There is considerable evidence that in Pennsylvania, high medical malpractice insurance rates are the result of factors other than claims and claims payout.The concepts under consideration by this Committee as embodied in HR 4600, do not address the plethora of factors, other than claims payout, that have caused a premium spirale.It is our hope that this Committee will expand its viewpoint of this problem.Further, it is our belief that these issues, with one exception, can and should be addressed by the Commonwealth of Pennsylvania and not by Federal intervention.

Pennsylvania, has had the benefit of two in-depth studies on medical malpractice within the Commonwealth performed by essentially the same individuals, first in 1985 and again in 2001.^[1]The initial study was the result of a cooperative effort of nine statewide organizations, who collectively, along with the Pennsylvania Senate, financed the study.These studies identified problems in the insurance delivery system in Pennsylvania and other factors which were the root cause of the malpractice insurance price spiral which led to the 1985 study, as well as the spiral which preceded 2001.Much of what is set forth in this paper is based upon the findings of Hofflander/Nye.

1.               Physicians Need Reimbursement Relief

I think all of us agree that physicians all across the United States have experienced sharp increases in medical malpractice insurance premiums.In Pennsylvania, the effect of these increases have been greatly exacerbated by the fact physicians reimbursements for services rendered to patients is amongst the lowest in the United States.According to Howard Richter, M.D., immediate Past President of the Pennsylvania Medical Society, those reimbursements average 20% below the Medicare schedules.Since physicians fees in Pennsylvania are essentially capped, any increase in the cost of doing business, including increases in malpractice premiums, is vexating.

This is a problem not addressed by HB 4600 and yet Federal legislation will be needed to remedy this inequity.Irrespective of what ultimately happens with respect to medical malpracticeinsurance, how can we stop the flow of physicians out of Pennsylvania when they can earn as much as 2 to 2 1/2 times more for doing a procedure in our neighboring state of New Jersey?If Medicare truly represents the gold standard of health care cost containment in the United States, how can such a disparity be tolerable.Only by Federal mandate can this problem be addressed.

2.               Malpractice Rates Are Directly Related To Declines In the Investment Market

Malpractice insurance rates are adversely affected, as are virtually all forms

of casualty insurance rates, by a poor investment market characterized by a bear stock market and low interest rates.This dependency of casualty insurance upon the investment market is well documented.We all are aware of the investment market decline over the past several years.Casualty insurers target a 20% return on the dollar and when they cannot obtain this return, at least in part, through investments, they must raise premiums.It is also well accepted that casualty insurers tend to contract and consolidate during such periods and are thus reluctant to expand their underwriting or enter new territories.

These factors result in an availability of insurance problem and we are faced with an availability problem today in Pennsylvania.When availability is a problem, it follows like night follows day that there will be an affordability problem.We have today a true Aseller's market@ in medical malpractice here and across the United States.

In addition, insurance availability in Pennsylvania has been adversely impacted by the failure of four major insurers over the past six years.Three of these, Physicians Insurance Company (PIC), Physicians Insurance Exchange (PIE) and Pennsylvania Hospital Insurance Company (PHICO) were leading primary insurance carriers at the time of their demise.The fourth insurance company to fail, Reliance Insurance Company, was a major provider of excess insurance to Pennsylvania hospitals.

There is an important common denominator to each of these failures; all wereallegedly brought about by fraud or mismanagement; each are subject to civil and criminal charges by the insurance departments of Pennsylvania and in the case of PIE, Ohio; and none of the failures have been linked to any adverse claims experience in Pennsylvania.These failures alone wiped out more than 50% of the primary insurance market in Pennsylvania^[2] Obviously, the result has been a disaster in terms of medical malpractice insurance availability.

3.               Pennsylvania Has Not Experienced A sharp Increase in Either The Filing of Claims or In Paid Claims. 

Pennsylvania enacted legislation, The Health Care Malpractice Services Act, in 1975, which fundamentally changed the medical malpractice insurance delivery system in Pennsylvania.One of the changes was the creation of a non-profit, state operated fund, the Medical Professional Liability Catastrophic Loss Fund (CAT Fund) to handle all claims above the primary insurance limit of $200,000 through the mandatory coverage ceiling of $1.2 million.The CAT fund went into operation in 1976.Claims covered by the Fund began maturation in 1980.Thus, 1980 is an obvious year to use as a base from which to track growth.

CAT Fund data demonstrates a composite growth in claims paid of 7.3% for the years 1980 through 1996.The medical cost index for this period was 7%.Since medical costs are a common primary element of personal injury claims, Hofflander/Nye concluded that the rate of growth was not out of cync.Claims payout declined in 1997, but then turned sharply higher in 1998 and 1999.These increases however can be at least partially attributable to the failures of PIC and PIE which virtually eliminated more than 25% of primary coverage.^[3]CAT Fund Director, John Reed, has estimated that these failures alone cost the CAT Fund approximately $30 million per year.

The National Practitioner Data Bank provides comparable information on verdicts in Pennsylvania as compared with the nation as a whole.It has been in existence since 1990.From 1990 to 2000, the national mean average verdict in medical malpractice cases was $202,000.In Pennsylvania, the mean average was $211,000.In the year 2000, it was $249,000 nationally and $251,000 for Pennsylvania.Verdicts in Pennsylvania were in sync with those across the nation.

With respect to the filing of medical malpractice claims, twenty-six states and the District of Columbia, had a higher ratio of filing, per capita, than did Pennsylvania.Pennsylvania is in the low middle when compared to the rest of the country in the filing of medical negligence claims.

When Hofflander & Nye did their study in 1985, they found that there was a tendency to separate doctors into multiple risk categories.This was referred to as Apyramiding@.The purpose was to enable a carrier to maintain very competitive rates for the low risk insureds for whom they wished to continue to write insurance.These include family practitioners, non-interventional dentists, and the like.Higher risk physicians, particularly those who perform surgeries, were separated out into different classifications so that the low risk physicians would be insulated from the claims experience of the higher risk physicians.The problem is that with additional rate classifications, the numbers involved in the higher risk classifications are often insufficient to comport with the principle of Aspread the risk@.As an example, in 1986, there were approximately 200 neurosurgeons in Pennsylvania. Neurosurgeons deal with backs and spines.Almost any mistake made by a neurosurgeon is going to be a seven figure, and perhaps multiple seven figure, mistake.Obviously, these numbers are too high to provide adequate funding for claims without charging exorbitant rates.In 1985, Hofflander & Nye estimated that there were as many as thirteen to sixteen rate classifications in the ranks of medical practitioners.

They recommended then, and CAT Fund Director, John Reed, recommended in 2001, that the pyramid be Acollapsed@.A collapsing of the pyramid to four or five categories could result in very substantial premium savings at the top of the pyramid, and a very minimal increase in premiums at the bottom of the pyramid (lower risk physicians).