Through the front glass of the locked Toyota Tercel, Mark Macumber, MD, could see his keys trapped inside. It was the first time he had ever made this mistake, and even though most of us would be happy with such a track record, for him, the memory remains somewhat ominous. It’s a reminder that he is fallible. And this state concerns him, as he knows it carries the potential to put his personal and professional well-being on the line.
Macumber, who is a family practice physician in the Chicago suburb of Berwyn, chose not to renew his professional liability policy after seeing his rates go from $4,500 to $40,000 over the past two years. The dramatic increase was completely unexpected, as Macumber has not been sued for malpractice in the six years he has been in practice.
“My first reaction was to pick up my life and move where it would be more affordable or consider a change in career,” he says. “But I was very uncomfortable with the concept of abandoning patients. I also felt that if I moved or found a way to stay and continue paying the rising premiums, I would passively be supporting a system that is out of control.”
By not carrying malpractice insurance, or “going bare,” Macumber understands that most managed care organizations won’t contract with him, and he has lost his hospital privileges. These days, he dedicates himself to serving a largely uninsured patient base. He stills sees some PPO patients, although they need to submit their own paperwork.
More significant, without coverage, Macumber would have to pay out of pocket for any costs resulting from a malpractice suit. He admits this prospect positions him to potentially lose everything he owns. Macumber has $130,000 in student loans to pay, a home purchased a year and a half ago with minimum down, and of course, there’s the Tercel–which, thankfully, is paid off.
Also, patients have limited recourse should malpractice occur. Macumber’s patients sign a note indicating they are aware of this risk. The note, however, does not waive their right to sue.
“It’s not a long-term solution,” admits Macumber. “But I think it accomplishes my goal of continuing to be a physician and taking care of patients. It also draws attention to the issue, and the level of desperation that’s surfacing here.”
Although Macumber’s predicament may sound extreme, he’s not alone in feeling frustrated. The rising cost of medical malpractice insurance is a challenge rocking many healthcare providers across the country. Some insurers are quoting rates double and triple the rates of just a year ago.
Of course, fierce rate spikes are nothing new to the medical malpractice insurance industry. Rate setting tends to be cyclical, and previous swells occurred in the mid-’70s and early ’80s. What’s different today, however, is that the medical malpractice market has changed significantly. The GAO estimates that about 60 percent of the market receives coverage from insurers owned and/or operated by physicians these days, and self-insurance is more common. Also, many states have introduced legislation affecting how medical malpractice insurance claims are processed through the court system and are intervening in the market by providing subsidies to providers or creating state run insurance programs.
How premium rates will behave during future hard or soft markets amid these shifting dynamics remains to be seen. To date, research, expert insight, and varying experiences at the state level show that identifying the scope of the problem and finding effective solutions prove increasingly elusive.
What’s Going On with Rising Malpractice Costs?
The amount that rates have increased and insurance availability depend largely on two factors:
Location. The medical liability market varies widely by state, largely due to legal and financial interventions undertaken at this level. Also, certain geographic regions are at a disadvantage. For example, Medical Protective, an Indiana-based organization insuring more than 60,000 healthcare providers, would not cover physicians in a county touching the Gulf of Mexico or the Mississippi River–areas with historically poor counties that have a losing track record in lawsuits.
Specialty. Physicians practicing in traditionally high-risk areas of medicine, such as emergency medicine, obstetrics, and neurology, tend to be hardest hit with premium increases. Average annual liability premiums paid by emergency physicians jumped 56.2 percent in just the past year to $53,500, according to data from the American College of Emergency Physicians and the American Medical Association (AMA). In some states. premiums for emergency physicians have increased 200 to 300 percent.
Reports of physicians retiring early, moving their practices to states with lower premiums, or ceasing to perform risky procedures have led the AMA to label 19 states as being in a full-blown medical malpractice insurance “crisis.”
The most recent state to be added to the list was Wyoming, where obstetricians, family neurosurgeons, and orthopedic surgeons pay at least $20,000 to $30,000 more than neighboring states. When announcing the addition, the AMA cited a survey that showed many Wyoming physicians over the age of 50 were planning for early retirement–a population that accounts for 40 percent of the state’s family physicians.
Some controversy exists, however, as to whether the AMA may be exaggerating the scope of these problems. In August, the GAO released the report Implications of Rising Premiums on Access to Health, Care (GAO-03-836), which found that rising insurance costs for physicians were not causing widespread denial of care. Of nine states studied–five of which are AMA-labeled crisis states–access problems were localized, but “not widespread.” The report adds that these instances often occurred in rural areas that traditionally had problems retaining physicians. Investigators also found that “some reports of physicians locating to other states, retiring, or closing practices were not accurate or involved relatively few physicians.”
The AMA has questioned the report’s methodology, objecting to data used as being limited or outdated in many instances. It also disagreed with the use of aggregated data to determine physician supply since many physicians hold multiple state licenses and typically retain them when relocating. In a prepared statement, AMA president Donald J. Palmisano, MD, JD, said the GAO report “confirms that America’s medical liability crisis is causing access to health care problems in high-risk medical specialties,” and noted that in the five states identified by the AMA as liability crisis states, “the GAO found health care access problems.”
Other provider groups also have challenged the report’s findings. The American Hospital Association (AHA) said the report didn’t acknowledge access problems in rural areas, and it ignored key limitations in obstetrical, neurological, and emergency care. “I think they missed a lot in terms of methodology,” says Curtis Rooney, counsel and senior associate director for the AHA. “The sample wasn’t large enough, and a lot of data they used is Medicare data, which isn’t really applicable to the situation. Given the age of the Medicare population, you’re not going to be dealing with OB/GYN access issues.”
Why Are Malpractice Costs So High?
A number of factors may be contributing to rising malpractice insurance premiums. In June, the GAO released the report Medical Malpractice: Multiple Factors Have Contributed to Increased Premium Rates (GAO-03-702), which found that increased insurance company losses from medical malpractice claims are the “primary driver” for widespread rate increases. The report also cited as contributing factors decreases insurers’ investment income as interest rates for bonds decreased; poor underwriting practices (when the economy was strong, many insurance companies kept premiums artificially low to gain market share); and reinsurance rates that increased rapidly, starting two years ago, that raised insurers’ overall costs. Further compounding the problem is that lack of profitability is causing many insurers to fold or flee the medical malpractice industry, which creates less incentive for those remaining to keep prices competitive.
One reason that claims losses may have become so high as of fate is an increase in large settlements. The HHS report Addressing the New Health Care Crisis: Reforming the Medical Litigation System to Improve the Quality of Health Care, which was released in March, went so far as to say this trend is largely responsible for not only the high cost of malpractice insurance, but also indirect costs to consumers, who must bear the burden of a system that rewards physicians for practicing defensive medicine. Data in the HHS report show that over the past two decades, the number of payments each year of $1 million or more that were reported to the National Practitioners Data Bank has grown rapidly, from 298 to 806.
Jury Verdict Research, which maintains a national database of verdicts and settlements resulting from personal injury claims, confirms this trend. In a span of six years, it found that more than half of medical malpractice jury awards were for $500,000 or more. This past year, the median jury award has risen to $1 million–up from $375,000 a decade ago. Insurers say one danger of these mega-wards is that they create a “lottery” type mentality, in which people are more apt to file frivolous lawsuits in hopes of a large payout.
“Non-meritorious lawsuits are a major factor in the medical malpractice crisis,” says Lawrence Smarr, president of the Physicians Insurers Association of America, a trade association whose members insure more than 60 percent of U.S. physicians and other healthcare providers. “Out of all malpractice cases closed this past year among our member companies, 67.7 percent were dropped or dismissed outright before ever reaching trial.
“Of the 4.9 percent that actually went to trial,” says Smarr, “only about 18 percent were won by the plaintiff. And even in eases that are dropped or dismissed, the defendant incurs legal costs–which for our members average $16,160 per case.”
What About the Effects of Tort Reforms on Rising Malpractice Costs?
To contain costs, many states are enacting tort reforms, legislative measures aimed at reducing either the size of awards or the number of suits that make it to court. Some of the most common reforms include:
* Eliminating the collateral source rule, which prevents juries from hearing that a plaintiff has been or will be reimbursed by another source
* Abolishing joint and several liability, which allows recovery of damages from any one or any combination of defendants
* Establishing expert witness rules
* Limiting lawyer contingency fees
* Establishing pretrial screening panels
* Enacting a statute of limitations
* Limiting damage awards
Particular attention has been placed on limiting awards for noneconomic damages, or pain and suffering (as opposed to economic costs, such as medical costs, lost wages, and similar fees), which tend to vary so substantially by jury. Some people feel that limiting these awards through tort reform can help lower premiums by introducing greater predictability into the market.
Are Noneconomic Caps Helpful?
The GAO report Implications of Rising Premiums on, Access to Health Care (GAO 03-836) found that growth in premiums and payments by insurance companies was slower in states that have placed limits on medical malpractice awards. However, the GAO could not determine whether the differences were the result of state-passed caps or other factors.
This past June, the Employment Policy Foundation, a not for profit, nonpartisan research and educational foundation that tracks workplace trends and policies, found significant cost differences between states with limits on noneconomic damages and those without. For example, over the past two decades, malpractice insurance premiums nationwide increased 505 percent, whereas in California, which caps noneconomic damage awards at $250,000, malpractice premiums grew 167 percent. Overall, states without effective ceilings on noneconomic damages experienced increases in medical malpractice premiums 3.7 times greater than states with ceilings.
Yet such limits aren’t without critics. Opponents of noneconomic caps say they unfairly limit the rights of children, homemakers, retirees, and others who would have difficulty proving economic damages.
Also, limiting damages does not necessarily affect rate-setting activities. A study this June by Weiss Ratings, an independent provider of ratings and analyses for financial service companies, found that caps on noneconomic damages effectively slowed growth in medical malpractice payouts, but the malpractice insurers didn’t necessarily pass all of the savings on to physicians.
“There wasn’t a direct correlation between caps and lower premiums,” says Stephanie Eakins, a financial analyst at Weiss. In some cases, carriers in states with caps actually implemented higher rate increases than those without. In 19 states that implemented caps during the 12-year study period, physicians saw their premiums jump 48.2 percent, from $20,414 to $30,246. However, in 32 states without caps, the pace of increase was actually slower, rising by only 35.9 percent, from $22,118 to $30,056.
“Caps are not the ultimate answer,” says Eakins. “They may work in conjunction with some other programs, but we don’t think that they are the magic wand that’s going to solve our problems and make premiums drop right away.”
PIAA’s Smarr calls the Weiss results “bogus and useless” because the study relies on median annual premiums, a methodology that also has been questioned by The Medical Liability Monitor and the National Practitioner Data Bank, both suppliers of data used in the study.
“The PIAA believes there is a direct link between pain and suffering caps in malpractice damage awards and lower medical liability premiums for physicians,” says Smarr. “It is important to note, however, that the benefits of caps often are not seen until reform measures clear legal hurdles.”
Insurers may hold off changing rates after a cap is passed because it could be struck down in the courts, as happened twice in Illinois. Also, relief isn’t likely to be immediate, as some time may be needed to process new cases and build enough of a pattern to be significant to actuaries.
Still others in the debate say capping damages and other attempts at tort reform sidestep much-needed interventions in the marketplace.
“Solutions do not lie with the legal system, the solutions lie with trying to better regulate the insurance industry with regard to rating policies,” says Joanne Doroshow, executive director of the Center for Justice and Democracy (CJ&D), a not-for-profit, nonpartisan civil liberties organization. She says file-and use provisions have allowed increases in most states to occur virtually unchecked.
Some of the actions supported by Americans for Insurance Reform, a CJ&D project consisting of more than 100 public interest organizations, include:
* Holding public hearings to determine whether pricing is excessive
* Requiring medical malpractice insurers to use claims history as a rating factor and to give that factor significant weight
* Creating a standby public insurer to write risks when the periodic cycle bottoms and hard markets occur, such as a medical malpractice insurer funded by a start-up loan from the state to compete with the existing malpractice carriers.
How Are Providers Responding to Rising Malpractice Costs?
A majority of hospitals in crisis states are paying increased deductibles or reducing their level of coverage, based survey earlier this year of more than 1,000 hospitals conducted by the AHA. Other physicians and hospitals have formed their own insurance companies, as was popular during the previous liability crises.
Although self-insurance is becoming increasingly common, it doesn’t necessarily lead to low rates–in fact, costs often run higher than commercial competitors, particularly during soft markets. However, these not-for-profit ventures can offer providers greater predictability and control over pricing and operations, according to Steven Salman, JD, CEO of Healthcare Underwriters Group, a Fort Lauderdale-based management organization that recently filed applications to establish physician-owned insurance companies in Florida and Kentucky.
“Pricing should be far more stable, since you’re not pricing for profitability,” he said, “Also, should you charge too much at the end of the day in premiums, the extra won’t go back in the form of dividends to public shareholders; it goes back to you as the insurers.”
Another key advantage to captives and similar risk-retention vehicles is that ownership helps ensure availability. In an era when many insurers have either folded or fled the medical-liability market, this stability can be important.
Some hospitals caught in particularly dire liability markets have had to take the extraordinary step of subsidizing their physicians’ insurance. In January, the OIG issued a guidance letter on this subject.
Although the letter did not address the legality of offering subsidies in relation to antikickback or Stark II provisions, it did indicate some degree of support. The OIG said it was aware of the critical problem of reduced access to medical care in states where physicians were curtailing their practices because of increased malpractice insurance costs, and it endorsed a handful of safeguards when hospitals chose to provide subsidies. Among these criteria were setting time limitations on the assistance and requiring physicians to pay at least as much as they currently pay for malpractice insurance.
Baptist Memorial Health Care Corp., which owns 16 hospitals throughout the Mid-South, recently offered subsidies to physicians at four of its underserved hospitals in Mississippi. It used the OIG letter as a framework for the program and consulted frequently with legal counsel. About 30 physicians at the facilities meet the OIG’s criteria, and seven applications had been processed about four months into the program. The move toward subsidizing the physicians came after the area’s major insurer, St. Paul Companies, withdrew from the market. Its competitors, Reciprocal of America and Doctors Insurance Reciprocal Co., then went into receivership.
“About 20 percent or so of the physicians in the state of Mississippi suddenly found themselves without a malpractice carrier,” says Jim Ainsworth, vice president and Mississippi market leader for Baptist Memorial Health Care.
Baptist attempted to remedy the situation by approaching two physician-owned companies, Medical Assurance Co. of Mississippi and State Volunteer Mutual, with offers to provide capital if they would extend coverage. Both insurers declined. However, State Volunteer Mutual agreed to cover physicians practicing ill counties contiguous to Tennessee, which included one of Baptist’s five Mississippi hospitals.
Ainsworth says the subsidy program affecting the remaining hospitals is simply a stop-gap measure. He hopes that the tort reform Mississippi enacted this past year, which caps noneconomic damages at $500,000, and market demand will address more systemic problems.
“The real concern I have is not the crisis we’re in now, but where I see us headed five to seven years down the road,” he said. “We’re already having difficulty recruiting people to Mississippi today because of the litigation issue. How is it going to affect us in the future when people now are in the process of deciding whether to enter health care and whether to practice medicine in Mississippi? We have border states where the malpractice issues are not as great as they are here, so it’s going to be difficult as we go down the road to ensure that there are enough medical practitioners to cover the state’s needs.”
In extreme situations, and in states where the practice is allowed, physicians unable (or unwilling, as in Macumber’s case) to pay high premiums may be going without insurance. AHA’s Rooney says hospitals that allow their physicians to go bare face great risk, since the organization would then become the “deep pocket” in a lawsuit.
He sees these actions as a harbinger of even greater troubles to come.
“You see kind of a continuum,” says Rooney. “First providers try to buy on the commercial market or go to one of the physician- or hospital-owned companies, which don’t really make a profit, so there aren’t as many stipulations. Then you see movement toward risk-retention pools. After that, you’ve got people going bare. And unfortunately, the trend is downward.”
What Is the Government Doing About Rising Malpractice Costs?
In July, Republican legislation that would have capped noneconomic damages at $250,000 was defeated in the Senate. The measure also would have capped punitive damages at the greater of $250,000 or twice the amount of economic damages, and placed limits on attorney contingency fees. Republicans have vowed to take up their message again, perhaps narrowing the scope of the legislation to one type of specialty, such as obstetrics, or particular geographic areas.
Democrats haven’t ruled out caps. However, many of them are concerned that patient rights will be sacrificed for the interests of large corporations. Some senators have backed an alternative that would focus on market interventions, such as offering tax relief to physicians to help cover insurance costs and stripping the insurance industry of its exemption from federal antitrust laws.
What Can Healthcare Executives Do About Rising Malpractice Costs?
* Stay in the loop. Talk with your medical malpractice insurance carrier frequently and others in the state to gauge their future plans.
* Keep an open mind. Continually weigh carrier selection and risk-retention options to determine coverage most appropriate for your needs.
* Communicate with your state medical society. Frequently, these organizations can discuss the impact of rising rates on physicians. Some may have data on when physicians stop practicing and for what reasons they stop, which can be useful when tailoring recruitment and retention strategies.
* Minimize risk exposure. Support patient-safety efforts and examine areas for improvement. Also, encourage a climate in which staff are not afraid to report problems.
* Get involved. Support state and national organizations that champion provider interests.
Sarah Loeffler is a senior editor in HMFA’s Westchester, Ill., office.