Medical Malpractice Furor Started in 2001 Slows Down, for Now
According to Gen Re, a medical malpractice reinsurer, states that have passed tort reform have seen a significant drop in the number of claims filed, yet, ironically, those that have not passed reform have also experienced a decline. Analysts point to patient safety initiatives including better risk management, fewer frivolous lawsuits, lawyers picking cases that show the potential for greater recovery, and society’s growing concern about the impact of an over-zealous legal system.
Anethesiologists Solve Their Own Legal Problems
A primary concern of the 20 million Americans preparing to undergo surgery each year is going under anesthesia, but the long-held fear may be unwarranted. Twenty years ago, anesthesiologists were hit hard with malpractice lawsuits and skyrocketing insurance premiums. Today, the specialty is among the lowest-priced medical groups to insure, a change brought about by the profession’s commitment to implement patient safety protocols.
Leaders in anesthesia recognized that preventable errors, such as disconnected breathing tubes or breathing tubes in esophagus rather than trachea, were occurring and took steps to reduce their incidences. This included the formation of the Anesthesia Patient Safety Foundation. “Many small changes, like monitoring standards, simulation training, and safety education and research, have led to the creation of a culture of safety in anesthesia that translates into fewer anesthesia accidents and lower professional liability insurance premiums,” says Robert Stoelting, M.D., president of the APSF.
In 1985, the American Society of Anesthesiologists launched APSF as a stand-alone organization devoted to patient safety through safety research and improvement. Markedly different from other medical organizations, the foundation allows not only anesthesiologists, but also nurses, insurers, and companies that develop products for the specialty to be members.
“Leaders in the medical specialty need to accept and endorse patient safety initiatives that are relevant to their specialty,” Stoelting advises. “Opportunities to include industry as a partner for patient safety need to be sought and nourished. Funds to support safety research need to become available from medical specialties and corporate partners.”
Because of the strategies implemented by APSF, patient deaths due to anesthesia have declined from 1 per 5,000 cases to 1 per 200,000 to 300,000 cases, according to studies compiled by the Institute of Medicine. As the death rate declined, so did the claims rate. Thirty-five years ago, nearly 8 percent of all medical malpractice claims were filed against anesthesiologists. From 1985 to 2001, claims dropped to 3.8 percent.
“They had a serious problem in anesthesiology, but they figured it out,” says Timothy J. Padovese, president/CEO, of Ophthalmic Mutual Insurance Company. “A lot of risk management went into it. A lot of hospitals understand it better, and risk management departments understand it better. You look at what anesthesiologists pay today in medical malpractice coverage. It is dramatically different from 20 years ago.”
However, states realize they can’t rely strictly on societal proclivities, and are turning to the state legislatures for necessary changes in medical malpractice tort law to ensure appropriate medical care for its citizenry and a friendly environment for physicians.
Illinois’ landmark 2005 medical malpractice reform legislation has resulted in declining lawsuits, stabilizing or declining premiums, increasing competition, and a growing number of physicians moving into the state. In Texas, a constitutional amendment was passed in 2003 limiting malpractice pain and suffering awards to $250,000 and total recoveries in death cases to $1.6 million, which has greatly improved the medical malpractice environment in the state. And quite possibly one of the more unique tort reform laws passed was in 2006 when Washington Gov. Chris Gregoire signed in to a law a measure that, among other things, allows doctors to apologize for medical mistakes without allowing the admission to be used against them in court. According to the American Medical Association, about half the states have passed similar laws and more than a half dozen other states have considered the so-called “I’m sorry” laws.
“The world of medicine isn’t perfect, and there are things that can happen even if the doctor does everything right. I think if you sit down with a patient and say ‘OK, this is what happened and this is what we are going to do to fix it,’ this is what patients want to hear,” says Timothy J. Padovese, president/CEO, Ophthalmic Mutual Insurance Company, a physician-owned company that has been serving ophthalmologists since 1987. “It just seems that the medical field is finally embracing this – that it’s OK to have a positive relationship with patients, and it’s not going to be held against them.”
In 2006, more than 15,000 medical malpractice claims were paid, totaling nearly $4.5 billion. But as claims frequency begins to experience some stability, the average size of claims is increasing at a rate of 6 percent a year. In fact, according to the Kaiser Family Foundation, medical malpractice payouts were already at $4.4 billion through June 2007. Fortunately, for every medical malpractice premium dollar collected in 2006, insurers paid out less than 90 cents in claims and expenses, a drop from 2003 and the five previous years when the combined ratio was 138.8, not including investment income.
The financial landscape, however, isn’t always so attractive for medical liability insurance. Obviously, when frequency and severity of claims rise, so do rates, however, it could take years before a medical liability insurance company realizes it set its rates too low.
“It causes problems when you try to make estimates about what your claims costs are going to be because they’re so far out in the future. You set a rate today, but you have a claim in 10 months, and it doesn’t get paid for 10 years,” says Steven C. Williams, president/CEO, State Volunteer Mutual Insurance Company, a physician-owned mutual insurance company based in Tennessee. “It’s kind of like the metaphor of driving a car around a curvy road by looking out your back window and predicting which way to turn the wheel. You can’t see what is ahead; you can only gauge from what’s happened in the past to make a prediction.”
The medical malpractice insurance industry concedes to having short, cyclical waves of rates being driven down too low; losses coming in higher than rates anticipated; and companies losing money and leaving the market or occasionally going broke.
“The rates react and go up, but sometimes they overreact. Then the companies are profitable again, and you get price competition, and everyone is trying to grab market share. It just spirals around,” Williams says. “In the 31 years we’ve been in business, we’ve gone through three complete cycles – from crisis to people saying that insurance companies are making too much money. It’s very severe in how far it is from the peak to the valley.”
The perfect storms
The most recent crisis in the medical malpractice industry occurred in 2001 when St. Paul Insurance Company in Minnesota, the second largest U.S. provider of medical liability insurance, announced it was pulling out of the market. As a result, 40,000 physicians found non-renew notices in their mailboxes. The company’s decision to leave this particular segment of the insurance industry was simple: the previous year, the company collected premiums of about $530 million, however, forecasts showed it would incur an underwriting cost of nearly $940 million.
“The care for patients, which is what medical malpractice claims are based on, has no assurances that following the rules gives perfect outcomes,” Williams says. “Each one of us is eventually a bad medical outcome because we all die. Not everybody gets 100 percent well despite the absolute best care. There’s a perception that failing to get a perfect outcome is somebody’s fault.”
From the mid-1990s until 2001, there was virtually no rate change in medical liability insurance to offset the rising number of claims, and skyrocketing lawyers fees, financial awards, and expenses. “I think it all came together in a perfect storm with the stock market dropping, investments dropping, dramatically inadequate rates in the marketplace, and then St. Paul dumping doctors, hospitals, and medical facilities. Actuaries were telling insurance companies for years, ‘you have to raise rates; you have to raise rates.’ But no one could do it because the market wasn’t letting them.”
Thirty years before, the healthcare industry experienced a similar situation, but on a much broader scale. Instead of just one company pulling from the medical liability scene, many U.S. insurance companies were leaving the market. “A lot of things were happening. In the mid-1970s, the frequency and the dollar value of medical malpractice claims took a big jump in a fairly short period of time,” Williams says. “Insurance companies looked at that and believed that it would take a large rate increase to get their rates to match where the losses were. They knew they couldn’t ask for rate increases that big, so they just got out.”
Playing a major role in the 1970s crisis was a securities market that was plummeting and interest rates that were going wild. Whether insurance companies invested in bonds or stocks or a combination, their financial capacities to take on business was limited simply because their investment results were so poor. “This coincided with the time when the losses were accelerating and, I imagine, the number of companies that otherwise might have been willing to try to stay in, simply looked at their financial condition. They just weren’t able or willing to stay in, so they just made the decision to discontinue,” Williams explains.
State Volunteer Mutual is one of several companies organized in a single state in the mid-1970s when commercial insurance for physicians became unavailable. In its first year, the company covered 3,500 physicians. Several years later, the company moved into Arkansas, central and southwest Virginia, Kentucky, and the northern fringes of Alabama, Georgia, and Mississippi. Today, State Volunteer insures 16,000 physicians.
Better, and less expensive, times ahead
A 2007 Medical Liability Monitor survey of medical malpractice rate changes for three specialties shows about 84 percent of the more than 800 rates quoted are steady or are decreasing, compared with 70 percent the previous year.
“We have announced a rate decrease in 2008 in every territory across the United States. Depending on the state, some are 2 percent, some are 15 percent. We also announced an 11 percent dividend, which will push $5 million back to policyholders,” Padovese says. “We had a rate decrease last year and paid a $2 million dividend the year before.”
Although the cost of medical malpractice insurance has stabilized or decreased for most specialties in most geographical areas, it takes three to five years before a company knows whether rates were adequate, but Padovese remains cautiously optimistic. “I won’t know for three years if the amount we charge the doctor down the street today was adequate. We won’t be absolutely sure for five years,” he says. “Medical malpractice is all about predicting the future; predicting human error. You have to believe in the medicine, you have to believe in your underwriting procedures, and you have to know how the practice is controlling its exposure.”