Distinguish Insurance Fact from Fiction

Richard E. Anderson

Physician's Money Digest, January15 2004, Volume 11, Issue 1

A June 2003 report by the government'snonpartisan General Accounting Office(GAO) concluded that malpractice premiumsare so high today because insurers arepaying out more in claims than they are collecting inpremiums. Reform opponents, particularly triallawyers, frequently place the blame elsewhere. Thefollowing are common malpractice insurance mythsalong with some straight answers:

The result:

• Investment losses are behind insurance rateincreases. Sure, the market has struggled the past fewyears. However, medical malpractice providers placedthe majority of their investments in secured bonds. Their assets continued to grow. Accordingto the GAO study, none of the insurers surveyed lostmoney on their investments through 2001. Of course,investment returns and interest rates are down.

Lower investment returns mean that today's ratesare more in line with reality. Even in states where premiumshave skyrocketed, the GAO found that lowerinterest rates were only a small part of the equation,usually a single-digit percentage. Moreover, insurancecompanies have no control over interest rates. Indeed,it is commendable that investment income was used tosubsidize rates and not used to increase profit.

• Insurers keep raising rates because they'regreedy. More than 60% of medical liability insuranceis supplied by physician-owned or -operated companies.These companies were created in the 1970s and1980s after commercial insurers fled the market.Doctors have only one reason to raise insurance rates:The company needs to meet potential losses andremain viable to preserve coverage. When losses areless than expected, money is returned to policyholdersin the form of dividends.

Malpractice insurance premiums are based on estimatesof potential future losses. They are heavily regulatedand all increases must meet state approval. Iflarge malpractice settlements are likely or the situationis unpredictable, which is the case in states thatdon't have settlement caps, insurance rates rise.

• Rates are lower in California because ofProposition 103. Proposition 103 targeted auto insuranceproblems in California. In fact, it wasn't in effectwhen California's rate increases started to slow down.By the time Proposition 103 was in effect, the GAOnotes, insurers had built up reserves thanks to lessthan expected losses. This lead to several years oflower rates. Changes in policy structures and thegrowth of physician-owned and -operated insurersalso lowered premiums in the early 1990s.

• California's malpractice reform is a failurebecause rates keep increasing. In 1975, Californiaimplemented the Medical Injury CompensationReform Act (MICRA). Of the seven states the GAOsurveyed last year, California was the only state wherelosses experienced by malpractice insurers didn'texceed premium revenue—despite the fact that theamount of litigation grew proportionally with thepopulation. Today, California premiums are amongthe lowest in the nation. Premiums rose in Californiaas a result of larger jury awards for economic damages,but at a slower rate than in other states.

MICRA created an environment that reduces riskand increases predictability. Patients also benefit fromMICRA. For example, settlements are reached faster, apatient's right to go to court is protected, and limits onattorney fees enable the injured to keep more of the juryaward. In addition, fewer physicians are abandoningtheir practice, which means greater access to healthcare. The California malpractice model has been successfulfor 29 years. It's the type of reform that states incrises need to stabilize insurance premiums and ensurethat quality health care is available for patients.

Richard E. Anderson is chairman and CEO of The Doctors Company,the first national physician-owned medical malpractice insurer. He isa noted authority on medical malpractice insurance and jurisprudence.For more information on The Doctors Company call 800-421-2368 or visit www.thedoctors.com.