Medical Malpractice
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THE TOPIC
SEPTEMBER 2008
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 began to rise at the beginning of this decade, after a period of essentially flat prices. Rate increases were precipitated in part by the growing size of claims, particularly in urban areas. Among the other factors driving up prices was a reduced supply of available coverage as several major insurers exited the medical malpractice business because of the difficulty of making a profit.
New research suggests that premium increases may be moderating but for any turnaround to take root significant reforms in the delivery of medical care that focus on patient safety need to occur, industry observers say.
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RECENT DEVELOPMENTS
- New York State: After failing to agree on a solution to the pressing medical malpractice issues facing the state, at the end of the 2008 legislative session lawmakers included in the budget package a provision that freezes medical malpractice insurance rates until June 30, 2009 and prohibits the imposition of a surcharge to reduce the deficit in the assigned-risk plan until that date. The state normally adjusts rates in July.
- After years of insufficient rate increases that have eroded their financial health, New York’s medical malpractice insurers received an average increase in medical malpractice insurance rates of 14 percent in 2007. One problem is that the assigned risk plan, the state’s pool for doctors who can’t find coverage in the regular market, is running a deficit, in part because in the past the legislature appropriated $691 million of its reserve fund for general state expenses. In addition to their own costs, insurers in New York State must pay off the pool’s $525 million deficit in proportion to their business in the state.
- A task force established by former Gov. Eliot Spitzer to address the underlying causes of the high cost of medical malpractice insurance in the state stopped meeting in December. Various plans are being considered including reducing the minimum amount of coverage physicians are required to but from $1.3 million to $1million. One plan that has been proposed is a no-fault compensation fund for babies severely injured at birth. This would help rein in premiums for obstetricians by reducing the potential for birth-related lawsuits. The program would provide financial assistance for the care of such children. In 1987 Virginia initiated a no-fault neurological injury compensation program, which funds care for about 120 brain damaged children. Florida also set up a similar fund a year later. In 1993 former Gov. Mario Cuomo recommended setting up a fund in New York State but the legislature did not support the proposal. The Virginia fund is credited with stabilizing rates but no firm data are available because other reforms were instituted at the same time, making it difficult to isolate the fund’s impact.
- Market Conditions: Although the cost of medical malpractice insurance has stabilized or decreased for most specialties in most geographical areas, it is still much higher than it was five or six years ago and doctors who reduced their coverage at the height of the crisis are not yet rushing to raise it again, according to Medical Economics. Doctors who left the traditional market for a captive or risk retention group are for the most part still there. A survey by the Risk Retention Reporter, published in October 2007, shows that, despite the growing availability and affordability of coverage, physicians are continuing to form risk retention groups (RRGs), insurance companies set up to assume the liability risk of their members. Fifty doctor-owned RRGs were formed from 2001 to 2006, representing 25 percent of total RRG formations during that period, compared with seven from 1990 to 2000, representing 12.5 percent of the total formed over that decade. Continuing the trend, 12 doctor-owned RRGs were set up in 2006 alone and 10 in the first nine months of 2007.
- One recent RRG addition is the North-Shore LIJ Physicians Insurance Co., which will offer coverage to doctors with admitting privileges at the nation’s third largest nonprofit health care system. Doctors who are employees of the New York-based health care system are insured through a combination of insurance from commercial medical malpractice insurers and the system’s Bermuda captive.
- A study by Conning, Medical Malpractice: Getting Ahead of the Curve, suggests that the recovery of the medical malpractice insurance business was driven by higher prices and moderating losses. It also notes that this line is undergoing greater specialization, which bodes well for its stability. In the mid-1970s multiline insurers had more than 60 percent of the market, whereas in 2006, specialists had 69 percent market share. The Conning study also discusses the alternative market, which in 2006 represented 64 percent of total medical malpractice insurance premiums, with captives holding 56 percent, RRGs 5 percent and others such as self insurance 39 percent.
- A 2007 Medical Liability Monitor survey of medical malpractice company rate changes for three specialties suggests rates are holding steady or dropping. About 84 percent of the more than 800 rates quoted showed no rate change or a rate decrease, compared with 70 percent last year. Upper Midwest states generally have the lowest rates while Florida has the highest.
- Fewer medical malpractice claims are being filed. States that passed tort reform saw a significant drop in the number of claims filed, and those that did not pass reform also saw a decline, according to Gen Re, a reinsurer of medical malpractice insurance companies. To explain the trend, analysts point to the results of patient safety initiatives including better risk management, fewer “frivolous” suits, the increasing costs of bringing a case to trial which may have caused plaintiffs’ attorneys to concentrate on cases with the greatest recovery potential and society’s growing concern about the impact of litigiousness. But the dollar amount of each claim is increasing. In a report on the medical malpractice insurance environment, Gen Re notes that claim costs for physicians and surgeons rose 7 percent and 9.5 percent for hospitals. Likewise, the insurance broker Aon, in its Hospital Professional Liability and Physician Liability 2006 Benchmark Analysis examining more than 47,700 claims representing more than $4.4 billion of incurred losses, found that while claim frequency is stabilizing, the average size of claims continues to increase at a rate of 6 percent a year. The average amount paid to plaintiffs increased only 3 percent, while amounts paid to defend against liability claims rose 17 percent as hospitals mount a more aggressive defense of claims.
- Claims, Jury Awards and Settlements: A report on the state’s medical malpractice insurance market by the Florida Department of Insurance shows the breakdown of claims payments in 2006. Insurers paid out $602 million on 3,811 closed claims, with 62 percent going for economic damages and 38 percent for noneconomic damages such as pain and suffering.
- In a study of medical malpractice claims closed between 2000 and 2004 in seven large states, published in March 2007, the U.S. Department of Justice’s Bureau of Justice Statistics found that most were closed without payment. The seven states selected, Florida, Illinois, Maine, Massachusetts, Missouri, Nevada and Texas, have comprehensive databases, some of which extended back to the 1990s. Not surprising, medical payouts increased for claimants with the most serious and permanent injuries and as claims advanced through the legal system to jury trial. Nearly 10 percent of claims in Florida, Maine, Missouri and Nevada closed with payments of $1million or more while 33 percent in Florida, Maine and Missouri closed with payments of less the $250,000. Median damages increased, sometimes significantly, depending on the state and the length of the period for which data exists. In Missouri, for example, the median grew from $33,000 in 1990 to $150,000 in 2004, but in Texas and Nevada increases were 26 and 27 percent respectively.
- Medical Errors/Patient Safety: Increasingly, hospitals are adopting policies that require them to forgo charges for treatment that involves preventable serious medical errors, also known as “never events.” Medicare said in August 2007 that it would no longer pay hospitals for procedures that involve eight types of serious medical errors including operating on the wrong person or wrong site. Vermont’s hospital association said that there should no payment for eight types of errors. Hospitals in Minnesota and Massachusetts also have adopted never-event policies. Some health insurers are following Medicare’s lead. Colorado is considering a “no-pay” policy.
- The Doctors Company, a large physician-owned medical malpractice insurance company, conducted a study of closed or settled claims to determine what percentage of claims were due to system errors. Looking at claims from 2004 to 2006, the researchers found that system errors contributed to 30 percent of settled claims. The most common problems involved medication-related errors (32 percent), communications errors (27 percent), healthcare associated infections (18 percent), medical records errors (13 percent) and identification errors or wrong site surgery (5 percent).
- Studies have shown that prompt disclosure of medical errors can lead to lower litigation costs. A three-pronged program set up by the University of Michigan realized significant savings when errors were disclosed and compensation for injury was paid quickly and fairly; cases without merit were aggressively defended; and adverse events were studied to determine how procedures could be improved. Between 2001 and 2005 litigation costs dropped from $3 million to $1 million; the average time it took to settle claims and lawsuits decreased from 20.7 months to 9.5 months; and the number of claims and lawsuits fell from 262 to 114. Legislation, the National Medical Error Disclosure and Compensation (MEDiC) bill, based on the concept of full disclosure and open communication between patients and medical providers, was introduced in the last Congress by Senators Clinton and Obama, but it was never moved out of committee. The measure would have provided grants and technical assistance to insurers, hospitals, doctors and health care systems to implement such programs.
- Three of the nation’s leading hospital systems are developing a comprehensive plan to identify best practices and thus improve patient safety. The initiative, known as the Safest Hospital Alliance, will focus on core processes that cut across a hospital’s operational structure to try to reduce by 80 percent the difference between today’s performance and perfection. Implementing the safest hospital template, according to the Alliance, could also reduce healthcare costs by as much as 30 percent.
- At the end of July 2005, Congress passed legislation that creates a network for reporting and analyzing medical errors. Reporting of mistakes by hospitals is voluntary, the information is confidential and information cannot be used in medical malpractice cases. There are currently at least 23 similar state programs, all of them but one with mandatory reporting.
- Conning researchers say that for any improvement to take root, reforms on several levels must take place, including judicial reform that would more clearly link compensation with avoidable errors, government support for a national response to the cost of medical errors, state and local support for more uniform model laws and regulations, and the development by the health care and health insurance industries of incentives to reduce avoidable errors.
- Tort Reform Initiatives: In Tennessee, legislation enacted in April 2008, the state’s first medical malpractice reform in several decades, requires attorneys planning to file a medical malpractice lawsuit to give all medical care providers to be named in the suit 60 days before filing the lawsuit and to obtain a certificate of good faith from an independent medical expert that claim has merit.
- In November 2007 Illinois’ landmark 2005 medical malpractice reform legislation was overturned. Cook County Circuit Court Judge Diane Larson ruled that caps on pain and suffering are unconstitutional. Her rationale was based on a state Supreme Court decision in 1997, which said the limits disregard the jury’s role in determining appropriate compensation. Supporters point to the positive impact of the law: the number of medical malpractice lawsuits has declined; premiums are stable or declining; more medical malpractice insurers are doing business in the state, thus increasing competition; and doctors are not shunning the state as they once did. The law caps damages at $500,000 for a doctor and $1million for a hospital.
- As a result of the Act’s inseverability clause, which prevents just one portion of a law from being struck down, in this case the caps on noneconomic damages, the ruling also nullifies other provisions such as the certification of merit required for a lawsuit to proceed, the qualifications of expert witnesses who testify about the standard of care and state regulators’ ability to collect and make available actuarial data used by medical malpractice insurers in the state. The Circuit Court decision is likely to be appealed to the state Supreme Court.
- A constitutional amendment passed in Texas in 2003 that limits malpractice pain and suffering awards to $250,000 and total recoveries in death cases to $1.6 million has greatly improved the medical malpractice environment in the state, prompting an influx of health care professionals that has boosted the number of specialists at hospitals and raised the ratio of physicians per capita.
- In April 2007, Oklahoma Gov. Brad Henry vetoed S.B. 507, a comprehensive civil justice reform bill that included provisions on class actions, expert testimony, damage limits and frivolous claims. Gov. Henry said he was opposed to the cap on noneconomic damages and the opt-in provision in the section on class action lawsuits.
- In early March 2006 Washington State Gov. Chris Gregoire signed into law a measure that, among other things, will allow doctors to apologize for medical mistakes they have made without allowing the admission to be used against them in court. About half the states have passed similar laws, according to the American Medical Association. In 2007, Nebraska and more than half a dozen other states have considered so-called “I’m sorry” laws.
- State-Run Programs: During the peak of the medical malpractice crisis several states, including Pennsylvania, New Jersey and Maryland, enacted legislation to help medical professionals purchase insurance coverage.
- In Pennsylvania, a state-run program funded in part by a 25-cent tax on cigarettes to help reduce the cost of medical malpractice premiums, has been put on hold by Governor Edward Rendell in the hope that the legislature will approve a plan to use part of the tax to pay for a health care program to cover the uninsured. Most health care providers in Pennsylvania are required to purchase at least $1 million in medical malpractice liability coverage, a portion of which can be obtained from the state-administered Mcare excess insurance program. Currently, the Mcare layer is $500,000. The commissioner would have liked to raise the private market’s share to $750,000 but determined in July 2007 that there was not sufficient medical malpractice insurance capacity in the state to assume the additional business.
- The Governor announced a plan in December 2007 for a 10-year extension of the Mcare abatement program to end the yearly request for an extension. Earlier, the Pennsylvania Senate had voted to extend the program for another year but rejected a move to use the surplus from the medical malpractice reserve to fund a program for the state’s uninsured. The abatement program was established in 2003 to encourage health care providers to stay in the state. The Mcare program took over a state-run catastrophic loss program with huge unfunded liabilities. Some lawmakers are calling for the various taxes that now finance the abatement program to be used to retire these unfunded liabilities. The state has spent nearly $1billion to help defray the cost of medical malpractice coverage.
- In New Jersey, the Medical Malpractice Insurance Premium Assistance Fund established in 2004 for a three-year period began to distribute subsidies to doctors in specialties with the highest medical malpractice insurance premiums in October 2005. Subsidies under the program terminated in December 2007.
- In Maryland, the subsidy program is funded by a 2 percent HMO premium, which is distributed to medical malpractice insurers in return for keeping rates down. Premiums to medical providers in high-risk specialties may not exceed more than 5 percent of premiums for the previous 12-month period. Part of a broader medical malpractice measure, the subsidy ends in 2008. The state allocated $35 million to the program in 2007.
- Costs to the Public: In March 2006 Towers Perrin released its U.S. Tort Costs: 2005 Update. The study found that over the 29 years since 1975, when medical malpractice insurance data were first separated out from other types of liability, medical malpractice cost increases have outpaced other tort areas, rising at an average of 11.7 percent a year, compared with 9.0 percent for all other tort costs. In 2004 medical malpractice costs totaled over $28.7 billion, up from about $26.5 billion the previous year.
- A February 2006 study, prepared by PricewaterhouseCoopers for America’s Health Insurance Plans, examined the factors contributing to rising health care costs and analyzed where the health care dollar goes. It found that medical liability costs and defensive medicine account for 10 percent of medical care costs. Defensive medicine is when doctors order more tests, prescribe more medication and make more referrals than they believe are necessary to protect themselves from being accused of negligence. The study, “The Factors Fueling Rising Healthcare Costs 2006,” also estimates that health insurance premiums rose 8.8 percent between 2004 and 2005.
- Proposals to Make Medical Malpractice Liability Insurance More Affordable: Litigation costs are high. Figures for 2005 from Highline Data put defense and cost containment expenditures in medical malpractice cases at 48 percent of the total costs to the medical malpractice insurer of settling a claim. Claims typically take about five years to resolve from the date of injury to the date of settlement. Increasingly, insurers and public policy leaders are examining ways to speed up compensation and reduce the cost of the system that provides it. Here is an overview of some of them:
(1) Emphasize risk management: The effectiveness of risk management measures, such as developing practice standards, is exemplified by the success of steps taken by anesthesiologists. After identifying the cause of most claims and establishing standards to avoid them in the 1980s, the specialty saw a significant drop in medical malpractice claims and awards and a corresponding drop in the cost of medical malpractice insurance. Other risk management proposals include requiring doctors to study medical malpractice prevention as part of their licensing requirements (Massachusetts has such a program in force); increasing the number of states that require mandatory reporting of medical errors by health care facilities; and helping doctors invest in new health information technology, such as electronic health records, electronic prescribing and experimental safety software.
(2) Take action against the small proportion of doctors with multiple judgments against them and who drive up the cost of insurance for all: In Florida, when a constitutional amendment that that would take away medical licenses from those with three or more medical malpractice judgments against them was proposed, a study found that about 7 percent of the state's practicing doctors would be affected.
(3) Encourage the disclosure of medical errors and open communication between health care providers and their patients when there is an unexpected adverse outcome so that claims can be resolved more quickly.
(4) Create special courts of law to handle medical malpractice cases or design a compensation system similar to workers compensation, a no-fault system that exists in all states to compensate for on-the-job-injuries. Some suggest that a standard of avoidability or preventability be used instead of a standard of negligence. Bills have been introduced in both houses of Congress and in half a dozen states that would allow such courts to be created. The bills in Congress would authorize up to 10 demonstration grants to states to set up alternatives to tort litigation to expedite and resolve medical malpractice cases. In addition, the American Medical Association recently considered a set of principles that would govern such courts. Noneconomic damages, such as pain and suffering, would be based on a schedule or maximum amount for specific injuries.
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BACKGROUND
Brief History: The insurance industry tends to be cyclical. The medical malpractice insurance segment 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 15 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 the patients of the doctors insured filed malpractice claims. 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 the possibility of suing for damages. 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.
A 2004 study conducted by the RAND Corp.’s Institute of Civil Justice in Santa Monica, California, confirmed the success of California’s tort reform initiative. It found that the 1975 California Medical Injury Compensation Reform Act (MICRA) has reduced the damages that doctors and their insurers are ordered to pay in medical malpractice lawsuits by 30 percent. MICRA limits jury awards for pain and suffering to $250,000 and also limits attorney fees. The study, which reviewed 257 plaintiff verdicts, also showed that compensation to injured patients declined by 15 percent while the fees for plaintiffs’ attorneys fell by 60 percent. Caps on noneconomic damages were imposed in 45 percent of trials that ended in a victory for plaintiffs. Those with the highest percentage loss as a result of caps on noneconomic awards were often those with injuries that caused relatively little economic loss but a significantly lower quality of life, according to the study. A major effect of the law was to make plaintiffs’ lawyers accept more of the cost of the litigation. The law, which was enacted when California was facing an insurance crisis, is being considered as a model for medical malpractice reform in other states.
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