The cause of the recent medical malpractice insurance crisis has had much to do with business cycles both inside and outside the insurance industry and little to do with tort-claim payouts, according to recent research by a former federal and state insurance administrator.
In fact, as med mal premiums soared, inflation-adjusted medical malpractice insurance payouts per physician dropped between 2000 and 2003, according to the analysis of industry data going back to 1975 that was done by J. Robert Hunter, now director of insurance for the Consumer Federation of America. The federation is a coalition of not-for-profit consumer groups whose largest members are the American Association for Retired Persons and the Consumers Union.
The real drivers of the rise in premiums over the past four years have been low interest rates, a sour national economy and the legacy of overly aggressive pricing polices in the years before the "crisis" began in late 2000, according to the report.
In 2000, direct premiums written per doctor were $9,068; they increased 7.6% to $9,759 in 2001, 14.6% to $11,187 in 2002, and 7% to $11,973 in 2003, the report said. Meanwhile, direct losses per doctor, which were $7,176 in 2000, rose a modest 1.2% to $7,262 in 2001, inched up 0.2% to $7,275 in 2002, then fell 8.8% to $6,637 in 2003, the report said.
Hunter said brokers reported premium increases of 9.4% in the second quarter of 2004, compared with the same quarter of 2003, indicating the "hard market" in the industry may be ending.
"It's the first time it's been under 10% since the first quarter of 2001," said Hunter, whose work was published by the not-for-profit Americans for Insurance Reform, itself a coalition of a consumer groups that is affiliated with the New York-based Center for Justice and Democracy. "I expect, if not this quarter, then in another quarter or two, med mal will be down to the rate of inflation or less."
Hunter, who served as chief actuary of the Federal Insurance Administration under former President Ford, became administrator of the FIA in 1974 and continued in that post under former President Carter. He also served as Texas insurance commissioner in 1993 and 1994.
Hunter said he first looked into gyrations in the medical malpractice insurance market at the behest of Ford in the mid-1970s, when premiums were spiking. The increases prompted state and specialty medical societies to found a host of physician-owned malpractice insurance companies. More than 30 of these "bedpan mutuals" exist today, according to a Modern Physician survey of the industry (July, p. 20).
At the time of his first study, insurance companies did not split medical malpractice data from that of other product lines, Hunter said, so it was hard to get a definitive look at the cause.
"Sampling, I told the White House I didn't think there was an explosion of claims; it (looked) like some kind of economic activity of the insurance industry due to declining interest rates," he said. Hunter said he recommended that the government not intervene, and it didn't. But Hunter said the government asked med mal carriers to begin reporting separately data for medical malpractice premiums written and paid out, and they did.
So, when the second med mal premium explosion occurred in the mid-1980s, he looked at the problem with the advantage of having more industry data. By then, Hunter had become president of the National Insurance Consumer Organization.
"We saw there was no jump in claims," he said. "There was a slight rise in claims, about 1% over inflation, but it was the same sort of pattern."
Hunter said he learned that a pattern of "hard market" and "soft market" conditions exists that is cyclical and dependent on the business cycle, interest rates and industry psychology.
The pattern repeated itself yet again with a hard-market period that began in late 2000 or early 2001 and was accelerated by losses and insecurities from the events of Sept. 11, 2001, Hunter said.
A couple of weeks ago, Hunter said he obtained insurance industry data from industry-rating agency A.M. Best, physician information from the American Medical Association, and inflation data from the Bureau of Labor Statistics to calculate inflation-adjusted numbers for each year between 1975 and 2003.
During periods of economic growth and relatively high interest rates -- which the nation enjoyed in the late 1990s and early 2000s -- the margin between payouts for claims and income from premiums waned in importance to insurers, Hunter said. What mattered more during those soft-market years was the money made on investments on the float, the premium dollars that can be held before being paid out.
In this past soft-market period, Hunter said, med mal carriers competed aggressively for business by cutting premiums, which was fine as long as rates stayed high and the economy remained strong.
"When the interest rates are high, insurance companies just love medical malpractice," he said. "It has what's called a long tail line." That means the time between when a claim is filed and actually paid out is very long, between five and 10 years for medical malpractice cases, compared with only 15 months for auto insurance claims.
During that time, insurers invest and ride on investment income off the float.
In a soft market in medical malpractice insurance, "you could pay out $1.50 on every premium dollar because of the float," Hunter said.
Still, the industry does make provision for the eventual payouts by piling up reserves.
Insurers set aside reserves for several purposes, Hunter said. Most pointedly for medical malpractice, he said, are case reserves and reserves for claims incurred but not reported.
Case reserves are retained to cover the estimated costs of claims already known to be pending against a physician, and actuaries have a good record of predicting payouts for these cases, Hunter said.
Variability and market psychology are more problematic with incurred but not reported reserves, he said. "That's saying we know there are some people out there, but we haven't heard about it yet."
The latter form of reserves involve "a lot of guesswork, and that's where the big swings can occur, whether you get optimistic or pessimistic (about) profitability."
When interest rates fall and yields from investments on the float shrink, the income flowing from the difference between premiums and payouts rebounds in importance, he said.
When insurers hit a hard market, they typically raise premiums as well as the amount set aside for reserves, Hunter said. When booked, the higher allocation for reserves has the added benefit of blunting criticism for raising insurance premiums, Hunter said, because "if they raise rates and reserves, then their books don't look like they're making a lot of money."
In 2001, industry executives spooked themselves when they looked around and saw a $2 billion jump in reserves, Hunter said.
"Then they (became) incredibly pessimistic, and then their whole attitude seemed to get depressed," he said.
The good thing about market psychology, however, is that it changes, and with rising interest rates, the mood of the insurance industry seems to be brightening, Hunter said.
"I suspect that by this time next year, rates (of premium increases) will go flat, and I expect they will be flat for a number of years. You'll expect to see competition come back as we get to the end of a hard market.
"The other lines (of insurance coverage) are coming back already. They are just sort of at the end of it with med mal."
Hunter, who said he recently had back surgery, does not dismiss the problems physicians, particularly high-risk specialists, are having with soaring premiums.
"I feel sorry for OB/GYNs because they're squeezed," Hunter said, noting that reimbursement rates for them, in particular, are not keeping pace with inflation. "I think it's tragic. But I blame the insurers, because they have these periods of skyrocketing increases that they don't plan for."
Consumer groups are by nature suspicious of tort reforms, Hunter said, but something must be done to smooth out the spikes in premiums, particularly in specialties where the risk is concentrated. But the needed dialogue probably will have to wait until the market softens.
"I think reasonable people could sit down and negotiate where everybody wins," he said. "You can't do it during a hard market, because everybody is in their trenches then."