The Missouri approach to the medical malpractice crisis has been more measured than steps taken in other states. The approach deserves some national attention as state legislatures take up medical malpractice reform in 2004.
PUBLIC POLICY ANALYSIS & OPINION
By Kevin P. Hennosy
Missouri study documents lower compensation
for more severe medical injuries
The Missouri approach to the medical malpractice crisis has been more measured than steps taken in other states. The approach deserves some national attention as state legislatures take up medical malpractice reform in 2004.
Missouri has taken a two-tracked approach to attack the problem. The state's insurance department has used a massive database of insurer data to study the insurance market. The initial findings of that study document competitive deficiencies that have had a negative impact on doctors, hospitals and ultimately patients. On a parallel track, the state has initiated efforts to reduce the root causes of medical malpractice claims.
In December 2003, the Missouri Insurance Department issued a report on medical malpractice insurance that contains some informative findings. The severity of patient injury in Missouri has increased, but the level of compensation paid out by insurers remains lower than the growth of medical costs, wages and injury severity.
While the increases in premiums and decrease in capacity is hard to explain based on the Missouri data, Missouri Governor Bob Holden understands that the severity of medical injuries must be reduced. Both the public interest and insurance markets demand improvement. As a first step, Governor Holden created Missouri Commission on Patient Safety to study the causes of patient injuries and identify best practices to reduce injuries.
Study
Like many states, Missouri has studied the massive failures in the medical malpractice market. The Missouri Insurance Department can produce analysis that few other states, if any, can because of a long standing commitment to market analysis in law and regulation.
Missouri has put in practice the integrated market analysis-based regulatory framework that the National Association of Insurance Commissioners has promised to design. Missouri requires insurers to file much more data, in greater detail, than other states. In order to make practical use of the data, the insurance department has assembled expertise in statistical and economic analysis that is rare in most insurance regulatory agencies.
Capacity
A statement issued by the Missouri Insurance Department describes the medical malpractice problem in the state as follows: "Between August 2001 and May 2002, Missouri's malpractice insurance market lost 57% of its capacity to write new business because of two major insolvencies, the withdrawal of two other major carriers nationally and a moratorium on new business by the state's largest writer."
The market focus of the Missouri report differentiates its findings from many other state studies. Other studies read more like horror novels--with anecdotal monsters (trial lawyers, lousy doctors or greedy patients) being presented at quick intervals. The Missouri report presents analysis, not excuses.
This is not to say that the Missouri report contains all the answers to the medical malpractice problem in a nutshell. One question that the report does not even ask relates to the market dominance of one or two insurers in the medical malpractice market. Policymakers have not yet explored whether that dominance had an anticompetitive impact on the market.
Competition
The Missouri report hints at this problem. A department statement quotes Missouri Director of Insurance Scott Lakin as observing, "The loss of capacity to write new business came on the heels of a long period of intense price competition when, insurers agree, they had substantially under-priced their product for physicians."
Missouri analysts seem prepared to assume that the inadequate prices were driven by competition, but this market condition could be explained in another way. One or more market leaders could have charged predatory rates for anti competitive reasons.
Take for example the Pennsylvania oil fields of the late 19th century. Hundreds of independent oil companies kept cutting oil prices to the point of cutting their own economic throats. This market could be explained as hypercompetitive, but that is only if the analysts ignored the handiwork of John D. Rockefeller, who controlled enough refining and production capacity to keep cutting prices until his competitors left the market or joined his Standard Oil Trust. Only then did he raise prices significantly.
Without collusion with other insurance companies, a dominant market leader could have kept prices artificially low for an extended period of time to the detriment of the market leaders' competitors. When those leaders left the market, one would expect the competitors to raise prices wildly in order to rebuild reserves that were decimated by the predatory pricing structure.
If insurance departments do not study this topic, state attorneys general or federal antitrust lawyers should do so. While regulated lines of insurance hold a limited exemption from federal antitrust law, deregulated lines do not.
In states like Missouri, the legislatures have acted to remove regulatory oversight of pricing for medical malpractice and other commercial lines; therefore, antitrust lawyers would have little trouble dispensing with any defense based on the McCarran-Ferguson exemption.
Claims frequency
While Missouri has attracted several new insurers to write medical malpractice business, regulators continue to express concern about insurers leaving the state. According to Director Lakin, "We have been extremely frustrated because carriers leaving Missouri have stressed that the state remains a good place to conduct insurance business. They uniformly have cited losses elsewhere in their decisions to stop writing malpractice coverage. Insurers across the country simply have little interest now in expanding into medical malpractice in any state, and increased competition is essential to stabilizing our market."
The claims numbers contained in the Missouri report only add to the frustration of state officials. Take for example Farmers Insurance Group, which will phase out its medical malpractice business in Missouri beginning in March 2004. According to the department's report, in 2002, Farmers paid $7,500 in Missouri medical malpractice claims. The company projects future payments of $1.2 million. In the same year, the company reported $20 million in earned premium in Missouri.
The department's report acknowledges that medical malpractice claims are delayed in nature; therefore, today's claims figures may not document the full extent of the insurers' woes. "The average medical malpractice claim is not paid until 45 months after the injury occurs--52 months in the case of doctors. After the average claim is filed, 28-month lapses before payment occur, with that period increasing to 32 months for claims paid against physicians."
The report examines claims rates on a going-forward basis. Overall claims increased 1.8% in 2001. Claims against doctors increased 6%. Neither of these numbers reflects the crisis rhetoric that is so common at the national level. New claims against physisicans in Missouri fell 26% below 2000 data and 31% below 1996.
The relatively low increase in claims generated in Missouri falls well within a range that could be explained by the public relations campaigns that call media attention to medical malpractice. "National studies indicate that few instances of medical malpractice actually result in claims. No one should be surprised that, with widespread media coverage of the medical malpractice issue, a few more injured parties are exploring and pursuing claims,"Lakin said. "This same phenomenon occurred in 1985 and 1986, when the last malpractice crisis peaked."
Claims severity
The severity of claims is another important element in the analysis of medical malpractice insurance. A few monster claims can skew data for regulatory analysis and/or exacerbate costs for insurers.
The Missouri Insurance Department review of insurer filings found that the severity of patient injuries declined for 2002's newly filed claims. The department learned that "awards of $1 million or more dropped to six in 2002, compared to eight in 2001 and a high of 11 in 1996."
Again, these data suggest that the market instability in Missouri is not directly linked to spikes in jury awards or severity of claims. The only area of claims costs that appears to outpace national economic trends relates to lost wages and "extra medical bills." These two elements of losses exceed any growth reported in pain and suffering/non-economic damages.
Damages capped
When looking at the Missouri data, it is important to note that state law imposes a cap on non-economic damages. Insurer advocates have often argued that limits on such damages hold the key to bringing stability back to medical malpractice insurance markets. Missouri state law establishes a cap for non-economic damages at an amount that is annually adjusted for inflation. During the time period that the report covers, damages were limited to $547,000 per injury. The insurance department found that in 2001, "Insurers identified 11 cases that exceeded the old cap in Missouri by $2.5 million or 1.9% of total losses in the state."
While the insurance department report does not opine on the causes of the medical malpractice crises in Missouri, a review of the report data suggests that reform proposals aimed at non-economic damages or restricting access to the courts may fail to bring market stability. Even if the cap were materially lowered, it is hard to arrive at the conclusion that either the rate increases or capacity reductions suffered in Missouri would improve. Neither the number nor the severity of claims seems to drive the increase in rates and decrease in capacity.
Traditionally in "hard markets," business drifts away from licensed insurers to alternative entities. One would expect that risk retention groups and surplus lines operations would clean up on the business that licensed insurers pass by. According to the insurance department report this is not the case in Missouri: "[T]he share of Missouri's malpractice business conducted in alternative markets fell from 18.4% in 2000 to 13% in 2002. The dollar value of surplus lines earned premium actually fell in 2002."
Nevertheless, there appears to be a mob mentality in Missouri--and many other states-- that will continue to push for ineffectual reforms. The same mentality will drive insurers away from a state that offers a great deal of profitable business.
The Missouri Insurance Department observed, "While claims payouts surpassed previous levels, those amounts accounted for the smallest percentage of premiums written since 1995--largely because licensed insurers have raised rates substantially amid dwindling competition. Licensed insurers paid out 63.2% of the premiums they wrote during the year, compared to a high of 86.5% in 1998, when the medical malpractice business was considered highly profitable for insurers."
Patient safety
If policymakers do want to address claims costs in a proactive manner, the area of patient safety seems a ripe place to start. Under Governor Bob Holden, Missouri has taken a lead in the national effort to improve patient safety, which presents the added benefit of reducing costs to physicians and insurers.
In September 2002, Governor Holden created the 17-member Missouri Commission on Patient Safety to improve the quality of health care and further reduce the number of medical malpractice claims in the state.
In a statement to journalists, Holden stated that, "the best outcome for all concerned is the prevention of medical errors that have devastating effects on the physical, emotional, professional and financial well-being of patients and families."
Holden expects the Commission on Patient Safety to make a report in 2004 on any legislative and administrative changes that the state should address. He said he plans to give the commission time to study and recommend improvements in several areas, including voluntary hospital protocols, innovative professional training, patient education, and other methods for improving patient safety. *
Note: The Missouri 2002 annual medical malpractice report is available in its entirety on the MDI Web site at http://insurance.mo.gov. Printed versions are available for $35 each by sending checks, payable to the Missouri Department of Insurance, to the MDI Statistics Section, P.O. Box 690, Jefferson City, MO 65102-0690.