Medical Malpractice basics

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 and in the liability system need to occur, industry observers say.

Cost of Claims: Fewer medical malpractice claims are being filed but the dollar amount of each claim is steadily increasing. Aon, a major insurance broker, has released its Hospital Professional Liability and Physician Liability 2006 Benchmark Analysis. The major finding of this year’s analysis, which measured over 47,700 claims representing more than $4.4 billion of incurred losses, was that the overall frequency of medical malpractice claims has not increased for the second consecutive year. While claim frequency is stabilizing, according to the study, the average size (severity) of malpractice claims continues to increase at a rate of 6 percent. However, the average amount paid to indemnify claimants is increasing at a rate of only 3 percent, while amounts paid to defend against liability claims are growing at 17 percent as hospitals invest in claims management.


A recent Conning Research & Consulting Inc. study, "New Opportunities Emerging? Or the Eye of the Hurricane?" predicts that the medical malpractice insurance sector may become profitable in 2006 for the first time in several years. The expected turnaround of the situation is due to a series of rate increases over the past four years that have allowed insurers to catch up with losses, the study says. Tort reform, particularly caps on noneconomic damages at the state level, is also playing a role in the turnaround.


The financial results of medical malpractice insurers show the crisis in medical malpractice insurance is lessening as premiums reach acceptable levels relative to costs. According to the National Underwriter Data Services, the medical malpractice combined ratio, a measure of profitability, was 100.1 in 2005. This means that in 2005 for every medical malpractice premium dollar collected, insurers payed out a little over one dollar in claims and expenses. This represents a significant drop from 2003, when the combined ratio was 138.8, and from the five previous years.


Medical Errors: Confirming the importance of reducing medical errors as part of an overall strategy for lowering medical malpractice claims costs, a study by the Missouri Insurance Department found that the leading grounds for malpractice awards in the state in 2004 were medical errors in diagnoses and surgery. At the end of July 2005, Congress passed legislation that would create a network for reporting and analyzing medical errors. Reporting of mistakes by hospitals would be voluntary, the information would be confidential and information could not be used in medical malpractice cases. There are currently 23 similar state programs, all of them but one with mandatory reporting.


In January 2005 experts commissioned by the Bush Administration to study medical malpractice litigation said state authorities should do a better job disciplining incompetent doctors. They said the public needed to be protected against substandard practice by physicians and that improved policing of medical treatment would decrease the number of malpractice lawsuits, adding that state medical boards often have insufficient resources to handle the thousands of complaints they receive each year and that the process of removing the license of an incompetent doctor is often long and costly.


Conning says in its recent study 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: On May 8, 2006 Congress voted against two measures to limit jury awards in medical malpractice lawsuits sponsored by Senate Republicans. The major bill was based on a Texas law passed a few years ago that supporters say has improved the medical malpractice environment greatly in that state. Proponents of the Texas reform claim it has caused insurance premiums to decline significantly and brought new doctors to the state. S.22 would have set a $250,000 cap on noneconomic damages for individual health care providers involved in malpractice claims, a $500,000 cap when more than one provider is involved and a $750,000 total cap. The vote represents the fourth time in the past three years that the Senate has rejected Republican-sponsored legislation involving medical malpractice.


The President has been urging Congress to pass a more restrictive and comprehensive medical malpractice reform bill that was approved by the House but defeated by the Senate last year. That bill would have limited noneconomic damage awards to $250,000, limited punitive damage awards, placed limits on the time allowed to injured patients to file a lawsuit and established a fee schedule for lawyers' contingency fees. A provision would also have provided liability protection for pharmaceutical firms.


An April 2006 poll conducted by Quorum for the Health Coalition on Liability and Access found that 75 percent of Americans want their elected representatives to pass comprehensive medical liability reform and 76 percent of the people surveyed favor placing reasonable limits on noneconomic damages.


In late March 2006 Wisconsin Governor Jim Doyle signed into law a medical malpractice liability bill that caps noneconomic damage awards at $750,000. The state supreme court struck down an earlier cap in July 2005, finding that those caps were arbitrary and unconstitutional.


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. It gives patients eight years to sue health care providers for malpractice. The measure also requires prior approval for medical malpractice insurance rates and stricter reporting of closed claim data and underwriting standards. The bill does not address caps on noneconomic damages or joint and several liability issues.


In 2005 three states — Georgia, Illinois and South Carolina — passed laws capping medical malpractice noneconomic damage awards and now some 25 states have such legislation on the books. However, also last year the Supreme Court of Wisconsin ruled that the state’s 10-year old law limiting noneconomic awards was unconstitutional. Other challenges are underway or being considered in Florida, Ohio and Illinois.


In New Jersey a program intended to address the escalating cost and lack of availability of medical malpractice insurance is being implemented. In October 2005 the New Jersey Medical Malpractice Insurance Premium Assistance Fund began to distribute subsidies to doctors in specialties with the highest medical malpractice insurance premiums. About 1,200 neurosurgeons, obstetricians and radiologists who read mammograms in the state will each receive about $11,000.


The American Medical Association (AMA) maintains a list of states it considers to be in a medical malpractice liability crisis. In May 2005 the AMA removed Texas from the list. The association pointed to a decline in medical malpractice claims and improved physician recruitment and retention in the wake of the state's 2003 medical malpractice tort reform as reasons for the action. At the same time, the AMA added Rhode Island to the list. It cited soaring jury verdicts that are driving medical liability insurance premiums out of the reach of many doctors. State surveys show that as a result of increasing medical liability costs, 49 percent of doctors in Rhode Island have discontinued or are considering discontinuing certain services and 48 percent are considering leaving the state or giving up clinical practice. With the one subtraction and one addition, the AMA's list continues to include 20 states.


Jury Awards and Settlements: The most recent research from Jury Verdict Research shows that after two years of median medical malpractice jury awards holding steady at about $1,000,000, in 2004 the median rose slightly to $1,045,000. The average award in 2004 rose from about $4.1 million in 2003 to $4.8 million in 2004. Settlements too have shown a steady increase, from a median of $300,000 in 1998 to $1,000,000 in 2004.


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: Aside from more effective disciplining of incompetent doctors by state authorities, a host of other solutions to reduce the cost of medical malpractice liability insurance have been suggested. Here is an overview of some of them:

(1) Continue efforts to expand the number of states that have pretrial screening panels: Currently about 30 states have such panels.

(2) 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.

(3) 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, where a constitutional amendment that that would take away medical licenses from those with three or more medical malpractice judgments against them has been proposed, a study found that about 7 percent of the state's practicing doctors would be affected.

(4) Form a Captive or Risk Retention Group (RRG): Captives and RRGs are part of what is known as the alternative insurance market. Captives are a special type of insurance company set up by a parent company, trade association or group of companies to insure the risks of its owner or owners. RRGs are groups in which entities in a common industry join together to provide members with liability insurance.

(5) Create special courts of law to handle medical malpractice cases: Several states are weighing this option, including Illinois, Maryland, Massachusetts and Pennsylvania. A federal bill, the Medical Liability Procedural Reform Act of 2005, authorizing funding to states creating a pilot program of health courts, has also been introduced.



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.