Anticipating and controlling rising malpractice insurance costs
Escalating malpractice insurance costs can take a huge bite out of providers’ budgets, but measures are available to ease the pain.
The unprecedented proliferation of large jury awards and settlements in medical malpractice cases over the past few years is expected to continue in 2002 and beyond. As a result, most major malpractice insurance carriers have experienced a deterioration of their loss ratios. Malpractice insurance premiums have skyrocketed, and in some cases, carriers have withdrawn from markets. Healthcare providers are challenged by malpractice-insurance-related expenses. Although providers may find it difficult to negotiate malpractice premium price breaks over the next few years as carriers attempt to restore their profitability, there are some measures their they can take to control their malpractice expenses, including selecting a knowledgeable agent of broker self-insuring, preparing a high-quality renewal submission, reinforcing their commitment to patient safety, and paying attention to carrier financial ratings.
Healthcare financial managers involved in the purchase of medical malpractice insurance in the past two years have witnessed startling changes in that market. Premiums are soaring, terms and conditions have become restrictive, deductibles are increasing, insurance policies are not being renewed, and insurers have failed in or withdrawn from certain market segments or territories. Healthcare providers from large health systems to individual physician practices will see their budgets greatly affected by medical malpractice insurance costs over the next few years.
Medical professional liability is a long-tail line of insurance, meaning that claim development and resolution take longer than for other types of insurance. Thus, the profitability of policies typically cannot be evaluated for three to five years. In the early 1990s, medical professional liability was one of the most profitable lines of insurance due to premium increases and malpractice reforms undertaken in the 1980s. Investment returns also were much higher in the 1990s. With the potential for large profits, many insurance companies focused on obtaining market share. Beginning in the mid-to-late 1990s, the flood of new companies entering the $6 billion malpractice insurance market, which is relatively small in terms of total premiums, caused the product to become underpriced. Investment returns have declined in recent years. Carriers have eroded much of the redundancy in their claims reserves, eating away the funds used to offset underwriting loss in the late 1990s. As a result, malpractice insurance has b ecome one of the most troubled lines of business in the property and casualty insurance industry.
(a) Concurrent social and legal factors also have contributed to the deterioration of medical professional liability insurance industry results, which are evaluated in terms of claim frequency and claim severity. Frequency defines how often claims are asserted. Severity defines the total cost of resolving malpractice claims. According to most industry experts, frequency has remained flat or increased modestly this year. The real problem facing the healthcare industry and its liability insurers in 2002 is severity, given the increasing numbers of large jury awards and settlements. Indeed, some experts have characterized the current problem as one of frequency of severity.
Social factors. Over the past few decades, public trust in the healthcare delivery system has eroded. Factors that influenced this erosion of trust include managed care, media attention to malpractice lawsuits, and negative publicity about medical errors since the release of the Institute of Medicine report To Err Is Human: Building a Safer Health System. (b)A recent study of the medical professional liability insurance industry cited the impact of managed care on healthcare providers, noting that as employers reconfigure health plans, patients change physicians more often, leading to a breakdown in the physician-patient relationship.
(c) Moreover, as managed care and government payers have slashed payment, hospitals and nursing homes have had to reduce staffing and, in some instances, physician practices have increased patient volume to maintain financial equilibrium.
(d)Certain social factors have contributed to making malpractice cases more expensive to resolve than ever before. Jury members tend to adopt a cynical view of awards due to the prevalence of “social inflation” factors, such as sports salaries, lotteries, and television game-show winnings.
(e) The escalating cost of medical care also has had a significant impact on the expense of resolving malpractice claims. Large awards are sought for the cost of providing future care for severely injured patients or providing for dependents.
Publicity about medical errors has increased public sensitivity to the potential for this problem and likely has influenced the increase in jury awards and, therefore, malpractice insurance expenses. Although most malpractice lawsuits are dismissed with no money changing hands, the worst cases often cannot be defended on a theory of liability, thus leaving the amount of damages virtually the only issue in dispute.
Legal factors. Many legal factors also have contributed to the current malpractice insurance problem. Juries are far more liberal in major metropolitan areas, and plaintiffs’ attorneys are more sophisticated. Plaintiffs’ attorneys are well financed, and the best attorneys can afford to accept only cases with high damage value. Many good defense attorneys have switched sides because the plaintiff’s side can be much more lucrative. Defense attorneys have a difficult time litigating against the well-financed plaintiff’s bar. Courts have expanded theories of liability, especially against healthcare provider defendants. Juries perceive healthcare organization defendants as having “deep pockets,” and thus ultimate liability for adverse patient outcomes, whether through negligence or not. Also, tort reform has been overturned by court decisions in many states, thereby removing a major factor in actuarial forecasts of ultimate loss.