Magazine article Clinical Psychiatry News

Pro & Con

Magazine article Clinical Psychiatry News

Pro & Con

Article excerpt

Is the insurance cycle responsible for rising malpractice premiums?


Medical malpractice claims have held steady yet insurance premiums have skyrocketed.

This pattern can be attributed to the cyclical nature of the commercial insurance business. We are in the midst of a classic "hard" insurance cycle. The first such crisis, which was particularly acute in the product liability and medical liability sectors, occurred in the mid-1970s.

The second crisis, dramatically detailed in the 1986 Time magazine cover story "Sorry, Your Policy Is Cancelled," was more extensive and particularly hard on municipalities, day care centers, environmental liability, and medical malpractice. This mid-1980s cycle is documented in the book, "Cycles and Crises in Property/Casualty Insurance: Causes and Implications for Public Policy" (Kansas City, Mo: National Association of Insurance Commissioners, 1991). The commissioners concluded that interest rate change, underpricing in soft markets, and adverse loss shocks caused the crisis.

Then, just as now, physicians marched on their state capitals demanding tort reform. Then, just as now, insurance companies blamed the steep price hikes on "frivolous" lawsuits. The problem is not lawsuits. The problem is insurers' lack of action on rates, coupled with the economy--specifically declines in interest rates. Premiums rise and fall with the economic cycle, but paid losses do not. Indeed, on an inflation-adjusted, per-doctor basis, losses paid grew slowly between 1975 and 1985 but have been essentially flat since then.

While the cost of medical care climbed in the 1990s, insurers relied on high market returns and kept down malpractice premiums. Instead, they should have been adjusting rates to more nearly reflect inflationary cost increases. It's also unlikely that trial lawyers could simply time their "explosions" in verdicts to coincide with the economic cycle of the insurers.

The average medical malpractice claim paid between 1992 and 2001 was $28,524, according to data from the rating agency A.M. Best, Oldwick, N.J. This includes costs for million-dollar verdicts as well as settlements, claims closed with no payment, and even costs such as insurer defense and claims adjustment. The figures show no growth in the average paid claim.

If one looks at the average payout just for claims with payments, as opposed to all closed claims, the average loss was $107,587, and again, there was no notable growth in the average over the decade. This includes costs for defense of claims settled, adjudicated, or otherwise closed with no payment, thereby overstating the cost per claim paid.

The true solution to skyrocketing medical malpractice premiums is insurance reform, not tort reform. An example is the strict rate regulation mandated by Proposition 103 in California, which rolled back rates by 25% and imposed price regulation.

Finally, I sympathize with the plight of high-risk specialists, who are hit hardest in the "hard cycle." The caste system that puts the heaviest cost of malpractice increases on the few high-risk doctors is illogical. Steps should be taken to spread the risk throughout the physician population.

J. Robert Hunter is director of insurance for the Consumer Federation of America in Washington, D. …

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