Medical Malpractice Update

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Medical Malpractice Update Prepared
For CAS Annual Meeting 2003 New
Orleans Prepared By Carl X. Ashenbrenner,
FCAS, MAAA Milliman USA Sarah Dore,
CPCU Independent Consultant Kathy
Pinkham Healthcare First A Division of
Arthur J. Gallagher Co. Kansas
City November 10, 2003
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Overview of Presentation

• Profile of the National Medical Malpractice
  Market
• Current State of the Medical Malpractice Market
• What the future holds Solutions and Forecasts
• Closing Thoughts Questions
• Attachments

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Topic 1Profile of the National Medical
Malpractice Market
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Property/Casualty Direct Premiums Written by Line
- 2002(Amounts in 000s)
34.72
35.34
10.60
10.49
6.66
2.20
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National Medical Malpractice Market
Growth in Direct Written Premium
Estimated per A.M. Best using net written premium
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National Medical Malpractice Market in 2002

• With withdrawal from the market of the largest
  writer, the expectation was that the market share
  of the specialty writers (the so called bed
  pan mutuals) would increase as this business was
  absorbed
• As the next slide illustrates, the growth in
  market share was driven by the multi line
  commercial writers rather than the specialty
  writers

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National Medical Malpractice Market
Commercial Carriers vs. Specialty Writers in 2001
and 2002
2001
2002
Multi-Line
Commercial
Multi-Line
Non-Publicly
Writers
Non-Publicly
Commercial
Traded
35
Traded
Writers
Specialty
Specialty
42
Writers
Writers
44
45
Publicly Traded
Publicly Traded
Specialty
Specialty
Writers
Writers
20
14
Based on Distribution of Top 20 Writers
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Profitability of the National Medical Malpractice
Market

• Underwriting Results
• Investment Results
• Overall Profitability

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National Medical Malpractice Market Historical
Combined Ratio
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National Medical Malpractice MarketInvestment
Gain Ratio
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National Medical Malpractice MarketPre-Tax
Operating Margin
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Myth or Reality?

• There is a public perception that malpractice
  premiums are increasing to cover the losses that
  insurance carriers have suffered in the stock
  market
• The reality is, that while investment returns are
  down, this is driven by a decline in interest
  rates, and not the stock market
• The overwhelming majority of invested assets for
  the specialty carriers are in fixed income
  securities

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Insolvency Conclusion

• Most companies that went insolvent were domiciled
  in crisis states
• Most of these states have prior approval rate
  filing
• Many of the larger companies that went insolvent
  expanded rapidly into new markets/territories/stat
  es before insolvency

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Topic 2 Current State of the Medical
Malpractice Market
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National Medical Malpractice Market Top 20 Writers
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National Medical Malpractice MarketTop 10 States
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National Medical Malpractice Rankings of
Premium by State
Direct Written Premium
Top Ten
Second Ten
Third Ten
Fourth Ten
Remainder of States
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The AMAs Crisis States

• In June of 2002, the American Medical Association
  released the results of a survey of its members,
  intended to evaluate the impact of the
  Professional Liability market on Access to
  Healthcare
• The survey focused on whether the Professional
  Liability market was causing physicians to
• Leave their current state of practice
• Retire early or
• Abandon high risk services
• Based on the survey results, the AMA classified
• 12 states as in crisis
• 30 states (plus D.C.) as showing problem signs
• 8 states currently ok

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The AMAs Crisis States

• In March of 2003 the AMA updated its survey
  results
• 18 states in crisis
• 26 states (plus D.C.) showing problem signs
• 6 states currently ok
• In July of 2003 the AMA again updated its survey
  results
• 19 states in crisis
• 25 states (including D.C.) showing problem signs
• 6 states not experiencing problems
• Note In August of 2003, one of these six states
  (Indiana) indicated a 72.6 increase would be
  implemented in fees for its patients compensation
  fund

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State of the Med Mal Industryas of July 2003
19 25 6
States in crisis
States showing problem signs
States showing no problem signs
Source American Medical Association
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AMA States Identified as not Experiencing
Problems - Existence of Patients Compensation
Fund and/or Cap on Damages
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Big NewsinSmall Town
MUST SELL TO PAY MALPRACTICE INSURANCE
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Crisis is Real

• Affordability Issue
• Doctors closing practices
• Doctors Dilemma
• Insurers cannot make a profit and doctors cannot
  afford the coverage. Rate increases are not the
  answer. The industry has to find a new way to
  manage the risk.
• Extreme Measures
• RRGs, New Companies, Off-Shore Insurers

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Medicare vs. Malpractice Rates

• Two major problems in current market
• Affordability
• Availability
• To address affordability, we compared Medicare
  reimbursement rates to medical malpractice rates
  for different states and specialties

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Medicare Reimbursement Rates

• Overview of Rating Process
• Three cost factors for each procedure
• Work
• Expense
• Malpractice
• Relativities by state/territory for each of the
  three factors

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Medicare vs. Malpractice Rates
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Medicare vs. Malpractice Rates
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Medicare vs. Malpractice Rates
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Conclusions and Observations

• Medicare reimbursement rates declined for higher
  risk specialties (Surgery and OB/GYN) while
  Medical Malpractice rates increased substantially
• Reimbursements not keeping up with medical
  malpractice rates
• Medicare reimbursements slow to changes

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Conclusions and Observations.(Continued)

• Higher severity specialties getting less
  reimbursement
• Will need to see more patients
• Use extenders more often
• May lead to increased claims and severity

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Topic 3What the Future Holds Solutions and
Forecasts
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Historical Problems

• 1970s - Multi-line companies withdrew from the
  market availability problem
• Solution - Physician owned insurers were formed
• 1980s Rates increased substantially after
  prolonged soft market (affordability)
• Solution Form changed from Occurrence to
  Claims-Made coverage

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Current Problems

• Companies withdrawing availability
• Substantial rate increases affordability
• Capacity Constraints
• Claim Severity increasing
• Healthcare process physicians must see more
  patients or use extenders
• Nursing shortage

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Current Solutions

• Physicians
• Policy changes lower limits, deductibles
• Captives forming
• Physicians going bare
• Hospitals providing coverage
• Leaving states / changing practices

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Current Solutions

• Insurers
• Re-Underwriting Book
• Retrenching back to core business
• States/Specialties/Territory Restrictions
• New business moratoriums
• Using broad-brushed underwriting approach

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Prognosis and Proposals

• Governmental
• Alliance for Healthcare Reform
• Administrative compensation system
• Reasonable compensation for avoidable injuries
• Reliable Medical Justice Act Immunity from
  lawsuits with early offer of compensation for
  injury
• Allow no-fault on certain specialties OB,
  Trauma, Emergency

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Prognosis and Proposals

• Governmental (continued)
• States establish an administrative board to
  evaluate compensation
• Establish special Health Care Courts with binding
  rules on causation, compensation, standards of
  care and related issues.
• Current AMA agenda for capping pain and suffering
  awards
• State Compensation Funds

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Prognosis and Proposals

• Physician
• Train physicians and other medical staff to treat
  patients better
• Set patient expectations properly
• Reinforce expectations frequently
• Spend more quality time with patients accept
  reduction in patients seen per day, in order to
  reduce claims and insurance costs
• Gather patient feedback, have it evaluated
  independently
• Obtain real informed consent

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Prognosis and Proposals

• Insurer
• Reduce the number of claims stop paying off
  illegitimate claims to make them go away
• Ask physicians to retain some risk through
  deductibles
• Work only with physicians who will follow best
  practices and who will insist that patients
  recognize their role in maintaining their own
  health and in keeping malpractice insurance costs
  manageable
• Change form to recognize arbitration agreements

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Prognosis and Proposals

• Underwriting
• Use more efficient ways of evaluating risk
• Number of patients
• Number of high-risk patients
• Quality of care measurements
• Adherence to standards of care, as set by
  specialty colleges
• Identify types of procedures that generate claims
• Evaluate error-management programs in hospitals
  and practices
• Evaluate patient advocacy programs

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Prognosis and Proposals

• Underwriting
• Develop more coverage options
• Defense costs inside policy limits (46 of claims
  cost is litigation)
• Examination of alternative dispute resolution and
  ombudsman mediator program
• Tail limits as extension of last limits

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Prognosis and Proposals

• Actuary
• More detailed review of losses to drill down to
  causation, rather than classifying and penalizing
  areas of practice
• Recommend evaluative measures of these causes for
  the underwriter
• Study the practices of low-risk doctors and
  develop rating factors based on those factors
• Identify common factors among high-risk patients
  i.e., help physicians select patients who wont
  sue them

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Prognosis and Proposals

• Actuary (continued )
• Create a measuring tool to evaluate the risk
  profile of physicians
• Identify the risk characteristics of physicians
  who have been sued
• Build a national database that provides a risk
  profile
• Use the risk profile to load individual
  physicians rates
• Encourage high-risk physicians to leave the
  patient care area of medicine
• Establish price tags for behavior modification
  tools

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Topic 4Closing Thoughts Questions
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Thank You!

• Carl X. Ashenbrenner, FCAS, MAAA
• Milliman USA
• carl.ashenbrenner_at_milliman.com
• [phone]
• Sarah Dore, CPCU
• Independent Consultant
• SKIDOOR_at_aol.com
• [phone]
• Kathy Pinkham
• Healthcare First
• A Division of Arthur J. Gallagher Co. Kansas
  City
• kathy_pinkham_at_ajg.com
• [phone]

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ATTACHMENTS
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Medicare Reimbursement Rates
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Frequency By Specialty