Effectiveness of Malpractice Tort Reforms:
The Relation Between Loss and Premium
Arthur Gurevitch, PhD
Manifestations of the
Current Malpractice Crisis
Withdrawal of St. Pauls’ in December
2001 followed by PHICO, Reliance,
Frontier, Miix, and Farmer’s.
 Reports in the popular press of
dramatic increases in premium and
decrease in availability of coverage.
 “Strikes” and other political activity by
physicians.
 Proposals/ legislation at national and
state level for “tort reform”.

Milliman USA
A June 2002 Wall Street Journal Article
Set the Stage for the Current Debate
“while malpractice litigation has a big
effect on premiums, insurers’ pricing
and accounting practices have played
an equally important role. Following a
cycle that recurs in many parts of the
business…(insurers) sell malpractice
coverage … at rates that proved
inadequate to cover claims”
Milliman USA
Plaintiffs’ Attorneys and “Consumer Advocates”
Have Extended These Arguments in their Fight
Against Tort Reforms

Premium increases have not been “unusual”
– “malpractice insurance costs have risen at half the rate
of medical inflation”

Claims are not increasing
– “the spike in medical liability premium was caused by
the insurance cycle, not by new claims or skyrocketing
jury verdicts”

Tort reforms will reduce neither claims nor premium
– “nothing about California’s experience suggests that
limiting jury awards will reduce malpractice premiums”
Milliman USA
Research Overview

How have losses and premium grown over
the past few years?

Do states with strong tort-reforms have lower
losses? Lower premiums?

What is the “insurance cycle” impact on the
cost of malpractice coverage?
Milliman USA
To Evaluate the Current Malpractice Crisis, We
Examined Annual Statement Premium and
National Practitioner Data Base Losses
– Premium –
Annual Statements




Written Premium, for
Medical Mal.
Includes Hospitals &
Physicians
Aggregate for State by
Policy Year
No Self Insurance or
State Fund Data
– Loss –
National Practitioner
Data Bank





Physician Only
Closed with Loss
No LAE
By Year Closed
Not Designed as an
Analytical Database
Milliman USA
Written Premium Increased
Dramatically in 2001
Per Capita Written Premium
(1997 = 1.0)
1.60
1.40
1.20
1.00
0.80
1997
1998
1999
2000
2001
2002
Year
Milliman USA
Losses began a rapid
increase in 2000
Prorated June Data
1.40
Loss Per Physician
(1997 = 1.0)
1.30
1.20
1.10
1.00
0.90
0.80
1997
1998
1999
2000
2001
2002
2003
Year Closed
Milliman USA
Relative Frequency or Severity
(1997=1.0)
Severity Rose Dramatically During
This Period. Frequency Has Been
Unchanged.
1.50
1.25
Prorated June Data
1.00
0.75
1997
1998
1999
2000
2001
2002
2003
Year Closed
Frequency
Severity
Milliman USA
Per Capital Loss or Premium (1997
= 1.0)
There Was a Clear and Dramatic
Change Between 1999 & 2001
1.60
1.40
1.20
Prorated June Data
1.00
0.80
1997
1998
1999
2000
2001
2002
2003
Year
Premium
Losses
Milliman USA
Losses Are Dramatically Lower
in States With Award Caps
Loss Per Physician
(Pure Premium)
10,000
7,500
5,000
2,500
0
1997
1998
1999
2000
2001
2002
2003
Year Closed
States with Caps
States without Caps
Milliman USA
This is Due to Lower Severity …
Severity
($ Loss per Claim)
400,000
300,000
200,000
100,000
0
1997
1998
1999
2000
2001
2002
2003
Year Closed
States with Caps
States without Caps
Milliman USA
Frequency
(Claims per 100 Physicians)
And Also Lower Frequency
3.00
2.50
2.00
1.50
1.00
1997
1998
1999
2000
2001
2002
2003
Year Closed
States with Caps
States without Caps
Milliman USA
Premium ($) per Physician
But Premium is Also Lower in
States With Caps on Awards
17,500
15,000
12,500
10,000
7,500
5,000
1997
1998
1999
2000
2001
2002
Year
States with Caps
States without Caps
Milliman USA
Premium($) per Physician
We Found a Correlation Between Premium
and Loss Over Time and Between States
y = 0.6769x + 6582.9
R2 = 0.2715
30,000
25,000
20,000
15,000
10,000
5,000
0
0
5,000
10,000
15,000
20,000
Loss ($) per Physician
Milliman USA
Accuracy of Forecast - Relative
Residual
The Simple Model Had More Predicative
Power for States With Over 400 NPDB
Cases Per Year
100%
75%
50%
25%
0%
-25%
-50%
-75%
-100%
0
500
1,000
1,500
2,000
2,500
NPDB Cases per Year
Milliman USA
These 9 States Account for Over
60% of National Malpractice





California*
Florida
Illinois
Michigan*
New Jersey

New York
 Ohio
 Pennsylvania
 Texas
* States With Caps
Milliman USA
Additional Analysis of Premium and
Loss for the 9 States Yielded a
Powerful Regression Model
Regression Statistics
Multiple R
0.882
R Square
0.779
Adjusted R Square
0.761
Standard Error
1,617.97
Observations
54
Intercept
Nat Loss -1
Loss -1
Loss -2
% State Fund
Coefficients
(5,833.59)
1.81
0.25
0.75
(11,700.57)
P-value
0.0170
0.0000
0.1028
0.0001
0.0000
Milliman USA
Over 75% of the Variability in
Premium Can Be Explained With a
Simple, Loss Based Model
Actual Premium
25,000
20,000
15,000
10,000
5,000
5,000
10,000
15,000
20,000
Forecast Premium
States With Caps
States Without Caps
Milliman USA
Equally Important Are the
Metrics That Had No Significant
Effect on Premium
Current Loss
 Losses Older Than 3 years
 Interest Rate (5 year Treasury)
 Average Case Age
 Discount Rate (Interest & Age)
 % PIAA (Mutual) Market Share
 Competitive Indices

Milliman USA
The Model Predicts
Stable Rates for 2003
Top 9 States
Premium per Physician
20,000
15,000
10,000
5,000
1997
1998
1999
2000
2001
2002
2003
Policy Year
Forecast
Actual
Milliman USA
Summary
Despite Claims to the Contrary

Premium increases have not been “unusual”
Between 1997 & 2003 overall per capita
premium has increased 50%

Claims are not increasing
Between 1997 & 2003 per capita losses
have increased 35%

Reforms will reduce neither claims nor premium
The evidence supports the effect of reforms
in reducing claims & premium
Milliman USA