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Prepared Witness Testimony The House Committee on Energy and Commerce
The Medical Liability Insurance Crisis: A Review of the Situation in Pennsylvania
Subcommittee on Oversight and Investigations
Mr. Lawrence Smarr
INTRODUCTION
Chairman Greenwood,
Representative Deutsch and members of the Sub-Committee, I am Lawrence E. Smarr,
President of the Physician Insurers Association of America (PIAA).Thank you for allowing me the opportunity to appear before you today and
speak regarding the medical liability crisis as it affects patients and health
care providers in Pennsylvania and across the nation. As we all know,
professional liability insurance premiums for doctors and hospitals are rapidly
rising in many states such as Pennsylvania to levels where they cannot afford to
pay them.These increased premiums
are caused by the ever-increasing size of medical liability insurance payments
and awards.The unavoidable
consequence is that physicians are moving away from Pennsylvania and other
crisis states, reducing the scope of their practices, or leaving the practice of
medicine altogether.Likewise,
hospitals are being forced to close facilities and curtail high risk services
because they can no longer afford to insure them. DOCTORS INSURING
DOCTORS The PIAA is an association comprised of professional liability insurance companies owned and/or operated by physicians, dentists, and other health care providers.Collectively, our 43 domestic insurance company members insure over 300,000 doctors and 1,200 hospitals in the United States and our nine international members insure
over 400,000 health care providers in other countries around the world.While PIAA members, such as the Pennsylvania Medical Society Liability
Insurance Company, are viable insurance companies, they can also be
characterized as health care professionals caring for the professional liability
risks of their colleagues - doctors insuring doctors, hospitals insuring
hospitals.We believe that the
physician owned/operated insurance company members of the PIAA insure over 60%
of America's doctors.Unlike
the multi-line commercial carriers, medical liability insurance is all that the
PIAA companies principally do, and they are here in the market to stay. The
PIAA was formed 26 years ago at a time when commercial insurance carriers were
experiencing unanticipated losses and exited the market, leaving doctors,
hospitals and other health care professionals no choice other than to form their
own insurance companies.A quarter
century has passed, and I am proud to say that the insurers who comprise the
PIAA have become the driving force in the market, providing stability and
availability for those they insure. When the PIAA and many of its member
companies were formed in the 1970's, we faced a professional liability market
not unlike that which we are experiencing today.At that time, insurers, all of which were general commercial carriers,
were experiencing rapidly increasing losses which caused them to consider their
continuance in the market.Many of
the major carriers did indeed exit the market, leaving a void that was filled by
state and county medical and hospital associations across the country forming
their own carriers.Again we see
the commercial carriers, such as St. Paul, exiting the market.But, this time, the provider owned carriers are in place and are indeed
providing access to insurance and stability to the market. Unfortunately, the
recent exodus from and transformation of the market is of such a magnitude that
the carriers remaining do not have the underwriting capacity to take all comers.Facing ever-escalating losses of their own, many of the carriers
remaining in the market are forced to tighten their underwriting standards and
revise their business plans with regard to their nature and scope of operations.This includes the withdrawal from recently expanded markets, which adds
to the access to insurance problem caused by carriers exiting altogether. My
goal here today is to discuss what the PIAA sees as the underlying causes of the
current medical liability crisisin
Pennsylvania and other crisis states across the nation.I want to stress that I believe that this situation should be
characterized as a medical liability crisis, and not a medical liability
insurance crisis.The PIAA companies covering the majority of the market are in
sound financial condition.The
crisis we face today is a crisis of affordability and availability of insurance
for health care providers, and more importantly, the resulting growing crisis of
access to the health care system for patients across the country. INSURANCE
INDUSTRY UNDERWRITING PERFORMANCE
Medical liability insurance is called a long-tail line of insurance.That is because it takes on average two years from the time a medical liability incident occurs until a resulting claim is reported to the insurer, and another two and one-half years until the average claim is closed.This provides great uncertainty in the rate making process, as insurers are forced to estimate the cost of claims which may ultimately be paid as much as 10 years after the insurance policy is issued.By comparison, claims in short-tail lines of insurance, such as auto insurance, are paid days or weeks after an incident. Over the past three years
medical liability insurers have seen their financial performance deteriorate
substantially due to the rapidly rising cost of medical liability claims.According to A.M. Best (Best), the leading insurance industry rating
agency, the medical liability insurance industry incurred $1.53 in losses and
expenses for every dollar of premium they collected in 2001.While data for 2002 will not be available until the middle of this year,
Best has forecast that the industry will incur $1.41 in losses and expenses in
2002, and $1.34 in 2003.The impact
of insurer rate increases accounts for the improvement in this statistic.However, Best also calculates that the industry can only incur $1.14 ½in losses and expenses in order to operate on a break-even basis.This implies that future rate increases can be expected as the carriers
move toward profitable operations. The physician owned/operated
carriers I represent insure a substantial portion of the market (over 60%).Each year, an independent actuarial firm, Tillinghast Towers-Perrin
provides the PIAA with a detailed analysis of annual statement data filed by our
members with the National Association of Insurance Commissioners (NAIC).This analysis is very revealing with regard to the individual components
of insurers financial performance. Exhibit 1 below details the operating experience of 32 physician owned/operated insurance companies included in the analysis.A widely relied upon insurance performance parameter is the combined ratio, which is computed by dividing the losses and expenses incurred by insurers by the premiums they earn to offset these costs.For these companies, this statistic has been deteriorating (getting larger) since 1997, with major increases being experienced in 2000 and 2001. EXHIBIT 1
For calendar year 2001,
the combined ratio (including dividends paid) was 141, meaning that total losses
and dividends paid were 41% more than the premiums collected.Even when considering investment income, net income for the year was a
negative ten percent.This follows a meager 4 percent net income in 2000. This
average experience is indicative of the problems being experienced by insurers
in general, and demonstrates the carriers' needs to raise rates to counter
increasing losses.All of the basic
components of the combined ratio calculation (loss and loss adjustment expense,
underwriting expense) have risen as a percentage of premium for all years shown.The only declining component has been dividends paid to
policyholders. To compare this group of PIAA companies with the industry, Exhibit 2 is taken from the 2002 edition of Best's Aggregates and Averages.This shows that medical malpractice is the least profitable property and casualty line of insurance in 2001, following reinsurance, which has been greatly impacted by the World Trade Center losses.The adjusted combined ratio for the entire industry is 153, as compared to 141 for the PIAA carriers represented on Exhibit 1. EXHIBIT 2
Investment income plays a major role for medical liability insurers.Because medical liability insurance is a "long tail" line of insurance, insurers are able to invest the premiums they collect for substantial periods of time, and use the resulting investment income to offset premium needs.As can be seen on Exhibit 3, investment income has represented a substantial percentage of premium, and has played a major role in determining insurer financial performance.However, investment income as a percentage of premium has been declining in recent years primarily due to historic lows in market interest rates. EXHIBIT 3
Contrary to the unfounded allegations of those who oppose effective tort reforms, medical liability insurers are primarily invested in high grade bonds and have not lost large amounts the stock market.As can be seen in Exhibit 4, the carriers in the PIAA survey have been approximately 80% invested in bonds over the past seven years. EXHIBIT 4
As shown on Exhibit 5, stocks
have averaged only about 11% of cash and invested assets, thus precluding major
losses due to swings in the stock market.Unlike
stocks, high grade bonds are carried at amortized value on insurer's financial
statements, with changes in market value having no effect on asset valuation
unless the underlying securities must be sold. EXHIBIT 5
The experience of the PIAA carriers is confirmed on an industry-wide basis through data obtained from the NAIC by Brown Brothers Harriman, a leading investment and asset management firm.Brown Brothers reports that "Over the last five years, the amount medical malpractice companies has invested in equities has remained fairly constant.In 2001, the equity allocation was 9.03%." EXHIBIT 6
Source:
Brown Brothers Harriman & Co., Insurance Industry Asset Allocation Study
using NAIC data Brown Brothers states that the
equity investments of medical liability companies ".had returns similar to
the market as a whole.This
indicates that they maintained a diversified equity investment strategy. The Brown Brothers report
further states: Since medical
malpractice companies did not have an unusual amount invested in equities and
what they did was invested in a reasonable market-like fashion, we conclude that
the decline in equity valuations is not the cause of rising medical malpractice
premiums.[1] While insurer interest income has declined due to falling market interest rates, when interest rates decline, bond values increase.This has had a beneficial effect in keeping total investment income level when measured as a percentage of total invested assets.This is shown in Exhibit 7 below.Thus, the assertion that insurers have been forced to raise their rates because of bad investments is simply not true.
Source:
A.M. Best Aggregates & Averages, 1997 through 2002 Editions, (Predominantly
Medical Malpractice Insurers). THE INSURANCE CYCLE
Opponents of effective tort
reform claim that insurance premiums in constant dollars increase or decrease in
direct relationship to the strength or weakness of the economy, reflecting the
industry's investment performance.The
researchers at Brown Brothers also tested this theory, and found no correlation
between changes in generally accepted economic parameters (Gross Domestic
Product (GDP) and 5-year treasury bond rates) with direct medical malpractice
premiums written.In fact, Brown
Brothers conducted 64 different regression analyses between the economy,
investment yield, and premiums, and found no meaningful relationship.The report produced by Brown Brothers states: Therefore, we can state with
a fair degree of certainty that investment yield and the performance of the
economy and interest rates do not influence medical malpractice premiums.[2] INSURER SOLVENCY
A key measure of financial health is the ratio of insurance loss and loss adjustment expense (amounts spent to handle claims) reserve to surplus.This ratio has deteriorated (risen) for the PIAA carriers since 1999 to a point where it is approximately two times the level of surplus, as shown on Exhibit 8 below. EXHIBIT 8
The relationship between
reserves (amounts set aside to pay claims) and surplus is important, as it is a
measure of the insurer's ability to contribute additional amounts to pay
claims in the event that original estimates prove to be deficient.At the current approximately two-to-one ratio, these carriers in
aggregate are still in sound financial shape.However, any further deterioration in surplus due to underwriting losses
will cause a deterioration in this important benchmark ratio indicating an
impairment in financial condition.Under
current market conditions, characterized by increasing losses and decline
investment interest income, the only way to increase surplus is through rate
increases. Net premiums written as
compared to surplus is another key ratio considered by regulators and insurance
rating agencies, such as A.M. Best.This
statistic for the companies in the PIAA survey has also been deteriorating
(rising) since 1999, showing a 50% increase in the two years ending in 2001.The premium-to-surplus ratio is a measure of the insurer's ability to
write new business.In general, a
ratio of one-to-one is considered to be the threshold beyond which an insurer
has over-extended its capital available to support its underwritings. As can be seen on Exhibit 9,
this statistic has also deteriorated, and the carriers in aggregate are
approaching one-to-one.As the
carriers individually approach this benchmark, they will begin to decline new
risks, causing further availability problems for insureds.Rate increases the carriers are taking also have an impact on this
important ratio as well as new business written. EXHIBIT 9
THE
CAUSE OF THE CRISIS The effects described in the
previous pages were caused by the convergence ofsix driving factors making for the perfect storm, as follows:
The primary driver of the
deterioration in the medical liability insurance industry performance has been
paid claim severity, or the average cost of a paid claim. EXHIBIT 10
Exhibit
10 shows the average dollar amounts paid in indemnity to plaintiffs on behalf of
individual physicians since 1988.The
mean payment amount has risen by a compound annual growth of 6.9% during this
period, as compared to 2.6% for the Consumer Price Index (CPIu).The data for Exhibit 10, as well as that for slides which follow, comes
from the PIAA Data Sharing Project.This
is a medical cause-of-loss data base which was created in 1985 for the purpose
of identifying common trends among malpractice claims which are used for risk
management purposes by the PIAA member companies.To date, over 180,000 claims and suits have been reported to the data
base. Allocated loss adjustment expenses (ALAE) for claims reported to the Data Sharing Project have also risen at alarming rates.ALAE are the amounts insurers pay to handle individual claims, and represent payments principally to defense attorneys, and to a lesser extent, expert witnesses. Average amounts paid for three categories of claims are shown below.As can be seen, the average amount spent for all claims in 2001 has risen to just under $30,000. EXHIBIT 11
One
very troubling aspect of medical malpractice claims is the proportion of those
filed which are ultimately determined to be without merit.Exhibit 12 shows the distribution of claims closed in 2001 as reported to
the PIAA Data Sharing Project.Sixty-one
percent of all claims filed against individual practitioners were dropped or
dismissed by the court.An
additional 5.7% were won by the doctor at trial.Only 33.2% of all claims closed were found to be meritorious, with most
of these being paid through settlement.Of
all claims closed, more than two-thirds had no indemnity payment to the
plaintiff.When the claim was
concluded at verdict, the defendant prevailed an astonishing 80% of the time.This data clearly shows that those attorneys trying these
cases arewoefully deficient in
recognizing meritorious actions to be pursued to conclusion. Analyses performed by the PIAA have shown that of all premium and investment income available to pay claims, only 50% ever gets into the hands of truly injured patients, with the remainder being principally paid to attorneys, both plaintiff and defense.Something is truly wrong with any system that consumes 50% of its resources to deliver the remainder to a small segment of those seeking remuneration. EXHIBIT 12
A review of the average claim
payment values for the latest year reported to the PIAA Data Sharing Project is
revealing.As shown on Exhibit 13,
the mean settlement amount on behalf of an individual defendant was just over
$299,000.Most medical malpractice
cases have multiple defendants, and thus, these values are below those which may
be reported on a per case basis.The
mean verdict amount last year was almost $497,000 per defendant. EXHIBIT 13
Exhibit 16 shows the mean
expense payment for claims by category of disposition.As can be seen, the cost of taking a claim for each doctor named in a
case all the way through trial is fast approaching $100,000. EXHIBIT 14
Exhibit 15 shows the distribution of claims payments at various payment thresholds.It can be readily seen that the number of larger payments are growing as a percentage of the total number of payments. EXHIBIT 15
This is especially true for
payments at or exceeding $1 million, which comprised almost eight percent of all
claims paid on behalf of individual practitioners in 2001 (Exhibit 16).This percentage has doubled in the past four years, and clearly
demonstrates why insurers are facing dramatic increases in the amounts they have
to pay for reinsurance.While
medical liability insurers are reinsured by many of the same companies having
high losses from the World Trade Center disaster, their medical liability
experience was rapidly deteriorating prior to September 11, 2001. EXHIBIT 16
In
addition to rising claim severity, like all other investors, medical liability
insurers have faced declining market interest rates.Eighty percent of PIAA insurers' investments are placed in
high-grade bonds.Exhibit 17 shows
the long-term decline in high grade bond earnings.As can be seen, this is not a recent phenomenon, but a long term trend. Critics of the medical
liability insurance industry say that insurers' reliance on investment income
to offset premiums has caused turmoil in the marketplace, implying that the use
of investment income is a bad thing.Nothing
could be further from the truth.If insurers did not ever use investment income to offset
premium needs, then rates would always be 30 - 40% higher than otherwise
necessary.The role market interest
rates play in determining pricing in medical liability insurance (and other
lines as well) is a fact of life which we cannot control. EXHIBIT 17
THE
ANSWER Medical liability insurers and
their insureds have faced dramatic long term rises in paid claim severity, which
is now at historically high levels.Paid
claim frequency (the number of paid claims) is currently remaining relative
constant, but has risen significantly in some states.While interest rates will certainly rise and fall in future years,
nothing has been done over the past three decades to stem the ever-rising values
of medical malpractice claim payments or reduce the number of meritless claims
clogging up our legal system at great expense - except in those few states
that have effective tort reforms.In
many states not having tort reforms, costs have truly become excessive, and
insurers are forced to set rates at levels beyond the abilities of doctors and
hospitals to pay.States having
tort reforms, such as California, provide a compelling example that demonstrates
how such reforms can lower medical liability costs and still provide adequate
indemnification for patients harmed as a result of the delivery of health care. The following reforms are those
which the PIAA advocates be adopted at the federal level, which we also feel
should be the standard for any state reforms enacted.They are based on the reforms found in the Medical Injury Compensation
Reform Act (MICRA) which became effective in California in 1976 and which have
been successful in compensating California patients and ensuring access to the
health care system since their enactment. EXHIBIT 18
The
keystone of the MICRA reforms is the $250,000 cap on non-economic damages (pain
and suffering) on a per-incident basis.Under
MICRA, injured patients receive full compensation for all quantifiable damages,
such as lost income, medical expenses, long-term care, etc.In addition, injured patients can get as much as one-quarter million
dollars for pain and suffering.Advising
juries of economic damages that have already been paid by other sources serves
to reduce double payment for damages.An
important component of MICRA is a reasonable limitation on plaintiff attorney
contingency fees, which currently can be 40% or more of the total amount of the
award.Under MICRA, a trial lawyer
must be satisfied with only a $220,000 contingency fee for a $1 million
award. A Gallup poll published on February 5, 2003 by the National Journal indicates that 57% of adult Americans feel there is too many lawsuits against doctors, and 74% feel that we are facing a major crisis regarding medical liability in health care today.Seventy-two percent of respondents favored a limit on the amount that patients can be awarded for their emotional pain and suffering.Only the trial lawyers and their front groups disagree, seeing their potential for remuneration being reduced.Especially displeasing to them is MICRA's contingency fee limitation, which puts more money in the hands of the injured patient. (at no cost reduction to the insurer). The U.S. House of
Representatives adopted legislation containing tort reforms similar to MICRA,
including a $250,000 cap on non-economic damages, for the seventh time in
September of last year.HR 4600,
known as the HEALTH Act, was introduced and adopted on a bi-partisan basis.We are very pleased that Chairman Greenwood and his many co-sponsors have
reintroduced this legislation as HR 5 in the 108th Congress.The Congressional Budget Office (CBO) conducted an extensive review of
the provisions of HR 4600, and reported to Congress that if the reforms were
enacted, ".premiums for medical malpractice insurance ultimately would be an
average of 25 percent to 30 percent below what they would be under current
law." The CBO found that HR 4600 reforms, the same reforms found in HR 5, would result in savings of $14.1 billion to the federal government through Medicare and other health care programs for the period 2004 - 2012. An additional $7 billion of savings would be enjoyed by the states through their health care programs.The CBO's analysis did not consider the effects federal tort reform would have on reducing the incidence of defensive medicine, but did acknowledge that savings were likely to result. EXHIBIT 19
The US Department of Health and Human Services published a report on July 24, 2002, which evaluated the effects of tort reforms in those states that have enacted them.As stated in Exhibit 23, HHS found that practitioners in states with effective caps on non-economic damages were currently experiencing premium increases in the 12 - 15% range, as compared to average 44% increases in other states. EXHIBIT 20
Annual data published by the National Association of Insurance Commissioners (NAIC) also documents the savings California practitioners and health care consumers have enjoyed since the enactment of MICRA over 25 years ago.As shown in Exhibit 21, total medical liability premiums reported to the NAIC since 1976 have grown in California by 167%, while premiums for the rest of the nation have grown by 505%.These savings can only be attributed to MICRA. EXHIBIT 21
These savings are clearly
demonstrated in the rates charged to California doctors as shown in Exhibit 22.Successful experience in California and other states makes it clear that
MICRA style tort reforms do work without lowering health care quality or
limiting access to care. EXHIBIT 22 2002
Rates- $1mil/3mil Coverage PROP 103 HAD NO EFFECT ON
CALIFORNIA MEDICAL LIABILITY PREMIUMS In an effort to derail
desperately need tort reforms as described above, the Association of Trial
Lawyers of America and related individuals and groups have stated that the
beneficial effects of MICRA as shown on Exhibit 24 are due to Proposition 103, a
ballot initiative passed in 1989 aimed primarily at controlling auto insurance
costs.The ballot initiative passed
by a 51% majority vote, with voters in only 7 of California's 58 counties
approving the measure.The major changes made by Prop 103 include:
Medical
liability insurers were not the intended target of Prop 103, but were covered by
the resulting regulations.However,
Prop 103 did not have any substantive effect on medical liability insurance
rates.Prop 103 did have the effect
of freezing most insurance rates in California until as late as 1994.[4]
This all came at a time when medical liability insurers across the nation were
seeing their rates level off or even decline.One major California medical liability insurer, the NORCAL Mutual
Insurance Company, actually had two rate decrease filings (-2%, -12%) which had
been made with the department of insurance in 1990 and 1991 held up until the
conclusion of legal challenges and exemption issues were resolved.NORCAL reached a consent agreement with the California Department of
Insurance in November of 1991, at which time its rate decreases were granted.NORCAL was specifically permitted to declare a one-time 20% return of
premium for policyholders insured between November 8, 1988 and November 8, 1989
as a dividend and was not required to reduce its rates as a result of Prop 103.As NORCAL had already paid dividends exceeding 20% during the
period in question, no monies were returned to policyholders as a result of Prop
103.The experience of other
California physician-owned companies was similar to that of NORCAL.Even if California medical liability insurers had been required to reduce
rates by 20%, this in no way could explain the wide gap in experience shown on
Exhibit 21. CONCLUSION Increasing medical malpractice
claim costs, on the rise for over three decades, have finally reached the level
where the rates that insurers must charge can no longer be afforded by doctors
and hospitals.These same doctors
and hospitals cannot simply raise their fees, which are limited by government or
managed care companies.Many doctors will face little choice other than to move to
less litigious states or leave the practice of medicine altogether. Legislators are now challenged
with finding a solution to the medical liability insurance affordability and
availability dilemma - a problem long in coming which has truly reached the
crisis stage.The increased costs
being experienced by insurers (largely owned/operated by health care providers)
are real and documented.It is time
for Congress to put an end to the wastefulness and inequities of our tort legal
system, where only 50% of the monies available to pay claims are paid to
indemnify the only 30% of claims filed with merit and the expenses of the
remainder.The system works fine
for the legal profession, which is why trial lawyers and others fight so hard to
maintain the status quo. The PIAA strongly urges members
of the House of Representatives to pass HR 5, the HEALTH Act, thereby stopping
the exodus from Pennsylvania and similar states of health care professionals and
institutions which can no longer afford to fund an inequitable and inefficient
tort system which benefits neither injured plaintiffs or the health care
community. [1] Did Investments Affect Medical Malpractice Premiums?Raghu Ramachandran, Brown Brothers Harriman, January, 2003. [2] Did Investments Affect Medical Malpractice Premiums?Raghu Ramachandran, Brown Brothers Harriman, January, 2003. [3] Ironically, the Proposition 103 Enforcement Project headed by Harvey Rosenfeld, a self-proclaimed consumer advocate who led the fight for the adoption of Prop 103, has received almost $1.5 million in intervenor fees through 1997.In total, "consumer organizations" and individuals have received over $7.1 million in intervenor fees and administrative costs through 1997.Source:Personal Insurance Federation of America, www.pifc.org/insurance/prop103.html. [4] Background on Insurance Reform - A Detailed Analysis of California Proposition 103, www.consumerwatchdog.org/insurance/fs/fs000159.php3.
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