Malpractice insurers accused of inflating loss projections to justify higher premiums

But insurers paid more than expected in recent years, industry spokesman says.

Issue: March 2006

Malpractice insurance companies overestimated expected losses to defend large premium increases, the Foundation for Taxpayer and Consumer Rights, a non-profit consumer advocacy group, said in a recent study, the Washington Post reported recently.

Insurers’ reported losses “do not represent, or even approximate, the actual losses a company will sustain as a result of claims against its policyholders,” the investigators said. Insurers overstated projected losses by $15 billion between 1995 and 2003, they said.

Insurance companies base their rates for a given year on “incurred losses” for that year. “Incurred losses” are “projected losses,” or estimates of what companies expect to pay on claims covered by policies that take effect in a specific year, the investigators said.

The average malpractice claim is paid about 5.5 years after it is filed; most claims are paid within 10 years. Thus, an insurer’s estimated “true liability” for claims is virtually accurate after 10 years, investigators said.

Insurers projected losses of $10.7 billion between 1986 and 1990, the last insurance “crisis.” Ten years later, reported losses totaled $7.1 billion, 51% less than the original estimates, the investigators said.

The investigators suggested more scrutiny of insurers’ practices, a moratorium on rate increases, tort-restricting legislation and measures similar to California’s Proposition 103, a voter-approved law that requires estimated incurred losses and other projections to comply with a regulatory formula prohibiting inflated losses. Proposition 103 also authorizes the state insurance commissioner and/or citizens to challenge high rates and order rate reductions.

Physician Insurers Association of America President Lawrence Smarr disputed the study results. For example, the study ignored recent years, when the industry paid out more than it reported to regulators, he said.

“As of the end of 2004, the latest year we have full data for, the initial incurred amounts are exceeded by the incurred amounts established at the end of 2004,” Smarr told Orthopedics Today. “In fact, for policy years 1998 and 1999, the actual payments that had been made at the end of 2004 exceed the initial incurreds. So, we’ve got the flip side of the late 1980s, early 1990s experience happening now.”

Smarr pointed out that insurers and policyholders are one, which he said put to rest images of giant insurance companies taking advantage of helpless consumers.

“You have to remember that most doctors in the United States are covered by insurance companies they own or operate,” he said. “It’s not like it’s the evil commercial insurance institutions sucking out all the profits, as some contend. That’s certainly not the case for our doctors.”

Smarr also challenged the study’s claim that insurers raised premiums to recover lost stock investments after Sept. 11, 2001.

“It’s a very, very highly coordinated junk science effort trying to say, ‘Really, there’s no problem in the medical malpractice arena. It’s the greedy insurance companies who lost all their money in the stock market and who have mismanaged, and that’s what’s causing our problem.’ We don’t have a lot money in the stock market. We have 10% of our assets invested in equities. Malpractice insurers, it’s been clearly demonstrated, are 80% invested in bonds and only 10% in stock.”

A ballot initiative is underway to overturn Proposition 103, Smarr noted.

Maryland malpractice reporting

In other malpractice-related news, Maryland’s Board of Physicians has failed to discipline several physicians facing malpractice lawsuits, the Baltimore Sun reported recently. Maryland lawmakers want better malpractice claim reporting and more physician discipline, the Sun reported.

The state legislature created the physicians board in 2002. However, the legislation that created the panel expires this year; lawmakers were scheduled to review the law in February.

The Sun found that 120 Maryland physicians have faced five or more malpractice claims since 1993. Most state physicians face one malpractice claim in a decade, the report said.

The physician board automatically investigates only those surgeons who settle three cases of $150,000 or more in five years. It also reviews any physician who resolved a claim with a minimum $1 million payment in the last five years. Those requirements apply to few physicians, the report said.

Many lawsuits end in settlements with no determination of fault — and some settlements do not even name the physicians involved, the report said.

Proposed remedies include physician “report cards” and increased public access to physicians’ disciplinary hearings.

Many states, like Massachusetts, Nevada and Pennsylvania, have thorough review policies. Nevada and Pennsylvania investigate every malpractice claim. Virginia assesses a physician's competence if he or she has three malpractice payments in 10 years. Georgia will begin investigating physicians’ “fitness to practice” after two legal settlements.

Other state developments include the following:

Pennsylvania’s largest malpractice insurers did not increase premiums in 2005, according to the Philadelphia Inquirer. Malpractice lawsuits dropped more than one-third between 2000 and 2004, the report said. Liability reform advocate William Sage declared the state’s malpractice crisis over. Gov. Edward Rendell said the crisis has “abated significantly.” Andrew Wigglesworth, president of the Delaware Valley Healthcare Council, said the crisis is not over. Premium increases have moderated but issues surrounding physician recruitment and retention remain, Wigglesworth said.
In Utah, state Sen. Peter Knudson is drafting legislation that would protect volunteer medical workers who receive some compensation for charity care services from malpractice suits, the Salt Lake Tribune reported. The state’s current law only protects unpaid medical volunteers. Those volunteers are subject to liability only if their care is deemed “grossly negligent” or “willful and wanton.” Knudson aims to extend legal protection to medical professionals receiving salaries or expense reimbursement, the Tribune reported.

For more information:
“False Accounting: How medical malpractice insurance companies inflate losses to justify sudden surges in rates and tort reform.” Foundation for Taxpayer and Consumer Rights. Available at consumerwatchdog.org.
Shulte F. “Disregarding the symptoms: Maryland ignores most malpractice claims and settlements — signs that other states use in examining physicians and protecting the public.” Posted Dec. 18, 2005. Available at baltimoresun.com.