Estimating the Effect of Tort Reform on
Medical Malpractice Costs
CAS Spring Meeting
May 16, 2005
Robert J. Walling, FCAS, MAAA
A Brief Recap
A Historical Recounting
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Favorable operating results and investment returns
Rating agency pressure on domestics
Aggressive expansion, competition and depressed rates
Strained insurer balance sheets
Unanticipated increase in large claim frequencies and
severities
Decreased investment returns post-9/11
Reduced coverage availability
Reduced coverage affordability
Reduced access to healthcare
Widespread, but not Uniform
A Call for Greater Efficiency
100%
The
current
system is
woefully
inefficient
90%
Pennies per Dollar of Premium
80%
70%
60%
50%
40%
30%
20%
10%
0%
Maine Med Mal
Medical
Malpractice
Group A & H
Private
Passenger Auto
Liability
Workers
Compensation
Line of Business
Losses ( Claimants' Share)
Commissions
Losses ( Attorneys' Share)
Taxes, Licenses & Fees
ALAE
Other Acquisition Expense
ULAE
General Expenses
Tort Reforms Impact on Efficiency
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Damage caps by themselves do not improve
system efficiency
Several other elements of MICRA should help
Some newer reforms may help too
Attorney fee caps
Birth Related Neurological Injury Funds (NICA)
Prelitigation screening
“I’m Sorry’ laws
I’m Sorry Laws
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Physicians want more communication
Patients feel physicians are “hiding something”
In most states, expressions of regret or empathy are
admissible as evidence
Lexington, KY VA Hospital
“I’m Sorry” laws,
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Enacted in CA, CO, FL, MA, OR, TN, TX, WA
AZ, ME and others are considering
Providers/staff can say “I’m sorry this happened to you”
CO only, “I’m sorry I did this”
without admissibility
I’m Sorry Laws
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Insurers are:
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Training providers on how to apologize (mandatory)
Coordinating with claims
Initial results are significant
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Reduced severities
Reduced loss adjustment expense
Reduced attorney involvement
(CO: 2 lawsuits in 433 claims)
Improved patient satisfaction
In many cases, much improved efficiency
Impact of “I’m Sorry” Laws
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Focus on claims <$35,000
Company’s can match apology with aggressive
claims settlement strategy (e.g. COPIC)
Increase efficiency at all costs (including higher
pure loss severity)
Reduces ALAE on small claims 35-65%
(3.5%-6.0% cost reduction overall)
Actually increases small claimant net damages
“I’m Sorry” Impact Complexities
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Data
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What claim types are best suited for improvements
due to apologies?
Differing results by company and state
Other
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Court interpretations
Lack of historical data in any state
Can actually run contrary to other reforms
(e.g. prelit panels)
Sliding Scale Attorney Fees
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CA’s MICRA:
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40% first $50,000,
33% next $50,000,
25% on next $500,000, and
15% > $600,000
Impact of Attorney Fee Caps
200
180
Incurred Losses ($M)
160
140
120
Uncapped Losses
Capped Losses
100
80
60
40
20
0-25
25-50
50100
100150
150200
200250
250350
Size of Loss
350500
5001000
1m2m
2m+
$500K
Non-Econ
Damage
Cap
reduces
costs 15%
($88M)
Changes in Net Damages ($M)
Millions
Impact of Attorney Fee Caps
60
40
20
0-25 25-50
50100
100150
150200
200- 250250 350
(20)
350- 500500 1000
1m2m
2m+
Change in Fees
Change in Losses
Caps on Fees
restore 75% of
Net Damages
($66M)
(40)
(60)
(80)
Size of Loss
Attorney Fee Cap - Impact Complexities
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Data
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Many states do not have detailed claim histories
Most states do not have economic vs. non-econ detail
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Look to available data
Nobody has data on current average fees (Rand-33%)
Other
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Judicial challenges can reduce impact
Many final laws allow “exceptions”
Are there other “soft” impacts?
Prelitigation Screening Panels
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Benefits of Prelitigation Screening Panel or
Medical Review Board
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Can eliminate frivolous claims
Can reduce ALAE on claims with payment and w/o
Decision of panel can cut off further actions
Create opportunity for counseling
Impact of Prelitigation Panels
1,800
Claim Severity ($K)
1,600
1,400
1,200
1,000
800
600
400
200
0
1-25
25-50 50-100
100150
150200
200250
250350
Size of Loss (No LAE)
Prelit state
Non-Prelit
350500
500- 1m-2m
1000
Impact of Prelitigation Panels
70
Claim Severity ($K)
60
50
40
30
20
10
0
1-25
25-50
Size of Loss (No LAE)
Prelit state
Non-Prelit
Prelitigation Panel - Impact Complexities
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Data
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At least two states of data needed
Other
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Rare to have only a single statutory difference
Implementation of panels can be very different
Judicial challenges can reduce impact
Courts can reduce panel protections
Are there other “soft” impacts?
Birth Related Neurological Injury Funds
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Government insurance mechanism
No Fault system (reduces attorney involvement)
Broader benefits
Broader funding base
Low frequencies, high severities
Florida (NICA) and Virginia (BRNICP)
Typical NICA Legislative Costings
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Changes in eligibility
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Birth weight
Physical “and” mental injuries versus “or”
Survival requirements
Mandatory coverage
Changes in benefits
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Housing allowances
Specialized equipment
NICA Impacts
2006 Average Claim Costs by Category
6%
2%
3%
1%
2% 1%
0%
4%
6%
4%
6%
65%
Nursing
Hospital/Physician
Incidental
Housing
Vans
Prescription Drugs
Lost Wages
Legal
Physical Therapy
Insurance
Medical Equipment
Medical Review/Intake
NICA Impacts
1.
Estimated Annual Claim Frequency
10
2.
Estimated % Claims Below 2,000 grams
25%
3.
Estimated Number of Claims Eliminated
2.5
4.
Estimated Claim Severity
5.
Estimated Annual Loss Reduction
4,871,198
due to introduction of 2,000 birth weight limit
1,948,479
NICA - Impact Complexities
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Data
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Very limited claims history (NICU admissions help)
Very inflation sensitive
Very mortality sensitive
What mortality table is comparable?
Other
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Eligibility issue can be politically sensitive