Cover Story
The Disappearing Doctor
By Ron Shinkman
What's the Status of Liability Insurance in Your State?
In February 2004, the board of directors of Rappahonock General Hospital in Kilmarnock, Va., made a difficult decision to eliminate the only obstetrical unit in the state's Great Neck Region near Chesapeake Bay. The reason was simple: local physicians who delivered babies could no longer afford their malpractice insurance premiums.
According to published reports, James M. Holmes, Rappahonock General's CEO, noted that premiums for the medical practice affiliated with the hospital approached $140,000 last year, nearly double the premium from 2003 and more than 20 times what the practice paid for coverage when it was formed in 1983. Rappahonock General delivered nearly 300 babies in 2003. As a result of the obstetrical unit's closure, local residents were forced to drive 60 to 80 miles south or west to cities such as Fredericksburg, Richmond and Newport News, which still have hospitals that deliver babies.
Rappahonock General is not the only hospital to have made such a difficult decision in recent years. According to the Florida Hospital Association, at least seven hospitals statewide have closed their obstetrical units due to increased malpractice insurance premiums. About 5 percent of the state's doctors no longer carry liability insurance.
Other warning signs have been cropping up for several years among providers throughout the country:
- Four surgeons in Washington County, Md., threatened in late 2004 to halt nonemergency procedures for two weeks to protest premiums that had risen 33 percent. They relented after Gov. Robert Ehrlich intervened.
- In Las Vegas, trauma surgeons at University Medical Center walked off the job for more than a week in July 2002 to protest rising insurance rates.
- In New York City, the Elizabeth Seton Childbearing Center, the nation's first freestanding birth center, closed its doors in August 2003 after nearly 30 years of operation. It was unable to afford the nearly $2 million a year required for malpractice insurance premiums. Its rates quadrupled in recent years.
- In Washington, the number of physicians leaving the state has increased more than 30 percent since 1998.
- According to the American Association of Neurological Surgeons, high malpractice premiums mean there are currently no neurosurgeons practicing south of Springfield, Ill.--an approximately 200-mile gap to the Missouri border.
The American Medical Association has declared a full-blown malpractice insurance crisis in 20 states, and lists 24 other states as demonstrating "problem signs" in terms of malpractice rates. The AMA has declared malpractice insurance reform to be at the top of its agenda.
"How many more patients will have to lose access to medical care before lawmakers decide to act and pass proven reforms?" said past AMA President Yank D. Coble Jr., M.D., in 2002. "There is something terribly wrong when dedicated professionals, who have trained for years, want to give up the work of a lifetime and retire, move to another state or stop offering high-risk procedures such as delivering babies."
In a survey to hospital leaders, conducted by the American Hospital Association this year, close to 19 percent of respondents reported increases in medical liability insurance between 50 percent and 99 percent. The survey also found that 52 percent of communities across the country lost physicians in the last two years, and the problem had a significant effect on access to care in 11 percent of communities. (The white paper can be found at www.aha.org.)
Insurance industry experts blame a variety of factors for the rate increases, including larger jury verdicts and an uneasy environment surrounding the reinsurance market in the wake of the Sept. 11, 2001, terrorist attacks. In a 2003 report on the topic, the U.S. Department of Health and Human Services (HHS) declared the crisis a "threat to health care quality for all Americans."
The HHS report laid blame squarely on the tort system, particularly in states that do not cap noneconomic (or "pain and suffering") damages that may be awarded to a plaintiff. Economic damages, which are based on lost wages and the cost of medical care, do not have caps, but because they are pegged to specific numbers, they tend to be much easier to control, legal experts say.
According to HHS research, Texas has experienced a 500 percent increase in the size of malpractice judgments over the past decade. The average award in that state is now $1.2 million, of which more than $800,000 covers noneconomic damages.
Insurers in Financial Pain
Studies elsewhere support HHS' claim. A report by Chicago-based insurance giant Aon indicated that among publicly traded hospitals, insured loss costs per acute care bed approached $8,000 in 2003, versus less than $4,000 in 1996.
According to Kenneth E. Thorpe, chair of the Department of Health Management at Emory University in Atlanta, malpractice insurers nationwide experienced a swing of net profit margins from 23 percent in the mid-1990s to negative 11 percent in 2002.
Partly as a result of such fluctuations, the nation's then-largest medical malpractice insurers, the St. Paul Cos.--now St. Paul Travelers--announced at the end of 2001 that it was exiting the medical malpractice field, a $500 million-a-year book of business for the St. Paul, Minn.-based insurer. Add to that other exits by smaller, regional carriers, and approximately 14 percent of insurers writing malpractice coverage have exited the U.S. market since the late 1990s.
But some contend that runaway juries and lawyers are not solely to blame for the increases. According to a study of the malpractice liability market in New Jersey by Tillinghast-Towers Perrin, premium increases have also been driven by a decline in yields on bond investments for insurers, from about 6.5 percent a year in the late 1990s to about 4 percent currently.
This may sound like a paltry change, but nearly 98 percent of the premiums collected by malpractice insurers in New Jersey are invested in bonds. "In the late 1990s, a malpractice insurer would ... need to collect approximately $68.53 for every $100 it expected to pay out in malpractice loss and legal expense," according to the report. "With yields now at 4 percent, an insurer needs to collect approximately $79.03 for every $1,000." An 11 percent premium increase would be required to make up for the shortfall, the report concludes.
Although little research has been done on how the bond market has affected insurance markets in other states, such fiscal changes are likely to have had an equivalent impact outside of New Jersey.
"The underlying problem of medical malpractice carriers is that, for competitive purposes, they will tend to underprice their product, then wind up with inadequate reserves or capital, or they're relying too much on investment income to support aggressive underwriting," says Brian E. Brezosky, chief operating officer and senior vice president of Coverage Options Associates, a subsidiary of the Kentucky Hospital Association that specializes in medical malpractice coverage for hospitals and physicians. As a result, Brezosky adds, insurers often have to either exit markets or rapidly increase premiums. With more than a decade in the medical malpractice insurance field, Brezosky has already seen such a cycle occur twice.
Brezosky's theory is supported in part by a report issued in June 2003 by the Government Accountability Office (GAO), the fiscal watchdog of Congress. In the report, the GAO blamed the increases partly on falling returns on insurer investments and the rising cost of reinsurance. However, the GAO blamed the increases primarily on higher losses on claims. Richard J. Hillman, the GAO's director of financial markets and community investment, told Congress in October 2003 that: "The medical malpractice insurance market appears to roughly follow the same 'hard' and 'soft' cycles as the overall property-casualty insurance market. However, the cycles tend to be more volatile ... because of the length of time involved in resolving medical malpractice claims and the volatility of the claims themselves."
How States are Addressing the Problem
Of the 20 states the AMA has declared to be in a malpractice insurance crisis, legislatures from only four--Texas, West Virginia, Florida and Arkansas--have enacted reforms.
In Texas, legislation to cap noneconomic damages at $250,000 was passed by the state legislature and ratified by voters in a ballot proposition amending the state constitution in early 2004. The cap will extend to other lawsuits in 2006. The AMA did note that nearly 10,000 medical malpractice lawsuits were filed statewide shortly before the ballot proposition was passed.
In West Virginia, a similar noneconomic damages cap was instituted in 2003. The legislation is undergoing numerous legal challenges, and, subsequently, reform results are slow. Physicians who pay into a state pool for liability insurance saw their premiums increase 8.4 percent in the first half of 2004.
Legislation passed in Florida and Arkansas was less stringent. Florida imposed a $500,000 cap on noneconomic damages, far greater than what the state's medical lobby had demanded. In Arkansas, reforms passed in 2003 included a $1 million cap on punitive damages in lawsuits, although such damages are rarely rewarded unless it is determined that a physician acted recklessly. The Arkansas constitution still prohibits caps on noneconomic damages.
Congress has yet to act decisively. Although tort reform is supported by Republicans, the party has tried and failed three times in recent years--most recently in early 2004--to get legislation that would cap noneconomic damages to President Bush's desk. Such legislation has passed handily in the House of Representatives, but has stalled in the Senate.
The Noneconomic Cap Conundrum
The cap on noneconomic damages is a prickly issue. According to research by Emory University's Thorpe, those states that cap economic damages--currently only five--experienced loss ratios nearly 12 percent lower than in states without caps. His research indicated that states that have adopted other reforms without caps experienced no measurable decrease in loss ratios.
On the other side of the issue in California, which became the first state in the nation to adopt a noneconomic damage cap 30 years ago, evidence suggests that patients may be getting shortchanged, particularly in terms of what the justice system believes they are entitled to. A July 2004 study by the RAND Corp. of 257 plaintiff verdicts rendered between 1995 and 1999 concluded that jury awards were being capped in 45 percent of medical malpractice trials in California, with a defendant's liability reduced 30 percent on average. Jury awards most likely to be capped involved patients who died, cases involving severe nonfatal injuries and plaintiffs younger than a year old, because they tended to be higher than the $250,000 cap. The study did not take into account the effect of inflation on the cap, which has not been altered since the state's 1975 Medical Injury Compensation Reform Act (MICRA) was enacted.
Michigan and Missouri, which also cap noneconomic damages, allow the caps to be adjusted upward over time. Missouri's $465,000 cap is adjusted annually for inflation. In Michigan, the $280,000 cap is not only adjusted for inflation but can reach as high as $500,000 if a plaintiff has permanently impaired cognitive activity.
And MICRA has also been showing some cracks. According to Duane Dauner, president of the California Hospital Association, economic damages awarded to plaintiffs in recent years have been double the rise in the consumer price index. Dauner also notes that many attorneys are now filing litigation under state elder-abuse laws, circumventing the limits of MICRA completely.
Alternative Solutions
Given the sensitivity on the issue--and the fierce opposition from trial lawyer and consumer lobbies--most short-term solutions are likely to be entrepreneurial rather than legislative. In Missouri, several physician groups are taking advantage of a special legal status relaxing the requirements for them to form their own malpractice insurance companies. Physician-controlled insurers in Missouri are not held to the same capital requirements, and can assess special surcharges on policyholders. However, policy coverage is limited to $1 million per incident. With a current cap on noneconomic damages of $557,000 in Missouri and no limit on attorneys' fees, the long-term effectiveness of such physician-sponsored coverage remains inconclusive.
In Ohio and Kentucky, hospitals are taking matters into their own hands. Brezosky, senior vice president of the Kentucky Hospital Association's insurance subsidiary, formed the Kentucky Hospital Insurance Company (KHIC) in 2002 specifically to provide malpractice coverage to 23 mostly rural hospitals statewide. The solution came in response to the 2003 insolvency of Reciprocal of America, the state's leading hospital insurer. The state is on the AMA's crisis list.
"Generally, the larger hospitals and programs are able to get competitive quotes, while some of the smaller facilities have trouble getting coverage," Brezosky says of the decision to launch the insurance company. KHIC acts as a mutual insurer, with the hospitals as shareholders. As a result, malpractice rates offered by the carrier have been relatively stable, with just one 15 percent premium increase in the three years policies have been written. "If you have conservative underwriting, rather than profits going to stockholders, you're able to more easily hold the line on rates," Brezosky says.
In 2003, KHIC entered the market in Tennessee--also considered a problem state by the AMA--and currently covers four hospitals. Brezosky says that KHIC's entry into a neighboring state almost immediately caused competing malpractice carriers to drop their rates as much as 50 percent, suggesting that there was flexibility in the market, despite burgeoning problems.
James R. Goodeloe, a senior vice president of the Tennessee Hospital Association subsidiary THA Solutions Group, plays down the link between KHIC's entry and the drop in premiums, but did agree that rates "plummeted" after KHIC's presence. "It's just become a much more desirable market for carriers," he says.
In Ohio, another AMA crisis state, the Ohio Hospital Association launched OHA Insurance Solutions in early 2004. The company is owned by 47 hospitals statewide. OHA Insurance Solutions covers not only hospitals, but physicians as well. Currently, it covers nine hospitals and 110 physicians. Since it began, it has had only one small premium increase in May 2004. There are currently no plans for another rate increase, according to OHA Insurance Solutions President Susan Stanfield.
"We've seen a steady growth in the physician business, and we should be able to help with Ohio's market stability," Stanfield says. She believes operations such as KHIC and OHA Insurance Solutions could represent the future of malpractice insurance. "[The number of] hospitals having a hand in their own insurance is likely to grow," she says. "When you don't have to guarantee a rate of return for stockholders every year and, instead, provide resources, it becomes an easier market to control. Hospitals want to take their destinies into their own hands."
Ron Shinkman is a writer based in Los Angeles.
This article 1st appeared in the December 2099 issue of Trustee Magazine.
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