Neurosurgeons refuse to perform high-risk surgery. Doctors leave Illinois to find cheaper insurance. And the state medical society chief warns that only a cap on jury awards can solve the malpractice crisis.
Sound like last week's news?
Actually, it was the 1980s. Then, as now, ISMIE Mutual Insurance Co., Illinois' dominant medical malpractice insurer, sharply raised premiums charged to physicians and lobbied state lawmakers for limits on malpractice verdicts.
Looking back, it's clear that the earlier "crisis" passed--without a major overhaul of malpractice law. And a look at ISMIE's business suggests this "crisis" probably will pass, too. And soon.
Rates for malpractice insurance are still increasing nationally, but at a slower rate, says Christopher Winans, vice-president of equity research at New York-based Lehman Bros. "It is not good news," Winans says. "It is less bad news."
Is it, as insurers and doctors say, runaway juries, which need to be reined in, that caused a nearly 40% premium hike in 1985 and a 35.2% increase in 2003? Another explanation is the wildly cyclical nature of the property-casualty insurance business, which includes insurers that write malpractice policies.
Medical care, of course, is a crucial public service. So, when something happens to reduce its availability, even by a little bit, it's a public policy problem. That explains widespread calls for legislation to limit doctors' liability in malpractice cases.
Insurance is a business, however, and to the chagrin of its customers and even the companies in the industry, it doesn't move in logical lockstep with the economy's growth, like so many businesses do. Rather, insurers compete too hotly for years at a time, pricing policies cheaply because they want to collect premium dollars and invest them. Doctors don't complain as much during these periods.
Years of that typically catch up with the industry. And, for some companies at least, the cost of paying claims--for car crashes, hurricane damage or doctors' errors--exceeds the premiums collected and investment gains realized on those premiums. That means losses, and a pulling back in the market.
Some insurers exit the market. Premiums rise. And, typically, insurers become more profitable, their reserves fattened against future claims.
A few years of that, of course, and they're slashing prices again to gain marketshare, and the whole cycle starts anew. Why the flight, then?
ISMIE doesn't see it that way. Harold L. Jensen, M.D., its chairman and an internist, says in a statement: "The problem with this reasoning is that in Illinois the cycle spirals continually upward due to the unpredictability of tort costs." If, Jensen asks, "there is no crisis, why are doctors and insurers leaving Illinois?" Changing the law to limit jury awards, he adds, would bring "predictability, competition and milder cycle swings--as evidenced in states with caps on awards."
To be sure, ISMIE's most recent rate hike was a hardship for some doctors, suggesting a gap between the insurer's estimation of risk and the healthcare market's willingness to pay for particular procedures. An obstetrician-gynecologist in Cook County, Ill., for instance, paid ISMIE $147,540 for malpractice insurance in 2003, on average. The premium is fast approaching a typical salary in the profession: $180,000 to $250,000.
ISMIE says it had 34 competitors in 1999; today, it counts four.
Mirroring ISMIE's pricing, the entire U.S. property-casualty industry pushed through big price hikes in the mid-1980s, again a decade later and once more in 2002, according to A. M. Best Co., the New Jersey-based insurer rating company.
The years after a big price hike are generally good ones for insurers. Averaged per doctor, the number of claims ISMIE paid between 1985 and 1994 declined 2.4%. And the average amount the insurer paid per claim was flat over the same period.
ISMIE insures about 56% of Illinois doctors and is owned, as a mutual, by its roughly 14,000 policyholding physicians.
Also from 1985 to 1994, ISMIE's cumulative profits were $154.3 million. That enabled the company to increase its surplus, the backstop against unexpected losses, to $135.3 million at year-end 1994 from $5.9 million a decade earlier. (The surplus was $201.7 million at year-end 2003.)
Is history repeating itself? After 2003's 35.2% rate hike, operating results are once again positive, with $19.8 million in profit last year. That follows cumulative profit for all the years between 1995 and 2002 of $25.1 million.
But what about the giant malpractice verdicts and settlements that, all of sudden, we keep reading about?
They're not so new, either. This year's eye-popping case in Illinois: The family of a 5-year-old boy, born with severe birth defects after the anesthesiologist on duty at Northwestern Memorial Hospital allegedly failed to respond to pages, was awarded $35 million. And 1986's: A jury awarded a 42-year-old woman $15 million--she later settled for $8 million--after a physician allegedly misdiagnosed a brain tumor as a migraine.
'No rate regulation' in Illinois
Some states regulate pricing in insurance markets more aggressively than Illinois does, limiting price cuts as well as hikes. Limiting price cuts is aimed at keeping a market stable with plenty of insurers competing, though not too fiercely, for business.
Current Illinois law only permits the state Department of Insurance to intervene when rates appear too low, if an insurer's solvency is at stake. "Illinois is quite unique," says Robert Detlefsen, owner of Virginia-based public policy consulting firm Ardet Issue Analysis. "For virtually all lines of property-casualty, there has been no rate regulation."
Each year, ISMIE estimates against the policies it writes that year, the dollar amount of malpractice claims that will result in coming years, as lawsuits trickle in and are settled or tried over a decade. That initial estimate of future losses is then adjusted over time as actual claims against the policy year start to come in. Sometimes ISMIE guesses too high, sometimes too low.
For policies written in 1990, for instance, it initially estimated claims costs of $163.5 million, but ended up revising that down to $99.3 million. A decade earlier, in 1980, it estimated claims costs of $49.9 million, but its costs ballooned to $86.8 million. It's hardly a science.
Right now, ISMIE is expecting claims costs for policies written the past two years to increase, to $229.9 million for 2002 policies and $242.4 million for 2003 policies. Those estimates have medical officials talking about a crisis.
They're up from an estimated $183.1 million in claims costs for 2001 policies, itself still a young estimate because there are several years for patients to make claims against insured doctors.
Of course, it will be years before we know how good those estimates are--whether a surge of costly claims is indeed ahead for Illinois doctors. By then, most certainly, the malpractice insurance market will have rolled through another wild cycle and, almost as certainly, there will be talk of a new crisis.