How can we resolve the liability crisis?

Leaders in medicine, law and insurance suggest solutions.

By AMNews staff. Nov. 4, 2002. Additional information

There has been much debate over the past 18 months about what has caused medical liability insurance rates to soar in some states. There has been even greater debate about whether state governments and/or the federal government should intervene. With the U.S. House of Representatives passing a bill that calls for a $250,000 limit on noneconomic damages this fall and a companion bill waiting to be heard in the U.S. Senate, American Medical News asked leaders of the American Medical Association, the Assn. of Trial Lawyers of America and the Insurance Information Institute to answer the following question in 650 words or less.

What do you believe is the solution to the medical liability insurance affordability and availability problems that physicians in numerous states are encountering?

AMA's Dr. Coble "Implement the reforms" -
ATLA's Alexander "These reforms can't work" -
III's Worters "Limit liability"

Yank D. Coble Jr., MD

President, American Medical Association

The solution to the medical liability crisis is really quite simple: Implement the reforms that have worked in California for more than a quarter century.

By stabilizing professional liability costs and premiums, these reforms have preserved patients' access to medical care. Patients do not have to worry that their physicians will close their practices or retire early because they cannot afford liability insurance.

The medical liability crisis we face today echoes the crisis that faced California more than 25 years ago.

Then, the physicians of the Golden State took on an out-of-control legal system and brought it under control through their support of a law known as MICRA.

MICRA -- the Medical Injury Compensation Reform Act of 1975 -- is now the basis for the Help Efficient, Accessible, Low Cost, Timely Healthcare Act of 2002 (S 2793, HR 4600), passed by the House of Representatives on Sept. 26 with bipartisan support.

The HEALTH Act:

Provides 100% unlimited recovery to patients for medical expenses, rehabilitation costs, lost wages and other economic damages.
Discourages meritless lawsuits by limiting incentives to pursue frivolous claims.
Maximizes patients' awards by limiting lawyers' fees.
Places a $250,000 cap on noneconomic damages.

And for those states that have such caps, such as California, Colorado and Indiana, the HEALTH Act also has the flexibility to ensure a state's right to keep its own cap if it works.

Those states already have reforms. Most do not.

The AMA has identified at least a dozen states where the liability crisis is full-blown and another 30 that are hurtling toward a crisis.

In these states, patients are in serious danger of losing their access to care because physicians are retiring early, limiting the services they provide, or quitting medicine altogether.

Consider the plight of a pregnant woman determined to get regular prenatal care but can't because the local doctor no longer practices obstetrics and the nearest physician is 70 miles away.

Or the plight of pregnant mothers in Bisbee, Ariz., who are forced to drive past their local hospital to seek out care. Babies should not have to be born at the side of the road.

This is not an exaggeration or a scare tactic. Already this year:

Trauma centers in Las Vegas, Mississippi and West Virginia have closed or cut their hours to certain days of the week.
Maternity wards and prenatal clinics in Arizona and Pennsylvania have been forced to shut their doors.
Family physicians in rural areas of Oregon and Ohio have stopped delivering babies.

That cold medical fact of the matter is this: If you or a loved one suffers a severe injury -- and the nearest trauma surgeon is hours away -- the chances for survival become increasingly dim. All because of our out-of-control legal lottery system.

If your state does not have medical liability reforms, the AMA stands ready with the advocacy, communications and data resources necessary to help you educate your lawmakers about this crisis.

Too many special interest groups are spreading misinformation about this life-and-death issue. But here are a few facts:

The median jury verdict has more than doubled since 1994 to $1 million.
73% of Americans favor a law that would guarantee injured patients full payment for lost wages and medical costs and place reasonable limits on noneconomic damages.
A recent U.S. Dept. of Health and Human Services report says that limiting unreasonable awards for noneconomic damages could save $60 billion to $108 billion in health care costs each year.
Because of MICRA reforms, an ob-gyn living in Los Angeles pays $150,000 less for liability insurance than one in Miami. Wisconsin surgeons pay about $130,000 less than their colleagues in Pennsylvania.

No matter where you live or what you do, our nation's deeply flawed liability system makes everyone pay. So what are we waiting for? Action is needed right now -- because who will care for our patients if doctors continue to disappear?

Mary E. Alexander

President, Assn. of Trial Lawyers of America and partner in the San Francisco law firm of Mary Alexander and Associates P.C.

In 1986, the last time medical malpractice insurance rates rose like they're rising today, insurance companies told us the same thing they say now: It's not their fault. Rather, they said, it's the fault of injured patients who recover too much money. Insurers said the only way to bring down malpractice rates was to limit recoveries.

But at the same time insurers made these claims, they already had done internal studies that showed what they were saying publicly was false. Aetna Life and Casualty Co., for example, asked its actuaries to calculate the likely cost savings from five specific limitations on liability, including a cap on noneconomic damages. Aetna's actuaries concluded that such a cap would not lower insurance costs.

Similarly, in 1986, St. Paul Fire and Marine Insurance Co. analyzed 313 closed claims after enactment of a Florida bill that made it more difficult for injured people to recover. The company concluded that "it's highly likely that there would have been no savings on these claims had the bill been in effect."

The insurance industry apparently hopes America has forgotten what happened 15 years ago, because insurers are proposing the identical "solutions" now that they admitted didn't work then. The reason these reforms didn't work -- and can't work -- is that periods of low rates and high profits inevitably alternate with periods of higher rates and lower profits in the malpractice insurance business. This happens because insurers make most of their money on their investments. And like so many others, insurers made lots of money in the stock market in the 1990s, which allowed them to cut their rates. Now they're raising rates to make up for the market's dramatic decline.

Making it more difficult for injured people to recover damages won't bring malpractice insurance rates down. The following reforms will:

Limit the percentage of an insurer's assets that can be put in stocks or other high-risk investments, and prevent insurers from recouping investment losses by raising rates. Medical malpractice insurers aren't paying out more in claims today, but they have lost a lot of money in the stock market. Requiring insurers to invest in less risky investments would prevent them from cutting prices as much as they did during the stock market boom, but also would prevent them from raising rates outrageously when the market goes bust.

Repeal the antitrust exemption for the insurance industry. The McCarran-Ferguson Act permits insurance companies to fix prices, divide up markets, and engage in other anticompetitive activities that are illegal in other industries. The current law promotes inefficiency because insurers aren't forced to reduce their costs -- they just make policyholders pay for their bad business decisions instead. Without their antitrust exemption, insurance companies couldn't act collectively to raise their rates, as they now apparently do.

Allow doctors to intervene in rate cases. State insurance departments often don't review proposed rate increases carefully. If doctors -- and patients -- could challenge proposed increases before insurance regulators, with information generated by their own actuaries, malpractice insurers would not be able to increase their rates as easily -- and dramatically -- as they do today.

Create a new medical malpractice insurer with a start-up loan from the state to compete with existing carriers. Several states have created similar companies to write workers' compensation insurance. In states where a state-authorized insurer competes with established carriers for both high- and low-risk business, other insurers have been forced to reduce their rates. Similar competition in the malpractice insurance business would drive down rates.

So let's not rub salt into the wounds of injured people by adopting "reforms" that even the insurance industry admits won't work.

Instead, let's get at the real cause of wild swings in malpractice insurance rates -- the insurance industry cycle -- and adopt reforms to smooth out that cycle. If we don't, drastic increases in malpractice premiums will continue to be a recurring problem that plagues our health care system and its professionals.

Loretta Worters

Vice president of communications, Insurance Information Institute, a nonprofit organization sponsored by the property/casualty industry.

Medical malpractice insurance has been rising since the hard market began in 2000, after almost a decade of essentially flat prices. The size of median medical malpractice jury awards rose to $1 million in 2000, a 110.7% jump from $474,536 in 1996, according to Jury Verdict Research -- a sure symptom of a sick marketplace.

The medical malpractice combined ratio, a measure of profitability, has deteriorated rapidly and is likely to hit the 140% mark. This means that insurers on average have been paying out $1.40 for every dollar they collected in premiums. Rate increases have been precipitated in part by the growing size of claims, more frequent claims in some urban areas and soaring defense costs. Losses are growing at a time when investment income, the cushion against losses, is declining, thus widening the gap between revenues [premiums] and claims.

Among the other factors driving up prices is a reduced supply of available coverage as insurers exit the medical malpractice business because of the difficulty of making a profit. Doctors are dropping risky procedures, prematurely retiring, practicing without insurance and leaving litigious areas in an effort to deal with the price of liability coverage.

In Texas, for example, doctors who had malpractice claims against them rose from 10.8% in 1988 to nearly 15%, or double the national average, in 1992. The number of Texas malpractice claims increased from 1,745 to more than 5,000 from 1984 to 1994. As the cost of claims has soared, insurers are leaving the market and many in the medical community in Texas, as well as Pennsylvania and other states, are experiencing difficulties finding affordable insurance.

In some states there has been a selective withdrawal from certain medical specialties or institutions. The problem is most severe in Florida, with loss costs per occupied bed at skilled nursing facilities rising to $6,283 at year-end 1999. Although the Florida situation may be an aberrant example of how bad losses can be, problems in this customer market also have occurred in numerous other states. Massachusetts, New Mexico and Nevada are among states with the most problems.

During the last medical malpractice crisis, doctors could pass on their higher insurance costs to patients, but now that is more difficult because in many cases their prices are controlled by contracts negotiated with health maintenance organizations and other health care companies.

Can anything be done to restore health to this market? Yes. Limit liability. As Congress considers legislation that calls for a $250,000 limit on noneconomic damages they should look to California as a model. Reforms enacted in California in 1975 are among the most effective in moderating increases in the cost of malpractice insurance and the size of awards. California's reforms have helped stabilize the medical malpractice environment in that state, making the coverage more affordable than in many other urban areas.

There are seven major elements to the reform: a collateral source rule, which requires that juries be told when plaintiffs have other sources of compensation for their injuries; a cap of $250,000 on noneconomic awards such as compensation for pain and suffering; and periodic payments rather than a lump sum for awards of more than $50,000. It also requires lawsuits generally to be filed within three years of the injury, includes a specific scale for attorney's fees, requires that plaintiffs' attorneys give 90 days advance notice to the defendant of their intention to file a lawsuit, and stipulates that contracts for medical services may include provisions for binding arbitration.

It is only through loss prevention, good claims management and tort reform that the medical malpractice crisis will recover. Society must balance a citizen's right to sue as a result of errors in medical treatment against the cost of lawsuits and ensuring continued access to medical practitioners.

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