Medical Malpractice Update
Prepared For:
CAS Annual Meeting 2003
New Orleans
Prepared By:
Carl X. Ashenbrenner, FCAS, MAAA
Milliman USA
Sarah Dore, CPCU
Independent Consultant
Kathy Pinkham
Healthcare First
A Division of Arthur J. Gallagher & Co. –
Kansas City
November 10, 2003
00
Overview of Presentation
 Profile of the National Medical Malpractice Market
 Current State of the Medical Malpractice Market
 What the future holds – Solutions and Forecasts
 Closing Thoughts & Questions
 Attachments
11
Topic #1:
Profile of the National Medical
Malpractice Market
22
Property/Casualty Direct Premiums Written by Line - 2002
(Amounts in $000s)
$160,000,000
35.34%
34.72%
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
10.60%
10.49%
$40,000,000
6.66%
$20,000,000
2.20%
$0
Homeowners
Multiple Peril
Private-Passenger Commerical Auto
Auto Liability &
Liability &
Physical Damage Physical Damage
Medical
Malpractice
Other Property and
Casualty
Workers
Compensation
33
National Medical Malpractice Market
Growth
Direct
Written Premium
Nationalin
Medical
Malpractice
Market
Growth in Direct Written Premium
Direct Written Premium (Billions)
22.5%
$9
$8
15.6%
$7
9.7%
$6
9.8%
$5
3.2%
(4.6%) (3.0%) 3.9%
4.9%
6.7%
26.5%
$4
52.8%
$3
$2
6.5%
3.2% (1.5%) (0.9%) 3.0% (0.4%)
5.9%
4.9%
11,4% 5.2%
13.2%
$1
$0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
*Estimated per A.M. Best using net written premium
44
National Medical Malpractice
Market in 2002
 With withdrawal from the market of the largest
writer, the expectation was that the market share
of the specialty writers (the so – called “bed pan
mutuals”) would increase as this business was
absorbed
 As the next slide illustrates, the growth in market
share was driven by the multi – line commercial
writers rather than the specialty writers
55
National Medical Malpractice Market
Commercial Carriers vs. Specialty Writers in 2001 and 2002
2001
Non-Publicly
Traded
Specialty
Writers
45%
2002
Multi-Line
Commercial
Writers
35%
Multi-Line
Commercial
Writers
42%
Non-Publicly
Traded
Specialty
Writers
44%
Publicly Traded
Specialty
Writers
20%
Publicly Traded
Specialty
Writers
14%
Based on Distribution of Top 20 Writers
66
Profitability of the National
Medical Malpractice Market
Underwriting Results
Investment Results
Overall Profitability
77
National Medical Malpractice Market
Historical Combined Ratio
175.0%
150.0%
125.0%
100.0%
75.0%
50.0%
25.0%
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
0.0%
Loss
LAE
Expense
Dividend
88
National Medical Malpractice Market
Investment Gain Ratio
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
1982 1983
1984
1985 1986
1987 1988
1989 1990
1991
1992 1993
1994 1995
1996
1997 1998
1999 2000
2001
2002
99
National Medical Malpractice Market
Pre-Tax Operating Margin
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
1982 1983
1984 1985
1986 1987 1988 1989 1990 1991
1992 1993 1994 1995 1996
1997 1998 1999 2000 2001 2002
-10.0%
-20.0%
-30.0%
-40.0%
1010
Myth or Reality?
 There is a public perception that malpractice
premiums are increasing to cover the losses that
insurance carriers have suffered in the stock
market
 The reality is, that while investment returns are
down, this is driven by a decline in interest rates,
and not the stock market
 The overwhelming majority of invested assets for the
specialty carriers are in fixed income securities
1111
Medical Malpractice Specialty Writers
Composition of 2002 Invested Assets
Other
11%
Affiliated Stock
3%
Stocks
9%
Bonds
77%
Bonds
Stocks
Affiliated Stock
Other
1212
Medical Malpractice Specialty Writers
Summary of Yearly Change in A.M. Best Ratings
Year
2000
2001
2002
2003
No Change
50
43
42
33
Change Categories
Upgraded
Downgraded Change to NR-x*
3
3
0
6
7
0
2
8
2
1
14
5
Total
56
56
54
53
* x=1-5
Source: Yearly publication of Best's Key Rating Guide
13
Insolvencies in the Medical Malpractice Market
1992-2003
6
5
4
3
2
1
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
14
Insolvency Conclusion
 Most companies that went insolvent were
domiciled in “crisis” states
 Most of these states have prior approval
rate filing
 Many of the larger companies that went
insolvent expanded rapidly into new
markets/territories/states before insolvency
1515
Topic #2:
Current State of the Medical
Malpractice Market
1616
National Medical Malpractice Market
Top 20 Writers - 1978
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Company
St. Paul Group
Aetna Life & Cas Grp
Medical Liability Mutual Insurance Company
Farmers Ins Grp
Medical Protective
Hartford Ins Group
Teledyne Group
Chubb Grp of Ins Cos
Illinois State Med Interins Exch
PHICO Group
CNA Insurance Companies
NORCAL Mutual Insurance Company
Southern California Physicians Ins Exch
Medical Interinsurance Exchange
The Doctors Company Interins Exch
American International Group
Pennsylvania Medical Society Liab Ins Co
PICO Group
Florida Physicians Insurance Reciprocal
USF&G Group
Total Top 20
Total US
1978 Net
Written
Premium
Market Share
$137,564,000
11.3%
113,539,000
9.3%
99,340,000
8.2%
95,719,000
7.9%
71,219,000
5.9%
54,092,000
4.4%
53,904,000
4.4%
43,170,000
3.5%
38,522,000
3.2%
24,660,000
2.0%
24,022,000
2.0%
23,882,000
2.0%
22,310,000
1.8%
21,558,000
1.8%
19,456,000
1.6%
18,909,000
1.6%
17,289,000
1.4%
16,511,000
1.4%
14,599,000
1.2%
14,561,000
1.2%
$924,826,000
76.0%
$1,216,217,000
100.0%
1717
National Medical Malpractice Market
Top 20 Writers
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Company
MLMIC Group
American International Group
Ge Global Insurance Holding Company
Proassurance Corp Grp
Zurich American Ins Group
Doctors Company Group
Health Care Indemnity Inc
CNA Insurance Group
FPIC Insurance Group Inc
ISMIE Group
Norcal Group
St. Paul Companies
Mag Mutual Insurance Group
Allianz Insurance Group
Markel Corporation Grp
Physicians Reciprocal Ins
Promutual Companies
Fairfax Financial
A.P. Capital
State Volunteer Mutual
Total Top 20
Total US
2002 Direct Written Premium
($000's)
% Growth
$958,842
36.1%
642,410
180.0%
633,229
56.4%
443,275
30.5%
416,496
31.8%
404,949
49.1%
340,927
18.5%
329,422
31.2%
291,530
44.6%
260,757
25.5%
246,744
-0.7%
217,997
-62.6%
212,654
65.3%
207,381
-11.0%
186,205
123.7%
185,332
8.7%
179,791
31.1%
177,194
105.4%
176,627
19.9%
163,859
36.3%
$6,675,621
23.4%
$8,928,252
22.5%
Type of Company
Specialty - Mutual
Multi-Line - Public
Multi-Line - Public
Specialty - Public
Multi-Line - Public
Specialty - Reciprocal
Specialty - Captive
Multi-Line - Public
Specialty - Public
Specialty - Mutual
Specialty - Mutual
Multi-Line - Public
Specialty - Mutual
Multi-Line - Public
Multi-Line Public
Specialty - Reciprocal
Specialty - Mutual
Multi-Line - Public
Specialty - Public
Specialty - Mutual
Market Share
10.7%
7.2%
7.1%
5.0%
4.7%
4.5%
3.8%
3.7%
3.3%
2.9%
2.8%
2.4%
2.4%
2.3%
2.1%
2.1%
2.0%
2.0%
2.0%
1.8%
74.8%
100.0%
1818
National Medical Malpractice Market
Top 10 States
Rank
1
2
3
4
5
6
7
8
9
10
State
New York
Florida
California
Texas
Illinois
Pennsylvania
Ohio
New Jersey
Georgia
Tennessee
Total Top 10
Total US
2002
Direct Written
Market Share
Premium
Market Share
of Top 2
($000's)
by State
Writers
$1,079,014
12.1%
68.6%
825,203
9.2%
35.5%
797,544
8.9%
36.4%
583,954
6.5%
36.9%
556,041
6.2%
54.3%
462,574
5.2%
39.8%
461,462
5.2%
26.7%
415,865
4.7%
67.4%
315,961
3.5%
50.1%
291,865
3.3%
55.4%
$5,789,483
61.2%
XX
$8,928,252
100.0%
17.9%
1919
National Medical Malpractice – Rankings of
Premium by State
Direct Written Premium
Top Ten
Second Ten
Third Ten
Fourth Ten
Remainder of States
2020
The AMA’s Crisis States
 In June of 2002, the American Medical Association
released the results of a survey of its members,
intended to evaluate the impact of the Professional
Liability market on Access to Healthcare
 The survey focused on whether the Professional
Liability market was causing physicians to:
 Leave their current state of practice;
 Retire early; or
 Abandon high – risk services
 Based on the survey results, the AMA classified:
 12 states as in crisis
 30 states (plus D.C.) as showing problem signs
 8 states currently ok
2121
The AMA’s Crisis States
 In March of 2003 the AMA updated its survey results:
 18 states in crisis
 26 states (plus D.C.) showing problem signs
 6 states currently ok
 In July of 2003 the AMA again updated its survey results:
 19 states in crisis
 25 states (including D.C.) showing problem signs
 6 states not experiencing problems
• Note: In August of 2003, one of these six states (Indiana) indicated
a 72.6% increase would be implemented in fees for its patients
compensation fund
2222
State of the Med Mal Industry
as of July 2003
19
States in crisis
25
States showing problem signs
6
States showing no problem signs
Source: American Medical Association
2323
AMA States Identified as not
Experiencing Problems Existence of Patients Compensation Fund
and/or Cap on Damages
Existence
of
PCF
State
No
California
No
Colorado
Yes
Indiana
Yes
Louisiana
Yes
New Mexico
Yes
Wisconsin
Statutory Limitations
PCF
Total
Attachment Non-Economic
Damages
Damages
Point
None
$250,000
$1,000,000
$250,000
$1,250,000
None
$250,000
$500,000*
None
$100,000
$600,000*
None
$200,000
None
$350,000 (i)
$1,000,000
* Total Damages Excludes Future Medical Costs
(i) Cap indexed with inflation
2424
Big News
in
Small Town
MUST SELL TO PAY
MALPRACTICE
INSURANCE
25
Crisis is Real
Affordability Issue
Doctors closing practices
Doctor’s Dilemma
 Insurers cannot make a profit and doctors
cannot afford the coverage. Rate increases are
not the answer. The industry has to find a new
way to manage the risk.
Extreme Measures
 RRGs, New Companies, Off-Shore Insurers
2626
Medicare vs. Malpractice Rates
 Two major problems in current market:
 Affordability
 Availability
 To address affordability, we compared
Medicare reimbursement rates to medical
malpractice rates for different states and
specialties
2727
Medicare Reimbursement Rates
Overview of Rating Process
Three cost factors for each procedure:
 Work
 Expense
 Malpractice
Relativities by state/territory for each of
the three factors
2828
Medicare vs. Malpractice Rates
$70
$10,000
$60
$50
$8,000
$40
$6,000
$30
$4,000
$20
$2,000
$10
$0
$0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Manual Rate
Medicare Reimbursement
$30,000
$70
$25,000
$60
$50
$20,000
$40
$15,000
$30
$10,000
$20
$5,000
$10
$0
Medicare Reimbursement
$12,000
Malpractice Manual Rate
Comparison Medical Malpractice Rates to Medicare
Reimbursement Rates
Cook County, IL - Internal Medicine
Medicare Reimbursement
Malpractice Manual Rate
Comparison Medical Malpractice Rates to Medicare
Reimbursement Rates
Southern California - Internal Medicine
$0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Manual Rate
Medicare Reimbursement
2929
Medicare vs. Malpractice Rates
$25,000
$60
$50
$20,000
$40
$15,000
$30
$10,000
$20
$5,000
$10
$0
$0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Manual Rate
Medicare Reimbursement
Malpractice Manual Rate
$70
Medicare Reimbursement
Malpractice Manual Rate
$30,000
$120,000
$2,500
$100,000
$2,000
$80,000
$1,500
$60,000
$1,000
$40,000
$500
$20,000
$0
Medicare Reimbursement
Comparison Medical Malpractice Rates to Medicare
Reimbursement Rates
Cook County, IL - OB/GYN
Comparison Medical Malpractice Rates to Medicare
Reimbursement Rates
Cook County, IL - Internal Medicine
$0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Manual Rate
Medicare Reimbursement
3030
Medicare vs. Malpractice Rates
$800
$700
$600
$500
$400
$300
$200
$100
$0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Manual Rate
Medicare Reimbursement
$250,000
$2,500
$200,000
$2,000
$150,000
$1,500
$100,000
$1,000
$50,000
$500
$0
Medicare Reimbursement
$900
Malpractice Manual Rate
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
Comparison Medical Malpractice Rates to Medicare
Reimbursement Rates
Dade County, FL - OB/GYN
Medicare Reimbursement
Malpractice Manual Rate
Comparison Medical Malpractice Rates to Medicare
Reimbursement Rates
Dade County, FL - General Surgery
$0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Manual Rate
Medicare Reimbursement
3131
Conclusions and Observations
Medicare reimbursement rates declined for
higher risk specialties (Surgery and
OB/GYN) while Medical Malpractice rates
increased substantially
Reimbursements not keeping up with
medical malpractice rates
Medicare reimbursements slow to changes
3232
Conclusions and Observations
….(Continued)
Higher severity specialties getting less
reimbursement
Will need to see more patients
Use extenders more often
May lead to increased claims and severity
3333
Topic #3:
What the Future Holds –
Solutions and Forecasts
3434
Historical Problems
1970’s - Multi-line companies withdrew
from the market – availability problem
 Solution - Physician owned insurers were
formed
1980’s – Rates increased substantially after
prolonged soft market (affordability)
 Solution – Form changed from Occurrence to
Claims-Made coverage
3535
Current Problems
Companies withdrawing – availability
Substantial rate increases – affordability
Capacity Constraints
Claim Severity increasing
Healthcare process – physicians must see
more patients or use extenders
Nursing shortage
3636
Current “Solutions”
Physicians
Policy changes – lower limits, deductibles
Captives forming
Physicians “going bare”
Hospitals providing coverage
Leaving states / changing practices
3737
Current “Solutions”
Insurers
Re-Underwriting Book
Retrenching back to core business
States/Specialties/Territory Restrictions
New business moratoriums
Using broad-brushed underwriting approach
3838
Prognosis and Proposals
Governmental
 Alliance for Healthcare Reform
• Administrative compensation system
• Reasonable compensation for avoidable injuries
 Reliable Medical Justice Act: Immunity from
lawsuits with early offer of compensation for
injury
 Allow no-fault on certain specialties: OB,
Trauma, Emergency
3939
Prognosis and Proposals
Governmental (continued…)
 States establish an administrative board to
evaluate compensation
 Establish special Health Care Courts with
binding rules on causation, compensation,
standards of care and related issues.
 Current AMA agenda for capping pain and
suffering awards
 State Compensation Funds
4040
Prognosis and Proposals
 Physician
 Train physicians and other medical staff to treat
patients better
• Set patient expectations properly
• Reinforce expectations frequently
• Spend more quality time with patients – accept reduction in
patients seen per day, in order to reduce claims and insurance
costs
• Gather patient feedback, have it evaluated independently
• Obtain real informed consent
4141
Prognosis and Proposals
 Insurer
 Reduce the number of claims – stop paying off
illegitimate claims to make them go away
 Ask physicians to retain some risk through deductibles
 Work only with physicians who will follow best
practices and who will insist that patients recognize
their role in maintaining their own health and in
keeping malpractice insurance costs manageable
 Change form to recognize arbitration agreements
4242
Prognosis and Proposals
Underwriting
 Use more efficient ways of evaluating risk
•
•
•
•
Number of patients
Number of high-risk patients
Quality of care measurements
Adherence to standards of care, as set by specialty
colleges
• Identify types of procedures that generate claims
• Evaluate error-management programs in hospitals
and practices
• Evaluate patient advocacy programs
4343
Prognosis and Proposals
Underwriting
 Develop more coverage options
• Defense costs inside policy limits (46% of claims
cost is litigation)
• Examination of alternative dispute resolution and
ombudsman mediator program
• Tail limits as extension of last limits
4444
Prognosis and Proposals
 Actuary
 More detailed review of losses to drill down to
causation, rather than classifying and penalizing areas
of practice
 Recommend evaluative measures of these causes for
the underwriter
 Study the practices of low-risk doctors and develop
rating factors based on those factors
 Identify common factors among high-risk patients –
i.e., help physicians select patients who won’t sue
them
4545
Prognosis and Proposals
 Actuary (continued …)
 Create a measuring tool to evaluate the risk profile of
physicians
• Identify the risk characteristics of physicians who have been
sued
• Build a national database that provides a risk profile
• Use the risk profile to load individual physicians’ rates
• Encourage high-risk physicians to leave the patient care area
of medicine
• Establish price tags for behavior modification tools
4646
Topic #4:
Closing Thoughts
&
Questions
4747
Thank You!
Carl X. Ashenbrenner, FCAS, MAAA
Milliman USA
carl.ashenbrenner@milliman.com
(262) 784-2250
Sarah Dore, CPCU
Independent Consultant
SKIDOOR@aol.com
(630) 357-9176
Kathy Pinkham
Healthcare First
A Division of Arthur J. Gallagher & Co. – Kansas City
kathy_pinkham@ajg.com
(816) 395-8501
4848
ATTACHMENTS
4949
Medicare Reimbursement Rates
Medicare Reimbursement Rate Example
California - Los Angeles
2002
Cesarean Deliveries
Work
Expense Malpractice
TOTAL
RVU
24.43
15.73
4.38
State/Territory Relativity
1.056
1.139
0.955
Adjusted RVU
25.80
17.92
4.18
Conversion Factor
$ 933.87 $ 648.56 $ 151.42 $
36.20
Percentage/Total
54%
37%
9% $ 1,733.85
Illinois - Chicago
2002
Cesarean Deliveries
Work
Expense Malpractice
TOTAL
RVU
24.43
15.73
4.38
State/Territory Relativity
1.028
1.092
1.797
Adjusted RVU
25.11
17.18
7.87
Conversion Factor
$ 909.11 $ 621.80 $ 284.92 $
36.20
Percentage/Total
50%
34%
16% $ 1,815.83
Illinois - Chicago
2002
Office Visit
Work
Expense Malpractice
TOTAL
RVU
0.72
0.71
0.03
State/Territory Relativity
1.028
1.092
1.797
Adjusted RVU
0.74
0.78
0.05
Conversion Factor
$
26.79 $ 28.07 $
1.95 $
36.20
Percentage/Total
47%
49%
3% $
56.81
5050
Frequency By Specialty
6
10 Year Frequency
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37
Specialty
5151