Medical liability premiums flat as California battles over caps

A TV political ad opposing Proposition 46 in California opens with black silhouettes of plaintiff lawyers shaking hands. In a later frame, a worried older woman opens a medical bill. A doctor in an empty hallway shakes his head.

Opponents of Proposition 46, who backed the ad, say it accurately portrays what will happen if Californians vote Tuesday in favor of the ballot initiative supported by plaintiff lawyers and patient advocacy groups. Among other things, the measure would raise the cap on non-economic damages in medical malpractice suits from $250,000 to $1.1 million and index the cap to inflation.

They argue that raising that cap—which hasn't been increased since it was approved in 1975—would cause doctors' medical liability insurance premiums to rise. Those costs, they say, would then be passed on to consumers.

“With millions of new patients entering the healthcare delivery system, there isn't a worse possible time to increase healthcare costs and decrease access to care,” said Molly Weedn, a spokeswoman for the California Medical Association, which opposes Proposition 46.

Physician, insurance and business groups have long argued that soaring medical liability costs have substantially driven up U.S. healthcare costs. They are worried about the symbolism of raising the cap in California, the first state to establish limits on damages and the model for many other states. Congressional Republicans also continue to call for malpractice damage caps as a key part of their healthcare reform proposals.

What Proposition 46 opponents don't mention is that medical liability premiums have been flat or declining since 2006, even in states that have not imposed caps on damages, according to liability experts, including insurance company representatives. According to the 2014 Medical Liability Monitor's annual rate survey, rates for three common specialties across the country declined from 2013 to 2014. That's been the trend since 2006, according to the survey, which is widely considered authoritative.

On average, rates in 2014 declined by 1.6% for nonsurgical internal medicine physicians, 1.3% for general surgeons and 1.7% for OB-GYNs. The only region of the country where these types of doctors faced an increase was the Northeast—and rates there rose by just 0.1%. In the West, rates dropped by an average of 4.1%. California was one of many states where rates did not change between 2013 and 2014. The rate trend for these three physician specialties is consistent with the trend for other specialties.

Experts attribute the overall flat-to-declining trend to a number of factors, including competition in the liability insurance market, fewer claims and hospitals hiring more physicians.

Michael Matray, editor of the Medical Liability Monitor, said the trend is partly due to lower numbers of malpractice claims, and partly to the success liability insurers have had in defending against claims. They have been aided by state tort reform laws and juror attitudes, making it tougher for plaintiffs to win cases. He noted that 70% to 80% of malpractice cases that make it to trial are decided in favor of the defense.

Michelle Mello, a Stanford University law professor who has studied tort reform, said the rate trend is part of a broader historical cycle. For a number of reasons, including competition between insurers, investment returns and pricing errors, liability insurance markets go through alternating periods of low prices and high supply, and high prices and tight supply.

Howard Friedman, president of liability insurer ProAssurance Corp.'s Healthcare Professional Liability Group, said lower rates are partly the result of less demand for liability policies from independent physicians at a time when more doctors are going to work for hospitals. Many hospitals are either self-insured or buy high-deductible policies covering their employed doctors that cost less than policies purchased by independent doctors.

Brian Atchinson, CEO of the Physician Insurers Association of America, which represents medical liability insurers, attributed the falling rates to competitive forces and strong operating results among carriers. He warned, however, that, “This is a very volatile line of insurance and rates could take an upward turn at any time.”

There's no denying that tort reform also has something to do with the steady rates, experts say. “Yes, caps do work,” Matray said. But there are other factors at play. He noted, for instance, that Minnesota has the lowest liability insurance premiums of any state in the nation but it imposes no caps on damages in medical liability cases.

Caps on non-economic damages—the main type of damages in many cases, such as those involving children and retirees where there is no lost income—deter plaintiff attorneys from taking on malpractice suits, said David Hyman, a professor of law and medicine at the University of Illinois. Such suits are famously time-consuming and expensive to prepare.

Nationwide, 31 states either have caps on non-economic or total damages, Hyman said. Over the years, many of these laws have been challenged in court, with varying success. Earlier this year, the Florida Supreme Court struck down that state's $1 million cap on non-economic damages as unconstitutional. In 2012, the Missouri Supreme Court similarly threw out the cap.

Mello said that while caps likely have some impact on liability premiums, the effect is relatively small. States with caps have seen premiums grow, on average, 6% to 13% more slowly than states without caps.

But opponents of Proposition 46 argue that the impact of raising the cap to $1.1 million would be dramatic. “Quadrupling the cap on non-economic damages will incentivize more lawsuits and result in significantly higher awards for speculative non-economic damages, thereby increasing malpractice costs and resulting in higher malpractice insurance premiums,” the California Medical Association's Weedn said.

Atchinson said states that have enacted caps have seen their premium rates grow “dramatically less” than in states without caps. He pointed to California as proof. In California, rates for internists, for example, ranged from $4,168 to $15,379, while rates in states such as Illinois and Michigan sometimes exceeded $30,000, according to the Monitor. Illinois has no cap, while Michigan has capped non-economic damages in malpractice cases at between $280,000 and $500,000 indexed to inflation.

Estimates vary on how much costs related to medical liability contribute to overall healthcare spending. Medical liability lawsuits cost the healthcare system about $56 billion in direct and defensive medicine costs each year, amounting to about 2.4% of overall healthcare spending, according to a 2010 Health Affairs article by Mello and her colleagues. Defensive medicine is defined as doctors ordering services mainly to protect against potential lawsuits. The Congressional Budget Office estimated in 2009 that a package of federal tort law changes including caps on non-economic and punitive damages would reduce U.S. healthcare spending by about 0.5%.

But a 2008 study in the journal Health Services Research found no evidence that state-level caps on non-economic damages have had any significant impact on the cost of employer-sponsored health insurance. On the other hand, medical negligence itself costs the country significantly in lives and money. The Society of Actuaries estimated that 1.5 million injuries in 2008 were associated with medical errors and that those errors cost the U.S. economy $19.5 billion.

A report issued in July by the California Legislative Analyst's Office, the state Legislature's nonpartisan fiscal and policy adviser, estimated that raising the cap on non-economic damages in California would increase healthcare spending by potentially boosting claims volume and damage payouts and increasing the amount of defensive medicine. It estimated that the direct costs of raising the caps—higher damages and possibly more claims—likely would increase total healthcare spending in California by 0.1% to 0.5%.

Hyman said his own research has shown no evidence of significant savings from reduced defensive medicine in Texas since that state adopted caps in 2003. In addition, an Oct. 16 article by RAND Corp. researchers in the New England Journal of Medicine found that in three states that significantly tightened the standard for suing emergency physicians between 2003 and 2005, there was no reduction in the rates of CT scans, MRIs or hospital admissions through 2011 in any of those states, and no reduction in charges in two of the states.

“Claims that tort reforms can save hundreds of millions of dollars by reducing doctors' fears of liability are wild exaggerations,” said Charles Silver, a law professor at the University of Texas who has studied tort reform with Hyman.

Overall, Mello said, capping non-economic damages has limited value in reducing healthcare costs. “If your goal is to save individual healthcare consumers money on their health insurance,” she said, caps “would be like my 10th choice.”