Finance 431 Medical Malpractice Insurance: A System in Crisis

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Finance 431Medical Malpractice InsuranceA
System in Crisis
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Medical Malpractice Insurance CrisisRound Three

• Current developments
• Rounds one and two
• Tort reform proposals
• Impact of interest rates on cost of insurance
• Why round three is occurring now
• Who are the major players in Illinois on this
  issue?
• What are their positions?

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Current Developments

• Rapidly rising premiums for medical care
  providers
• Inability to pass along the costs
• Restricted market for coverage
• President Bushs State of the Union address
  called for tort reform for medical liability
  Jan. 2003
• Doctor strikes around the country
• Indications that crisis conditions exist in many
  states

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Round OneMid 1970s

• Availability crisis
• Commercial insurers withdrew from market
• Solutions
• State level tort reform
• Medical provider owned insurance companies, known
  as bedpan mutuals
• Claims made policies introduced

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Round TwoMid 1980s

• Affordability crisis
• Causes
• State courts overturned tort reforms
• Resurgence of claim costs
• Adverse loss reserve development
• Interest rate declines
• Reinsurance market failures

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Round TwoSolutions

• More state tort reform
• Leveling of claim costs
• Stabilization of interest rates
• Recovery of reinsurance markets

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Tort Reform Specifics

• Modification in statute of limitations
• Elimination of ad damnum clause
• Pretrial screening panels
• Contingency fee limitations
• Modify collateral source rule
• Caps on liability awards
• Require periodic payments of damages
• Require itemization of awards
• Eliminate special damage needs in countersuits
• Eliminate punitive damages
• Apply expert witness standards
• Require affidavit in support of claim

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Impact of Interest Rates

• Medical malpractice claims are paid out over more
  than twenty years
• Assume average claim is paid 6 years after policy
  year
• At 7 interest rate, present value of 1 million
  in losses is 666,342
• At 3 interest rate, the present value is
  837,484
• Decline in interest rates from 7 to 3 increases
  the present value of losses by 26
• Conversely, if interest rates increase from 3 to
  7, then the present value of losses declines by
  20

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Why Round Three is Occurring Now

• Impact of 9/11 on insurers
• Reduced capital led to a tightened insurance
  market
• Insurers are leaving less profitable markets
• Companies leaving medical malpractice market
• St. Paul stopped writing medical malpractice
• Previously was the largest writer with 20 of the
  market
• Other medical malpractice insurers in financial
  distress
• Remaining companies restricting new business
• Interest rates have declined again

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Physicians and Surgeons Medical Liability
Insurance

• How bad is the problem?

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Who are the Major Players in Illinois?

• Health care providers
• Doctors
• Hospitals
• Nursing Homes
• Plaintiffs Attorneys
• Consumer Advocates
• Insurance Companies
• Illinois State Medical Inter-Insurance Exchange
  (ISMIE)
• Illinois Providers Trust (insures hospitals)
• American Insurance Association
• Regulators
• Legislators

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What are their Positions?

• Health care providers want lower premiums
• State tort reform has been unsuccessful
• Caps on damages declared unconstitutional 3 times
  in Illinois
• Federal tort reform
• Caps on non economic damages
• Proportionate liability
• Three year statute of limitations
• Limitations on legal fees
• Plaintiffs attorneys oppose tort reforms
• Argue caps would hurt seriously injured
  plaintiffs
• Seek to eliminate confidential investigations of
  medical errors

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What are their Positions? (2)

• Consumer advocates want
• To reduce medical errors
• Investigate problem doctors
• Take away licenses of incompetent doctors
• To prevent insurers from gouging policyholders
• Regulate insurance company rates
• Restrict insurers from leaving state
• Insurance companies want predictable losses
• Reduce level of uncertainty in lawsuits
• Continue to allow rate freedom

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What are their Positions? (3)

• Regulators want to focus on key responsibilities
• Solvency
• Market conduct
• Competition
• Legislators want to solve the problem
• Difficult issue to deal with
• Competing interests
• No easy solution

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Caps on Noneconomic Damages

• Many states have caps on noneconomic damages
• 5 states in the 1970s (CA, IN, LA, MN, VA)
• 15 states in 1986-87
• Recent developments
• Ohio and Texas adopted in 2003
• Viscusi and Born study
• Caps reduce losses by 16-17
• Caps were passed in Illinois during 2005
• 250,000 for physicians, 500,000 for hospitals
• Are caps constitutional?
• Illinois experience no
• Workers Compensation comparison

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Conclusion

• Medical malpractice crisis will affect the public
• Reduced access to non routine care
• Specialists in rural areas
• High risk treatments
• Higher cost of medical care
• Legislation is likely
• Federal level
• State level
• Caps are currently in effect
• Legislation may be overturned in court
• Debate over medical malpractice is a precursor to
  liability reform in general