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Is there really a medical malpractice crisis?

The cost of medical malpractice insurance has been rising. The hard market began in 2000, after almost a decade of essentially flat prices. Rate increases have been precipitated in part by the growing size of claims, particularly in urban areas. Among the other factors driving up prices is a reduced supply of available coverage as insurers exit the medical malpractice business because of the difficulty of making a profit and rapidly rising medical care costs. A Towers Perrin survey predicts that health care costs will rise by 8 percent in 2005. This is on top of average annual increases during the period from 2000 to 2004 that ranged from 12 to 16 percent. Depending on plaintiffs’ age and degree of medical impairment, medical costs resulting from medical malpractice incidents may continue for decades.

Rate increases have caused hardship for doctors in some cases. The medical community is pushing for limits on noneconomic damages and other reforms that may reduce costs.  Pennsylvania has been one of the hardest hit states, but is not alone in the crisis.

A Pennsylvania court has given the nod to state insurance regulators to liquidate failed PHICO Insurance Co., effective immediately.

According to Pennsylvania Insurance Commissioner Diane Koken, PHICO Insurance — which sold medical malpractice insurance and workers compensation insurance to doctors and hospitals — has a surplus of only $6.8 million, a drop of more than $120 million since 2000. The insurer does not have money in reserves sufficient to pay its customers' claims, she says.

"Further attempts to rehabilitate the company would be futile," says Koken. "We had no choice but to liquidate PHICO in order to avoid further risk of loss to PHICO's policyholders, claimants, and creditors."

Help for policyholders

Pennsylvania law requires that all active PHICO Insurance policies be cancelled within 30 days of the court's Feb. 1 liquidation order. Policyholders in Pennsylvania and other states should submit their outstanding claims to their states' guaranty associations, where applicable. For more information, call (800) 382-1378 or visit PHICO's Web site.

The insurer's demise marks the state's second large insurer liquidation within the last four months. Koken shut down Reliance Insurance Co. in October 2001 when the insurer could not overcome a deficit of more than $9 billion.

Market crisis

PHICO Insurance was licensed to sell insurance in 50 states, the District of Columbia, and Puerto Rico. The states with the largest number of policyholders include Florida, Indiana, Texas, and New Jersey. These customers must now find new coverage, a feat that will be made more difficult by the rapidly rising premiums nationwide for medical malpractice insurance.

The insolvency of PHICO Insurance is "just another sign of the crisis in the medical malpractice insurance market," says Chuck Moran, spokesperson for the Pennsylvania Medical Society. The society says the hefty sums awarded in malpractice lawsuits are bankrupting medical liability insurers and driving doctors' medical liability premiums through the roof. Pennsylvania now ranks second among the states in terms of total payouts for medical litigation; New York is No. 1.

Pennsylvania doctors and hospitals will be able to find replacements for their PHICO policies, says Moran, because the state has "insurers of last resort" that must take all applicants. "But the question will be whether the applicants will be able to afford the premiums," he says. Pennsylvania cannot dictate what these insurers charge.

Medical malpractice crisis forces 12 insurers out of Illinois since 2001

The governor, Illinois trial lawyers and victims' rights groups all point to the insurance industry as the primary cause for Illinois' medical malpractice insurance crisis.

Dr. Harold Jensen disagrees. He is chairman of nonprofit Illinois State Medical Inter-insurance Exchange, the largest provider of medical malpractice insurance in the state.

Mutually owned by more than 8,000 Illinois physicians, ISMIE provides malpractice insurance to more than one-half of the state's doctors.

The crisis has driven 12 other carriers out of the state since 2001. Only five remain.

Victims and Families United - a local nonprofit organization created in February to weigh in on the malpractice debate - points to the fact that the current crisis is not the first.

ISMIE was born out of a related medical provider insurance crisis of the early and mid-1970s. Another similar crisis occurred in the 1980s, according to Doug Wojcieszak, spokesman for VFU.

In the 1990s, when the stock market was booming, he said, malpractice insurers flocked here, trying to write every policy they could, banging on doors and knocking each other down on price.

"They just wanted any premium dollars to invest those dollars in the stock market," Wojcieszak said. "When everything was going great and the stock market was up, that was fine. But once that all went bust, a lot of the (insurance) companies didn't have the wherewithal to stay in the market, and they had to back out. That was when premiums went through the roof."

Jensen says that assessment is inaccurate.

"Our company's reserves are invested 97 percent in bonds and 3 percent in stocks," he said. "There was a slight loss because that 3 percent collapsed. The bond market went down a little bit, too. We lost some $3 million on bonds in 2003. But to put it in perspective, we lost $115 million from (med mal) verdicts."

The huge increase in number of verdicts and in settlement amounts, Jensen said, impacted the reserves and the surplus. "In 2002, our three sets of actuaries said, 'You can expect $80 million in losses this year, therefore you must pitch your premium at this level.' The number they predicted for 2002 was $115 million off."

To stop this downward spiral, insurers raise rates to fund their reserves, Jensen said.

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Michael Schostok, president of the Illinois Trial Lawyers Association, said lack of competition is the problem - and ISMIE is responsible for that.

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Maryland legislature takes action to curb medical malpractice

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The Maryland Insurance Administration has provided funding from the new Rate Stabilization Fund, enabling MEDICAL MUTUAL to reflect a state subsidy to eligible and participating policyholders in their third quarter invoices.

The Rate Stabilization Fund was created by the Maryland General Assembly and is one of the key components of bills recently enacted by the State of Maryland to address the concerns of Physicians facing a medical professional liability insurance crisis caused by a significant rise in the cost of litigation.??

Doctors in south Texas recently staged a walkout to protest the high cost of medical malpractice insurance. In Tallahassee, hundreds of doctors flocked to the state capitol to lobby the Florida legislature for relief from some of the highest insurance rates in the nation.

Meanwhile, many physicians in South Carolina not yet devastated by malpractice insurance rates face a 40% increase in their premiums this year. When the downturn in the national economy left insurance companies reeling from diminished returns on their investments, the industry identified a familiar culprit - damages paid as the result of malpractice lawsuits.

"The jury verdicts are just unbelievable," says Dr. Daniel Brake, a physician in family practice in Charleston. "The amount of money being awarded is going to have an impact in South Carolina and other states. What you wind up doing is punishing good doctors by driving up the cost for them to practice medicine."

OB-Gyns in South Carolina pay between $20,000 and $28,000 a year (in insurance premiums)," says Brake. "But in Florida, that same coverage could cost them between $100,000 and $200,000." By way of explanation, Brake observes that jury verdicts here have not been as high as in Florida - until recently, when he says the awards have begun to increase sharply.

Insurance actuaries can only guess at future claims cost

When insurers try to project how much malpractice claims will cost them in a given year, they make little more than an educated guess. It's based mainly on prior claims, jury verdict trends and how badly patients were injured.

That guess -- which determines how much they charge doctors for coverage -- can be far from the actual cost. For example, malpractice claims and payments increased sharply in the mid-1980s, so insurers increased their anticipated losses and premiums. After Florida and other states passed new laws to discipline doctors and discourage frivolous lawsuits, the number of malpractice suits fell.

That created a windfall for insurers, who were still getting the higher premiums.

In 1992, ProNational's predecessor estimated that claims filed up to that year would cost the company more than $252 million. A decade later, it turned out the company actually paid out only one-third of that. The rest of the premiums it collected were profit.

Insurers are again predicting the worst case for losses. Friedman says the industry has been seeing steady jumps in claim costs annually, especially in payments worth $1 million or more.

"We need to react to that," he said. ProNational raised rates in Florida 15 percent in 2001, 20 percent in 2002 and 27 percent this year. Five years from now, the company may realize huge profits if it overestimated the size of future payments to the injured and awards are capped.

On the other hand, "if we're wrong, there's no money there to pay when the time comes."

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