Can med mal market attain long-term health? Tort reform can only go so far in solving woes of this captive-dominated business By Michael J. Moody, MBA, ARM
There is continuing evidence that a softer insurance market is emerging in the United States. The significant premium increases in most lines of coverage that had been the rule since 9/11 are now subsiding. In fact, some lines of coverage and market segments are actually beginning to see competition return. And, as is usually the case, once competition has started, premium reductions are not far behind. Premium reductions are now becoming widespread with two major exceptions. One of the major problem areas is catastrophic property coverage and since this year’s hurricane season looks like it could be as active as last year, little short-term relief will be found here. The other problem area, medical malpractice liability, is even more challenging since we are still in the midst of the worst “crisis” since the mid-1970s. Affordability issues abound, and even availability issues threaten to directly affect the health care delivery system as some doctors are being forced to curtail some high-risk procedures. Frightening facts Most people are all too familiar with the current medical malpractice crisis that has continued to plague the health care marketplace in recent years. While there are numbers of reasons for the chaos that grips the current medical malpractice market, many experts believe it is tied to the rapidly rising severity of medical malpractice claims. After a number of years of relative stability, malpractice jury awards have skyrocketed since 1998. Both the mean and median jury awards more than doubled between 1997 and 2002. Fortunately, the claims frequency has remained constant during this same period. While this increase in claims severity has caused problems nationwide, there are significant differences in intensity from state to state. These regional differences are the result of the effectiveness of state tort reform. The American Medical Association (AMA) has indicated that 20 states are considered “crisis” states. In other word, these 20 “crisis” states are the ones in which patients’ access to health care is threatened by the cost of medical liability insurance and expensive medical liability lawsuits. Another 20 states qualify as “showing problem signs” and could easily move into the “crisis” status if tort reform does not materialize soon. This situation has caused health care professionals to take one of several unattractive paths: move to more favorable states, drop risky specialties or procedures, or quit practicing medicine altogether. Obviously, none of these choices works toward the long-term interest of the health care-purchasing public. Current conundrum The current situation also has seen a number of major national carriers exit the medical malpractice line of coverage, most notably The St. Paul in December 2001. In addition, over the past couple of years, a number of large regional medical malpractice underwriters has either gone out of business or received ratings downgrades. This has left a significant capacity shortage in the medical malpractice insurance marketplace. Even where carriers have been able to obtain the rate increases they feel are justified, because of financial constraints (i.e., lack of additional surplus, etc.), they are unable to support much additional business. This has led to the remaining financially sound carriers being much more selective in the accounts they do underwrite. Overall, there has been minimal improvement in the medical malpractice market for health care facilities such as hospitals, clinics and even nursing homes over the past 12 months. Typically, this has resulted in only affordability issues for these insureds, rather than major availability issues. The news is much worse for physicians generally, but more specifically for radiology, obstetrics/ gynecology, neurosurgery and emergency medicine. For all intents and purposes, the traditional commercial medical malpractice insurance marketplace has abandoned the individual doctors in these specialties. Risk retention route Since the mid-1970s, the alternative risk market has played a significant role in the medical malpractice arena. Since that time, between 60% and 70% of the U.S. medical malpractice market has been provided by either hospital- and/or physician-owned mutual insurance companies, many of which had been started by their respective state associations. For the most part, these carriers were started in response to the dire market conditions during the 1975 to 1977 time period. Over the years, these carriers have served their insureds well, but the current skyrocketing claims severity is proving difficult for all insurers. Over that 30-year time frame, the captive insurance company has found favor in the medical malpractice marketplace. Heretofore, it has been the medical facilities that have taken the lead in captive formations; but with the current situation, it is now the health care providers that are turning to captives for solutions to their availability issues. While some hospitals have begun setting up captives to write coverage for their attending physicians, it is more common today to see physician groups start their own captives, using the Risk Retention Groups (RRG) route. Historically, the Cayman Islands have provided a favorable environment for health care captives, and the marketplace has rewarded them with significant growth over the past 20 years. But much of the growth in today’s doctor-owned captives is coming from RRGs, and the federal legislation does not permit offshore domiciles for RRGs, thereby excluding the Caymans and Bermuda. This has led to meaningful growth in U.S. domiciles such as Vermont, South Carolina and the District of Columbia. Even newer domiciles such as Nevada and Montana are beginning to see interest from health care professionals in forming RRGs. RRGs continue to prove their worth in the alternative market, with premiums for all liability lines for 2004 exceeding $2 billion. Prevention programs The current medical malpractice problems that are plaguing our country are really quite complex. Unfortunately, they are frequently manifesting themselves as shouting matches between the legal profession and the health care profession, with the consumer caught in the middle. While it is a complex issue, there are some shortcomings in the system that are well known and need to be dealt with. First and foremost, a significant number of medical malpractice claims result from preventable injuries. While the actual number of preventable incidents is not known, many experts believe that it represents a significant percentage of the total losses. Specific steps should be developed to be more proactive in this area of health care. Programs advanced by a number of health care professional groups have begun this process, but more resources are required. An additional concern with regard to the medical malpractice “crisis” deals with repeat offenders. Again actual statistics are very difficult to locate; however, many believe that a disproportionate number of doctors are responsible for many of the claims. It has been estimated that as few as 5% of physicians account for half of the claims. Some doctors have more than five claims active at one time and this puts the whole system in jeopardy. The health care profession must find some constructive way to deal with these repeat offenders. Simply moving to another state is not the answer. As has been noted above, the current medical malpractice problems are spilling over to the entire economy, frequently forcing U.S. employers into non-competitive positions in the global marketplace. In the short-term, RRGs will be able to provide viable risk financing solutions for health care professionals of all types. Current estimates are indicating that 2005 will be another banner year for RRG formations countrywide. But without reform, these will be only short-term solutions, and the RRGs could find themselves in the same untenable position as the insurers that have chosen to leave this market. Tort reform will help. But rather then depend on a patchwork of tort reform laws to relieve some of the pressure in the marketplace, maybe it’s time to deal with the primary problems—preventable accidents and bad doctors. This is really the only long-term solution to the medical malpractice “crisis.” * |
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