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Harming Patient Access to Care: The Impact of Excessive Litigation
Subcommittee on Health
Mr. Richard Anderson M.D.
Chairman Bilirakis, Representative Brown and members of the subcommittee, thank you for this opportunity to present to you today our views on the implications of excessive litigation and the need for Federal health care litigation reform. My name is Richard Anderson and I am an oncologist with more than 25 years experience practicing cancer medicine in California. I am also Chairman of The Doctors' Company one of the 45 doctor-owned and/or operated medical liability insurers that comprise the Physician Insurers Association of America (PIAA). Collectively, the PIAA companies insure over 60% of the Nation's practicing physicians. At last count, PIAA companies insured more than 277,000 doctors and 1,100 hospitals. On behalf of our member companies and their insureds, the PIAA has always supported health care liability reform that will more equitably and rapidly compensate patients who have received substandard care, but which at the same time will also limit frivolous lawsuits and increase access to health care.
BACKGROUND
Despite stunning advances in scientific knowledge, medicine remains more of an art than science because human beings are not machines. Sadly, the tide of litigation against America's doctors has risen even faster. Approximately one of every six practicing physicians faces a malpractice claim every year. In high-risk specialties such as obstetrics, orthopedics, trauma surgery and neurosurgery, there is one claim for each doctor every 2 ½ years. However, fully 70% of these tens of thousands of cases are found to be without merit. Nonetheless, every single case requires a costly legal defense. Nationally, as the chart below shows, these loss adjustment expenses average $22,967 per defendant. Those cases that go all the way through trial before a vindicating defense verdict average $85,718 per defendant.[1] [See chart below] The Doctors' Company itself, for example, has spent more than $400 million defending claims that ultimately were shown to be without merit.
ROOTS OF THE CURRENT ENVIRONMENT
Medical
liability claims were fairly uncommon until the 1970s.
In the 40 year period between 1935 and 1975, 80% of all medical
malpractice lawsuits were filed in the last five years of that period.[2] Massive
losses between 1970 and 1975 forced many commercial insurers to conclude that
the practice of medicine was an uninsurable risk, and they simply refused to
provide malpractice insurance at any price. This resulted in a "crisis of
availability" to which providers responded emergently. Doctors contributed
their own funds as capital to support the efforts of their state medical and
hospital associations, among others, to start as many as 100 provider owned
specialty carriers across the country. Dubbed
"bed pan mutuals" by their commercial competitors (many of whom had fled the
market), these upstarts were not expected to succeed where the giant commercials
could not find success. Because their primary mission is to provide a service,
and because they were entirely committed to remaining present even in the most
difficult markets, these companies have succeeded and are the basis of the PIAA.
As one example, The Doctors' Company was formed by doctors, for doctors
in 1976, and today insures more than 25,000 doctors throughout the nation. A LITIGIOUS SOCIETY GROWS
A second crisis emerged in the early 1980's, known as a "crisis of affordability." Insurers faced ever-mounting losses, with rampant increases in paid claim frequency (number of paid claims) and severity (amount of indemnity payment). PIAA data shows that on average it takes 5 ½ years for an insurer to close a malpractice claim after the date of the incident.[3] There is often a long lag before the claim is reported. The majority of the delay, however, comes because of the inefficiencies of the tort system. California enacted the Medical Injury Compensation Reform Act of 1975 (MICRA) which largely eliminates the lottery aspect of malpractice litigation in that state. The Doctors' Company data reveals that claims are settled in one-third less time than the national average. [See chart below] This result not only decreases the cost of litigation, but it means injured patients are indemnified much faster in California.
During
much of the 1990s, PIAA companies exercised their fiduciary responsibility to
wisely invest the premium deposits of their policyholders, who benefited from
the rising bond markets. These
returns were used not to line the pockets of the companies, but to subsidize the
premium rates being charged to policyholders so that they could remain
affordable. It was the policy
holders (health care providers) who reaped the financial benefits. It
must be noted that insurance is a highly regulated industry.
Every state department of insurance, as well as the national rating
agencies, closely monitors both the kinds and qualities of investments.
Virtually no medical liability insurance company has experienced net
investment losses. In fact, 80% of
investments by PIAA companies are in high-grade bonds. What has happened is that
investment yields have declined due to falling interest rates and are no longer
available to subsidize premium rates to the extent they once did.
In other words, premium rates must now more closely match the actual cost
of losses. The combination of these
factors created "the perfect storm" for medical liability insurers. THE
PERFECT STORM During this same time period, claim frequency and severity continued to increase. In addition, reinsurance costs rose significantly in relation to the increase in loss costs. The insurance system was able to accommodate even this inexcusable volume of litigation as long as the size of the few valid claims was predictable. Unfortunately, in the past few years there has been an explosion in the cost of individual claims. Texas has seen a $268,000,000 verdict. A number of states have witnessed verdicts in excess of $100,000,000. The city of Philadelphia alone has recorded multiple verdicts in excess of $50,000,000 in just the past two years. Four claims in Arkansas totaled $98,000,000 in just the past year. According to PIAA data [shown on next chart], during the period 1991 to 2001, the percentage of claims costing in excess of $1 million dollars increased nearly four-fold. Insurance is not magic. If society expects insurers to pay unlimited awards, it should expect those who are insured to pay corresponding premiums. As premiums rise so must the cost of health care. Since health care today is a zero sum game, these costs increases mean corresponding decreases in access to health care. Claim
Payments =>$1 Million  % of Paid Claims Those are the largest claims. What about the size of the average claim? PIAA data shows that the average indemnity payment in 2001 was more than $310,000, a 60% increase in the last five years. As the next chart shows, the average malpractice payment is rising precipitously. With it, the sum of the malpractice claims paid rises. In New York and Pennsylvania alone nearly $1 billion was paid in 2000. Average Indemnity Claim Payments PIAA Data Sharing Project
Actual Dollar Values *Per defendant - many claims
have more than one defendant THE
CURRENT SITUATION As
the new millennium began, insurers who were not able to weather the storm began
to experience poor financial results. Expressed
differently, a number of companies that felt that they could provide insurance
for less than its cost learned the inevitable lesson.
Several, such as PHICO, PIE and Reliance, have ceased all underwriting
operations. In December of last year, long-time industry leader St. Paul
announced that due to unsustainable losses and the "unfavorable tort
environment" the company would no longer write new medical liability coverage
and it would not renew the policies of its 42,000 physicians, 750 hospitals and
73,000 other health care providers. Though St. Paul is a commercial carrier and
not a member of PIAA, it is telling that the largest company in the industry for
the better part of two decades feels that it can no longer afford the risk of
insuring the practice of medicine. Companies remaining in the market have had no
choice but to take the rate increases necessary to insure survival. Conning
& Co. estimates that malpractice insurers will pay out approximately $1.40
for every premium dollar collected in 2001 and 2002. Even with the projected rate increases, Conning & Co.
still projects insurers will pay out $1.35 for each dollar collected in 2003
(Conning Report on Medical Malpractice Insurance, April 2002). PIAA data reveals that since 1990, claims costs have risen
annually by 6.9%, nearly three times the rate of inflation. IN
CONCLUSION The
average claim payment has increased by 60% over the past five years.
The cost of the most expensive claims has exploded in a manner that is
absolutely unprecedented. If
judgments are to be unlimited, than the premiums need to increase accordingly to
pay for those judgments. With
absolute certainty, this money will be taken out of our healthcare system and
compound the severe access to care issues that we all face today. Several spurious arguments have been put forth by those with an interest in continuing the tsunami of medical malpractice litigation. First, it has been deceptively argued that stock market losses are the real driver of price increases. In fact, investments by insurance companies are highly regulated and controlled by each state department of insurance and closely monitored by the rating agencies. Insurance companies continue to gain funds from their investments and use those funds to offset even higher malpractice premium rates. As income from investments decreases, however, premiums must more closely match losses. Second, it is argued that
insurance companies should have raised rates sooner. There may be some truth to
this. However, it is difficult to understand how having today's sky-high rates
earlier would make them more palatable. Third, it is argued that
insurance companies fail to settle claims when they should, and are therefore,
exposed to astronomic jury verdicts. Again,
reality is quite different. In most
cases, it is the physician, not the company, who must make any settlement
decision. Remember that doctors are
found to be without fault in approximately 8 out of 10 malpractice trials.
Should these cases have been settled? Finally, there are those who
argue for a state run medical liability system.
Allow me to point out that the majority of state run malpractice programs
have gone bankrupt, or charge premiums that are much higher than those charged
by PIAA companies. In New York,
premiums are actually set by the Department of Insurance, not by individual
companies, and New York rates are among the highest in the nation. THERE IS A "TRIED AND TRUE" SOLUTION
California has 27 years of experience with the MICRA statutes. We know, we do not have to speculate, that tort reform works. Since 1975, The Doctors Company malpractice premium rates in California have decreased by 40% in constant dollars. [See chart below] This is true despite the fact that there has not been and is not today any limit on actual damages awarded. MICRA Helps Reduce California Medical Liability Premium Rates by 40%
We know, we do not speculate,
that claims settle about 33% faster in California than the rest of the nation
because the lottery aspect of non-economic damages has been controlled. We know, we do not speculate,
that even very large judgments can be accommodated by the insurance system
because they can be paid on an annual basis over the intended period of
compensation, not as a single jackpot. We know, we do not speculate,
that injured patients actually take home a significantly higher percentage of
awards in California because there is an upper limit on attorney contingency
fees. In many areas, more than 40% of a malpractice award goes directly into the
pocket of the plaintiff's attorney. In
California, MICRA contains a limitation on this fee. An attorney winning a $1 million claim must be satisfied with
a legal fee of $221,000. We know, we do not speculate,
that MICRA has not limited access to attorneys. California remains a litigious
state and according to The Doctors Company data the frequency of malpractice
cases in the state is 50% higher than the national average. California passed effective tort reforms and its providers have been able to weather this liability crisis well. These same reforms are found in H.R. 4600, the Help Efficient, Accessible, Low-cost, and Timely Healthcare Act of 2002 (the HEALTH Act). The PIAA and The Doctors Company fully support the provisions of this act, which when signed into law, will provide the same protections to patients across the United States as found in California for over a quarter century. The next chart, which was compiled from data reported to the National Association of Insurance Commissioners, speaks volumes about MICRA's effectiveness: Savings
from MICRA Reforms
We thank members of the Committee and their staff for holding this important hearing and inviting us to testify. We look forward to working with you to make the health care liability system fairer for everyone. I will be happy to answer any questions you might have. [1]PIAA Data Sharing Project, May 2002. [2]Professional Liability in the '80s, Report 1, American Medical Association, 10, 84, p4. [3]PIAA Data Sharing Project, December, 2001.
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