An estimated 42,000 physicians and 750 hospitals around the country could lose their medical malpractice coverage after last week's announcement that the nation's second-largest provider of malpractice insurance plans to get out of the business.
The St. Paul Cos. is dropping its healthcare division altogether after losing more than $700 million in the past four years.
St. Paul announced last week that it will exit the medical malpractice business by not renewing policies as they expire. The company said it will record $900 million in pretax charges in the fourth quarter of 2001, $600 million of which is to bolster medical malpractice reserves.
"The actions we announce today are the product of our careful review of each of St. Paul's business operations and address the challenges the company has faced over the past several years, which in certain cases have been exacerbated by recent market trends," Jay Fishman, chairman and chief executive officer, said in a written statement accompanying the announcement.
The company said its medical malpractice business will generate a 2001 underwriting loss of $940 million.
"It's been a rumor for a while that they're just going to wipe their hands of the business," said Jack Lewin, M.D., CEO of the 34,000-member California Medical Association.
St. Paul's departure from one of its core businesses would affect an estimated 42,000 physicians in 50 states, forcing those doctors to scramble for coverage from another carrier likely to charge far more for annual premiums.
The multibillion-dollar company, which also provides insurance for 750 hospitals and hospital systems, announced its decision before its investor/analyst conference last week.
"Healthcare is one of a number of areas of the company that has, over the last couple of years, been identified as an area where results haven't been good and where we need to take some corrective action," said St. Paul spokesman Pat Hirigoyen.
The Minnesota-based insurer, which ranks No. 222 on the list of Fortune 500 companies, boasts consolidated revenue of about $8 billion and employs more than 10,000 people worldwide. Yet its 70-year-old healthcare division represents only about 10% of the company's overall premium revenue. It ranks as the second-largest insurer of doctors after the Medical Liability Mutual Insurance Co., which provides coverage "in excess" of the 42,000 doctors carried by St. Paul, an official from MLMI said.
St. Paul's departure from the business could be a serious blow to physicians who have struggled for years with sharply increasing medical malpractice premiums. State governments might have to step in to help stabilize the market-as the Legislature in West Virginia did earlier this month, creating a temporary, state-run insurance plan after many doctors complained they couldn't afford current premiums.
"We're seeing a crisis develop," said Richard Corlin, M.D., president of the American Medical Association.
St. Paul isn't the only insurer in financial trouble. In August, state insurance regulators in Pennsylvania seized control of failing PHICO Insurance Co., a medical malpractice carrier, after it reported a net loss of about $42 million in 2000. The company's estimated 9,400 medical malpractice policies nationwide are now nonrefundable unless affected states deem otherwise. A lawsuit filed by the state of Pennsylvania blames the insurer's board of directors for poor decisions leading to the disastrous financial results (Dec. 10, p. 28).
The AMA has been lobbying for years for the passage of a tort reform package in Congress similar to a law passed about 26 years ago in California, which places a limit of $250,000 on noneconomic losses and restricts the percentage of awards to attorneys. Corlin said that law has led to "stable, or relatively stable, rates" for medical malpractice liability insurance.
Richard Lutz, vice president of underwriting at MLMI, based in New York, said underwriters across the country will take a look at the "revised market" and examine the possibilities of new business if St. Paul drops out of the medical malpractice business. In contrast to St. Paul's huge recent losses, Lutz's mutual insurance company has paid dividends for the past five years.
"They've been writing medical malpractice for a long time," he said. "So, obviously, we thought they were going to continue to write it. They have to make market determinations. They're a company that is for-profit, looking at their individual situation."
Once St. Paul's policies expire, the affected physicians will almost inevitably pay far more for their coverage, observers said. "It's going to be a lot more expensive," Lewin said. "So expensive, in fact, that some might not be able to afford it."
Lewin said the situation underscores the need for national tort reform to help corral what he called runaway malpractice premiums.