CRITICAL ISSUE REPORT
By Phil Zinkewicz
Latest med mal crisis resembles previous crises all too well,
but chances for tort reform appear better
What makes the current malpractice insurance crisis a bit different is that the legal profession is under siege, perhaps for the first time.
Earlier this year, 4,000 physicians in New Jersey closed down their practices--for a day, that is. They didn't endanger the public in any way. Emergency services at hospitals continued, as did scheduled office visits for patients with serious illnesses, such as those undergoing chemotherapy. But for all other kinds of treatment, physicians just took the day off, not to golf, but to journey to Trenton and voice their frustration over soaring medical malpractice premiums.
Medical malpractice crises are nothing new to the insurance industry. There was a crisis in the 1970s and another in the 1980s. The earlier crisis was primarily a crisis of availability as insurance left the marketplace, leading to the formation of provider-owned companies that offered coverage at much high rates than the traditional marketplace. In the 1980s, the crisis was one of affordability. Insurers found it necessary to raise rates dramatically in response to surging claim frequency and severity.
What makes the current malpractice insurance crisis a bit different is that the legal profession is under siege, perhaps for the first time. There are moves on the state and federal levels for reform of the tort liability system. There are moves to reform asbestos litigation, which again includes reform of the tort liability system. And, there are moves to change the class action system of litigation, which also calls for reform of the tort liability system.
And, when those New Jersey physicians stopped their normal work hours and took the time to march on Trenton, they did two things. First, they managed to grab headline news, both in the nation's dailies and on national television. Second, and perhaps this is even more important, they brought the issue of soaring medical malpractice costs into the minds of the general public---something that did not happen in either of the previous crises. Plaintiffs' trial attorneys argue that doctors and the insurance industry are exaggerating the current insurance crisis.
What is not being exaggerated, however, is the capacity that has been taken out of the malpractice insurance marketplace or that has voluntarily exited. Companies such as Phico, Frontier and MIIX did not voluntarily exit the malpractice insurance market. Phico, a Delaware insurance company, is in liquidation. MIIX, a medical malpractice insurance market that covered about 37% of New Jersey's doctors, was ordered to stop writing new business. Frontier also exited the market because of financial difficulties.
But the real blow to the malpractice insurance arena was when St. Paul, once the largest writer of medical malpractice insurance in the country, announced in 2001 that it would no longer write the business. That development had a serious effect on buyers of malpractice insurance in a great many states, including Arizona, Georgia, Iowa, Kentucky, New Jersey, Mississippi, Ohio and Texas. Regulators and legislators in those states immediately implemented stop-gap measures to keep physicians from moving on to other states or closing down their practices altogether. The malpractice crisis got the attention of state legislatures because it had escalated into a health care crisis.
Last year, in Nevada, Governor Kenny Guinn unveiled a plan to provide medical malpractice insurance to doctors in the state. Guinn established a special state underwriting association, The Nevada Essential Insurance Association, to assure the availability of insurance for doctors who have been hit with skyrocketing malpractice insurance costs and even availability problems. When making the announcement, Guinn told reporters that the current malpractice insurance system in the state was as bad or worse than any flood, adding that, if he had to spend taxpayers' money to protect the public, "I will damn well do it."
Under Guinn's plan, Nevada doctors pay $32,300 annually and $105,000 over an unspecified period of time to cover past events. But Guinn said he did not see this approach as a long-term arrangement. He intends to work with the current legislature to effect tort reform in the state. A similar plan has been tried in Pennsylvania, but to date it has been unsuccessful and legislators are calling for tort reform measures.
In fact, all the states with medical malpractice insurance woes are touting tort reform as the answer--as is the insurance industry--state by state and on the national level. Many are looking to California as the example to follow in terms of tort reform, believing it to be a "pioneer" in this area.
California malpractice insurance law, called the Medical Injury Compensation Reform Act (MICRA) has been in effect since 1975 and it does the following:
* Limits recoveries for "nebulous" pain and suffering portions of settlements to $250,000
* Allows periodic, rather than lump-sum, payments of damages for future losses to ease the strain on insurers in the case of high settlements
* Shortens statutes of limitations to a period of one-to-three years
* Limits contingency attorneys' fees, with attorneys being allowed no more than 15% of any amount over $600,000
* Discourages plaintiffs from double-dipping by suing a doctor for medical expenses, even though a health insurer already paid the patient's medical bills
* Encourages and facilitates arbitration
Insurance companies and certain state and federal legislators believe that MICRA should be the model upon which all state and/or federal tort reform laws should be based. Organizations such as the Alliance of American Insurers, the National Association of Independent Insurers, and the American Insurance Association are strongly in favor of the California law. In addition, President Bush has repeatedly called for such reform at the federal level, but so far it has not come to pass. Recently, the president made a special trip to Scranton, Pennsylvania--the site of a major protest by physicians over skyrocketing medical malpractice insurance premiums--to renew his call for Congress to pass legislation to address the problem.
Claiming that frivolous lawsuits and "defensive medicine" (when doctors order tests or procedures that patients may not need just in case they are sued) cost the federal government $28 billion annually, Bush called upon both Houses of Congress to pass legislation that the House alone has passed repeatedly, most recently last fall, only to have it die in the Senate. That bill would cap non-economic damages, those for "pain and suffering" at $250,000. It would also cap "punitive" damages, which are intended to punish particularly egregious behavior.
Arguing against this approach are, of course, the trial lawyers--a powerful lobby on both the state and federal levels--some self-proclaimed consumer advocates, such as J. Robert Hunter, and some powerful senators, including Edward Kennedy (D-MA), Richard Durbin (D-IL), Patrick Leahy (D-VT) and John Edward (D-NV).
They seek to blame the insurance industry for the current malpractice crisis. They agree that medical malpractice insurance premiums are increasing nationwide, but they say it is due to insurers' bad business decisions, bad investments, a faltering economy and a minority of doctors who are responsible for a disproportionate share of the injuries and deaths suffered by patients.
This view is the one continually espoused by all of the local trial lawyer chapters and the national chapter. It is also the view of J. Robert Hunter, whose opinions, coincidentally or not, almost always track with the trial lawyers. They say that this medical malpractice crisis is nothing new, that similar crises occurred in the 1970s and 1980s when insurers' profits were down.
And, there is some factual evidence to back them up. During the period in the 1990s, for example, when the stock market was booming and investment yields were extremely attractive, it is well known that insurers willingly underpriced medical malpractice risks to keep the cash flowing in. Jim Hurley, consulting actuary with Tillinghast-Towers Perrin says that during the 1990s, in some jurisdictions, there was some underpricing of the malpractice insurance product even relative to economic inflation. "Some insurers, perhaps, were not keeping pace with sound actuarial practices, either because of the attractiveness of investment earnings or because they just didn't know because they were new players in the field," he says. "The time has now come to reconcile the price of the product relative to low investment yields, not to recoup from the past, but to get back on to stable footing."
Trial lawyers and their proponents also say that, because of medical malpractice crises in the past, some legislators were pressured to restrict the rights of innocent victims, theoretically to bring down insurance costs.
"It didn't work," says the Ohio Academy of Trial Lawyers. "In 1975, California enacted caps on the amount a jury could order a negligent doctor to pay patients they injure or the families of those they kill. Now, 27 years later, California doctors pay 20% more for medical malpractice coverage than the national average, according to the American Medical Association's 'Physician Socioeconomic Statistics,' 2000-2002. In state after state, so-called 'tort reforms' have not resulted in the promised reduction in malpractice premiums."
Dr. Richard Anderson, noted oncologist and chairman of the California-based The Doctors Company, the only physician-owned medical malpractice insurance carrier to underwrite in all 50 states, says that argument is totally without merit. "The severity and frequency of claims in 'crisis states' has created a perfect storm. In states without 'effective' reforms insurance carriers are required to set premiums that reflect the unpredictability of jury awards. The result is premiums so high that physicians are forced to close their practices or move to states where coverages are more reasonable. Lawmakers, physicians and insurers in California responded to a similar crisis in 1975 by passing MICRA. For 27 years, MICRA has stabilized premiums and safeguarded access to care in California by eliminating the 'lottery' aspects of jury awards, while preserving a person's right to take legal action."
So, what's in store on the malpractice reform front? At the state level, few states have gone beyond the "study" stage of reform, despite the fact that it has been two years since St. Paul removed itself from the market. At the federal level, President Bush's efforts for malpractice reform have been killed in the Senate time and again. However, after the last election, with Republicans taking control of the Senate, people like Hurley and Anderson believe the federal reform might go through this time. "The only wrinkle is that those opposed might try for a filibuster and we'd have to get past that," says Anderson.
In the meantime, insurance agents who are on the front lines of the insurance crisis are having a difficult time trying to retain or establish new markets. Bill Yurek, president of the Chicago-based AVRECO, a wholesale agency that places physicians and hospitals malpractice insurance, says that, on the primary end, the number of companies willing to offer malpractice insurance is still shrinking. "The latest development is the demise of the Reciprocal of America, a Virginia-based insurer of physicians and hospitals malpractice insurance," Yurek says. "Nobody appears to be willing to step up to the plate, except those among the excess lines carriers. There are some emerging Bermuda-based companies that are willing to write on an excess basis."
That scenario is likely to continue unless changes are made to the tort liability system overall. But that's a fight that has been waged by the insurance industry for 30 years now. Perhaps that's why physicians themselves are taking to the streets to protest in Pennsylvania and are staging walkouts in New Jersey. *
The author
Phil Zinkewicz is an insurance journalist with some 25 years' experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he regularly writes for a number of London publications.