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MYTHBUSTER

“CAPS” DO NOT CAUSE INSURANCE RATES TO DROP

 

In recent years, during the medical malpractice insurance “crisis” for doctors, great pressure was brought to bear on state legislatures to restrict the rights of injured patients to be compensated for their injuries.  As during past insurance “crises,”1 the insurance industry told lawmakers that enacting “tort reform,” particularly caps on compensation for patients, was the only way to reduce skyrocketing insurance rates - even though other statements by industry insiders repeatedly contradict this.2

 

Today, medical malpractice rates have stabilized and availability has improved around the country.3  The flattening of rates had nothing to do with tort law restrictions enacted in particular states, but rather to modulations in the insurance cycle everywhere.  Whether a state has enacted strong insurance regulatory laws has also helped.4  The following are a few examples:

 

• Illinois.  In October 2006, Illinois Division of Insurance announced that an Illinois malpractice insurer, Berkshire Hathaway’s MedPro, would be expanding its coverage and cutting premiums for doctors by more than 30 percent. According to state officials and the company itself, this was made possible because of new insurance reforms enacted by Illinois lawmakers in 2005, and expressly not the cap on compensation for patients that was enacted at the same time.5  The law requires malpractice insurers to disclose data on how to set their rates.  This, according to Michael McRaith, director of the state’s Division of Insurance, allows MedPro to “set rates that are more competitive than they could have set before.”
• Connecticut: “Rate increases are even slowing or stopping in some states that have not limited awards for pain and suffering, including Connecticut, where premium increases in the past have soared as much as 90 percent in a single year.”6 Connecticut has no cap on damages.
• Maryland. “[T]he state’s largest malpractice insurer said it does not need a rate increase for next year, leading some to question whether the much-debated malpractice crisis ever existed.”7  In 2006, Maryland’s largest malpractice insurer, Med Mutual, announced plans to cut their malpractice rates by 8 percent in 2007.8 Maryland has had a cap on damages since 1986. Sixteen years later, during the most recent insurance crisis, the state still experienced premiums that “rose by more than 70 percent in the last two years.”9
• Pennsylvania.  In Pennsylvania in recent years, rates across the med mal marketplace “have found a new plateau,” according to an associate counsel and director of patient safety and risk management at the University of Pittsburgh Medical Center, Richard P. Kidwell.10  Pennsylvania has no cap.
• Massachusetts.  In early 2005, “[T]he state's largest malpractice insurer said it will not raise doctors' premiums…”11  Massachusetts has had a cap, but with significant exceptions, since 1986.
• Washington.  In 2005, the state’s largest med mal insurer Physicians Insurance, which is owned by doctors, requested a 7.7 percent reduction in medical malpractice rates, with the company reporting record-breaking net income.12  Washington does not have a cap on damages. 

THE CALIFORNIA EXPERIENCE

• Thirteen years after the state’s severe $250,000 cap on damages was enacted (MICRA, passed in 1975), “doctors’ premiums had increased by 450 percent and reached an all-time high in California.” But in 1988 California voters passed a stringent insurance regulatory law, Proposition 103, which “reduced California doctors’ premiums by 20 per within three years,” and stabilized rates.13 
• In the thirteen years after MICRA, but before the insurance reforms of Prop. 103, California medical malpractice premiums rose faster than the national average.  In the twelve years after Prop. 103 (1988-2000), malpractice premiums dropped 8 percent in California, while nationally they were up 25 percent.14  Moreover, the law has led to public hearings on recent rate requests by medical malpractice insurers in California, which resulted in rate hikes being lowered three times.15 

The “liability insurance crisis” of the mid-1980s was ultimately found to be caused not by legal system excesses but by the economic cycle of the insurance industry.16  Just as the liability insurance crisis was found to be driven by this cycle and not a tort law cost explosion as many insurance companies and others had claimed, the “tort reform” remedy pushed by these advocates failed.  It has failed again.  

 

Only effective insurance reforms will stop these cyclical insurance crises.

 

 

NOTES

1 Volcanic eruptions in insurance premiums for doctors have occurred three times in the last 30 years – in the mid 1970s, again in the mid-1980s, and between 2001 and 2005 (the “hard” insurance market.) See, e.g., “Malpractice - Doctors in Revolt,” Newsweek, June 9, 1975; “Malpractice: MD’s Revolt,” Newsweek, June 9, 1975; “Some of the Losers who ‘Won,’” Newsweek, June 9, 1975; George J. Church, “Sorry, Your Policy Is Canceled,” Time Magazine, March 24, 1986; “Let the Free Market End Malpractice Warfare,” Business Week, Aug. 3, 1987. The cause is always the same: a severe drop in investment income for insurers compounded by underpricing in prior years (the “soft” insurance market). Because insurers make most of their money from investment income, insurance is a cyclical business. Americans for Insurance Reform [AIR], “Insurance Industry Admits: Insurance Business Practices and Investment Cycle to Blame for Insurance Liability ‘Crisis,’”http://centerjd.org/air/pr/Investments.pdf.  But each time the “hard” market takes hold, insurers have tried to blame lawyers and the legal system for the problems caused by this cyclical underwriting.  Compounding the impact of the most recent cycle was some insurers’ misleading business and  accounting practices. As the Wall Street Journal found in a front page investigative story on June 24, 2002: “[A] price war that began in the early 1990s led insurers to sell malpractice coverage to obstetrician-gynecologists at rates that proved inadequate to cover claims.… A decade of short-sighted price slashing led to industry losses of nearly $3 billion last year.” Christopher Oster & Rachel Zimmerman, “Insurers’ Missteps Helped Provoke Malpractice ‘Crisis,’” Wall Street Journal, June 24, 2002.

2 Americans for Insurance Reform, “Insurance Industry Admits: Tort Reform Will Not Lower Insurance Rates,” http://centerjd.org/air/pr/Quotes.pdf; Americans for Insurance Reform, “ATRA Admits Tort Reform Won’t Lower Rates,” http://www.insurance-reform.org/AIRATRARelease.pdf; CJ&D, “Center for Justice & Democracy Response to AIA Attack on Premium Deceit: The Failure of Tort Reform to Cut Insurance Prices,” http://centerjd.org/press/release/020319.response.pdf.

3 Americans for Insurance Reform, “Commercial Insurance Rates Continue to Fall While Insurer Profits Continue to Skyrocket to Record Levels,” (October 25, 2006) http://www.insurance-reform.org/AIRSoftMarketProfits.pdf

4 Credible studies reject the notion that enactment of caps on damages will lower insurance rates. A study by law professors at the University of Texas, Columbia University and the University of Illinois based on closed claim data compiled by the Texas Department of Insurance since 1988 concluded that “the rapid changes in insurance premiums that sparked the crisis appear to reflect insurance market dynamics, largely disconnected from claim outcomes.”  Black, Silver, Hyman, and Sage, “Stability, Not Crisis: Medical Malpractice Claim Outcomes in Texas, 1988-2002,” Journal of Empirical Legal Studies (2005).  That study further concluded that, after controlling for the quantity of health care delivered, the frequency of large paid claims declined, the number of small paid claims declined sharply, and payout per claim on large claims remained constant over a 15-year period.  Similarly, an econometric analysis of the malpractice market by two Dartmouth economists found that “past and present malpractice payments do not seem to be the driving force behind increases in premiums,” and that premium growth may be affected by many factors beyond increases in claims payments, such as industry competition and the insurance underwriting cycle.  Katherine Baicker and Amitabh Chandra, National Bureau of Economic Research, “The Effect of Malpractice Liability on the Delivery of Health Care,” at 14 and 20 (Aug. 2004).  See also, Amitabh Chandra, Shantanu Nundy, Seth A. Seabury, “The Growth of Physician Medical Malpractice Payments: Evidence from the National Practitioner Data Bank,” Health Affairs, May 31, 2005.  The study analyzed National Practitioner Data Bank data on payments, as well as data on premiums, physicians, and treatments.  Weiss Ratings, an independent insurance-rating agency, found that between 1991 and 2002, states with caps on noneconomic damage awards saw median doctors’ malpractice insurance premiums rise 48 percent – a greater increase than in states without caps. In states without caps, median premiums increased only 36 percent. Moreover, according to Weiss, “median 2002 premiums were about the same” whether or not a state capped damage awards. Weiss Ratings, “Medical Malpractice Caps Fail to Prevent Premium Increases,” http://weissratings.com/News/Ins_General/20030602pc.htm; http://www.weissratings.com/malpractice.asp A study released by the congressional General Accounting Office in 2003, “Medical Malpractice Insurance: Multiple Factors Have Contributed to Increased Premium Rates,”found absolutely no support for capping damages as a solution to bring down insurance rates for doctors.  Americans for Insurance Reform, “New GAO Study Finds No Support For Caps on Damages; Findings On ‘Losses’ Challenged by Consumer Groups,” http://centerjd.org/air/pr/AIRGAO.pdf  See also, Americans for Insurance Reform, “Measured Costs,” July 2005, http://www.insurance-reform.org/measured_costs.pdf; Americans for Insurance Reform” Stable Losses, Unstable Rates,” October 2004, http://www.insurance-reform.org/StableLosses04.pdf; See, also, Jay Angoff, “Falling Claims and Rising Premiums in the Medical Malpractice Insurance Industry,” July  2005, http://www.centerjd.org/ANGOFFReport.pdf.

5 See, Adam Jadhav, “Minor insurer is cutting malpractice rates for doctors,”

St. Louis Post-Dispatch, October 13, 2006; 10/13/2006; http://www.illinois.gov/PressReleases/ShowPressRelease.cfm?SubjectID=1&RecNum=5414

http://www.dailysouthtown.com/business/blesch/100695,1BIZ3-18.article

6 Diane Levick, “Malpractice Premiums Begin to Level Off,” Hartford Courant, September 18, 2005

7 M. William Salganik, “Doctor insurer says malpractice rate increase not needed this year,” Baltimore Sun, August 20, 2005.

8 M. William Salganik, “Physicians' insurer to lower premiums,” Baltimore Sun, Dec. 15, 2006.

9 James Dao, “A Push in States to Curb Malpractice Costs,” New York Times, Jan. 14, 2005.

10 KIertesz, Louise, “Medical malpractice rates stable, but still at ‘very high levels’,” Business Insurance, October 30, 2006.

11 Liz Kowalczyk, “Malpractice insurer says it won't raise rates,” Boston Globe, April 5, 2005.

12 Rebecca Cook, “How Sick is Malpractice Mess?” Associated Press, Jan. 17, 2005.

13 Foundation for Taxpayer and Consumer Rights, “How Insurance Reform Lowered Doctors’ Medical Malpractice Rates in California and How Malpractice Caps Failed” (March 7, 2003), http://www.consumerwatchdog.org/healthcare/rp/rp003103.pdf.

14 Foundation for Taxpayer and Consumer Rights, “Insurance Regulation, Not Malpractice Caps, Stabilize Doctors' Premiums,” http://www.ftcr.org/healthcare/fs/fs003013.php3.

15 Foundation for Taxpayer and Consumer Rights, “California Group Successfully Challenges 29.2% Rate Hike Proposed by California's Ninth Largest Medical Malpractice Insurer; Proposition 103 Invoked to Slash Medical Protective Company's Requested Increase by 60%,” Sep 16, 2004, http://consumerwatchdog.org/insurance/pr/pr004625.php3.

16 The Ad Hoc Insurance Committee of the National Association of Attorneys General concluded after studying the “crisis” in 1986: “The facts do not bear out the allegations of an “explosion” in litigation or in claim size, nor do they bear out the allegations of a financial disaster suffered by property/casualty insurers today.  They finally do not support any correlation between the current crisis in availability and affordability of insurance and such a litigation ‘explosion.’ Instead, the available data indicate that the causes of, and therefore solutions to, the current crisis lie with the insurance industry itself.”  Francis X. Bellotti, Attorney General of Massachusetts, et al., “Analysis of the Causes of the Current Crisis of Unavailability and Unaffordability of Liability Insurance” (Boston, Mass.: Ad Hoc Insurance Committee of the National Association of Attorneys General, May, 1986).  State commissions in New Mexico, Michigan and Pennsylvania reached similar conclusions. See, e.g., New Mexico State Legislature, “Report of the Interim Legislative Workmen's Compensation Comm. on Liability Insurance and Tort Reform,” November 12, 1986; Michigan House of Representatives, “Study of the Profitability of Commercial Liability Insurance”, November 10, 1986; Insurance Comm. Pennsylvania House of Representatives, “Liability Insurance Crisis in Pennsylvania,”September 29, 1986. Even the insurance industry admitted this internally.  In 1986, Maurice R. Greenberg, then President and Chief Executive Officer of American International Group, Inc., one of the country’s leading property/casualty companies, told an insurance audience in Boston that the industry’s problems were due to price cuts taken “to the point of absurdity” in the early 1980s.  Had it not been for these cuts, Greenberg said, there would not be ‘all this hullabaloo’ about the tort system.” Greewald, “Insurers Must Share Blame: AIG Head,” Business Insurance, March 31 1986, p. 3.