficiencies in hospitals include failure to follow physicians’ orders, failure to treat, physical or verbal abuse, medication error, failure to monitor adequately and failure to diagnose. He said there are also concerns with the analysis and accuracy of Online Survey, Certification and Reporting (OSCAR) data. “Simple counts of survey deficiencies can be misleading unless the scope, severity and type of each deficiency is considered,” he said. “In a recent analysis of 16,698 OSCAR assessments, six percent of facilities report total census numbers not equal to the total number of residents calculated from other OSCAR items,”

Walton said that there are better ways to measure quality and risk. “OSCAR analysis can be improved by using geographical adjustment, severity adjustment, focus on litigation risks and other methods,” he said. ‘We need to utilize advanced methods of assessing, managing and defending the long-term care quality and associated risk and we need to eliminate the subjectivity in the data. We are making advancements with underwriters in this area.”