[Senate Hearing 108-144]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 108-144
 
 ADDRESSING THE NEW HEALTH CARE CRISIS: REFORMING THE MEDICAL LITIGATION 
               SYSTEM TO IMPROVE THE QUALITY OF HEALTH CARE

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                     MARCH 13, 2003--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                                 ______

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                            WASHINGTON : 2003
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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                    James W. Morhard, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terrence E. Sauvain, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
JUDD GREGG, New Hampshire            ERNEST F. HOLLINGS, South Carolina
LARRY CRAIG, Idaho                   DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          HARRY REID, Nevada
TED STEVENS, Alaska                  HERB KOHL, Wisconsin
MIKE DeWINE, Ohio                    PATTY MURRAY, Washington
RICHARD C. SHELBY, Alabama           MARY L. LANDRIEU, Louisiana
                           Professional Staff
                            Bettilou Taylor
                              Jim Sourwine
                              Mark Laisch
                         Sudip Shrikant Parikh
                             Candice Rogers
                        Ellen Murray (Minority)
                         Erik Fatemi (Minority)
                      Adrienne Hallett (Minority)

                         Administrative Support
                             Carole Geagley




                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Arlen Specter.......................     1
Statement of Claude A. Allen, Deputy Secretary, Department of 
  Health and Human Services......................................     3
    Prepared statement...........................................     5
Statement of Peter McCombs, M.D., Chair, Department of Surgery, 
  Pennsylvania Hospital..........................................    22
    Prepared statement...........................................    25
Statement of Donald M. Berwick, M.D., M.P.P., president and CEO, 
  Institute for Healthcare Improvement; member, Quality of Health 
  Care in America Committee, Institute of Medicine, National 
  Academy of Sciences............................................    28
    Prepared statement...........................................    31
Statement of Jay Angoff, counsel, Roger C. Brown & Associates....    33
    Prepared statement...........................................    34
Statement of James D. Hurley, Chair, Medical Malpractice 
  Subcommittee, American Academy of Actuaries....................    42
    Prepared statement...........................................    44
Statement of Brian Holmes, M.D...................................    50
    Prepared statement...........................................    52
Statement of Linda McDougal, Woodville, WI.......................    54
    Prepared statement...........................................    56
Statement of Leanne Dyess, Vicksburg, MS.........................    57
    Prepared statement...........................................    59
Prepared statement of Senator Thad Cochran.......................    67
Letter from the American Bar Association.........................    67
Prepared statement of the Alliance of Specialty Medicine.........    69
Letter from the American College of Legal Medicine...............    76


ADDRESSING THE NEW HEALTH CARE CRISIS: REFORMING THE MEDICAL LITIGATION 
              SYSTEM TO IMPROVE THE QUALITY OF HEALTH CARE

                              ----------                              


                        THURSDAY, MARCH 13, 2003

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:34 a.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
presiding.
    Present: Senator Specter.


               opening statement of senator arlen specter


    Senator Specter. Good morning, ladies and gentlemen, the 
Appropriations Subcommittee on Labor, Health and Human 
Services, and Education will now proceed with this hearing to 
consider issues on medical legal liability.
    There are problems in many States, including my home State 
of Pennsylvania. My travels around the State in covering 
Pennsylvania's 67 counties have led me to situations where 
there are areas where obstetricians are unavailable, requiring 
women to travel long distances. I talked to one orthopedic 
surgeon who told me that he was the last specialist in town, 
and raised the issue as to what would happen if he broke his 
leg, and there are problems in other States. Some States do not 
have the intensity of the problems which the State of 
Pennsylvania and some other States do.
    There are a variety of factors which are cited, depending 
on the source, as the cause or causes of the issue. One is the 
litigation system, a second is the rising cost for delivery of 
health care and declining income, a third factor is cited as 
errors by the deliverers of health care, and a fourth factor is 
cited as the insurance company investments, or insurance 
company management.
    With respect to the litigation issue, there is no doubt 
that there is a significant problem caused by so-called 
frivolous lawsuits. Last month, there was a joint hearing held 
by the Judiciary Committee and the Committee on Health, 
Employment, Labor, and Pensions, and that February 11 hearing 
had a good bit of important testimony, one aspect of which was 
the citation that while 70 percent of the claims are dismissed 
or lost, that the litigation costs were an enormous factor in 
driving up health care costs.
    There have been a number of ideas advanced on that issue. 
One is to require a statement by a certified doctor in advance 
or near the start of a lawsuit specifying that there is a valid 
claim. Another remedy has been cited as sanctions to be imposed 
by the court for frivolous lawsuits. Federal courts have 
substantial authority under Federal Rule 11 to impose such 
sanctions.
    There has been concern expressed about medical caps and a 
counterconcern about limitation of the traditional role of the 
jury, especially where there are what Senator Hatch described 
in a quotation on the front page of the New York Times on 
February 26. He said that any legislation to cap malpractice 
awards would have to have an exception for egregious cases, 
close quote.
    Concern has been expressed as to what egregious means, and 
there would have to be a definition which is based upon some 
experience, and there are some State statutes which deal with 
this problem generally. Pennsylvania has two statutes, 42 P.A. 
section 8553(c), in the limited tort context, and 75 P.A. 
1705(d), which deals with suits against governmental agencies. 
Michigan has a statute which provides a definition for a 
category of cases which Senator Hatch and others have referred 
to as: ``a category of death, serious impairment of bodily 
function, or permanent serious disfigurement.''
    The rising costs of medical practice and declining 
physician income have been a factor. Doctors have complained 
that Medicare was about to put a 4.4 percent cut effective 
March 1, and in light of some other reductions from the 
Balanced Budget Act of 1997 there was a real problem there, and 
in the omnibus bill which was signed into law last month, 
Senator Stevens, Senator Cochran and I and others took the lead 
in freezing that cut.
    Doctors have also complained that Medicare has not kept up 
in the allocation of costs of malpractice insurance. They are 
several years behind, and malpractice rates have gone up very 
considerably in the immediate past. We had the Administrator of 
CMS, the Centers for Medicare and Medicaid Services in a 
hearing here not too long ago. Mr. Scully said he had no 
intention of making a modification, and the omnibus bill 
directed Mr. Scully and CMS to make that modification. When he 
was in here the day before yesterday for a hearing on outlier 
payments he said they would be making that change, so we have 
moved in a couple of directions to give relief to physicians on 
that crunch between declining income and rising expenses.
    The issue of the insurance investments is one which we will 
take up. The New York Times ran an extensive article several 
weeks ago about the inability of homeowners to get insurance in 
Texas because there have been so many hurricanes, the insurance 
companies have pegged their premiums low, and the investments 
had gone down, so that there is an issue as to what extent 
those factors on insurance premiums are in play.
    Doctors' errors are another factor. This subcommittee has 
done extensive work in this area, following a report by the 
Institute of Medicine attributing almost 100,000 deaths a year 
to those medical errors, and in fiscal year 2001, we started 
off with a $50 million appropriation, and it has increased each 
year, and this year the budget request is for $84 million to 
find ways to reduce medical errors and trying to limit the 
scope of lawsuits which are filed against doctors.
    This specific hearing was prompted by a report which just 
came out on March 3 from the Department of Health and Human 
Services entitled, Addressing the New Health Care Crisis, 
Reforming the Medical Litigation System to Improve the Quality 
of Health Care.
STATEMENT OF CLAUDE A. ALLEN, DEPUTY SECRETARY, 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES
    Senator Specter. Our first witness is the Deputy Secretary 
for the Department of Health and Human Services, who also 
serves as the Department's chief operating officer, Mr. Claude 
A. Allen, who holds a jurisdoctorate and master of laws from 
Duke University Law School, did his undergraduate education at 
the University of North Carolina at Chapel Hill. Welcome, Mr. 
Allen. The floor is yours, and we look forward to your 
testimony.
    Mr. Allen. Thank you, Mr. Chairman. It is a privilege to be 
here with you today. We appreciate your inviting the Department 
to appear before the committee today to strongly support 
legislation that will increase access to quality health care 
for Americans by fixing what we see as a broken medical 
litigation system.
    We are facing a threat to health care today, trapped in a 
medical litigation system that does more to reward trial 
lawyers than to help injured patients. The administration 
believes strongly that medical professionals, not lawyers, are 
the key to providing quality health care, and our reform 
package demonstrates this belief.
    When we talk about the medical litigation crisis today, 
however, we should not focus on doctors or hospitals, or 
insurance companies, or even lawyers. We need to be focused on 
patients and what is best for them in terms of their care, and 
that is why the President and Secretary Thompson are calling 
upon the Senate to enact legislation this session that will 
reform the medical litigation system and improve patient 
quality of care.
    The President likes to illustrate how destructive our 
current system is by talking about a fellow named Kurt Kooyer 
in Mississippi. Dr. Kooyer went to Rolling Fork, Mississippi to 
serve as a pediatrician. Unfortunately, because of frivolous 
lawsuits and his rising liability insurance premiums, Dr. 
Kooyer left Mississippi, which means there will no longer be a 
pediatrician in that county.
    Dr. Kooyer's story is not unique. Mr. Chairman, you have 
already pointed out some cases in Pennsylvania, even, and it is 
being repeated all too frequently across the country. Three OB-
GYNs who staffed a practice responsible for delivering half of 
the babies in Fayette County, Pennsylvania, stopped delivering 
babies to reduce their malpractice premium expense. Without the 
OB services, their premiums went down from $400,000 to under 
$100,000 a year.
    Pregnant women in States like Nevada, Mississippi, 
Pennsylvania, West Virginia, and Florida now have to drive 
hours to find an obstetrician who can care for them. Several 
States like Vermont, Mississippi, Nevada, and Massachusetts 
have witnessed an exodus of obstetricians who simply cannot 
afford to practice in those States any longer.
    Trauma centers in several States have had to close because 
insurance carriers were not willing to offer malpractice 
liability insurance to their doctors, or surgeons could no 
longer afford malpractice insurance. Some doctors' premiums 
have increased from $37,000 to $150,000 in 1 year, such as an 
OB-GYN in Nevada who had to move her practice from that State 
to California.
    Six of the largest nursing home companies have filed for 
bankruptcy in the past 2 years, largely because of the 
uncontrollable costs of medical liability premiums and tort-
related expenses. One-third of hospitals saw an increase of 100 
percent or more in liability premiums in 2002, and over one-
fourth of all hospitals have reported either curtailment or 
complete discontinuation of services as a result of growing 
liability premium expenses.
    Physicians are reacting to the threat of litigation by 
avoiding the specialties that present the greatest risk of a 
lawsuit, such as general surgery and obstetrics. A recent 
survey of physicians revealed that one-third shied away from 
going into a particular specialty because they fear the 
liability exposure.
    This litigation system attacks the wallets of every 
American, and we have calculated, the Department, that each 
American household is taxed over $1,200 to pay the costs 
associated in defensive--defending frivolous lawsuits, 
exorbitant jury awards, and the costs associated with defensive 
medicine.
    The saddest part is that our medical liability system does 
not serve the interests of the patients it is designed to. Up 
to 70 percent of medical liability claims result in no payments 
to the patient, but it costs an average of over $40,000 to 
defend each claim, and less than 2 percent of the cases result 
in trial victories for plaintiffs.
    A plaintiff who wins a judgment must pay the lawyer 30 or 
40 percent of that judgment, and sometimes even more. 
Successful plaintiffs do not recover anything, on average, 
until 5 years after the injury, and even longer if the case 
goes to trial, and for most injured patients the litigation 
process offers a remote chance of a large judgment or provides 
very real, little benefit.
    The President believes all of those who are truly injured 
by negligent medical care should receive swift, certain 
recovery of their economic injuries. They should be made whole 
financially, but we need reasonable limits on noneconomic 
damages, such as pain and suffering, and reasonable caps on 
noneconomic damages to result in lower health care costs and 
reductions in premium increases and, thus, greater access to 
care.
    Estimates show that if this reform were adopted nationally, 
it would save at least $70 billion a year in health care costs, 
of that amount, over $28 billion in taxpayer money that the 
Federal Government spends through our programs.
    Over the last 2 years, States with reasonable limits of 
$250,000, or $350,000 on noneconomic damages have seen 
increases in premium quotes for specialists, increases in terms 
of their premium quotes increase only 18 percent, but States 
without reasonable limits on economic damages, which represent 
almost half of the entire U.S. population, have seen increases 
of 45 percent, and this is why the President wants to ensure 
that recoveries for noneconomic damages do not exceed a 
reasonable amount.
    The President has also called for reserving punitive 
damages in health care cases that justify them, such as 
instances where there is clear and convincing proof that the 
defendant acted with malicious intent, or failed deliberately 
to avoid unnecessary injury to the patient, and we are 
encouraged that today the full House will vote on needed 
malpractice reforms, and yesterday passed legislation to 
improve patient safety. These reforms will not only bring the 
cost of practicing and providing medical care down, but it will 
also improve the quality of health care and access to health 
care throughout the country.
    Studies have established that one of the best ways to 
improve health care quality is to provide better opportunities 
for health care professionals to work together to identify 
errors, or practices that may lead to errors, and then correct 
them. Doctors, nurses, hospitals, all who participate in good 
faith peer review efforts and research activities should not be 
afraid that their quality efforts would get them caught up in a 
lawsuit.
    As well as increasing quality, our reform package helps 
provide greater access to health care in areas where it is 
needed desperately. Our rural areas pay the greatest price, 
with no health care in their communities, and I have traveled 
throughout some of the poorest counties in America, including 
some with Senator Sessions in Alabama when I first came to the 
Department, and as physicians and health care providers left 
communities, patients were faced with long drives and long 
waits for health care.
    There are many doctors like Dr. Kooyer in Mississippi who 
want to serve people in rural areas like this but cannot afford 
to do so, and we have to make it easier for physicians and 
health care professionals like them to do what they love to do 
for the people who need their care the most.

                           prepared statement

    I want to thank you for the opportunity to represent the 
administration here today, Mr. Chairman, and I look forward to 
working with you in this committee and Members of Congress to 
help fix the medical liability system and improve access to 
care for all Americans. I want to thank you again, members of 
the committee, for your commitment to this issue, and look 
forward to answering any questions you may have.
    [The statement follows:]
               Prepared Statement of Hon. Claude A. Allen
    Thank you very much, Chairman Specter, Senator Harkin, 
distinguished committee members, for calling this very important 
hearing, and for inviting me here to discuss the Bush Administration 
and Department of Health and Human Services' strong support for 
legislation that increases access to care for Americans by fixing the 
broken litigation system.
    Before I begin, let me start out by thanking this committee for its 
leadership and vision on this important issue. Last year, the House 
passed its medical liability reform bill, however the Senate did not 
act. Mr. Chairman, the Administration looks forward to working with 
this Committee and other Senators to move a bill through the Senate 
this year.
    On behalf of our President, I must report that there is today a 
threat to health care quality and access because of our badly broken 
litigation system that does more to reward trial lawyers than to help 
injured patients. This system is impairing access to care for all 
Americans.
    The medical liability crisis is not about doctors or hospitals or 
insurance companies or even lawyers; it is about patients. This crisis 
is threatening quality of care; it is threatening access to care for 
all Americans. Last, week our Department issued a report entitled: 
``Addressing the New Health Care Crisis: Reforming the Medical 
Litigation System to Improve the Quality of Health Care,'' which shows 
how problems associated with medical litigation have worsened 
significantly in this past year. Premiums charged to specialists in 18 
states without reasonable limits on non-economic damages increased by 
39 percent between 2000 and 2001. Premiums in these states have since 
gone up an additional 51 percent. In other words, they have almost 
doubled in two years. The report documents the spiraling cost of 
insurance for health care providers, which is impairing patients' 
access to care, as well as the cost and quality of care.
    In states without reforms, physicians are leaving their practices 
for states with lower premiums, reducing their care for high-risk 
patients, or leaving the practice of medicine altogether. Hospitals and 
nursing homes also are finding it increasingly difficult to obtain 
insurance against lawsuits. As a result, patients in more states are 
facing greater difficulty in obtaining access to quality care and 
physicians.
    Pregnant women in states like Nevada, Mississippi, Pennsylvania, 
West Virginia, and Florida have to drive hours to find an obstetrician 
who can care for them. Several states, like Vermont, Mississippi, 
Nevada, and Massachusetts have experienced an exodus of obstetricians 
from their state.
    Trauma centers in several states have had to close because 
insurance carriers were not willing to offer malpractice liability 
insurance to doctors staffing it, or surgeons who were called in for 
cases could no longer afford to pay their malpractice insurance. Some 
of these doctors' premiums have increased from $40,000 to $200,000.
    In Mississippi, doctors have moved across the river to Louisiana to 
serve the same Mississippi patients because they can no longer afford 
to practice there. Washington State has reported a thirty-one percent 
(31 percent) increase in the number of physicians moving out of state 
since 1998. The Massachusetts Medical Society reported that rising 
premiums in their state have forced many obstetricians to give up 
delivering babies. The Florida Medical Directors Association has 
reported that attending physicians have stopped seeing their patients 
in nursing homes in the last 12 months because of difficulty obtaining 
liability coverage.
    Six of the largest nursing home companies have filed for bankruptcy 
in the past two years, largely because of the uncontrolled costs of 
medical liability premiums and tort related expenses. One-third of the 
nation's hospitals saw an increase of 100 percent or more in liability 
premiums in 2002, and over one-fourth of all hospitals have reported 
either a curtailment or complete discontinuation of some services as a 
result of growing liability premium expenses.
    Physicians also are reacting to the threat of litigation by 
avoiding the specialties that present the greatest risk of a lawsuit. A 
recent survey of physicians revealed that one-third shied away from 
going into a particular specialty because they feared the liability 
exposure. Fear of liability forces physicians to engage in the practice 
of defensive medicine. The practice of defensive medicine, performing 
tests and providing treatments to protect themselves from the risk of 
possible litigation, is astounding. Seventy-nine percent (79 percent) 
of physicians admit that fear of litigation caused them to order more 
tests; Seventy-four percent (74 percent) refer more patients to 
specialists than they otherwise would. Fifty percent (50 percent) have 
recommended what they consider to be not-medically necessary procedures 
to confirm diagnoses because of litigation fears.
    The litigation system attacks the wallets of every American. We 
have calculated that each American household is taxed over $1,200 to 
pay the costs of associated with defending frivolous lawsuits, jackpot 
jury awards, and the costs associated with defensive medicine.
    At the same time, this crisis is being caused by a medical 
liability system that does not serve the interests of patients. Too 
many lawsuits that have no merit are filed against doctors. The 
unpredictability of our liability system encourages plaintiffs' 
attorneys to file frivolous cases, in the hope of receiving a very 
large verdict--a verdict that means a very large payday for the lawyer. 
Mega-million dollar ``jackpot'' jury awards for non-economic damages 
are a very real problem to our health care system. The health care 
system suffers because the awards siphon money out of the system. 
Future settlements are influenced because the ``jackpot'' awards create 
a benchmark for them. Between 1991 and 2001, the maximum payment 
reported to the National Practitioner Data Bank escalated from 
$5,300,000 to $20,700,000. The number of payments of $1 million or more 
reported to the National Practitioner Data Bank exploded in the past 7 
years nationwide, from 298 in 1991 to 806 in 2002.
    This crisis has also not been caused by losses from investment 
income. In fact, investments by medical malpractice companies have been 
conservative. Most states have laws that specifically limit the 
percentage of assets an insurance company can put in stocks. Over the 
last five years, the industry wide allocation of assets into equities 
has been relatively constant. Medical malpractice insurers' investments 
in equities as a percentage of total assets, as shown below, has been 
11 percent or less. Neither asset allocation nor investment income 
correlates to, much less causes, the current medical malpractice 
crisis. Brown Brothers Harriman & Company analyzed the relationship 
between premiums and the change in investment yields among malpractice 
insurers. The results showed that the performance of the economy and 
interest rates do not determine medical malpractice premiums.
    There is another attempt to shift the blame to insurers by 
asserting that they have engaged in anti-competitive practices. The 
National Association of Insurance Commissioners has reviewed this 
assertion and reported that ``insurance regulators have not seen 
evidence that suggests medical malpractice insurers have engaged or are 
engaging in price fixing, bid rigging, or market allocation.'' Rather, 
the NAIC also says, ``the preliminary evidences points to rising loss 
costs and defense costs associated with litigation as the principal 
drivers of medical malpractice [insurance] prices.''
    President Bush outlined a framework for addressing this national 
crisis. First, the President believes all those who are truly injured 
by medical care should receive swift, certain recovery of their full 
economic injuries. But for the sake of affordability and access, we 
need reasonable limits on non-economic damages, such as pain and 
suffering. While we grieve for the individuals who were injured, we 
also recognize that money obtained years later will do little or 
nothing to relieve the pain. The House of Representatives passed these 
reforms last September. We believe that was an important step in the 
right direction--and are encouraged that the Judiciary and Energy and 
Commerce Committees have forwarded H.R. 5 for a full vote in the House. 
I understand that the House is scheduled to vote on this important 
legislation this afternoon. We are committed to working with this 
committee, and other members of the Senate to bring these common sense 
reforms to all Americans.
    Reasonable caps on non-economic damages result in lower medical 
liability costs and lower insurance premiums--increasing doctors', 
hospitals', and nursing homes' ability to stay in business, which leads 
to greater access to care. Everyone wins, except trial lawyers. We have 
estimated that if this reform were adopted nationally, it would save as 
much as $126 billion in health care costs this year. Of that amount, 
over $28 billion is taxpayers' money the Federal Government spends in 
Federal health care programs. The research is compelling that this type 
of reform works. Over the last two years, states with limits of 
$250,000 or $350,000 on non-economic damages have seen increases in 
premium quotes for specialists increase only 18 percent, but states 
without reasonable limits on non-economic damages, in states 
representing almost half of the entire United States population, have 
seen average increases of 45 percent. Since California instituted a 
reasonable cap on non-economic damages and other critical procedural 
reforms 25 years ago, liability premiums have increased by less than 
one-third as much as in the rest of the country.
    The President has also called for reserving punitive damages in 
health care cases where there has been egregious misconduct. And he has 
called for several other key procedural reforms that would ensure that 
defendants pay their fair share--ensuring that cases are brought before 
they become stale and taking steps to make future payments are 
available when patients need them.
    We are also encouraging states to consider other innovative ways to 
deal with the broken medical liability system. The Department of Health 
and Human Services is implementing a demonstration program, an ``Early 
Offer Program,'' for rapid and fair settlement of claims made against 
the Department for claims of negligence by Indian Health Service and 
Health Center patients.
    Our judicial system must also address medical errors. If we truly 
want a healthcare system where quality is valued, we should seek to 
change health care systems to reduce or avoid real medical errors 
before problems become injuries. Seminal studies have established that 
one of the best ways to improve health care quality is to provide 
better opportunities for health professionals to work together to 
identify errors, or practices that may lead to errors, and correct 
them. Many preventable errors and complications arise not from failures 
by individual doctors, but from systemic problems in our increasingly 
complex medical delivery system. In its report, To Err is Human, The 
Institute of Medicine acknowledged, ``the common initial reaction when 
an error occurs is to find and blame someone . . . Preventing errors 
and improving safety for patients require a systems approach in order 
to modify the conditions that contribute to errors. The problem is not 
bad people; the problem is that the system needs to be made safer.''
    Providers need to be able to study how mistakes occur and how to 
prevent them. When they do, the results can be incredible. The doctors 
and hospitals of the Pittsburgh Regional Healthcare Initiative reduced 
blood infections in ICUs by 20 percent through collaborative work to 
identify safer ways to treat ICU patients. Anesthesiologists reduced 
dramatically the patient death rate from anesthesia administered during 
surgery, from two deaths per 10,000 anesthetics in the mid-1980s to 
about one death for every 200,000-300,000 anesthetics administered 
today.
    How did the anesthesiologists do it? First, they acknowledged that 
a problem existed, and they shared information. They standardized 
anesthesia machines to ensure consistency in the delivery of drugs and 
also addressed issues of fatigue and sleep deprivation and changes in 
training. To give one example: an engineering researcher observed a 
number of anesthesiologists in operating rooms. The researcher noted 
that anesthesia machines were not standardized: Turning a dial 
clockwise on one machine decreased the concentration of anesthesia in 
some machines. In others, turning the dial clockwise increased the 
concentration of anesthesia. The research was publicized and 
manufacturers standardized anesthesia machines so that dials turned in 
a uniform direction.
    Unfortunately, our tort system has set up roadblocks that 
discourage health care providers from participating in quality 
improvement efforts. Providers are reluctant to report information 
about adverse events or near misses out of fear that it will be used 
against them in a tort action and are reluctant to collaborate on 
solutions for fear of drawing up a road map for lawsuits.
    Legislation in the last Congress would have given health 
professionals the ability to engage in quality and safety evaluation 
without fear of having the process or information used against them in 
court. The Administration supported these efforts, and has encouraged 
quick action this year. Just yesterday, the House passed H.R. 663, the 
Patient Safety and Quality Improvement Act. I would like to take this 
opportunity to applaud the House's quick action on this important 
issue. We look forward to working with this Committee and members of 
the Senate to secure passage of a similar bill and other proposals to 
help fix the medical liability system and improve access to care for 
all Americans.
    Additionally, today Secretary Thompson is making a major patient 
safety announcement. FDA is proposing a new regulation that would 
require ``bar codes'' on all prescription and some over-the-counter 
drugs. Bar codes are symbols consisting of horizontal lines and spaces 
and are commonly seen on most consumer goods. In retail settings, bar 
codes identify the specific product and allow software to link the 
product to price and other sales- and inventory-related information. 
FDA's bar code rule would use bar codes to address an important public 
health concern--medication errors associated with drug products. FDA's 
regulation proposes to require bar codes on prescription drugs, over-
the-counter drugs packaged for hospital use, and vaccines. The bar code 
would, at a minimum, contain the drug's National Drug Code number, 
which uniquely identifies the drug, its strength, and its dosage form.
    The Institute of Medicine and other expert bodies have concluded 
that medical errors have substantial costs in lives, injuries, and 
wasted health care resources, and that misuse of drugs is a major 
component of those errors. FDA estimates that the bar code rule, once 
implemented, will result in a 50 percent increase in the interception 
of medication errors at the dispensing and administration stages. This 
will result in 413,000 fewer adverse events over the next 20 years. 
Some hospitals that currently have bar code systems in place report a 
substantially higher reduction in errors from bar code usage. This 
initiative is another example of the Administration's commitment to 
doing everything in our power to increase access to health care and 
enhance patient safety, both of which are among the President's and the 
Secretary's top priorities.
    Thank you for giving me the opportunity to represent the 
Administration here today. In closing, let me stress that the 
Administration believes that doctors who practice bad medicine ought to 
be held accountable for their actions. But, a system that puts good 
doctors out of business is a broken system; a system that restricts 
patient access to physicians is a broken system; a system that 
encourages physicians to order excessive tests and procedures that 
places patients at great risk is a broken system. Needless litigation 
does incredible harm to our health care system. Our goal is to improve 
the quality of care, increase access to care, and reduce the costs. The 
litigation system is imperiling this effort. We should rely on doctors, 
not lawyers to improve our health care system. We need to fix this 
broken medical liability system now, and the reforms I just discussed 
are the first step. With good ideas, strong leadership through this 
committee, and much-needed reform, we can truly restore common sense to 
medical liability in America.
    Thank you, Mr. Chairman, and Members of the Committee, for your 
commitment to this issue.

    Senator Specter. Thank you, Mr. Allen. Let me begin with 
the issue of doctors' compensation, which your Department has 
some direct control over. What can HHS do to stop the periodic 
reductions in payments of physicians under Medicare?
    There is a terrible squeeze on the doctors. They were 
supposed to have a 4.4 percent cut on March 1. There was a 
national outcry about the matter, but we did not see the 
Department of HHS doing anything about it, or coming forward 
with any recommendations. It was left to the Appropriations 
Committee to freeze that. What can HHS do to stop these 
reductions in payments to doctors and hospitals which are just 
so debilitating to the medical system?
    Mr. Allen. Senator, first of all, I would suggest that it 
is not just HHS's responsibility. It has to be in concert with 
Congress, and Tom Scully was here the day before yesterday to 
testify, and I think he has been on the Hill numerous times 
working with Members of Congress to consider and try to address 
this issue.
    Senator Specter. But we look to HHS for leadership. The 
executive branch has the expertise. We deal with all of the 
problems that the Government has. We had to reach out to Mr. 
Scully the day before yesterday on outlier costs which HHS 
planned to put into effect without any notice to hospitals, 
drastic curtailment, and it was only through action of this 
subcommittee that they allowed a comment period--a little 
unheard of, not to have a comment period--until April 4, and to 
allow hospitals some opportunity to figure it out.
    Why does that initiative have to come from this 
subcommittee, as opposed to HHS taking that kind of step 
without an opportunity for hospitals to be heard, or without 
any transition period?
    Mr. Allen. Certainly Senator, in terms of a comment period, 
that certainly is something that is within our control, and we 
were remiss if we did not allow for a comment period to occur 
in that situation, but let me make it very clear that we are 
limited by the legislation that Congress enacts, and our hands 
are tied in terms of the formulas that we are allowed to use 
when it comes to addressing physician payments, fee schedules, 
so we have parameters that are set by Congress within which we 
are required to work.
    Senator Specter. I understand that Congress passes the 
laws, but where you have the expertise at HHS it would be 
enormously helpful to the Congress if you would come forward 
and take the initiative and say what ought to be done.
    Now, take the issue of malpractice rates. I have heard all 
over my State about malpractice insurance rates going up. It is 
a big point you were making, and yet HHS was using old 
statistics. The rates have gone up enormously since HHS made an 
allocation to doctors for malpractice insurance, and we issued 
a directive, an order from the Congress, signed by the 
President, that you had to update those statistics. Why doesn't 
HHS take it upon itself to give relief to the doctors by doing 
what the law mandates, and that is to use current statistics 
for calculating malpractice insurance reimbursement?
    Mr. Allen. Senator, that is a great question, and I think 
we are doing a lot to try to address it, and I will give you a 
good example of that. We have come to Congress and we are 
requesting Medicare reform. We know that the Centers for 
Medicare and Medicaid Services is using 40-year-old technology 
to try to address this very issue.
    Senator Specter. You are off the point, Mr. Allen. I do not 
want to talk about the generalizations of Medicare reform. We 
only have a few minutes here.
    Mr. Allen. Sir, you asked me a very specific question. If I 
am permitted to answer it, I will attempt to do so----
    Senator Specter. Please do.
    Mr. Allen [continuing]. But if I am not permitted to do so 
I cannot help you with trying to get to the answer that you are 
seeking.
    Senator Specter. I would like an answer to the question as 
to why HHS did not use up-to-date statistics on calculating 
reimbursement to doctors for malpractice insurance payments.
    Mr. Allen. Senator, we are using the most recent statistics 
that we are able to get, and utilizing the systems that we have 
at Medicare--Medicaid--the Centers for Medicare and Medicaid 
Services. We attempt to do that. It is not something that 
happens overnight.
    Senator Specter. You are not right on the facts, Mr. Allen.
    Mr. Allen. Sir, if you have additional facts that you would 
like me to take into consideration I would be glad to do that, 
but I sit and work with Mr. Scully regularly. We address these 
issues, and try to address them, and we have tried to work with 
Congress to bring reasonable solutions to look at how do we 
resolve issues in terms of payments to physicians but at the 
same time how do we do it consistent with the law that we are 
required to operate within.
    Senator Specter. Well, the narrow question which I am 
pursuing is the one of calculating payments to physicians to 
take into account their costs for malpractice insurance, and 
the facts are that you are 3 years out of date, and Mr. Scully 
testified here at a hearing last month that there was no 
intention by HHS to update those statistics, and then there is 
a specific requirement in the omnibus bill directing HHS to use 
up-to-date statistics, and on Tuesday Mr. Scully said that HHS 
would follow the mandate of the Congress which, of course, HHS 
has to do.
    But my question to you is, why was there a significant 
delay period before this issue was taken up? Why does Congress 
have to tell HHS to use up-to-date statistics?
    Mr. Allen. Because the physician payment schedule, those 
numbers are set in statute. That is not set by the Department. 
We have formulas that we have to follow and we do that to the 
best of our ability.
    In the specific case that you are raising in terms of 
outlier payments--physician payments, I am sorry, we were bound 
by what was required in statute and the interpreting the 
regulation that we were required to follow, and that is not 
something that we can change overnight. That is something that 
we try to exercise the amount of flexibility that we are 
provided in statutes, and that is what the Department 
consistently tries to do.
    Senator Specter. Well, the statute says you compensate the 
physicians in part based on their malpractice insurance rates, 
and that up-to-date statistics be used. Will you go back to 
those statutory provisions and review them? We have gone over 
this with Mr. Scully in detail, and the response that HHS has 
made is not really timely on using the statutory authority 
which you have to compensate the doctors for that very 
important part of their expenses.
    Mr. Allen. Mr. Chairman, I will be glad to go back and look 
at that and work with the Congress to address what we think is 
limiting on our flexibility to do exactly what you are talking 
about us doing.
    Senator Specter. Moving to the subject of physicians' 
errors, when the Institute of Medicine came out with its report 
that almost 100,000--the figure was set at 98,000 deaths due to 
physicians' errors, this subcommittee took the lead in 
providing $50 million on a statute which was promulgated on May 
12 of the year 2000, giving HHS 2 years to come up with 
recommendations to deal with physicians' errors, and as yet we 
have had no response. That provision was contained on a 
directive to the Agency for Health Care Research and Quality 
which, of course, is a part of Health and Human Services.
    The report noted that the committee is troubled by these 
statistics on the Institute of Medicine report. Responsible for 
as many as 98,000 deaths per year, medical errors have a 
substantial economic cost, with estimates ranking as high as 
$29 billion annually, and we directed the Agency for Health 
Care Research and Quality to devote $50 million to determine 
the ways to reduce medical errors, with a report, but so far we 
have had no response, and it is almost 3 years. What is 
happening on that, Mr. Allen?
    Mr. Allen. Mr. Chairman, if that is a report--I am assuming 
you are referring to a report that the Agency for Health Care 
Research Quality was asked to review on patient safety, and I 
understand from the Department that we have provided the 
subcommittee staff with an oral interim report of what the 
findings have been. The final report will be completed in 
September of this year, coming out of the Department. We will 
move to get that out as soon as we can, but it looks like 
September 2003 is when the report is due out.
    Senator Specter. I am advised by my chief of staff here 
that about a year ago--precisely what happened, Bettilou?
    Ms. Taylor. You had met with us regarding what your plans 
were for it, but I have not gotten anything back as far as what 
the report will contain.
    Mr. Allen. I would be more than happy, Mr. Chairman, to 
schedule another interim review pending the final report coming 
out, and will be glad to have our staff discuss that with you.
    Senator Specter. Well, we would like to have the report, 
Mr. Allen.
    Mr. Allen. And I gave you the date for when the report is 
supposed to be ready, as I understand it will be completed.
    Senator Specter. Well, could you expedite that?
    Mr. Allen. I will certainly see about----
    Senator Specter. We are really working on legislation in 
the field, and we would like to have a better handle on what 
the medical errors are as a part of this problem. Your report 
published on March 3, addressing the new health care crisis, 
does not take up that issue at all, does it?
    Mr. Allen. Of patient quality or patient safety?
    Senator Specter. Medical errors.
    Mr. Allen. As I recall, we do discuss the role of medical 
errors in terms of solutions. We recognize that medical errors 
are a tremendous part of the burden that we bear in terms of 
health care expenses, and so we do address that. I will do all 
that I can to try to expedite getting the patient safety report 
out.
    Senator Specter. Well, aside from recognizing that medical 
errors are a factor, which you do not need a report to say, my 
question is, when you have been working on this for almost 3 
years, is there something from all that study that you could 
have incorporated into this report to give us some 
understanding as to how medical errors play into this equation 
so that when we legislate we know what that factor involves?
    Mr. Allen. Mr. Chairman, with regard to the specific of the 
report, again, it is in process. The reason it was not 
incorporated in the study is because it is not finished. But, 
we did incorporate other reports that do have finished products 
that address patient safety, medical errors, and that would 
include the IOM study that you referenced earlier. We work very 
closely with the Institute of Medicine.
    Senator Specter. Well, Mr. Allen, could you supplement this 
report, which you published on March 3, with at least a 
synopsis of what your study on medical errors shows so that the 
subcommittee and the Congress can have an idea as to how that 
factor bears on legislation which we are considering right now?
    Mr. Allen. We would be more than happy to go back and look 
at it and provide additional information. In addition, I can 
update you on what the Department is doing in terms of looking 
at medical errors and the roles that they play, apart from the 
report that is due, September 2003.
    Senator Specter. My request to you is, if you are going to 
have the report in September of this year, and it has been in 
process for several years, would you review that as to whether 
there is any information that you have already gleaned which 
would bear upon the topic of this report, which is addressing 
the health care crisis?
    Mr. Allen. Well, certainly we will go back and review that 
and we'll be glad to work with you to find out if there is 
something that will be helpful. That is not a problem.
    [The information follows:]

    Question. (a) What has AHRQ discovered so far from patient safety 
research (essentially a preview of substance of findings that will be 
in the September Report to Senate Appropriations' Committee on Patient 
Safety)?
    (b) Can AHRQ commit to doing a briefing soon, and if so, when?
    Answer. (a) The projects from which this information is being 
gathered are still quite early in their life cycle. However, we have 
gathered some preliminary information that you may find useful. Early 
investigation suggests some common causes for medical errors 
irrespective of condition or specific circumstances: communication; 
health care professional staffing patterns or skill mix; devices and 
equipment failure; inadequate patient education; incomplete assessment 
of the patient; lack of adherence to protocols and poor or incomplete 
documentation in medical records. Additional issues include improper 
identification of patients, training or orientation deficiencies, staff 
overload, lack of supervision, lack of coordination at transfer, 
failure to get patient consent, poor specimen labeling, and inadequate 
procedures as the source of medical errors.
    AHRQ grantees confirm what we frequently hear from health care 
leaders: the definition of medical errors is variable and often unclear 
to those who report them. Trust, team building, and partnering is an 
important factor in developing and implementing successful reporting 
systems but presents a real challenge because of different 
institutional cultures and perceived or real legal protections. 
Furthermore, legal protection of reporters and reported data is 
critical for success of a reporting system. Reporters must feel 
comfortable that they will not be at increased risk of punitive or 
malpractice actions. Grantees noted that organizational culture varies 
considerably and directly impacts institutions' and leaders' 
willingness to embrace changes necessary to improve patient safety.
    Technology is both a solution for some medical errors and a direct 
contributor to others. The latter point is that human factors (i.e., 
the machine/user interface) must be addressed for each technological 
solution developed and implemented. Information on ``near misses'' 
(i.e., errors that occur but are intercepted before they reach the 
patient) can contribute substantially to our understanding of errors 
and the interventions necessary to prevent or mitigate their injurious 
impact on patients. However, the sheer magnitude of medical errors may 
be overwhelming making them both difficult to capture and analyze. 
Reporting systems that provide easy-to-use, actionable information may 
be more readily accepted compared to systems that are time consuming, 
awkward to use, redundant, and lack adequate value-added factors and 
feedback mechanisms to reporters. Furthermore, physicians and patients 
have different perspectives on how they want medical errors disclosed.
    Research that AHRQ supported showed that both patients and 
physicians had unmet needs following errors. Patients wanted disclosure 
of all harmful errors and sought information about what happened, why 
the error happened, how the error's consequences will be mitigated, and 
how recurrences will be prevented. Physicians agreed that harmful 
errors should be disclosed but choose their words carefully when 
telling patients about errors. Although physicians disclosed the 
adverse event, they often avoided stating that an error occurred, why 
the error happened, or how recurrences would be prevented. Patients 
also desired emotional support from physicians following errors, 
including an apology. However, physicians worried that an apology might 
create legal liability. Physicians were also upset when errors happen 
but were unsure where to seek emotional support. (Gallagher et al, 
JAMA, Vol. 289 No. 8, Feb. 26, 2003)
    (b) The AHRQ staff is available to do a briefing at the convenience 
of the Committee.
    The Agency's Interim Report to the Senate Appropriations' 
Committee, which is coming in September 2003, will detail, to date, the 
results of the Agency's efforts to reduce medical errors and will 
provide information specifically about:
  --How hospitals and other health care facilities are reducing medical 
        error
  --How these strategies are being shared among health care 
        professionals
  --How many hospitals and other health care facilities record and 
        track medical errors
  --How medical error information is used to improve patient safety
  --What types of incentives and/or disincentives have helped health 
        care professionals reduce medical error
  --Most common root causes of medical errors
  --Data showing the effectiveness of State requirements in reducing 
        medical errors

    Senator Specter. We would appreciate it. I am going to have 
to excuse myself for a few minutes. We are in the middle of a 
vote, or at the end of a vote, and I will return very shortly.
    Mr. Allen, there has been considerable criticism in the 
past of the fact that the same doctors appear many times with 
complaints against them, or litigation. Have your studies borne 
that out, that there is a pattern with some doctors coming up 
again and again with allegations of error?
    Mr. Allen. Mr. Chairman, I am not familiar with any studies 
that we have pointed to that problem with a small class of 
doctors. We do have studies demonstrating that certain 
specialties are much more prone to litigation, obstetrics-
gynecology, for example, and those that are involved with very 
invasive procedures, like neurological surgery.
    Senator Specter. I am on a different point. I am on the 
point whether there is a recurrent pattern of the same doctor 
having complaints filed against him.
    Mr. Allen. Again, answering your question, I do not know 
that we have studies that we have looked at that demonstrate 
that. I do know that the Institute of Medicine's report looked 
at some of these issues, and what they pointed out is that the 
issue is not so much individual doctors.
    For example, we know that in the area of obstetrics, that 
the average OB-GYN has three malpractice cases filed against 
him or her during the course of their career. While we have 
statistics such as that, we do not have data that says that 
there is small percentage or a large percentage of the same 
doctors who are being sued over and over.
    In fact, it is my belief, having just worked at the State 
level and overseen physician activities in the Commonwealth of 
Virginia, that we have systems in place that look at 
disciplinary actions and focus on malfeasant physicians. We do 
know that that happens, but I cannot tell you that we have 
studies that show more detail on a certain percentage of 
those----
    Senator Specter. Well, the subcommittee would appreciate it 
if you would take a look at that, as to what patterns, if any, 
exist for the same doctors. You use the word, malfeasance. I 
would not go quite that far.
    [The information follows:]

    Question. To what extent do the data on medical errors confirm that 
the problem with medical errors is truly system-wide versus the problem 
of repeat offenders?
    Answer. Medical errors are the result of multiple human and system 
failures stemming from the structure and process of health care. 
Reporting systems that capture and record root cause analysis almost 
universally find that events involve a combination of contributing 
factors leading to the event. While virtually all near-miss, no-harm 
(event occurred, reached the patient, but patient was not injured), and 
adverse events contain some element of human failure or error, these 
alone did not lead to the undesired outcome. Most often it is 
underlying risks and hazards within the structure and process of care 
that contributed the patient injury or harm. This finding has been 
reported repeatedly in the patient safety literature. The data 
supporting this observation comes from the United States, Australia, 
the UK, Denmark, and the Netherlands. Additionally, in a study of 
transfusion events, the researchers found that the greater the level of 
the severity of the event, the greater the contribution of 
organizational and technical failures that were involved. (Kaplan and 
Battles, 1999) It is only at the lowest levels of actual or potential 
errors where there were greater contributions of only human factors 
involved. This mix of human, organizational, and technical distribution 
of events seems to be matched outside of medicine as well. When events 
from a transfusion service in the United States were compared to a 
Dutch chemical process plan, the distribution of causes was virtually 
identical. (Kaplan, Battles, van der Schaaf, 1998)

    Senator Specter. There is a Public Citizen's report on the 
situation in Pennsylvania which shows that repeat-offender 
physicians are responsible for the bulk of medical malpractice 
costs. I would appreciate it if your report, the Department's 
report on physician errors would look into this issue of repeat 
offender physicians and let the subcommittee know what is in 
place in the States, taking at least, say, a half-a-dozen State 
samples as to what action is taken on reviewing this matter by 
licensure boards, and also by hospitals.
    We have had a number of reports that there is very little 
action taken by hospitals, disciplinary action, and that 
doctors move from one hospital to another when they are quietly 
let go, and no effort made to follow the doctors who do have 
these repeat errors. That is an area which is bubbling right 
below the surface, Mr. Allen, and the subcommittee would 
appreciate it if your report would take into account that 
factor.
    Mr. Allen. Mr. Chairman, we will be glad to look at that, 
but again I point your attention to the reports that are 
already out that do talk about a lot of these issues, for 
example, the IOM report. The title is: ``To Err is Human'', and 
one of the things that they say in the report is that 
preventing errors and improving safety for patients requires a 
systems approach.
    [The information follows:]

    Question. To what extent do hospitals address problems of medical 
errors and medical malpractice? To what extent do ``bad actors'' simply 
move on to other institutions or jurisdictions?
    Answer. Virtually every hospital in the country has in place some 
type of an event reporting system. However the extent to which 
hospitals actually use reporting systems to make patient safety 
improvements is variable. Some institutions have done and continue to 
do an outstanding job in using the data. Others do not fully utilize 
the available data that they already collect as an optimal patient 
safety management tool. What we do know is that hospitals which are 
committed to patient safety improvement tend to encourage reporting of 
patient safety events, and move to align their internal policies (and 
thereby culture) to encourage reporting by adoption of a just culture. 
When this happens, institutions may experience a large increase in 
reporting. AHRQ has developed a survey to determine the extent to which 
hospitals collect patient safety data and how those data are used, and 
a pilot study of the instrument is currently being conducted.
    For the most part, the type of information on problem physicians 
moving to other institutions or jurisdictions is anecdotal, and without 
strong linkages between state licensing boards, these issues cannot be 
fully tracked. However, in a study completed a few years ago that 
focused on risk-adjusted mortality for cardiac by-pass graft (CABG) 
surgery in New York State, the researchers found that some of the 
surgeons with high mortality rates left the state while some continued 
to practice within New York State but ceased performing the CABG 
surgery. (Chassin, Health Affairs, July/August, 2002, Vol. 21. No. 4, 
pp. 40-51). Some information on migration of individual practitioners 
may also be available through the Health Resources and Services 
Administration's National Practitioner Databank. We would like to 
emphasize, however, that the majority of injuries resulting from the 
delivery of health care are not attributable to individuals, but rather 
to systems-related issues.

    Mr. Allen. We can spend a lot of attention focusing on the 
doctors who are responsible for committing the errors. That is 
only one aspect focused on the individual. What we at the 
Department believe, and the reason we think it is so important 
that we look at this broadly, we look at the medical liability 
system. We look at the impact that it has on health care in 
general. That impact is evident in several ways. We spend 
between $70 and $126 billion a year in terms of what we call 
defensive medical practices, where doctors are ordering more 
tests, where doctors are prescribing more medication, where 
doctors are taking steps because of the fear of litigation.
    What we want to focus a lot of attention on, is how do we 
work with medical systems. So, you can deal with the individual 
physician whether there are many or few, but the key is to take 
a system approach to catch those situations before a mistake is 
made that damages a person's life.
    Senator Specter. Well, Mr. Allen, that is very interesting, 
but that does not respond to the specific point that I am 
making. When you talk about defensive medicine, I understand 
that. That is a factor. When you talk about before a mistake is 
made, I understand that. I am having a very focused question 
about doctors who make repeat mistakes, are sued, or are up for 
disciplinary action.
    Mr. Allen. And Mr. Chairman, I responded to that.
    Senator Specter. And if I can finish my question, and we 
are putting up $84 million, and the subcommittee would like to 
have you take a look at that.
    Mr. Allen. Mr. Chairman, I have already answered that and 
said we would look at that. I said we would certainly be glad 
to go back and look at it. The specific question you asked me 
was whether we had studies that showed that, and I answered 
that and said no, and you asked us to look at that, and I said 
yes, we would go back and attempt to look at that.
    Senator Specter. With respect to the insurance factor, Mr. 
Allen, are you familiar with the situation in Texas where 
people cannot buy homeowners' insurance because the insurance 
companies have stopped writing it because the losses were so 
extensive from hurricanes, and the reserves of the companies 
have gone down so much?
    Mr. Allen. I heard you reference that earlier, Mr. 
Chairman. I am not personally familiar with it. I do not follow 
the homeowner insurance areas, but I do follow what is 
happening in the medical area.
    Senator Specter. Well, I would appreciate it if you would 
take a look at this extensive report in the New York Times on 
December 1, and one extract, the price and availability of 
homeowners' insurance has become a political issue in Texas. 
Texans pay the highest premiums for homeowners insurance in the 
Nation, while the insurance companies say they lost billions of 
dollars because of the State's run of natural disasters like 
tropical storm Alison, and then the study goes into the issue 
of the insurance companies having lost a lot of money on their 
investments.
    What is the best statistical studies you know of which bear 
upon the question as to how much of the increase in premiums 
has been caused by the investments of the insurance companies?
    [The information follows:]

    HHS has not conducted such statistical studies and our 
researchers have not conducted a literature search on this 
topic.

    Mr. Allen. The two areas I can point to are in the report 
itself. There is a table, Table A, that talks about the 5-year 
historical asset allocations for medical malpractice carriers, 
and it lays out for the asset classes and lays out for the 
years 1997 to 2001 information regarding their asset 
allocations. It points out what we think is the case that this 
crisis has not been caused by poor management practices by 
insurers in terms of their investments.
    In fact, there is a letter of February 7 that was sent to 
Senator Gregg from the National Association of Insurance 
Commissioners, and I will make sure you have a copy of it, 
where they look at this issue. They are charged with overseeing 
the insurance industry in terms of their portfolio investments. 
Insurance carriers are very conservative in terms of their 
portfolio investments. What they point out is that the issue is 
not the investments of the portfolios, but rather they believe 
the issue is the high loss ratios in many States. Regulator 
concerns have been with rate inadequacy in those regards, and 
so those would be the two areas that I would point you to that 
address insurance company investments.
    Senator Specter. Well, we are going to have other witnesses 
testify to this. I am sorry that you will not be here to listen 
to their testimony, because what the subcommittee customarily 
does is to have witnesses interact, and we have put you on a 
separate panel out of deference to your standing as Deputy to 
the Department, but I wish you would convey to Secretary 
Thompson the subcommittee's request that when witnesses come 
here they are prepared to spend the time of the hearing. If the 
Senators can spend the time, we would ask the Department to 
spend the time, and you have told me in advance that you have 
other commitments, so would you please convey to the Secretary 
my request that when he or witnesses from your Department come, 
you are prepared to stay for the hearing?
    Mr. Allen. Mr. Chairman, I will be glad to do that, and as 
I shared with you, because of the situation that we are dealing 
with in terms of homeland security, I am required to be back at 
the Department to deal with some issues there. Otherwise, I 
would have intended to stay here. That was my intention, but 
unfortunately, because of the press of other business, I do 
need to return.
    Senator Specter. I am doing a lot of work on homeland 
security myself----
    Mr. Allen. And we greatly appreciate that.
    Senator Specter [continuing]. On the Appropriations 
subcommittee and on the Government Affairs Committee, and on 
the terrorism issue with Judiciary. We are all very, very busy, 
but when the subcommittee schedules a hearing--just tell the 
Secretary we would like his witnesses to stay, okay.
    Mr. Allen. We will pass that on for you.
    Senator Specter. Thank you.
    Mr. Allen. Thank you.
    Senator Specter. I am not finished, Mr. Allen.
    Mr. Allen. Okay.
    Senator Specter. Going on to the issue of the lawyers, the 
frivolous lawsuits are a real problem, beyond any question, and 
on the hearing we had last month with the Judiciary Committee 
and the Committee on Health, Education, Labor, and Pensions, 
the testimony was given that although 70 percent of the 
lawsuits are won, the litigation costs are very high.
    A couple of ideas which have been advanced are to require, 
as Pennsylvania has done, a certificate be filed at the time 
the lawsuit is instituted, or within 60 days, from a recognized 
expert that there is a bona fide claim, and another line has 
been the imposition of sanctions on the lawyers who bring 
frivolous lawsuits, giving the judge discretion to identify a 
frivolous lawsuit, and to have that as a deterrent effect.
    Do you think that those measures would be effective in 
eliminating frivolous lawsuits?
    Mr. Allen. I think Rule 11 has been in place for a long 
time as a deterrent on attorneys bringing frivolous claims, and 
so the States enforce that in terms of lawyers bringing 
frivolous claims.
    Our concern is the patients, and in many of these 
situations very few patients file claims. In those cases where 
they do, it is usually 5 or more years before they see anything 
in terms of recovery. We think the approach that we are 
recommending in terms of malpractice litigation reform is an 
important step overall, in terms of the principle, but the 
examples that you cite certainly are tools that can be 
utilized.
    We are focusing on how to get a quicker judgment, or 
quicker decision that serves the patient who has been injured, 
but at the same time how do we focus on the system changes that 
can contribute to improving the quality of health. That is what 
we are going to focus on, and that is what we think is a very 
key piece of the puzzle.
    Senator Specter. Well, there is no doubt that we want to 
take care of the patients and have the matter resolved as 
promptly as we can, but when your report deals with reform of 
the system, my question to you is, how big a part of the 
problem is the frivolous lawsuit, and how effective will these 
two measures be on that point? I do not think your last answer 
was responsive at all to that question, Mr. Allen.
    Mr. Allen. Let me try again, Mr. Chairman.
    Senator Specter. Thank you.
    Mr. Allen. With respect to frivolous lawsuits, we already 
have laws on the books that address frivolous lawsuits.
    Senator Specter. You cite Rule 11. That is the Federal 
court. Relatively small numbers of malpractice cases are 
brought in Federal courts. You do not have sanctions imposed in 
the State courts to any substantial extent, or is your 
information different?
    Mr. Allen. I think you can qualify the issue by saying to a 
substantial extent, there are States that do have sanctions, 
and that have attempted to impose sanctions.
    Senator Specter. Are the States imposing sanctions on 
frivolous suits, Mr. Allen?
    Mr. Allen. Some States do.
    Senator Specter. Do you have any evidence to back that 
statement up?
    Mr. Allen. I can certainly provide those for you for the 
record to give you what we have looked at in terms of efforts 
States have undertaken to try to address that issue.
    Senator Specter. The complaints that I have heard from the 
medical profession is that frivolous lawsuits are filed and the 
insurance companies complain they eat up a lot of time and 
cost, and there is no remedy at all in existing State court 
practices.
    Mr. Allen. Mr. Chairman, you are not getting an argument 
from me saying that is not the case. We would agree that 
frivolous lawsuits are taking place. Steps, as you suggest, can 
go a long way to addressing those issues in terms of slowing 
the litigation process, those that are frivolous.
    Senator Specter. Mr. Allen, what I want to focus on, I want 
to focus on the issue of frivolous lawsuits, and your judgment 
as to how they would be affected by these two remedies. That is 
what I want to focus on.
    We are trying to get a handle on what we ought to do 
legislatively, and your Department has published this report on 
addressing the health care crisis, and we want to make a 
determination as to whether we ought to legislate on this 
subject. That is the thrust of the question. We would like to 
know if your Department has any evidence as to whether States 
are now adequately handling frivolous lawsuits, or the Federal 
Government adequately handling frivolous lawsuits, and what 
ought to be done about it.
    Mr. Allen. Mr. Chairman, I think again the goal seems to be 
moving. I think I addressed your concern in saying that we 
agree that frivolous lawsuits are taking place, that they are 
casting a chill on the practice of medicine, and we should do 
something to address frivolous lawsuits. So, I am not sure 
where the argument is--I said I agreed with you in what you are 
saying.
    Senator Specter. There is no argument. You have not yet 
addressed the question as to whether these two reforms would 
take care of frivolous lawsuits.
    Mr. Allen. Mr. Chairman, I am not in a position, nor do I 
think the Department is in a position to say across the board 
whether these will take care of all the issues. In fact, what I 
would say is, given what we have looked at in terms of the 
impact that it has on health care in general, they would be two 
steps that could be addressed, but they are not the only 
issues. It is not just the cases that are frivolous that are 
impacting the system.
    They have a major impact. As I cited already, we find that 
defensive--defending claims cost on average about $40,000 per 
claim. The numbers would suggest that the more claims that we 
could deal with, whether they were frivolous or not, they 
should be dealt with on the front end of the system.
    So I am saying that we agree with what you are suggesting 
as a potential one step in the situation, but that does not 
cover the vast majority of issues which we are talking about in 
terms of the cost that huge awards for noneconomic damages are 
having on the medical industry. That is what we are talking 
about in terms of patient care.
    Senator Specter. Mr. Allen, I am about to come to the 
noneconomic issues, but the questions which I have addressed to 
you are these: To what extent is your Department in a position 
to comment about the seriousness of frivolous lawsuits, number 
1. Number 2, what is your evaluation of the two reforms which I 
have suggested?
    What I would like you to do is get the transcript and see 
if your answers have been responsive, and if you think they 
have been responsive, forget it. If they have not been 
responsive, give me responsive answers.
    Mr. Allen. I will be glad to.
    Senator Specter. On the issue of caps, do you agree with 
Senator Hatch's statement that there ought to be an exception 
for what he classified as egregious cases?
    Mr. Allen. The President's proposal does consider what we 
call the egregious cases, those cases where it has been 
demonstrated clearly and convincingly that there has been a 
malicious intent, or willful knowledge of the wrong that has 
been done. There should be reasonable caps on it, but certainly 
exceptions exist for egregious cases within a reasonable cap 
limitation. The President's proposal does envision allowing for 
those situations where there has been an egregious case to 
allow for increased recovery through punitive damages.
    Senator Specter. Well, Mr. Allen, there are two concepts 
involved here. One is the point of the nature of the 
wrongdoing, if it is negligence or if it is willful or 
malicious. There is another issue, which is totally separate, 
and that is the question of damages.
    Now, if you leave out the punitive damage question for just 
a minute, because we will come to that, the issue is whether 
there should be a category--let me back up just a minute. Are 
you saying that the President's plan allows for more than a 
$250,000 cap on noneconomic damages, aside from punitive 
damages?
    Mr. Allen. We would separate out punitive damages from 
noneconomic damages.
    Senator Specter. Just focus on noneconomic damages. Are you 
saying that there is some category of cases in the President's 
plan where the cap of $250,000 would not apply?
    Mr. Allen. We would say that the President's plan calls for 
ensuring that for noneconomic damages, that they would not 
exceed a reasonable amount, and we have stated $250,000 based 
upon what we have seen in States where the cap is between 
$250,000 and $350,000. I do not want to settle on a hard and 
fast number, because it is that range between $250,000 and 
$350,000 where we have seen States' experience has demonstrated 
a benefit from that, and putting a cap on.
    Senator Specter. All right. Whether the figure is $250,000 
or $350,000, are you saying that the President's plan would 
allow an exception above whatever figure is set for egregious 
cases?
    Mr. Allen. We would say that again, in this situation that 
we are looking at for noneconomic damages, egregious cases in 
terms of--you are focused on noneconomic, not punitive damages, 
is that--am I understanding you correctly?
    Senator Specter. I am focused again--to repeat for the 
fourth time, I am talking about noneconomic damages, not 
punitive damages, and not where the quality of the act is 
involved, like malicious or gross, to warrant punitive damages. 
I am talking about the injuries, the damages. Are you saying 
that the President would allow more than whatever figure is 
set, $250,000 or $350,000, for egregious cases?
    Mr. Allen. No, that is not what I am saying. What I am 
saying is that the President's proposal would put a reasonable 
limit of between $250,000 to $350,000 on noneconomic damages.
    Senator Specter. Well, take a look at your earlier 
testimony. I think you have shifted a bit here, but so be it. 
So essentially you disagree with Senator Hatch on having a 
category of egregious cases which would not be limited by 
whatever cap is set?
    Mr. Allen. I would--again, not knowing specifically Senator 
Hatch's statement, whether he was referring to noneconomic 
damages. We would suggest that in the area of punitive 
damages--not noneconomic damages--that is where you deal with 
egregious cases--if there is an egregious case, we believe 
punitive damages are appropriate in those circumstances, but 
not in the area of noneconomic damages.
    Senator Specter. Mr. Allen, if you had a situation like the 
young woman in North Carolina, where they made the wrong 
transplant, would you say that the noneconomic damages ought to 
be limited to $250,000 or $350,000, whatever the cap is set?
    Mr. Allen. In the case of the North Carolina case which was 
cited--I am assuming it is the one at Duke Hospital you are 
talking about, the double transplant case--we would say, again, 
first and foremost, the loss that that family experienced is 
tragic, and we recognize the tragedy, and we believe in those 
circumstances that, compensatory damages, those are the 
economic damages should be recovered, and we believe a 
reasonable recovery for noneconomic damages should take place.
    The issue there that we focus on, however--and if there is 
evidence that the physician involved, or those involved had 
malpracticed, then there would be an appropriate place for 
punitive damages that would be consistent with the injury. 
However, we would also say in that case, and this is what the 
Department feels very strongly about, that this is the classic 
example where system reforms would minimize the risk associated 
with that practice. In this case, it would have helped if there 
were duplicate checks in place that would look at the blood 
type, look at the errors where errors are made, and that is 
where we focus much of our attention.
    Because even awarding those individuals large awards, if 
that is what they recover, does nothing to mitigate the problem 
in the vast majority of the system where access is an issue, 
where physicians are leaving practices. So we think that yes, 
you can deal with that individually in that regard. That would 
be consistent with reasonable recovery, but we believe there is 
a broader concern, and that is why the President stepped in to 
suggest system reforms.
    Senator Specter. Mr. Allen, I would invite you to take a 
look at the transcript and your response to my last question, 
and if you think it is responsive, just forget it. If you do 
not, I am interested to know the position of your Department on 
whether noneconomic damages for the transplant victim should be 
capped at $250,000 or $350,000. You take a look at your answer, 
and if you think it is responsive, then forget it, and if you 
do not, I would be very much interested in an answer to my 
question.
    Let me move on to another example of the wrongful 
mastectomy on the wrong woman, where there are hardly any 
economic damages. Is the position of your Department, the 
administration, that the noneconomic damages ought to be 
limited to $250,000 or $350,000?
    Mr. Allen. Once again, in terms of the recovery for 
noneconomic damages, the President's proposal is focused on 
noneconomic damages that would be reasonable between $250,000 
and $350,000. In that situation, if there was evidence, again, 
that demonstrated that there was clear and convincing evidence 
of wrongdoing----
    Senator Specter. No, we are not talking about punitive 
damages. I am just talking about ordinary negligence.
    Mr. Allen. The answer would be yes, we believe that in the 
proposal, in the circumstances where that is happening, we 
believe that a reasonable noneconomic recovery would be 
appropriate because (1) you cannot replace what has been taken 
from someone. You cannot replace a child that has been lost to 
a family, or someone who has been injured in that regard, but 
what we can do is, we can ensure that we have systems in place 
and processes in place that try to minimize the error.
    Senator Specter. Mr. Allen, no one would deny that you 
cannot make people whole and put them back in the position they 
would have been had the act not occurred. The whole purpose of 
damages is to compensate as best you can, so that presentation 
is really aside from the point, but if you think that wrongful 
mastectomy should be limited on noneconomic damages, I 
understand your position.
    Mr. Allen. Mr. Chairman, my position is, and the 
administration's position focuses not just on individuals. We 
believe that there are systems in place to address individual 
wrong and harm, but we need to look at the impact on the system 
of an award to an individual. As we have seen in many States, 
Mississippi being a good example, where they have had nine 
awards in excess of $9 million, where we see large awards there 
is an impact on health care throughout the system. That is what 
we focus on.
    We do not seek to minimize the harm that has been done to 
individuals, nor do I suggest that you or Congress or anyone is 
suggesting to do that. But, we do believe that we need to look 
at what is happening to a system that is driving doctors out of 
the system, and a system that is not contributing to patient 
safety and quality improvements. We are looking at that the 
medical liability situation in this country today is doing just 
that, in order to stimulate such system changes.
    Senator Specter. Mr. Allen, it is a given that there is 
concern by the legislative as well as the executive branch on 
the delivery of health care to Americans. It is something I 
have been working on now for 23 years on this subcommittee in 
many, many directions, and it is a given that there are 
problems in many States. It is a legislative job to analyze and 
see where the sources of the problems are, and it is a complex 
matter on many, many lines which I have already identified, and 
we are trying to figure out where an appropriate line for 
compensation is.
    Thank you very much, Mr. Allen.
    I would like to call our second panel now, Dr. Peter 
McCombs, Dr. Donald Berwick, Mr. Jay Angoff, Mr. James Hurley, 
Dr. Brian Holmes, Ms. Linda McDougal, and Ms. Leanne Dyess.
STATEMENT OF PETER McCOMBS, M.D., CHAIR, DEPARTMENT OF 
            SURGERY, PENNSYLVANIA HOSPITAL
    Senator Specter. Our first witness, Dr. McCombs, is the 
chair of the Department of Surgery at Pennsylvania Hospital. He 
is also the clinical associate professor of surgery at the 
University of Pennsylvania School of Medicine, received his 
bachelor of science degree in American studies from Yale and 
his medical degree from Tufts.
    Dr. McCombs, thank you very much for joining us, and we 
look forward to your testimony. Our subcommittee rule, which is 
general in the Congress, is to limit testimony to 5 minutes. 
You have been advised of that.
    I more recently have been adding an addendum to the time 
limit. We had a memorial service for Ambassador Annenberg and 
the limit was 3 minutes for speeches, and that applied to 
former President Ford and Secretary of State Powell and me, and 
many, many others, so I want you to know that by those 
standards 5 minutes is generous. It does not sound like it when 
you have the kind of expertise and study you experts have put 
into this subject, but if you can limit your testimony to 5 
minutes, it gives us the maximum time for discussion.
    Thank you for joining us, Dr. McCombs, and we look forward 
to your testimony.
    Dr. McCombs. Thank you, Mr. Chairman. It is a privilege for 
me to be here.
    Senator Specter. There is a button on your microphone.
    Dr. McCombs. Okay, I have it now.
    Mr. Chairman, Pennsylvania Hospital is a teaching hospital 
located in the center of the City of Philadelphia. It happens 
to be the Nation's first hospital, and it has a long tradition 
of medical education dating back to 1773. It is one of four 
institutions that comprise the University of Pennsylvania 
Health System.
    Senator, you are well aware of the gravity of this problem, 
and I do not intend to reiterate any inflammatory rhetoric. I 
will simply state that we need Federal action now to address a 
serious problem jeopardizing health care both nationally and in 
our Commonwealth. H.R. 5, the HEALTH act, sponsored by 
Congressman Jim Greenwood of Pennsylvania, provides the 
critical elements of such an initiative.
    As chairman of an academic department of surgery, I have 
ultimate responsibility for the quality of care across the 
entire array of surgical services. I take pride in our many 
surgical triumphs. Regrettably, I also know about our 
complications and deaths, our mistakes and near misses, and the 
occasional cases that suffer potentially preventable 
disabilities. I live with surgeons every day, and I am actively 
engaged in training the young surgeons who will become their 
successors. It is my job to adjudicate, to teach, and to 
listen, to perpetuate an environment that is founded on ethical 
standards and open inquiry that effectively balances risk and 
benefit, and that above all never loses its focus on the needs 
of patients.
    The majority of our staff is engaged in private practice. 
Management of overhead is a way of life, and overhead includes 
payment of malpractice premiums. These have recently become so 
expensive that many surgeons have reconsidered their options in 
order to remain even marginally profitable. A significant 
number have been faced with the drastic decision to change the 
scope of their practice, to retire early, to temporarily 
suspend performing surgery, or to leave Pennsylvania in search 
of a better environment.
    I am personally familiar with three vascular surgeons, 
three neurosurgeons, one orthopedic surgeon, two plastic and 
reconstructive surgeons, three general surgeons, and one 
interventional radiologist who have retired prematurely or 
relocated their practices and their families outside of 
Pennsylvania.
    We have the busiest obstetric service in Philadelphia, but 
our department of obstetrics has been reduced from 50 to 29 
obstetricians over the past 3 years on account of this problem. 
In addition, 11 orthopedists, 2 neurosurgeons, 7 general 
surgeons, 8 urologists, and 3 surgical oncologists suspended 
their surgical practices for a period of days to weeks late 
last year and early this year.
    Finally, I have five general surgeons on my staff whose 
malpractice policies expire on June 30. They face the future 
with great uncertainty. These surgeons have placed their faith 
in Governor Rendell's commitment to deliver relief for this 
crisis in Pennsylvania. All are considering relocation of their 
practices if no significant relief is forthcoming.
    In addition, according to the Pennsylvania Hospital 
Association the total cost of medical liability insurance 
coverage for Pennsylvania's hospitals has increased by 86 
percent over the past 12 months, and 23 percent of hospitals 
reported premium increases that exceeded 200 percent.
    One has to look carefully at the implications of this 
crisis on patient care. While very few individuals have been 
denied needed surgical treatment in the Philadelphia area, this 
is not the case in other parts of Pennsylvania. The departure 
of high risk specialties from Berks, Fayette, and Lackawanna 
Counties has forced patients to travel to find replacement 
specialists.
    In the Philadelphia area, many patients have voiced 
complaints to me about excessive delays in obtaining surgical 
consultation, and about receiving treatment from younger and 
less experienced surgeons than they had expected or preferred, 
or from surgeons who are clearly overworked and overstressed, 
and going forward, it appears that a significant number of our 
most respected surgeons are destined to be replaced in the 
prime of their careers.
    One additional byproduct of this crisis in Pennsylvania has 
been that recruitment of new surgeons has been very difficult. 
Philadelphia is fortunate enough to have five medical schools 
and a much larger number of excellent training programs in all 
of the surgical disciplines, yet the number of graduates 
remaining in the Philadelphia area to practice is almost 
negligible. Groups attempting to recruit a young surgeon almost 
invariably need to go to the Joint Underwriters Association, 
the last available resort, in order to obtain coverage.
    In fact, many doubt that the private practice model, as our 
patients and we have known it over the years, is sustainable. 
As damage to our system continues, the feasibility and costs 
associated with rebuilding it are virtually impossible to 
fathom.
    Quality assurance is an integral part of the surgical 
culture. We have an active safety initiative that is built on 
the foundation of a systems-oriented, nonaccusatory, root cause 
analysis process. Our weekly morbidity and mortality conference 
is the backbone of our educational program. Discussions are 
structured and explicit, and sometimes are emotional and 
brutally candid, but it is through these dialogues that we all 
learn and grow. They remind us about our standards. They help 
us to make the right choices. They establish role models for 
younger surgeons to follow.
    Senator, there are warning signs that our system is 
collapsing. We are not only failing to attract the best 
candidates into surgery, but are also losing some of our bright 
young residents to fields outside of medicine altogether. A 
shocking number of graduating medical school seniors is 
choosing to pursue a second degree, or to enter industry rather 
than to begin a residency. I have serious concerns about who 
may be doing your, and when I say your, I am referring 
collectively to everyone in this room----
    Senator Specter. Dr. McCombs, you are over time. Could you 
summarize, please?
    Dr. McCombs. Yes, sir--or mine when the time comes, or who 
may be delivering your grandchildren or mine in the years 
ahead.

                           prepared statement

    It is not appropriate for individual States to compete for 
surgeons and obstetricians based on the cost of liability 
insurance. In order to preserve access to good health care for 
everyone, the playing field must be leveled.
    Thank you, Mr. Chairman.
    [The statement follows:]
               Prepared Statement of Dr. Peter R. McCombs
    Chairman Specter and members of the Committee, good morning. I am 
Dr. Peter McCombs, Chairman of the Surgery Department at Pennsylvania 
Hospital, a teaching hospital located in Center City Philadelphia. It 
happens to be the nation's first hospital and has a long tradition for 
medical education, dating back to 1773. It is one of four hospitals 
that comprise the University of Pennsylvania Health System. The Penn 
Health System is an integrated, academic health system that also 
comprises associated medical staffs, three multi-specialty out-patient 
facilities, a faculty practice plan, a primary care physician network, 
a significant number of clinicians in private practice, and numerous 
other sub-acute providers.
    I am a practicing surgeon, board certified in general surgery and 
vascular surgery. I came into my present position following a twenty-
three year career as a community-based clinician and dedicated 
educator. From this perspective, I would like to present my views on 
the medical liability crisis as it currently impacts patients, 
physicians and the health care institutions on which we all depend in 
Pennsylvania. I am very grateful for this opportunity.
    Senators, I know that you are well aware of the gravity of this 
problem in Pennsylvania and elsewhere around the nation. I am confidant 
that many of the hardships experienced by patients and physicians are 
well known to you. I know that you understand and have sensitivity for 
the impact that the changing climate has had on such vital and 
customary services as prenatal and obstetrical care, trauma care, 
surgical care across a wide spectrum, and now even primary care. I do 
not intent to take your time by reiterating the inflammatory rhetoric 
that has become so ubiquitous in the media as well as throughout our 
hospital cafeterias, hallways and waiting rooms.
    I will simply state that we need federal action now to address a 
serious problem that jeopardizes the way we provide health care both 
nationally and in our Commonwealth. We need your leadership to move a 
comprehensive medical liability reform initiative forward, and I 
propose that H.R. 5, the HEALTH Act sponsored by Congressman Jim 
Greenwood of Pennsylvania, provides the critical elements of such an 
initiative.
    Let me now take a moment to set before you a representation of the 
issues as I see them. As Chairman of an academic department of surgery, 
I have ultimate responsibility for the quality of care rendered to our 
patients across the entire array of surgical services at Pennsylvania 
Hospital. In addition to general surgery, these include vascular and 
thoracic surgery, cardiac surgery, urology, ophthalmology, 
otolaryngology, orthopedics and neurosurgery. I know about our many 
surgical triumphs and, like my colleagues, I take a lot of pride in 
those cases. Regrettably I also know about our complications and 
deaths, our mistakes and near misses, and the occasional cases that 
suffer potentially preventable disabilities. I live with surgeons every 
day, and I am actively engaged in training the young surgeons who will 
one day become their partners and their successors. It is my job to 
adjudicate, to teach and to listen, to perpetuate an environment that 
is founded on proper ethical standards and open inquiry, effectively 
balances risk and benefit, and above all never loses its focus as a 
resource for the needs of patients. For many years, Pennsylvania 
Hospital has been a wonderful place to practice surgery.
    As in many community-based hospitals, the majority of our staff is 
engaged in private practice. These physicians are fully responsible for 
managing the business aspects of their practices. Recruitment and 
retention of staff, billing and collection of revenue, management of 
pension and retirement plans for partners and employees, and management 
of overhead are all a way of life for physicians in private practice, 
and overhead includes payment of malpractice premiums. Always a major 
line item in the practice overhead, these premiums have recently become 
so expensive that many surgeons have had to reconsider their options in 
order to remain even marginally profitable. A significant number have 
been faced with the drastic and unexpected decision to change the scope 
of their practice, to retire early, to temporarily suspend performing 
surgery, or to leave the state of Pennsylvania in search of an 
environment in which they can practice and raise their families with 
greater stability and less uncertainty.
    As examples, I am personally familiar with three vascular surgeons, 
three neurosurgeons, one orthopedic surgeon, two plastic and 
reconstructive surgeons, three general surgeons and one interventional 
radiologist who have retired prematurely or relocated their practices 
and their families outside of Pennsylvania. In addition, I personally 
know eleven orthopedists, two neurosurgeons, seven general surgeons, 
eight urologists and three surgical oncologists who were forced to 
suspend their surgical practices for a period of days to weeks during 
lapses in coverage brought about by skyrocketing premiums late last 
year and early this year. I know two neurosurgeons and three general 
surgeons who have changed their employment model, becoming full-time 
health system employees as an alternative to leaving the state. 
Finally, I have five general surgeons on my staff whose malpractice 
policies expire on June 30. They face the future with great 
uncertainty. These surgeons have placed their faith in Governor 
Rendell's stated commitment to deliver short and long-term relief for 
this crisis in Pennsylvania this year. All are considering relocation 
of their practices if no relief is forthcoming.
    In addition, according to the Pennsylvania Hospital Association, 
the total cost of medical liability insurance coverage for 
Pennsylvania's hospitals has increased 86 percent over the past 12 
months, and 23 percent of hospitals reported premium increases exceeded 
200 percent. These premium increases have occurred even as coverage has 
decreased, either in the form of deductibles or higher retention 
levels.
    One has to look carefully at the implications of this crisis on 
patient care. While I am aware of very few, if any, individuals who 
have been denied needed surgical treatment in the Philadelphia area, 
this is not the case in other parts of Pennsylvania. When high-risk 
specialists leave Berks, Fayette, or Lackawanna Counties, Pennsylvania 
residents in those areas have to travel to find replacement providers. 
In the Philadelphia area, many patients have voiced complaints to me 
and to others like me about excessive delays in obtaining surgical 
consultation, and about eventually receiving treatment from younger and 
less experienced surgeons than they had expected or preferred, or from 
surgeons who were clearly overworked or overstressed. And going 
forward, it appears that a significant number of our most respected 
surgeons are destined to be replaced in the prime of their careers by 
less experienced colleagues.
    One additional byproduct of this crisis in Pennsylvania has been 
that many surgical practices have found it very difficult to recruit 
new surgeons. Philadelphia is fortunate enough to have five schools of 
medicine or osteopathy and a much larger number of excellent training 
programs in all of the surgical disciplines. And yet, the number of 
graduates of those programs who have demonstrated an interest in 
entering the practice of surgery or a surgical subspecialty, 
particularly in the private practice arena in the Philadelphia area, is 
almost negligible. Practices interested in attempting to recruit a 
talented young surgeon almost invariably need to go to the Joint 
Underwriters Association, the last available resort, to obtain coverage 
for new surgeons entering the area. In fact, a number of my colleagues 
are seriously wondering if the private practice model as we and our 
patients have known it over the years is sustainable on account of the 
malpractice crisis. Also, as the damage to the system continues, it is 
unclear if we will ever be able to return to that system as we knew it, 
and what the costs incurred will be to try to rebuild it.
    Quality assurance is an integral part of the surgical culture. We 
participate actively with numerous advocacy groups and task forces. We 
have an active safety initiative that is built on the foundation of a 
systems-oriented, non-accusatory root cause analysis process. We are 
doing our best to police ourselves and to create a safer environment 
for our patients. The morbidity and mortality conference that I 
moderate weekly is the backbone of our educational program for medical 
students, residents, fellows, and surgical faculty. Our discussions are 
structured and explicit, and are sometimes emotional and brutally 
candid. But it is through these dialogues that we all learn and grow. 
They remind us about our standards. They help us to make the right 
choices. They establish role models for younger surgeons to follow.
    From a broader statewide perspective, according to the American 
Medical Association, Pennsylvania is one of 12 states nationwide in the 
midst of a liability crisis. Only six states are considered stable, one 
of which is California, which passed significant liability reforms in 
1975. The additional 32 states and the District of Columbia are 
considered states that are beginning to show problem signs. In 2000, 
Pennsylvania's medical liability payments per capita--the amount of 
money spent per resident--was the highest state in the nation. The 
amount for Pennsylvania was $40.23 per person compared to California's 
$5.98 per person in 2000.
    Only a few short years ago there were more than 30 insurance 
companies active in the Pennsylvania market. Today, there are only two 
major insurance companies left. The Pennsylvania Insurance Department 
has approved several new medical liability insurance companies during 
the past year, but the market still lacks sufficient capacity and 
competition.
    The Secretary of the Pennsylvania Insurance Department recently 
testified before a State senate committee on the status of the 
Pennsylvania medical liability insurance market. Among the key points 
that she shared:
  --Total medical liability coverage payments (primary and the state 
        Mcare Fund) have doubled in the last decade from $363 million 
        in 1991 to $730 million in 2001. Actuarial estimates for 2002 
        and 2003 are $893 million and $1.2 billion, respectively;
  --Pennsylvania healthcare providers have had to seek alternative risk 
        arrangements, such as self- insurance or risk retention groups, 
        or turn to the Pennsylvania Joint Underwriting Association 
        (JUA), the insurer of last resort;
  --Loss experience data from the Pennsylvania Insurance Department 
        indicates a tenuous financial situation for medical liability 
        insurers. Direct losses incurred exceeded direct premiums 
        written in 2001 by $102 million. The loss ratio for all 
        Pennsylvania medical liability insurance companies has 
        increased from 67 percent in 1996 to 127 percent in 2001;
  --Investment asset distribution of medical liability insurance 
        companies demonstrates that medical liability insurance 
        companies have less than 9 percent of their investment 
        portfolio in common stocks and they have not lost significant 
        investments as a result of the downturn in the financial 
        markets;
  --Mcare Fund payments have doubled since 1994. About $175 million was 
        paid in 1994 and about $350 million was paid in 2002: and
  --Medical liability insurers indicate that the two most important 
        barriers for entry and expansion in Pennsylvania are no caps on 
        non-economic damages and the existence of the Mcare Fund.
    It is significant that insurers are not leaving other property/
casualty markets. If the crisis were solely caused by lower investment 
income, as some groups have asserted, these companies would be leaving 
other insurance markets. But they are not. They are leaving the medical 
liability market because of the instability and lack of predictability 
of the risk. According to the Pennsylvania Insurance Department, 
liability insurance carriers had combined underwriting losses of $102 
million in 2001.
    Until insurers feel that they can make money writing medical 
liability policies in Pennsylvania, they will either dramatically 
increase their rates to ensure that they are more than adequately 
covered or discontinue writing any policies in Pennsylvania.
    As the medical liability insurance market continues to deteriorate, 
some commercial carriers have had to exit markets and others have had 
to dramatically increase premiums to stabilize their financial 
conditions. As a result, many companies have seen their ratings 
downgraded and the number of plans in rehabilitation or liquidation has 
grown, which increases the coverage gaps.
    With the crisis only growing worse, Pennsylvania enacted three 
liability reform bills in 2002: the ``Medical Care Availability and 
Reduction of Error (Mcare) Act,'' the ``Fair Share Act'' that changes 
the joint and several liability rule, and a new law to end venue 
shopping. In addition, the Supreme Court has issued new rules designed 
to alleviate the problem. Combined, these new laws and rules should 
result in long-term premium savings.
    It will take several years to realize the full benefit of these 
reforms since they apply only to incidents on or after the effective 
date of the acts and are spread over a multi-year period before the 
full financial benefits are realized. In addition, insurers are likely 
to wait for actual claims experience and the results of anticipated 
court challenges before modifying premiums.
    Meanwhile, hospitals and physicians continue to feel the effects of 
a shrinking income base and dramatic expense increase, and patients pay 
the ultimate price.
    To help address this crisis, hospitals and physicians need 
reasonable limits on non-economic damages. To help lower settlements 
and awards and for insurance companies to be able to better predict 
awards for liability cases, we must address non-economic damages. 
Today's system for assessing non-economic damages in medical liability 
cases is lacking in standards and thus is prone to variable results in 
similar cases. The resulting unpredictability encourages divergences in 
valuation of cases, thus undercutting the ability of parties to reach 
voluntary settlement without expensive trials. It also adversely 
affects the availability and cost of medical liability insurance.
    Non-economic damages are separate from, and do not include, 
compensation for medical costs, lost wages, or other out-of-pocket 
expenses, and they do not include punitive damages.
    Two principles must guide our debate on this issue. Injured 
patients are entitled to full compensation for all economic losses. 
Every person is entitled to receive health care services from a 
physician or other provider that are at least equal to the ``community 
standard of care.'' If the patient is injured by substandard care and 
suffers economic losses, the patient is entitled to recover those 
losses completely.
    Second, non-economic damages should be fair, equitable, stable and 
predictable. Almost everyone in society--physicians, patients, lawyers, 
and judges--agrees that losses due to substandard care should be 
compensated, but not excessively. Medical liability claims are complex. 
Seventy percent of such claims are won by the defendant, dismissed or 
dropped because they have no merit, but when juries do award damages 
they give health care injury claimants significantly more for their 
``pain and suffering'' than persons who have incurred the same kinds of 
injuries in car accidents or other settings. The median jury award has 
increased to $1 million a doubling of the amount since 1995.
    In closing, I would stress that the medical liability crisis is 
very real. Each day that passes without additional reform further 
batters a health care system already under siege. Policymakers must be 
prepared for the consequences of non-action--continued erosion of 
access to care, the unraveling of an exceptional system of care that 
may never be truly salvaged, and the clear cut costs that will come 
with rebuilding that system.
    Senators, there are warning signs that our system is collapsing. We 
are not only failing to attract the best candidates into surgery, but 
are also losing some of our bright young residents to fields outside of 
medicine altogether. A shocking number of graduating medical school 
seniors is choosing to pursue a second degree or to enter industry 
rather than to begin a residency. I have serious concerns about who may 
be doing your surgery or mine when the time comes, or who may be 
delivering your grandchildren or mine in the years ahead. It is not 
appropriate for individual states to compete for surgeons and 
obstetricians based on the cost of liability insurance. In order to 
preserve access to good care for everyone, the playing field must be 
level. For those reasons I respectfully urge you to urge you to support 
H.R. 5, the HEALTH Act, and to move as expeditiously as possible to 
deliver it to President's Bush's desk for signature.
    I thank the Chairman and this subcommittee for this opportunity and 
welcome questions at the appropriate time.

    Senator Specter. Thank you very much, Dr. McCombs.
STATEMENT OF DONALD M. BERWICK, M.D., M.P.P., PRESIDENT 
            AND CEO, INSTITUTE FOR HEALTHCARE 
            IMPROVEMENT; MEMBER, QUALITY OF HEALTH CARE 
            IN AMERICA COMMITTEE, INSTITUTE OF 
            MEDICINE, NATIONAL ACADEMY OF SCIENCES
    Senator Specter. We turn now to Dr. Donald Berwick, 
president and CEO of the Institute for Healthcare Improvement, 
a member of the Institute of Medicine of the National Academy 
of Sciences, a graduate of Harvard, master's in public policy 
from the JFK School of Government, and an M.D. from the Harvard 
Medical School. Thank you for joining us, Dr. Berwick, and we 
look forward to your testimony.
    Dr. Berwick. Thank you, Mr. Chairman. My full remarks are 
here for the record.
    Senator Specter. Your full statement will be made a part of 
the record, without objection.
    Dr. Berwick. Thank you so much.
    I am here as a representative of the IOM. I served on the 
committees that wrote the reports that you have referenced, and 
I serve on their governing council. Their reports are familiar 
to you.
    The To Err is Human report on which I focus says that tens 
of thousands of Americans are injured by their care, and many 
die as a result of their care instead of their diseases. Only a 
tiny fraction of these injuries are due to incompetence, or 
carelessness, or sabotage, or even gross negligence on the part 
of individuals. Most are wired into the system. Any human being 
in a similar situation runs the same risk of causing that 
injury, so in some sense they are due to errors, but that is a 
misleading idea, because they are caused by the design of the 
system.
    A way to think about that is, if today we fired every 
doctor and nurse that made a mistake in care, even multiple 
mistakes, tomorrow the injury rate would remain the same, 
because new human beings would be subject to the same frail 
systems in which they are embedded.
    The third finding, though is, that is not a prescription 
for hopelessness. Other industries have gotten safe. They have 
done it by engineering safety into the design of the system of 
work. We can do the same in health care, but we have not yet. 
In order to get safer, health care has to change. If it is to 
get much safer, it is going to have to change a lot.
    The two changes that our committee has recommended are in 
the arena of technology and in the arena of culture. 
Technologically, we are a backward industry. We lack modern 
information systems, we lack an electronic medical record, we 
have complex procedures and steps that vary senselessly from 
place to place, we build complexity into systems, and 
complexity invites failure.
    Culturally, we are even in worse shape at the moment. There 
are safe cultures and there are unsafe cultures. We are an 
unsafe culture in health care, despite the best intentions of 
the professionals who are in that system. A safe culture has 
four attributes. Safety is a priority. People can be open and 
talk about hazards and injuries in their own areas, in the 
areas of others. It can be discussed. Communication and 
coordination are high priorities, and innovation is constant.
    Today, health care organizations do not exhibit a culture 
of safety. Safety is not a top priority for top leaders. Their 
attention is focused on other imperatives for their 
organizations, and safety does not really pay off now in the 
health care system, and we do not talk about it very much. As 
the prior witness said, physicians and others are frightened to 
talk about injuries to patients and things that they are 
involved in, despite their wish to do well.
    I am an optimist. Today, I am speaking at noon to 1,000 
people at the National Patient Safety Foundation meeting here 
in Washington, which is making tremendous progress, as are many 
Federal agencies, including the Veterans Health Administration, 
DOD, Bureau of Primary Care, and HRSA. We have progress 
underway, but it is nowhere near enough.
    Congress has helped a lot. I have five recommendations for 
more help from Congress. The first is, I would like to suggest 
that you continue to review and support and encourage the 
really path-finding work going on in Federal agencies that give 
and fund care, the Veterans Health Administration, the Military 
Health Command, the Indian Health Service--these are gems, and 
they are making progress which could become national 
benchmarks.
    Second, please keep the spotlight on safety. Keep the heat 
on with hearings like this. We need to grow will in the public 
and the professions and in the leadership to make safety a 
priority.
    Third, the attention of your particular subcommittee on 
malpractice reform is important. The malpractice system impedes 
work on safety today. It enforces a culture of secrecy and fear 
which no successful safety agenda can really tolerate.
    I do not have a simple answer. The Institute of Medicine 
has recommended tort reform demonstration trials. I think the 
recommendation is correct. I see recently a report in the State 
of Florida just a few weeks ago for a statewide change that I 
think would be great.
    My personal recommendation--I am departing a bit from the 
Institute of Medicine here, because I am getting into details 
that are not in our report, but it would be for demonstrations 
that have five properties at the State level.
    The first property is that at the demonstration there 
should be immediate disclosure of any injury to any injured 
patient and family. It must be a requirement that disclosure 
occurs.
    Second, there should be apology. Injured patients want 
someone to say they are sorry. Our current system does not do 
that.
    Third, there should be fair and reasonable compensation to 
injured families and patients. I think the analogy to a 
workers' compensation system is correct.
    Fourth, there must be learning from these injuries so the 
rates go down.
    And fifth, the proper locus of responsibility is with the 
executives, boards, and leaders of health care systems, not 
with individual physicians. In general, when there is egregious 
misconduct or bad intention, that person should be rapidly 
disciplined, but that will only cover 2 or 3 percent of the 
injuries that patients get subjected to.
    I recommend that such tests be time-limited, and that the 
health care system be mandated to deliver. If the system does 
not get safer under the conditions of such a test, the test 
should end and we should return to the status quo.
    My fourth recommendation is that Congress should mandate 
the development of a national patient electronic medical record 
that should be available to any physician, office, practice in 
the United States at no cost or low cost. It should become a 
Federal standard, and should be used throughout the country, 
compatible with legacy systems.

                           prepared statement

    My final recommendation is that you continue to support, as 
you have, Senator, ambitious, path-finding research on patient 
safety through ARC and others. We are making progress 
intellectually. It needs to continue. Please be the voice of 
the American people on this. We need you to speak out about 
your concern about safety levels and demand that the system 
become safer.
    Thank you.
    [The statement follows:]
              Prepared Statement of Dr. Donald M. Berwick
    Thank you for the opportunity to testify here. I am President and 
CEO of a non-profit organization, the Institute for Healthcare 
Improvement, whose mission is to accelerate improvement of health care 
systems. I am also Clinical Professor of Pediatrics and Health Care 
Policy at Harvard Medical School.
    I am here today as a representative of the Institute of Medicine of 
The National Academies. I serve on the IOM's governing Council, and I 
was a member of the IOM's Committee on Quality of Healthcare in 
America, which wrote the two landmark reports on quality, To Err Is 
Human and Crossing the Quality Chasm. I believe that these and 
subsequent IOM reports on quality offer this nation, and this Congress, 
a superb blueprint for the redesign and improvement of our American 
health care system.
    I am going to focus on the To Err Is Human report mainly: What does 
it say? What should we do? And, how can Congress help?
    That report has three major findings:
  --First.--Many Americans are injured by the health care that is 
        supposed to help them. Tens of thousands, in fact, die from 
        injuries caused by their care and treatment, rather than from 
        their diseases. The IOM's estimate is between 44,000 and 98,000 
        such deaths per year in hospitals, alone.
  --Second.--Only a tiny fraction--perhaps two or three percent--of 
        these injuries are due to incompetence, carelessness, sabotage, 
        or gross negligence on the part of individuals. They tend, 
        instead, to come from latent hazards built right into the 
        systems of care. The more complex the systems, the bigger the 
        hazards. Put otherwise, the IOM finds that most patient 
        injuries, if they are due to human errors, are due to those 
        kinds of errors that are part of daily life--human factors--and 
        therefore those errors are in some sense, inevitable. If we 
        fired every single doctor and nurse who made a mistake today, 
        the error rate in America health care would be the same 
        tomorrow. Mostly, the people are good, but they work in flawed 
        systems.
  --Third.--Errors can be reduced, but not eliminated. Injuries are 
        different; they can be eliminated, or nearly so. From other 
        industries and from good theories, we know that it is possible 
        for very complicated systems to be very safe--much safer than 
        health care--by providing technological and cultural supports 
        that make human error less likely to do harm. The problem is 
        that health care has not yet invested anywhere near enough 
        time, talent, and money in trying to become much safer. We lack 
        both the technologies and the culture that could make us safe.
    To get safer, health care has to change. To get much safer, it has 
to change a lot.
    On the technology front, we must modernize our information systems, 
make the electronic medical record a routine feature of all health 
care, and simplify our procedures and practices by removing unnecessary 
steps, unnecessarily complicated equipment, and senseless variations in 
practice from place to place. We need to integrate information across 
boundaries, so that we do not drop the ball when the patient moves from 
one hospital to another, or from the office to the hospital to the 
nursing home and back home. We need to develop registries and systems 
for remembering patients' drugs, diagnoses, and preferences. We--both 
the care providers and the public--need to understand that in health 
care, more is not always better--in fact, it is very often worse. And 
that even in this wonderful age of biomedicine, simpler care is often 
safer care.
    As tough as the technologic challenges are, the cultural changes we 
need may be even tougher. There are safe cultures, and there are unsafe 
cultures. The properties of a safe culture include the following:
  --Safety is a top priority, from the top, all the time; no injury--
        none--is regarded as inevitable;
  --People talk openly about hazards, errors, injuries, and other 
        threats to safety. A fearful organization--where people feel 
        that they have to hide their own mistakes--cannot be a safe 
        organization;
  --Communication and coordination are high priorities; people value 
        teamwork above all;
  --Innovation is constant, and new ways to make things safer are 
        rapidly incorporated into practice.
    From this cultural viewpoint, most health care organizations do not 
exhibit a culture of safety. Becoming much safer is not yet a top 
priority for clinical leaders, executives, and Boards. Other, 
apparently more pressing, issues of organizational finance and survival 
occupy their attention. Few seem to believe that major improvements in 
patient safety will help them become more vital, resilient players in 
their markets. Financially, safety in health care does not yet pay off.
    In fact, we still do not even talk about it much. People in health 
care are fearful about discussing injuries to patients, near misses, 
and errors. They are afraid of lawsuits, embarrassment, and mistrust 
from colleagues. Most injured patients never know that it happened to 
them. Communication and coordination are not taught as skills in 
professional training, nor are they well-supported by proper 
investments of time and leadership attention. Nor have we yet invested 
enough in innovations to modernize our safety systems, especially 
innovations related to electronic patient records and prescribing 
systems. Health care systems are complaining about the costs of 
modernizing their patient record and drug order systems. In short, with 
respect to the needed cultural changes, we are stuck in ``neutral'' too 
often and in too many places.
    Since the IOM reports, awareness has grown that health care safety 
ought to be a top priority. But, actions have lagged well behind 
awareness.
    And yet, I am an optimist. People are waking up. Today and 
tomorrow, the National Patient Safety Foundation is holding a 
conference here in Washington with hundreds of clinicians and health 
care leaders attending to learn about how to improve from some of the 
greatest experts in the world. Federal systems, like the Veterans 
Health Administration, the Department of Defense's medical care system, 
and the Bureau of Primary Care in the Health Resources and Services 
Administration, are making widespread progress in improvement. My 
organization--the IHI--is announcing this afternoon the launch of a 
free, open, web-based support system--``QualityHealthCare.org''--to 
help anyone, anywhere, who wants to improve care, and we are beginning 
with patient safety as the prime focus.
    Congress has helped, but you can help even more. Here is how.
  --Continue your review, support, and encouragement of leading work on 
        patient safety in Federal agencies that give or fund care, 
        including the Veterans Health Administration, the Military 
        Health Care System, HRSA, the Indian Health Service, and CMS. 
        Urge--insist--that these systems become benchmarks of safety 
        for the nation.
  --Keep the spotlight on safety with hearings such as this, and in 
        your own individual work, so that the public will for change 
        grows.
  --Help us reduce the toxicity of our current unfair, inefficient, and 
        illogical malpractice liability system, which today produces 
        too much fear and waste, and which fails to compensate most 
        injured patients at all. The IOM has called for one or more 
        statewide demonstration projects on medical tort reform, and 
        Congress should do what it can to make sure these actually take 
        shape. (A recent report from the Florida Governor's Select Task 
        Force on Health Professional Liability Insurance includes some 
        creative ideas for one such demonstration.) A tort reform 
        demonstration trial should have, in my personal opinion, the 
        following five elements: (a) immediate disclosure of injuries 
        to patients and families; (b) apology; (c) fair and reliable 
        compensation to injured patients and families (analogous to a 
        workers' compensation system); (d) learning from injuries and 
        near misses so that hazards are continually reduced; and (e) 
        fixing the locus of responsibility for all of this at the 
        enterprise level--holding executives, Boards, and leaders 
        accountable for improving safety, rather than generally blaming 
        individual clinicians. (Of course, in the very rare instances 
        when the injury is the result of bad intention or clear and 
        gross individual incompetence or negligence, action to correct 
        individuals should be prompt and precise. We must keep in mind, 
        however, that the vast majority of injuries do not have this 
        property.) Finally, tort reform experiments should be time-
        limited tests--at first perhaps three or four years long. The 
        changes should become permanent only if the new system achieves 
        measurably higher levels of fairness, compensation, and safety 
        than the current one.
  --To help bring health care into the modern electronic era, please 
        establish a national program to produce, within the next two 
        years, a simple, public-domain electronic medical record that 
        any hospital or physician's office in the nation can get and 
        use. Such a record should have a problem list, a medication 
        list, registry functions, and the ability to interface and 
        exchange information helpful to individual patient care.
  --Continue to fund ambitious, path-finding patient safety research 
        through the Agency for Healthcare Research and Quality and 
        other related research programs.
    Above all, please continue to be the voice of the American people, 
expressing our shared concern about the current, unacceptable levels of 
injuries to patients. Insist that the health care system become safer, 
and create rewards for those systems that invest authentically in that 
goal, and consequences for those that do not.

    Senator Specter. Thank you very much, Dr. Berwick. We will 
be coming back with questions a little later.
STATEMENT OF JAY ANGOFF, COUNSEL, ROGER C. BROWN & 
            ASSOCIATES
    Senator Specter. I would like now to call on Mr. Jay 
Angoff, Of Counsel to Roger Brown & Associates, Jefferson City, 
Missouri. He has served as Missouri's Insurance Director and as 
New Jersey's Deputy Insurance Commissioner, and is a graduate 
of Oberlin and Vanderbilt Law School. Thank you for joining us.
    Mr. Angoff. Thank you very much, Mr. Chairman.
    In Missouri, Mr. Chairman, we have got a law which requires 
the Insurance Department to collect data directly from the 
medical malpractice insurers on claims filed each year, claims 
closed each year, both paid and unpaid, and payment per claim. 
We actually collect data on each payment, each medical 
malpractice payment that occurs.
    What we have found is that there is a general downward 
trend. In the 6 years I was a commissioner, between 1993 and 
1998, the number of malpractice claims filed went down, the 
number of malpractice claims paid went down, and not 
surprisingly, medical malpractice rates went down.
    After I left the Department, claims filed continued to go 
down, claims paid continued to go down, and in particular the 
average payment per claim, particularly between 2000 and 2001, 
went down substantially, so what happened to medical 
malpractice insurance rates in Missouri? They went up. They 
went way up. That does not seem to make sense, but it really 
does make sense when you understand the underlying 
characteristics of the medical malpractice insurance industry, 
and I would like to talk about four.
    First, malpractice carriers make their money on investment 
income, not on paying out less than they take in. The reason is 
that malpractice carriers hold their premium income for an 
average of about 6 years before they pay out the claim 
associated with that premium, so when investment income is 
high, malpractice carriers do great. When investment income is 
low, they do not do very well and obviously, Mr. Chairman, they 
are not doing very well now. Regardless of whether they have 
their money in stocks or in bonds, they are not making very 
much money.
    Today, they have an unprecedented amount in cash, because 
there is no place today malpractice insurers can put their 
money where they are going to make any money, so that is number 
1, the first explanation of the underlying cause of the 
insurance cycle which causes rates to go up even though claims 
might be going down.
    A second reason is the cost of reinsurance. Just as we buy 
insurance to pay claims we cannot afford, insurers by insurance 
called reinsurance to pay the very high claims they cannot 
afford to pay. The cost of reinsurance, Mr. Chairman, was going 
up before September 11. After September 11, obviously, as you 
know, it went up even more, for reasons that have nothing to do 
with malpractice or the medical system.
    Cause number 3, and this is fairly technical but it is very 
important, when insurance companies say they have a loss, what 
they mean is, not--when they talk about their losses, they do 
not mean the amount they actually pay out in a given year. They 
talk about the amount that they project that they ultimately 
will pay out on premiums collected in that year.
    So for example, let us go back to the last insurance 
crisis, which you remember, in the mideighties, the same thing 
was happening then as is happening now, and there was the same 
rhetoric on both sides, as we hear today. At that time, 
insurance companies said they had a very high loss ratio, that 
they were paying out more than a dollar in losses for each 
dollar they took in in premiums, but what they meant was--and 
there is nothing insidious about this--this is just the way 
that insurance accounting is done.
    What they meant was, they projected that they were going to 
pay out more than a dollar ultimately on the premiums that they 
took in, let us say in 1986. Well, what it turned out was, when 
it came time to pay those premiums they actually paid out a lot 
less than they projected that they would pay out. That is why 
insurers were able to cut their rates in the nineties. The same 
thing is happening now. Insurers are projecting that they are 
going to pay out a great deal. In fact, ultimately they will 
not pay out that much.
    And then finally, Mr. Chairman, the final cause which I 
think is very important in these periodic insurance crises, is 
the antitrust exemption for the insurance industry, the 
McCarran-Ferguson Act. That was an act enacted in 1945 which 
exempts insurers from the antitrust laws except for boycotts. 
Very importantly, though, even the boycott exception to 
McCarran has been narrowed.
    After the last insurance crisis, the attorneys general of 
19 States sued several insurers and reinsurers alleging that 
they had gotten together and restricted coverage. The Supreme 
Court ultimately said that the AGs could proceed with their 
case, and it was ultimately settled. It was ultimately settled 
because rates were going down by the time they got around to 
settling it, but very importantly, Justice Scalia wrote an 
opinion very narrowly construing the boycott exception.

                           prepared statement

    So, Mr. Chairman, those four reasons are the underlying 
causes, the antitrust exemption, the high cost of reinsurance, 
the change in investment income, and the fact that insurers 
make rates based on incurred losses, not paid losses. These 
things occur regardless of the litigation system.
    Thank you very much, Mr. Chairman.
    [The statement follows:]
                    Prepared Statement of Jay Angoff
    Mr. Chairman and Members of the Committee: My name is Jay Angoff 
and I am a lawyer from Jefferson City, Missouri, and a former insurance 
commissioner of Missouri and deputy insurance commissioner of New 
Jersey. I appreciate the opportunity to testify here today.
                               background
    During my 1993-98 tenure as insurance commissioner of Missouri, 
both the number of medical malpractice claims filed and the number of 
medical malpractice claims paid out decreased: according to the data 
the medical malpractice insurance companies filed with our department, 
the number of new medical malpractice claims reported decreased from 
2,037 in 1993 to 1,679 in 1998, and the number of medical malpractice 
claims paid out decreased from 559 in 1993 to 496 in 1998. See Exhibits 
1 and 2. As might reasonably be expected, medical malpractice insurance 
rates in Missouri decreased during that time.
    After I left the insurance department, the number of malpractice 
claims paid continued to decrease: from 496 in 1998 to 439 in 2001. And 
the number of malpractice claims filed decreased even more 
dramatically: from 1,679 in 1998 to 1,226 in 2001. Moreover, the 
average payment per claim rose by less than 5 percent--from $161,038 to 
$168,859--far less than either general or medical inflation.
    Unexpectedly, however, malpractice insurance rates rose sharply 
last year in Missouri--by an average of almost 100 percent in little 
over a year, according to a Missouri State Medical Society survey--just 
as they did during the insurance crises of the mid-1970's and mid 
1980's. Insurance rates going up while insurance claims are going 
down--and Missouri is just one of many states where this phenomenon is 
occurring--doesn't seem to make sense. But it does make sense, for four 
reasons.
                       causes of insurance crises
    First, malpractice insurers make money not by taking in more in 
premiums than they pay out in claims, but by investing the premiums 
they take in until they pay the claims covered by those premiums. 
Investment income is particularly important for malpractice insurers 
because they invest their premiums for about six years, since they 
don't pay malpractice claims until about six years after they have 
occurred; insurers pay other types of insurance claims much more 
quickly. When either interest rates are high or the stock market is 
rising, a malpractice insurer's investment income more than makes up 
for any difference between its premiums and its payouts. Today, on the 
other hand, stocks have crashed and interest rates are near 40-year 
lows. The drop in insurers' investment income today can therefore dwarf 
the decrease in their claims payments, and thus create pressure to 
raise rates even though claims are going down.
    Second, just as people buy insurance to insure themselves against 
risks that they can't afford to pay for or choose not to pay for 
themselves, insurance companies buy insurance--called re-insurance--for 
the same reason. For example, an insurer might buy reinsurance to pay 
an individual claim to the extent it exceeds a certain amount, or to 
pay all the insurer's claims after its total claims exceed a certain 
amount. The re-insurance market is an international market, affected by 
international events, and the cost of re-insurance for commercial lines 
was already increasing prior to the terrorist attacks. After those 
attacks, not surprisingly, it increased far more, due to fears related 
to terrorism (and completely unrelated to medical malpractice).
    Third, insurance companies use a unique accounting system-called 
statutory accounting principals, or SAP--rather than the generally 
accepted accounting principles (GAAP) used by most other companies. 
Under this system, insurers increase their rates based on what their 
``incurred losses'' are. ``Incurred losses'' for a given year, however, 
are not the amount insurance companies have paid out in that year--
although that would be its non-insurance, common-sense meaning--but 
rather are the amount the insurer projects it will pay out in the 
future on policies in effect in that year. These projections are, by 
definition, a guess, under the best of circumstances, i.e., under the 
assumption that an insurer has no business reason to either overstate 
or understate them.
    Insurers do, however, have reasons for inflating or understating 
their estimates of ``incurred losses.'' Insurance companies who are 
thinly capitalized--who have very little cushion, called ``surplus'' in 
the insurance industry, beyond the amount they estimate they must pay 
out in claims--will often understate their ``incurred losses'' on the 
reports they file with insurance departments so that they can show a 
higher surplus on those reports. (It's the job of insurance department 
auditors to ferret out insurers who are doing this.)
    At other times, however--like today--insurers overstate their 
incurred losses to justify a rate increase. In addition, because 
increasing their ``incurred losses'' lowers their income, they also 
have tax reasons for inflating those estimates. Today, insurers' 
incurred loss estimates have increased dramatically because they are 
seeking to recoup the money they have lost on investments--not because 
the amount they have actually paid out in the past has risen 
substantially (to the contrary, in Missouri it has actually decreased). 
When it becomes apparent that the insurers' current loss estimates are 
too high, insurers will be able to use the amount they estimated they 
would pay out but did not in fact pay out to reduce premiums or 
increase profits, or both. This is one reason premiums fell during the 
1990's: the ``incurred loss'' estimates insurers made in the mid-1980's 
to justify their rate increases during the 1985-86 insurance crisis 
turned out to be wildly inflated, enabling insurers to use the 
difference between what they estimated they would pay out and what they 
actually ended up paying out to both reduce premiums and increase their 
profits in the 1990's. These same phenomena will inevitably occur after 
this insurance crisis.
    The final factor contributing to periodic spikes in insurance rates 
is the insurance industry's exemption from the antitrust laws under the 
McCarran-Ferguson Act. Unlike virtually all other major industries, 
insurance companies may agree among themselves to raise prices or 
restrict coverage, may collectively refuse to deal except on specified 
terms, and may engage in other anticompetitive activities. When times 
are good--i.e., when investment income is high--the industry's 
antitrust exemption would seem to be irrelevant. Far from raising 
prices in concert, insurance companies compete for market share by 
cutting price. When times are bad, however--and they could hardly be 
worse than they are today, when both the stock market and the bond 
market are producing low or negative returns--the antitrust exemption 
for the insurance industry allows insurers to collectively raise their 
prices without fear of prosecution. In other industries, fear of such 
prosecution prevents such collective increases.
    There is a long and unfortunate history of classic boycotts 
collective refusals to deal in the property/casualty insurance 
industry. See, e.g., U.S. v. South-Eaastern Underwriters Assn., 322 
U.S. 533 (1944) (agreement by insurers not to deal with customers or 
agents of competitors who refused to join price-fixing conspiracy); St. 
Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531 (1978) (agreement 
among St. Paul and three other malpractice insurers not to write 
medical malpractice insurance for doctors insured by St. Paul); 
Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) (agreement 
among insurers and reinsurers to refuse to do business using the 
traditional ``occurrence'' commercial general liability policy). At the 
same time, the Court has been careful to distinguish between classic 
collective refusals to deal, which under the boycott exception to the 
McCarran exemption are unlawful in the insurance industry as well as 
other industries, and other types of anti-competitive activities which 
are unlawful in general but lawful in the insurance industry. In 
Hartford Fire, for example, the Court emphasized that ``concerted 
agreements on contract terms are as unlawful as boycotts'' outside the 
insurance industry, 509 U.S. at 803, but that among insurers such 
agreements are lawful.
    Under current law, therefore, anti-competitive activity among 
insurers is only actionable if it can reasonably be characterized as a 
complete refusal deal: McCarran-Ferguson immunizes not only price-
fixing but also ``concerted agreement[s] to terms,'' which the Court in 
Hartford Fire characterized as ``cartelization.'' Id. at 802.
                 how to prevent future insurance crises
    What, then, can be done to reduce medical malpractice insurance 
rates in the short run, and to prevent periodic medical malpractice 
insurance crises from occurring in the future just as they have 
occurred in the past? First, Congress should repeal the McCarran 
antitrust exemption, so that insurers could no longer act in concert to 
raise prices without fear. A second solution is to give doctors 
automatic standing to challenge rate increase proposals filed by 
medical malpractice insurers with state insurance departments. Some 
malpractice insurers are today owned by doctors, and many doctors have 
the quaint idea that those doctor-owned insurers are somehow different 
than other insurers. When doctors own insurance companies, however, 
they act like insurance executives, not doctors; and they are just as 
affected by poor investment performance and high reinsurance costs as 
are other insurers, and just as likely to inflate their incurred loss 
estimates and take advantage of their antitrust exemption as are other 
insurers. By hiring an independent actuary at a cost of a few thousand 
dollars to point out the unreasonableness or irrationality of an 
insurer's ``incurred loss'' estimate on which its rate increase request 
is based, a state medical association could save its members hundreds 
of thousands or even millions of dollars in the aggregate.
    Third, the states could change their laws to make it easier for 
insurance commissioners to prevent excessive rate increases. In many 
states, for example, medical malpractice insurers can raise their rates 
at will, without getting approval of the insurance commissioner. In 
other states the insurance commissioner may disapprove a rate only if 
he first finds that the market is not competitive; by the time the 
commissioner makes such a finding, however, the damage has already been 
done.
    Fourth, states can authorize and provide start-up loans for new 
malpractice insurers which would compete with the established insurers. 
In Missouri, the legislature created such a company to write workers 
compensation insurance in 1993, when workers comp rates were increasing 
dramatically even though workers comp claims were not, and that company 
has been a success: it charged rates that were based on experience 
rather than inflated ``incurred loss'' estimates, which forced the 
other insurers to do the same; it paid back its loan from the state 
well ahead of schedule; and it now is a significant player in the 
workers comp market. The key to its success is the fact that it 
competed with the established insurers for all risks, including the 
most profitable; the established carriers had sought to limit its 
mission to insuring only the worst risks. If a state establishes a new 
medical malpractice carrier and authorizes it to compete with the 
established carriers for all doctors' business then that insurer should 
help drive medical malpractice rates down just as the Missouri state-
authorized workers comp insurer has helped drive workers comp rates 
down.
    Finally, there is the California 20 percent solution. In 1988, 
California voters narrowly approved a ballot initiative, Proposition 
103, which not only repealed California's antitrust exemption for 
insurance companies and gave both doctors and consumers automatic 
standing to challenge insurers' proposed rate increases, but also 
mandated that insurance companies roll back their rates. The California 
Supreme Court upheld substantially all of Proposition 103, including 
the rollback, modifying it only to the extent necessary to permit 
insurers to avoid the rollback if they could demonstrate that they 
would be unable to earn a fair rate of return if their rates were 
rolled back. Few insurers could prove this, and as a result medical 
malpractice premiums in California fell sharply in the years 
immediately after Prop 103 was enacted, and even today are lower than 
they were in the year before Prop 103 was enacted. While a mandatory 
rollback sounds--and is--extreme, what California tells us is both that 
it is constitutional and that it works. Some doctors argue that what 
has caused rates to fall in California is a law limiting the non-
economic damages that injured people can recover that the California 
Supreme Court held constitutional in 1984. But in the first full year 
after the law was upheld, premiums rose by 35 percent. Premiums did not 
begin to fall until Prop 103 was enacted in 1988 and declared 
constitutional a year later. See Exhibit 3.
          what insurers themselves say about insurance crises
    To be sure, the current sharp and apparently irrational increases 
in insurance rates have created pressure to enact limitations on 
liability, based on the understandable rationale that if the amount 
injured people can recover from insurance companies is limited, 
insurance companies will pay out less money to such people, and they 
will pass at least some of those savings on to policyholders. I have 
explained that such limitations do not make sense because the other 
factors which cause insurance rates to fluctuate, such as investment 
income and the cost of reinsurance, have a much greater impact on the 
premium dollar than could any plausible limitation on the amount 
injured people could recover.
    In addition, Missouri and many other states did enact such 
limitations after the insurance crisis of the mid-1980's, or the 
insurance crisis of the mid-1970's, yet rates are rising today in those 
states just as they are rising in states that did not enact such 
limitations--even if, as in Missouri, litigation is decreasing, not 
increasing.
    But perhaps the best evidence that litigation does not cause 
insurance rates to rise--and conversely, that limiting litigation will 
not cause insurance rates to drop-is what two of the biggest medical 
malpractice insurance companies said themselves after the last 
insurance crisis. Florida reacted to that crisis by limiting non-
economic damages for all injuries to $450,000, and limiting liability 
in four other respects. After the law was passed, the insurance 
commissioner required all medical malpractice insurers to refile their 
rates to reflect the effect of the five major limitations on liability 
the state had just enacted. In response, Aetna Casualty and Surety 
conducted a study that concluded that none of those limitations would 
reduce insurance rates. See Exhibit 4. In particular, Aetna concluded 
that the $450,000 cap on non-economic damages would have no impact on 
Aetna's claims costs ``due to the impact of degree of liability on 
future losses, the impact of policy limits, and the actual settlement 
reached with the plaintiff.''
    The St. Paul Fire and Marine Insurance Company--which at the time 
was the largest malpractice insurer in the nation--conducted a similar 
study. That study analyzed 313 claims it had recently closed and found 
that 4 of those 313 claims would have been affected by the limitations 
enacted in Florida, ``for a total effect of about 1 percent savings.'' 
See Exhibit 5. The St. Paul further explained that the 1 percent 
savings estimate probably overstates the savings resulting from the new 
restrictions. And it specifically emphasized that ``the conclusion of 
the study is that the noneconomic cap of $450,000, joint and several 
liability on the nonecomic damages, and mandatory structured 
settlements on losses above $250,000 will produce little or no savings 
to the tort system as it pertains to medical malpractice.''
    What the Aetna and St. Paul studies may really be telling us--since 
they prepared those studies to justify their refusal to reduce their 
rates after limitations on liability were enacted--is that even if such 
limitations might reduce the amount insurers pay out, insurers don't 
pass on any savings to policyholders. More important, however, even if 
they did pass on any such savings, they would be insignificant compared 
to the other factors affecting malpractice rates. Perhaps that is why 
after the last insurance crisis the chairman of the Great American West 
Insurance Company told an audience of insurance executives that tort 
reform ``will not eliminate the market dynamics that lead to insurance 
cycles,'' and warned them that ``we must not over-promise--or even 
imply--that insurance cycles will end when civil justice reform 
begins.'' See ``Don't Link Rates to Tort Reform, Insurance Executive 
Warns Peers,'' Liability Week, Jan. 19, 1988, at 1.
                               conclusion
    In conclusion, over the long run the medical malpractice insurance 
industry is substantially more profitable than the insurance industry 
as a whole: during the 10-year period 1991-2000, according to the 
National Association of Insurance Commissioners, its return on net 
worth has been more than 40 percent greater than the industry average, 
and its loss ratio has been 6 percentage points lower than the industry 
average, i.e., it has paid out in losses six cents less on the premium 
dollar than have all property/casualty insurers. See Exhibit 7. Despite 
this long-run above- average profitability, however, medical 
malpractice insurance rates, for the reasons I have described, 
fluctuate substantially. The reforms I have outlined can both reduce 
those fluctuations and, particularly if the insurance industry's 
antitrust exemption is repealed, reduce the level of malpractice rates 
over the long run.
    I would be happy to answer any questions the committee may have. 
    
    
    
    
    
    
    
    
    
    
    
    

    Senator Specter. Thank you, Mr. Angoff.
STATEMENT OF JAMES D. HURLEY, CHAIR, MEDICAL 
            MALPRACTICE SUBCOMMITTEE, AMERICAN ACADEMY 
            OF ACTUARIES
    Senator Specter. Our next witness is Mr. James Hurley, 
chairperson of the Casualty Practice Council Medical 
Malpractice Subcommittee of the American Academy of Actuaries, 
consulting actuary at Tillinghast-Towers Perrin, based in 
Atlanta, a B.S. from the College of Insurance in New York. 
Thank you for joining us, Mr. Hurley, and we look forward to 
your testimony.
    Mr. Hurley. Mr. Chairman, members of the subcommittee, 
thank you for inviting me to testify today on behalf of the 
American Academy of Actuaries.
    The academy is the public policy and professionalism 
organization for actuaries practicing in all specialties within 
the United States. It is nonpartisan, and assists the public 
policy process through the presentation of clear and objective 
actuarial analysis. The academy also develops and upholds 
actuarial standards of conduct, qualification, and practice.
    For those not familiar with actuaries, actuaries collect 
and evaluate loss and exposure data to advise about rates to be 
charged for prospective coverage and reserve liability to be 
carried related to the coverage already provided. The academy 
appreciates this opportunity to comment on issues related to 
the availability and pricing of malpractice insurance.
    In the time available, I would like to highlight a few key 
points in my written statement. I will start by discussing 
recent experience in the malpractice line of business. During 
the 1990s, the medical malpractice line experienced favorable 
operating results. It was contributed to by favorable reserve 
development on prior coverage years, and healthy investment 
returns. Insurers competed aggressively. Health care providers 
shared in the benefit of improved loss experience and higher 
levels in investment income through stable or decreasing 
premiums.
    Recently, however, the cost of malpractice insurance has 
been rising. Rate increases have been precipitated in part by 
the growing size of claims, more frequent claims in some areas, 
and higher defense costs. The decline in expected future bond 
yields exacerbates the need for rate increases.
    From a financial standpoint, medical malpractice results 
deteriorated for the 3 years ending 2001. 2002 data is not yet 
available, but it is projected to reflect similar results. Two 
indicators of the financial results are the combined ratio and 
the operating ratio. We can obtain these indicators for 
reporting companies from A. M. Best data. A. M. Best is a 
company that offers comprehensive data to insurance 
professionals and tracks these results. The combined ratio is 
an indication of how the company is doing in its insurance 
underwriting.
    For all companies reporting to A. M. Best, the combined 
ratio of 130 percent and 134 percent for 1999 and 2000 
respectively deteriorated to 153 percent in 2001. For 
underwriting, this represents an expected loss of 53 cents on 
each dollar of premium written in 2001. Preliminary projections 
for 2002 are for a combined ratio just under 140 percent.
    A measure of the overall profitability of companies is the 
operating ratio. The A. M. Best operating ratio adjusts for the 
combined ratio for other expense items and primarily investment 
income as well. It does not include Federal income tax.
    The operating ratio for 1999 and 2000 was approximately 106 
percent, indicating a net loss of 6 cents on every dollar of 
premium. This deteriorated to 134 percent in 2001, indicating a 
loss of 34 cents per dollar of premium. Given lower investment 
income, the 2002 operating ratio will probably not improve as 
much as the projected improvement in the combined ratio. At 
these levels, 2001 and 2002 results are the worst they have 
been in 15 years or more, certainly approximating levels of the 
1980s.
    The data is clear. Today, the loss and operating 
environment has deteriorated. Benefits of favorable reserve 
development appear to be gone, and the available investment 
income offset has declined. In fact, some say that reserve 
liabilities may require increases to cover current ultimate 
loss obligations. As a result, rates for both insurers and 
reinsurers need to increase to properly align with current loss 
and investment income levels. Companies failing to do this 
jeopardize their surplus base and their financial health.
    My written statement summarizes the two key drivers of 
financial results and their effects on operating results and 
surplus for some 30 companies that specialize in this coverage. 
These companies represent about one-third of the companies 
reporting to Best. The results for these companies are more 
favorable than the industry, but reflect similar deterioration.
    In chart B at page 6 of my testimony, the total after tax 
operating income for these companies is shown. The favorable 
operating income of the earlier years in the 20 percent 
neighborhood has declined to a slight profit in 2000 and a 10 
percent loss in 2001.
    Likewise, on chart E on page 8 of my testimony, the surplus 
declines in the most recent couple of years. This is important, 
because surplus represents the capital base for these insurers. 
Its decline reduces capacity to write new or renewing business 
prospectively, and lessens insurers' ability to absorb any 
adverse development on business written in prior years.
    This, coupled with voluntary and involuntary withdrawals--
for example, St. Paul, MIIX, Reciprocal of America--contributed 
to availability problems, in addition to affordability 
problems.
    Companies continuing to write malpractice insurance must 
interpret current experience and determine what rates to charge 
for prospective coverage. The term ratemaking is used to 
describe this process. In ratemaking, the company must estimate 
the cost of the coverage, set a price for it, and assume the 
risk that the cost may differ, perhaps substantially, from 
those estimates.
    The ratemaking process is forward-looking. It does not 
reflect loadings for past pricing inadequacy or past investment 
losses. In short, ratemaking reflects future costs and 
expectations.

                           prepared statement

    My written testimony provides a bit more detailed 
discussion of this process. However, three additional 
observations. It should be noted that rates are generally 
subject to regulatory oversight in most jurisdictions. Second, 
investment portfolios are subject to regulatory constraints, so 
companies are limited in how much they can invest in equities, 
and third, because rates are generally reduced based on 
prospective bond yields, when yields decrease, rates need to 
increase.
    The academy appreciates the opportunity to provide an 
actuarial perspective for these important issues, and will be 
glad to answer any questions the subcommittee has. Thank you.
    [The statement follows:]
                 Prepared Statement of James D. Hurley
                              introduction
    The American Academy of Actuaries appreciates the opportunity to 
provide comments on issues related to patient access to health care 
and, in particular, the availability and pricing of medical malpractice 
insurance. The Academy hopes these comments will be helpful as Congress 
considers related proposals. This testimony discusses what has happened 
to medical malpractice financial results and likely effect on rates, 
the ratemaking process, and some discussion of frequent misconceptions.
                medical malpractice--what has happened?
    The medical malpractice insurance marketplace is in serious turmoil 
after an extended period of reported high profitability and 
competitiveness during the 1990s. This turmoil began with serious 
deterioration in financial results, continued with some consequences of 
these results and, at least at this point, gives rise to an uncertain 
future. Industry-wide financial results reflect a 2001 combined ratio 
(the measure of how much of a premium dollar is dedicated to paying 
insurance costs of the company in a calendar year) that reached 153 
percent and an operating ratio (reducing the combined ratio for 
investment income) of about 135 percent; the worst results since 
separate tracking of this line of business began in 1976. Projections 
for 2002 are for a lower combined ratio of approximately 140 percent 
and probable lesser improvement in the operating ratio. This follows 
1999 and 2000 operating ratios of 106 percent.
    The consequences of these poor financial results are several. 
Insurers have voluntarily withdrawn from medical malpractice insurance 
(e.g., St. Paul Companies, Inc., writer of approximately nine percent 
of total medical malpractice insurance premium in 2000) or have 
selectively withdrawn from certain marketplaces or segments of medical 
malpractice insurance. In addition, several insurers have entirely 
withdrawn due to poor financial results (e.g., Phico, MIIX, Frontier, 
Reciprocal of America, some of which are under regulatory supervision). 
Overall, premium capacity has been reduced by more than 15 percent. 
These withdrawals fall unevenly across the states and generally affect 
those identified as jurisdictions with serious problems more severely 
than others.
    Capacity to write business would have decreased even more if not 
for the fact that much medical malpractice coverage is written by 
companies specializing in this coverage, some of whom were formed for 
this specific purpose.
    The future outlook is not positive, at least in the short term. 
Claim costs are increasing more rapidly now than they were previously. 
Further, the lower interest rate environment would require higher 
premium rates, even if losses were not increasing. The combined effect 
is that there are likely to be more poor financial results and 
additional rate increases.
Background
    Today's premium increases are hard to understand without 
considering the experiences of the last decade. Rates during this time 
period often stayed the same or decreased relative to the beginning of 
the period due to several of the following factors:
  --Favorable Reserve Development.--Ultimate losses for coverage years 
        in the late 1980s and early 1990s have developed more favorably 
        than originally projected. Evidence of this emerged gradually 
        over a period of years as claims settled. When loss reserves 
        for prior years were reduced, income was contributed to the 
        current calendar years, improving financial results (i.e., the 
        combined and operating ratios). That was the pattern during the 
        middle to late 1990s for 30 provider-owned medical malpractice 
        insurers whose results are shown in Chart A. What is evident 
        from that chart is that favorable reserve development (shown as 
        a percentage of premium) was no longer a significant factor in 
        2001 for these insurers as the effect approached zero. In 
        contrast to the experience of these provider-owned insurers, 
        the prior-year reserves for the total medical malpractice line 
        of business actually deteriorated in 2000 and in 2001. 
        
        
  --Low Level of Loss Trend.--The annual change in the cost of claims 
        (frequency and severity) through most of the 1990s was lower 
        than expected by insurers, varying from state to state and by 
        provider type. This coincided with historically low medical 
        inflation and may have benefited from the effect of tort 
        reforms of the 1980s. Rates established earlier anticipated 
        higher loss trends and were able to cover these lower loss 
        trends to a point. As a result, rate increases were uncommon 
        and there were reductions in several states. This was justified 
        in part because the rates established at the beginning of the 
        last decade proved too high, inasmuch as carriers had assumed 
        higher loss trends.
    Insurers responded to the emerging favorable loss trend in 
different ways. Some held rates stable and paid policyholder dividends 
or gave premium discounts. Some reduced filed rates. Others increased 
rates modestly and tried to refine pricing models to improve overall 
program equity. In general, however, premium adequacy declined in this 
period. Collected rates came into line with insurers' costs, but 
competitive actions pushed rates even lower, particularly in some 
jurisdictions.
  --High Investment Yields.--During the 1990s, investment returns 
        produced a real spread between fixed income rates of return and 
        economic inflation. Counter to what some may believe, medical 
        malpractice investment results are based on a portfolio that is 
        dominated by bonds with stock investments representing a 
        minority of the portfolio. Although medical malpractice 
        insurers had only a modest holding of stocks, capital gains on 
        stocks also helped improve overall financial results. These 
        gains improved both the investment income ratio and the 
        operating ratio.
  --Reinsurers Helped.--Many medical malpractice insurers are not large 
        enough to take on the risks inherent in this line of insurance 
        on their own. The additional capacity provided by reinsurers 
        allows for greater availability of medical malpractice. Similar 
        to what was happening in the primary market, reinsurers reduced 
        rates and covered more exposure, making the net results even 
        better.
  --Insurers Expanded Into New Markets.--Given the financial results of 
        the early-to-mid-1990s, some insurers expanded into new markets 
        (often with limited information to develop rates). They also 
        became more competitive in existing markets, offering more 
        generous premium discounts. Both actions tended to push rates 
        down.
What Has Changed?
    Although these factors contributed to the profitability of medical 
malpractice insurance in the 1990s, they also paved the way for the 
changes that began at the end of the decade.
  --Loss Trend Began to Worsen.--Loss cost trends, particularly claim 
        severity, started to increase toward the latter part of the 
        1990s. The number of large claims increased, but even losses 
        adjusted to eliminate the distortions of very large claims 
        began to deteriorate. This contributed to indicated rate 
        increases in many states.
  --Loss Reserves Became Suspect.--As of year-end 2001, aggregate loss 
        reserve levels for the industry are considered suspect. Reserve 
        reductions seem to have run their course. As mentioned earlier, 
        the total medical malpractice insurance industry increased 
        reserves for prior coverage year losses in 2000 and 2001, 
        although results vary on a company-by-company basis. Some 
        observers suggest that aggregate reserves will require further 
        increases, particularly if severity trends continue or 
        intensify.
  --Investment Results Have Worsened.--Bond yields have declined and 
        stock values are down from 1990s highs. The lower bond yields 
        reduce the amount of expected investment earnings on a future 
        policy that can be used to reduce prospective rates. A one 
        percent drop in interest rates can be translated to a premium 
        rate increase of two to four percent (assuming no changes in 
        other rate components) due to the several year delay in paying 
        losses on average. A 2.5 percent drop in interest rates, which 
        has occurred since 2000, can translate into rate increases of 
        between 5 percent and 10 percent. Note that this factor may 
        discourage an insurer from maintaining market presence and also 
        may discourage new entrants.
  --The Reinsurance Market Has Hardened.--Reinsurers' experience 
        deteriorated as their results were affected by increased claim 
        severity and pricing changes earlier in the decade. Because 
        reinsurers generally cover the higher layers of losses, their 
        results are disproportionately influenced by increases in claim 
        severity. This, coupled with the broadly tightened reinsurance 
        market after Sept. 11, has caused reinsurers to raise rates 
        substantially and tighten reinsurance terms for medical 
        malpractice.
    The bottom line is that these changes require insurers to increase 
rates if they are to preserve their financial health and honor future 
claim payments.
The Results
    To obtain a better understanding of the effect of these changing 
conditions, we focus on the results of 30 specialty insurers that are 
primarily physician owned or operated and that write primarily medical 
malpractice business. Their results reflect the dynamics of the medical 
malpractice line. This sample represents about one-third of the insured 
exposures in the United States. 


    These insurers, achieving more favorable financial results than 
those of the total industry, showed a slight operating profit (four 
percent of premiums) in 2000. This deteriorated to a 10-percent 
operating loss in 2001 (see Chart B).
    There are two key drivers of these financial results:
  --Insurance Underwriting.--For these companies, a simplified combined 
        ratio was calculated by dividing calendar year loss and loss 
        adjustment and underwriting expenses by premium. The combined 
        ratios were 124 percent and 138 percent in 2000 and 2001, 
        respectively. That means in 2001, these insurers incurred $1.38 
        in losses and expenses for each $1.00 of premium. The preceding 
        five years were fairly stable, from 110 percent to 115 percent. 
        Deterioration of the loss and loss adjustment expense ratio 
        drove these results; the underwriting expense ratio remained 
        relatively constant (see Chart C). 
        
        
  --Investment Income.--Pre-tax investment income (including realized 
        capital gains and losses) derives from policyholder-supplied 
        funds invested until losses are paid as well as from the 
        company capital (``surplus''). The ability of investment income 
        to offset some of the underwriting loss is measured as a 
        percentage of earned premiums. This statistic declined during 
        the measurement period from the mid-40 percent to the mid-30 
        percent level and, in 2001, to 31 percent (see Chart D). 
        
        
    This offset will continue to decline because (i) most insurer-
invested assets are bonds, many of which were purchased before recent 
lower yields, and interest earnings do not yet fully reflect these 
lower yields; and (ii) the premium base is growing due to increased 
rates and growth in exposure. Invested assets are not increasing as 
rapidly as premium and, therefore, investment income as a percentage of 
premium will decline.
    The effect of these results on surplus is reflected in Chart E, 
which shows the percent change in surplus from one year to the next. 
Surplus defines an insurer's capacity to write business prospectively 
and to absorb potential adverse loss development on business written in 
prior years (see Chart E). 


                         the ratemaking process
    Ratemaking is the term used to describe the process by which 
companies determine what premium is indicated for a coverage. In the 
insurance transaction, the company assumes the financial risk 
associated with a future, contingent event in exchange for a fixed 
premium before it knows what the true cost of the event is, if any. The 
company must estimate those costs, determine a price for it and be 
willing to assume the risk that the costs may differ, perhaps 
substantially, from those estimates. A general principle of ratemaking 
is that the rate charged reflects the costs resulting from the policy 
and the income resulting from the anticipated policy covered losses, 
not what is actually paid or is going to be paid on past policies. It 
does not reflect money lost on old investments. In short, a rate is a 
reflection of future costs.
    In general, the actuarial process used in making these estimations 
for medical malpractice insurance starts with historical loss 
experience for the specific coverage and, usually, for a specific 
jurisdiction. Rates are determined for this coverage, jurisdiction, and 
a fixed time period. To the appropriately projected loss experience, a 
company must incorporate consideration of all expenses, the time value 
of money and an appropriate provision for risk and profit associated 
with the insurance transaction.
    For a company already writing a credible volume of the coverage in 
a state, the indications of the adjusted ultimate loss experience can 
be compared to its current premiums to determine a change. For a 
company entering the line or state for the first time, obtaining 
credible data to determine a proper premium is often difficult and, 
sometimes, not possible. In the latter situation, the risk of being 
wrong is increased significantly.
    Additionally, some lines of insurance coverage are more predictable 
than other lines. The unpredictability of coverage reflects its 
inherent risk characteristics. Most companies would agree that costs 
and, therefore, rates for automobile physical damage coverage, for 
example, are more predictable than for medical malpractice insurance 
because automobile insurance is relatively high frequency/low severity 
coverage compared to medical malpractice insurance. In the case of auto 
physical damage, one has a large number of similar claims for 
relatively small amounts that fall in a fairly narrow range. In medical 
malpractice insurance, one has a small number of unique claims that 
have a much higher average value and a significantly wider range of 
possible outcomes. There also is significantly longer delay for medical 
malpractice insurance between the occurrence of an event giving rise to 
a claim, the reporting of the claim, and the final disposition of the 
claim. This longer delay adds to the uncertainty inherent in projecting 
the ultimate value of losses, and consequently premiums.
    The following guidelines explain the ratemaking process:
    1. Historical loss experience is collected in coverage year detail 
for the last several years. This usually will include paid and 
outstanding losses and counts. The data is reviewed for reasonableness 
and consistency, and estimates of the ultimate value of the coverage-
year loss are developed using actuarial techniques.
    2. Ultimate losses are adjusted to the prospective level (i.e., the 
period for which rates are being made). This involves an appropriate 
adjustment for changes in average costs and claim frequencies (called 
trend). Adjustments also would be made for any changes in circumstances 
that may affect costs (e.g., if a coverage provision has been altered).
    3. Adjusted ultimate losses are compared to premium (or doctor 
counts) to determine a loss ratio (or loss cost per doctor) for the 
prospective period.
    4. Expenses associated with the business must be included. These 
are underwriting and general expenses (review of application, policy 
issuance, accounting, agent commission, premium tax, etc.) Other items 
to consider are the profit and contingency provision, reinsurance 
impact, and federal income tax.
    5. A final major component of the ratemaking process is 
consideration of investment income. Typically for medical malpractice 
insurance, a payment pattern and anticipated prospective rate of return 
are used to estimate a credit against the otherwise indicated rate.
    These five steps, applied in a detailed manner and supplemented by 
experienced judgment, are the standard roadmap followed in developing 
indicated rates. There are a number of other issues to address in 
establishing the final rates to charge. These include recognizing 
differences among territories within a state, limits of coverage, 
physician specialty, and others. The final rates will reflect 
supplemental studies of these various other aspects of the rate 
structure.
    Many states have laws and regulations that govern how premium rates 
can be set and what elements can or must be included. The state 
regulators usually have the authority to regulate that insurance 
premium rates are not excessive, inadequate, or unfairly 
discriminatory. It is not uncommon for state insurance regulators to 
review the justification for premium rates in great detail and, if 
deemed necessary, to hold public hearings with expert testimony to 
examine the basis for the premium rates. In many states, the insurance 
regulator has some authority to restrict the premium rates that 
insurance companies can charge.
                        frequent misconceptions
    In closing, it might be helpful to address some frequent 
misconceptions about the insurance industry and medical malpractice 
insurance coverage.
Misconception 1: ``Insurers are increasing rates because of investment 
        losses, particularly their losses in the stock market.''
    As we have pointed out, investment income plays an important role 
in the overall financial results of insurers, particularly for insurers 
of medical professional liability, because of the long delay between 
payment of premium and payment of losses. The vast majority of invested 
assets are fixed-income instruments. Generally, these are purchased in 
maturities that are reasonably consistent with the anticipated future 
payment of claims. Losses from this portion of the invested asset base 
have been minimal, although the rate of return available has declined.
    Stocks are a much smaller portion of the portfolio for this Group, 
representing about 15 percent of invested assets. After favorable 
performance up through the latter 1990s, there has been a decline in 
the last few years, contributing to less favorable investment results 
and overall operating results. Investment returns are still positive, 
but the rates of return have been adversely affected by stock declines 
and more so by lower fixed income investment yields.
    In establishing rates, insurers do not recoup investment losses. 
Rather, the general practice is to choose an expected prospective 
investment yield and calculate a discount factor based on historical 
payout patterns. In many cases, the insurer expects to have an 
underwriting loss that will be offset by investment income. Since 
interest yields drive this process, when interest yields decrease, 
rates must increase.
Misconception 2: ``Companies operated irresponsibly and caused the 
        current problems.''
    Financial results for medical liability insurers have deteriorated. 
Some portion of these adverse results might be attributed to inadequate 
knowledge about rates in newly entered markets and to being very 
competitive in offering premium discounts on existing business. 
However, decisions related to these actions were based on expectations 
that recent loss and investment markets would follow the same 
relatively stable patterns reflected in the mid-1990s. As noted 
earlier, these results also benefited from favorable reserve 
development from prior coverage years. Unfortunately, the environment 
changed on several fronts--loss cost levels increased, in several 
states significantly; the favorable reserve development ceased; 
investment yields declined; and reinsurance costs jumped.
    While one can debate whether companies were prudent in their 
actions, today's rate increases reflect a reconciliation of rates and 
current loss levels, given available interest yields. There is no added 
cost for past mispricing. Thus, although there was some delay in 
reconciling rates and loss levels, the current problem reflects current 
data.
Misconception 3: ``Companies are reporting losses to justify increasing 
        rates.''
    This is a false observation. Companies are reporting losses 
primarily because claim experience is worse than anticipated when 
prices were set. Several companies have suffered serious adverse 
consequences given these financial results, including liquidation or 
near liquidation. Phico, MIIX, Frontier and, most recently, the 
Reciprocal of America, are all companies forced out of the business and 
in run-off due to underwriting losses. Further, the St. Paul Companies, 
Inc, formerly the largest writer of medical malpractice insurance, are 
now in the process of withdrawing from this market. One reason for this 
decision is an expressed belief that the losses are too unpredictable 
to continue to write the business.
    The Academy appreciates the opportunity to provide an actuarial 
perspective on these important issues and would be glad to provide the 
subcommittee with any additional information that might be helpful.

    Senator Specter. Thank you very much, Mr. Hurley.
STATEMENT OF BRIAN HOLMES, M.D.
    Senator Specter. Our next witness is Dr. Brian Holmes, 
neurosurgeon, who recently moved from Pennsylvania to join a 
physician's group based in Hagerstown, Maryland. He has an 
undergraduate degree from the University of Pennsylvania and 
medical degree from Pennsylvania State University College of 
Medicine.
    Dr. Holmes, thank you for joining us. We look forward to 
your testimony.
    Dr. Holmes. Good morning, Mr. Chairman. My physician 
colleagues and I are grateful for this hearing and the 
opportunity to testify.
    You began to outline my professional training and 
experience, and I just wanted to reiterate that after 4 years 
of college, 4 years of medical schools, and then 7 years of 
postgraduate training in neurological surgery, I accepted the 
position of assistant professor at the Penn State University 
College of Medicine, where I remained for 4 years. I then moved 
on to Scranton, Pennsylvania, where I continued in private 
practice for 4 years.
    I recently moved to Hagerstown, Maryland and joined a group 
there, and I have a limited practice in Chambersburg, 
Pennsylvania. I am certified by the American Board of 
Neurological Surgeons, and I currently hold the office of 
president of the Pennsylvania Neurosurgical Society.
    In October of 2001, I received a letter from my liability 
insurance carrier stating that my insurance was being 
terminated effective December 31. When I inquired about that 
notification, I was told that that company was no longer 
writing policies for neurosurgeons in Pennsylvania. I found out 
at that time there was no option for liability insurance 
outside of the Joint Underwriters Association, a State-mandated 
organization.
    Unfortunately, I could not get a precise quote for my 
premium at that time, but neurosurgeons in Philadelphia were 
paying JUA rates in excess of $200,000. Therefore, I made 
arrangements to close my practice due to the potential of 
unaffordable insurance coverage. I canceled operations and 
appointments that had been scheduled, and made arrangements for 
the transfer of care for some patients. That transfer of care 
was difficult, because other neurosurgeons had left the State, 
and the delay for some patient appointments was up to 6 months.
    On December 31, 2001, I was notified that my insurance 
would not be canceled. This notification came 9 hours before my 
practice was scheduled to close. I was never able to find a 
satisfactory explanation as to why this occurred. Nevertheless, 
I made arrangements to reopen my practice and attempt to 
minimize the interruption in medical care which fell upon some 
patients.
    As the year 2002 unfolded, I saw other neurosurgeons in the 
State being assessed with very high premiums, premiums that 
literally exceeded their incomes. A gifted neurosurgeon 
specializing in spinal surgery at the Thomas Jefferson 
University was asked to pay a premium to the Joint Underwriters 
Association and CAT fund of over $300,000. He moved to Indiana. 
Other neurosurgeons retired, or contemplated moving out of the 
State. I became very outspoken about the liability crisis in an 
attempt to bring it to the attention of my State legislators 
and the public.
    Although I had a liability insurance policy in effect 
through the end of 2002, I was not confident that affordable 
insurance would be available for 2003. Therefore, I made the 
difficult decision to close my practice and move to Maryland. 
Unwillingly, I left the region in which I was born and raised, 
and expected to practice for many years. The professional 
liability insurance premium for a neurosurgeon in Hagerstown, 
Maryland, is approximately $30,000 per year.
    I was asked today to speak to give my story, but I believe 
this is really more a story about patients. I personally 
perform approximately 300 operations per year. Many are 
literally life-saving emergency procedures performed in 
circumstances where delay in treatment may determine the 
difference between recovery to productive existence versus 
disability or death.
    I evaluate and treat by nonsurgical means maybe 2,000 
patients per year. I had intended to practice neurosurgery in 
Scranton, Pennsylvania, for another 20 years. My subtraction 
from that medical community has real consequences for thousands 
of patients.
    The specialty of neurosurgery is numerically small. There 
are fewer than 3,500 neurosurgeons in the United States. 
Residency training programs graduate only about 130 
neurosurgeons per year nationwide. It is therefore very 
difficult to recruit neurosurgeons to States where others have 
left. I had tried to recruit neurosurgeons to Scranton, and was 
told by potential candidates that other States were preferred 
due to a more stable liability insurance climate.
    The implications for patients are profound. Trauma centers 
have strict criteria for on-call coverage by board-certified 
neurosurgeons and are being threatened. Each week now, I 
evaluate or perform surgery on patients who drive 200 miles 
from northeastern Pennsylvania to my practice based in 
Maryland.
    I would like to say a few words about neurosurgery and 
claims of malpractice. Neurosurgeons treat many patients with 
critical or life-threatening illness such as brain tumors, 
brain hemorrhage and spinal cord injury. The natural history of 
many of these disease processes results in some unfavorable 
outcomes such as disability, chronic pain, or death. That is 
why neurosurgery is classified as a high risk specialty.
    An unfavorable outcome may be due to the natural history of 
the disease, but patients often hold their physician 
accountable. The best data that I can derive from my peers in 
organized neurosurgery is that a neurosurgeon may expect to 
have a claim filed against him every 1\1/2\ years. The result 
is that most neurosurgeons have some outstanding claims. The 
majority are decided in favor of the physician. Unfortunately, 
the process of bringing a claim to closure takes several years. 
A claims history, which is almost inevitable in my specialty, 
amplifies the difficulty of obtaining affordable professional 
liability insurance in some States.

                           prepared statement

    In summary, I would say that as a surgeon and as a 
physician I am motivated by a sincere concern for patients, and 
physicians overall are troubled that our ability to promptly 
deliver high quality medical care to patients is threatened.
    Thank you.
    [The statement follows:]
                 Prepared Statement of Dr. Brian Holmes
    I am Brian Holmes. I am a neurosurgeon that recently moved from 
Pennsylvania to join a physician group based in Hagerstown, Maryland. I 
had been in practice in Scranton, Pennsylvania for four years.
    I will briefly outline my professional training and experience. I 
received an undergraduate degree from the University of Pennsylvania. I 
received my medical degree from the Pennsylvania State University 
College of Medicine in Hershey. I completed a six-year residency 
training program in neurosurgery at the Dartmouth-Hitchcock Medical 
Center in New Hampshire and a one year post-graduate fellowship in 
Cranial Base and Cerebrovascular Surgery at the George Washington 
University Medical Center. I accepted the position of Assistant 
Professor at the Penn State University College of Medicine where I 
remained for four years. I then moved on to Scranton, Pennsylvania 
where I continued in private practice for four years. I now practice 
primarily in Hagerstown, Maryland with a limited practice in 
Chambersburg, Pennsylvania. I am certified by the American Board of 
Neurological Surgeons and I currently hold the office of President of 
the Pennsylvania Neurosurgical Society.
    In October of 2001, I received a letter from my liability insurance 
carrier that my insurance was being terminated effective December 31, 
2001. When I inquired about the notfication, I was told that the 
company was no longer insuring neurosurgeons in Pennsylvania. I found 
out that at that time, there was no option for insurance outside of the 
Joint Underwriters Association, a state mandated organization. 
Unfortunately, I could not get a precise quote for my premium. 
Neurosurgeons in Philadelphia at that time were paying JUA rates in 
excess of $200,000. Therefore, I made arrangements to close my practice 
due to the potential of unaffordable insurance coverage. I cancelled 
operations and appointments that had been scheduled and made 
arrangements for the transfer of care for some patients. That transfer 
of care was difficult because other neurosurgeons had left the state 
and the delay for patient appointments was up to six months.
    On December 31, 2001 I was notified that my insurance would not be 
cancelled. This notification came nine hours before my practice was 
scheduled to close. I was never able to find a satisfactory explanation 
as to why this occurred. Nevertheless, I made arrangements to reopen my 
practice and attempt to minimize the interruption in medical care which 
fell upon some of my patients.
    As the year 2002 unfolded, I saw other neurosurgeons in the state 
being assessed with very high premiums--premiums that literally 
exceeded their incomes. A gifted neurosurgeon specializing in spinal 
surgery at the Thomas Jefferson University was asked to pay a premium 
to the Joint Underwriters Association and CAT fund of over $300,000. He 
moved to Indiana. Other neurosurgeons retired or contemplated moving 
out of the state. I became very outspoken about the liability crisis in 
an attempt to bring it to the attention of my legislators and the 
public.
    Although I had a liability insurance policy in effect through the 
end of 2002, I was not confident that affordable insurance would be 
available for 2003. Therefore, I made the difficult decision to close 
my practice and move to Maryland. Unwillingly, I left the region in 
which I was born and raised and expected to practice for many years.
    The professional liability insurance premium for a neurosurgeon in 
Hagerstown, Maryland is approximately $30,000 per year.
    I was asked to speak today to give ``my story.'' However, I believe 
that this is really a story about patients.
    I perform about three hundred operations per year. Many are 
literally life-saving emergency procedures performed in circumstances 
where a delay in treatment may determine the difference between 
recovery to a productive existence versus disability or death. I 
evaluate and treat by nonsurgical means about two thousand patients per 
year. I had intended to practice neurosurgery in Scranton for another 
twenty years. My subtraction from that medical community has real 
consequences for thousands of patients.
    The specialty of neurosurgery is numerically small. There are fewer 
than 3,500 neurosurgeons in the United States. Residency training 
programs graduate only about 130 neurosurgeons per year. It is 
therefore very difficult to recruit neurosurgeons to states where 
others have left. I had tried to recruit neurosurgeons to Scranton and 
was told by many potential candidates that other states were preferred 
due to a more stable liability insurance climate. The implications for 
patients are profound. Trauma centers have strict criteria for on-call 
coverage by Board Certified neurosurgeons and are being threatened. The 
thousands of patients of the neurosurgeons that are leaving 
Pennsylvania are experiencing dramatic interruptions and delays in 
care. Each week, I evaluate or perform surgery on patients who drive 
almost 200 miles from Northeastern Pennsylvania to my practice based in 
Maryland.
    I would like to say a few words about neurosurgery and claims of 
malpractice.
    Neurosurgeons treat many patients with critical or life-threatening 
illness such as brain tumors, brain hemorrhage, and spinal cord injury. 
The natural history of many of these disease processes results in some 
unfavorable outcomes such as disability, chronic pain, or death. This 
is why neurosurgery is classified as a ``high risk specialty.'' An 
unfavorable outcome may be due to the natural history of the disease, 
but patients often hold their physician accountable. The best data that 
I can derive from my peers and organized neurosurgery is that a 
neurosurgeon may expect to have a claim filed against him or her every 
one and one half years. The result is that most neurosurgeons have some 
outstanding claims. The majority of claims are decided in favor of the 
physician. Unfortunately, the process of bringing a claim to closure 
takes several years. A ``claims history,'' which is almost inevitable 
in my specialty, amplifies the difficulty of obtaining affordable 
professional liability insurance in some states.
    After almost nine years of practice and seven years of residency 
and fellowship training in neurosurgery, I am named as a primary 
defendant in one claim. Two other claims were filed but dropped before 
a written complaint was ever generated. I believe that the legal term 
for this process is ``non pros.'' I use the term, ``frivolous.'' 
Because I was a treating physician in two other cases, I am named on a 
list of co-defendants. I have never settled a claim or had a jury award 
decided against me. As a participant in the current discussion I feel 
that it is important to bring these facts forward.
    I would like to close by describing to you what is really second 
nature to me.
    I am motivated as a physician by my deep respect for patients. I 
have studied and worked intensively through over a decade of formal 
medical and neurosurgical training. I spend countless hours reading and 
participating in continuing medical education to maintain and improve 
my skills as a neurosurgeon. I spend many hours of personal time 
contemplating patients and nuances of their care. Physicians labor to 
make patients' lives longer and better because we care deeply about 
them. We are troubled that our ability to promptly deliver high-quality 
medical care to patients is threatened.
    I am grateful to you for giving me the opportunity to participate 
in this discussion today.
    Thank you.

    Senator Specter. Thank you very much, Dr. Holmes.
STATEMENT OF LINDA MCDOUGAL, WOODVILLE, WI
    Senator Specter. We now turn to Ms. Linda McDougal, a U.S. 
Navy veteran, an accountant, married, family in Woodville, WI, 
three sons, and Ms. McDougal had a medical procedure that she 
will testify about.
    Thank you for joining us, Ms. McDougal. The floor is yours.
    Ms. McDougal. Thank you, Chairman Specter. I greatly 
appreciate the opportunity you have given me.
    I am a victim of medical malpractice. I am 46 years old. I 
live with my husband and three sons in Woodville, a small 
community in Wisconsin. My husband and I are both veterans. 
This is my story.
    About 9 months ago, in preparation for an annual physical, 
I went to the hospital for a routine mammogram. I was called 
back for additional testing and had a needle biopsy. Within a 
day, I was told that I had breast cancer. We made the 
difficult, life-changing decision to undergo what we believed 
was the safest long-term treatment, a double mastectomy, the 
total removal of both of my breasts.
    Forty-eight hours after surgery, the surgeon walked into my 
room and said, I have bad news for you. You do not have cancer. 
I never had cancer. My breasts were needlessly removed. The 
pathologist switched my biopsy slides and paperwork with 
someone else's. Unbelievably, I was given another woman's 
results.
    How could the doctors have made this awful mistake? The 
hospital called my case an isolated incident. Since then, other 
cases within the same pathology lab in the same hospital have 
been found. On February 4, the Minnesota Department of Health 
made an unannounced visit to the hospital and found that my 
case had not even been documented and reported, a violation of 
State statutes. I think that doctors do a bad job of governing 
themselves.
    It has been very difficult for me to deal with this. My 
scars are not only physical, but emotional. After my breasts 
were removed, I developed raging infections, requiring 
emergency surgery. Because of my ongoing infections, I am still 
unable to have reconstructive surgery. I do not know whether I 
will ever be able to have anything that ever resembles breasts 
again.
    After I came forward publicly with my story, I was told 
that one of the pathologists had a 10-year exemplary 
performance record, and that she would not be reprimanded or 
punished in any way until a second incident occurred. Should 
someone else have to suffer or even die before any kind of 
disciplinary action is taken?
    Well, there are no easy answers. Apparently now the 
insurance industry is telling Congress it knows exactly how to 
fix what it believes to be the problem caused by malpractice, 
by limiting the rights of people like me, who have suffered 
permanent life-altering injuries. Why, even doctors have 
collectively refused to serve clients in order to gain leverage 
with the legislature.
    Arbitrarily limiting victims' compensation is wrong. 
Malpractice victims that may never be able to work again and 
may need help for the rest of their lives should be fairly 
compensated for their suffering. Without fair compensation, a 
terrible financial burden is placed on their families.
    Those who would limit compensation for life-altering 
injuries say that malpractice victims still would be 
compensated for not being able to work, meaning they would be 
compensated for economic loss. Well, I did not have any 
significant economic loss. My lost wages were approximately 
$8,000, and my medical expenses to date are $48,000. My 
disfigurement from medical negligence is almost entirely 
noneconomic.
    As you discuss and debate this issue, I urge you to 
remember that no two people, no two injuries, and no two 
personal situations are identical. It is unfair to suggest that 
all victims should be limited to this one-size-fits-all 
arbitrary cap that benefits the insurance industry at the 
expense of patients.
    I am a veteran, and I see that patriotism requires an 
honest recognition of our rights as defined in the 
Constitution, a foundation that our forefathers fought for, and 
what I thought we today continue to defend. Victims have a 
right to have their cases decided by a jury that listens to the 
facts of a specific case and makes a determination of what is 
fair compensation based on the facts of that case.
    I could never have predicted or imagined in my worst 
nightmare that I would end up having both of my breasts 
needlessly removed because of a medical error. No one plans on 
being a victim of medical malpractice, but it happened, and now 
proposals are being discussed that would further hurt people 
like me, all for the sake of helping the insurance industry. It 
would place negligent or incompetent physicians outside the 
reach of judicial accountability.
    I am not asking for sympathy. What happened to me may 
happen to you or someone you love, and when it does, maybe you 
will understand why I am telling my story. The rights of every 
injured patient in America are at stake, limiting victims' 
compensation in malpractice cases who have been hurt, who have 
suffered life-altering injuries like loss of limbs, blindness, 
brain damage, or even affected with the loss of a child or 
spouse.
    Instead of taking compensation away from people who have 
been hurt and putting it in the pockets of the insurance 
industry, we should look for ways to improve the quality of 
health care service in our country to prevent medical errors 
like the one that cost me my breasts, part of my sexuality and 
part of who I am as a woman.

                           prepared statement

    Medical malpractice kills as many as 98,000 Americans each 
year, and it permanently injures hundreds of thousands of 
others. We must make hospitals, doctors, HMOs, drug companies, 
and health insurers more accountable to patients. A good start 
would be to discipline health care providers who repeatedly 
commit malpractice. We should make their track records 
available to the general public. Limiting victims' compensation 
will not make health care safer or more affordable. All it will 
do is add to the burden of people whose lives have already been 
shattered. We should say no to this legislation.
    Thank you.
    [The statement follows:]
                  Prepared Statement of Linda McDougal
    First, I want to thank Chairman Specter and Senator Harkin. I 
greatly appreciate the opportunity you have given me. My name is Linda 
McDougal and I am a victim of medical malpractice.
    I am 46 years old. I live with my husband and sons in Woodville, a 
small community in northwestern Wisconsin. My husband and I are both 
veterans of the United States Navy. This is my story.
    About 8 months ago, in preparation for my annual physical, I went 
to the hospital for a routine mammogram. I was called back for 
additional testing and had a needle biopsy. Within a day I was told 
that I had breast cancer.
    My world was shattered. My husband and I discussed the treatment 
options and decided on the one that would give me the best chance of 
survival, and maximize my time alive with my family. We made the 
difficult, life-changing decision to undergo what we believed was the 
safest, long-term treatment--a double mastectomy.
    Forty-Eight hours after my surgery, the surgeon walked in my room 
and said, ``I have bad news for you. You don't have cancer.''
    I never had cancer. My breasts were needlessly removed. The 
pathologist switched my biopsy slides and paper work with someone 
else's. Unbelievably, I was given another woman's results.
    I was in shock. My husband was with me in the room and we were 
reduced to tears. Today, I am still in shock. To some extent, it was 
easier to hear from the doctor that I supposedly had cancer, than to 
hear after both my breasts were taken from me the fact that I never had 
cancer. How could the doctors have made this awful mistake?
    The medical profession betrayed the trust I had in them.
    It's been very difficult for me to deal with this. My scars are not 
only physical, but emotional. After my breasts were removed, I 
developed raging infections requiring emergency surgery. Because of my 
ongoing infections, I am still unable to have reconstructive surgery. I 
don't know whether I will ever be able to have anything that will ever 
resemble breasts.
    After I came forward publicly with my story, I was told that one of 
the pathologists involved had a ten-year exemplary performance record, 
and that she would not be reprimanded or punished in any way until a 
second ``incident'' occurred. Should someone else have to suffer or 
even die before any kind of disciplinary action is taken?
    While there are no easy answers, apparently now the insurance 
industry is telling Congress it knows exactly how to fix what it 
believes to be the ``problem'' caused by malpractice by limiting the 
rights of people, like me, who have suffered permanent, life-altering 
injuries.
    Arbitrarily limiting victims' compensation is wrong. Malpractice 
victims may never be able to work again and may need help for the rest 
of their lives should be fairly compensated for their suffering. 
Without fair compensation, a terrible financial burden is imposed on 
their families.
    Those who would limit compensation for life-altering injuries say 
that malpractice victims still would be compensated for not being able 
to work. Meaning, they would be compensated for their economic loss. 
Well, I didn't have any significant economic loss. My lost wages were 
approximately $8,000, and my hospital expenses of approximately $48,000 
were paid for by my health insurer. My disfigurement from medical 
negligence is almost entirely non-economic.
    As you discuss and debate this issue, I urge you to remember that 
no two people, no two injuries, no two personal situations are 
identical. It is unfair to suggest that all victims should be limited 
to the same one-size-fits-all, arbitrary cap that benefits the 
insurance industry at the expense of patients. Victims deserve to have 
their cases decided by a jury that listens to the facts of a specific 
case and makes a determination of what is fair compensation based on 
the facts of that case.
    Recently, I heard a politician on the news argue in favor of 
limiting patients' compensation. He said insurance companies need the 
predictability of knowing, in advance, the maximum amount they might 
have to pay to injured patients. He said lack of predictability makes 
it hard for insurance companies to run their businesses profitably. 
We'd all like to be able to count on the predictability that this 
politician wants for insurers. But life doesn't work that way. My case 
is a perfect example.
    I could never have predicted or imagined in my worst nightmare that 
I would end up having both my breasts removed needlessly because of a 
medical error. No one plans on being a victim of medical malpractice. 
But it happened, and now, proposals are being discussed that would 
further hurt people like me . . . all for the sake of helping the 
insurance industry.
    I'm not asking for sympathy. What happened to me may happen to you 
or someone you love. When it does, maybe you will understand why I am 
sharing my story. The rights of every injured patient in America are at 
stake. Limiting victims' compensation in malpractice cases puts the 
interests of the insurance industry ahead of patients who have been 
hurt, who have suffered life-altering injuries like loss of limbs, 
blindness, brain damage, infertility, sexual dysfunction, or loss of a 
child, spouse, or parent.
    Instead of taking compensation away from people who have been hurt 
and putting it in the pockets of the insurance industry, we should look 
for ways to improve the quality of health care services in our country 
to reduce preventable medical errors like the one that cost me my 
breasts; part of my sexuality; part of who I am as a woman.
    Medical malpractice kills as many as 98,000 Americans each year and 
it permanently injures hundreds of thousands of others. We must make 
hospitals, doctors, HMOs, drug companies and health insurers more 
accountable to patients. A good start would be to discipline health 
care providers who repeatedly commit malpractice. We should make the 
track records of individual health care providers available to the 
general public, instead of protecting bad doctors at the expense of 
unknowing patients.
    Limiting victims' compensation will not make health care safer or 
more affordable. All it do is add to the burden of people whose lives 
have already been shattered by medical errors. Every patient should say 
no to any legislation that does not put patients first. I urge you to 
do the same.
    Thank you for your time and consideration.

    Senator Specter. Thank you very much, Ms. McDougal, for 
sharing your situation with us.
STATEMENT OF LEANNE DYESS, VICKSBURG, MS
    Senator Specter. Our next and final witness is Leanne Dyess 
from Vicksburg, MS, a wife, mother of two, teacher for 20 
years. Her husband was involved in a car accident last year and 
sustained a massive head injury, and because of medical 
liability costs no neurosurgeon was immediately available to 
treat her husband.
    Thank you for joining us, Mrs. Dyess, and we look forward 
to your testimony.
    Ms. Dyess. Thank you, Chairman Specter. It is an honor for 
me to sit here before you this morning to open up the life of 
my family in an attempt to demonstrate how medical liability 
costs are hurting people across America. While others may talk 
in terms of economics and policy today, I want to speak to you 
from the heart.
    I want to share with you the life my two children and I are 
forced to live because of the crisis in health care that I 
believe can be fixed. This crisis is not about insurance, or 
doctors, or hospitals, or even personal injury lawyers. It is a 
crisis about individuals like you and I, and their access to 
what I believe is otherwise the greatest health care in the 
world.
    Our story began on July 5, when my husband, Tony, was 
returning from work in Gulfport, MS. We had started a new 
business. Tony was working hard, as I was. We were doing our 
best to build a life for our children, and their futures were 
filled with promise. Everything looked bright.
    Then in an instant everything changed. Tony was involved in 
a single car accident. They suspect he fell asleep, though we 
will never know. What we do know is that after removing him 
from the car, they rushed him to Garden Park Hospital in 
Gulfport. He had head injuries and required immediate 
attention. Shortly thereafter, I received a telephone call I 
pray no other wife will ever have to receive. I was informed of 
the accident and told the injuries were serious, but I cannot 
describe to you the panic that gave way to hopelessness when 
they told me, we do not have the specialist necessary to take 
care of him. We will have to airlift him to another hospital.
    I could not understand this. Gulfport is one of the 
fastest-growing, most prosperous regions in Mississippi. Garden 
Park is a good hospital. Where were the specialists that could 
have taken care of my husband?
    Almost 6 hours passed before Tony was airlifted to 
University Medical Center, 6 hours for the damage to his brain 
to continue before they had a specialist capable of putting a 
shunt into the back of his head to relieve the pressure on the 
brain, 6 unforgettable hours that changed our life. Today, Tony 
is permanently brain-damaged. He is mentally incompetent, 
unable to care for himself, unable to provide for his children, 
unable to live the vibrant, active, and loving life he was 
living just moments before the accident.
    I could share with you the panic of a woman suddenly forced 
into the role of both mother and father to her teenage 
children, of a woman whose life is suddenly caught in limbo, 
unable to move forward or backward. I could tell you about a 
woman who now had to worry about the constant care of her 
husband, who had to make concessions she never thought she 
would have to make in order to pay for his care and therapy, 
but to describe this would be to take us away from the most 
important point and value of what I have learned.
    Mr. Chairman, I have learned that there was no specialist 
on staff that night in Gulfport because a rising medical 
liability cost had forced physicians in that community to 
abandon their practices. In that area, in that time, there was 
only one doctor who had the expertise to care for Tony, and he 
was forced to cover multiple hospitals, stretching him thin and 
unable to care for everyone. Another doctor had quit his 
practice just days before Tony was admitted because his 
insurance company terminated all of the medical liability 
policies nationwide. That doctor could not obtain affordable 
coverage. He could not practice. And that hot night in July, my 
husband and our family drew the short straw.
    I have also learned that Mississippi is not unique to this 
crisis. It rages all across America, in Nevada, where young 
expectant mothers cannot find OB-GYNs, in Florida, where 
children cannot find pediatric neurosurgeons, and it rages in 
Pennsylvania, where the elderly, who have come to depend on 
their orthopedic surgeons, are being told that those trusted 
doctors are moving to States where practicing medicine is 
affordable and less risky.
    The real danger of this crisis is not readily seen. It is 
like termites in the structure of a home. They get into the 
woodwork, but you cannot see the damage. The walls of the house 
remain beautiful. You do not know what is going on just beneath 
the surface, at least not for a season, and then one day you go 
to hang a picture or a shelf and the whole wall comes down.
    Before July 5 I was, like most Americans, completely 
unaware that just below the surface of our Nation's health care 
delivery system serious damage was being done through excessive 
and frivolous litigation, litigation that was forcing liability 
costs beyond the ability of doctors to pay. I heard about some 
of these frivolous cases and, of course, the awards that 
climbed into the hundreds of millions of dollars and, like most 
Americans, I shook my head. Someone has hit the lottery. But I 
never asked, at what cost? Who has to pay for those incredible 
awards?
    It is a tragedy when a medical mistake results in a serious 
injury, but when that injury, often an accident or an oversight 
by an otherwise skilled physician, is compounded by a lottery-
like award and that award, along with others, make it too 
expensive to practice medicine, there is a cost, and believe 
me, it is a terrible cost.
    Like most Americans, I did not know the cost. I did not 
know the damage. You see, Mr. Chairman, it is not until it is 
your spouse that you need a specialist, or you are the 
expectant mother who needs the OB-GYN, or it is your child who 
needs a pediatric neurosurgeon that you realize the damage 
beneath the surface. From my perspective sitting here today, 
this problem far exceeds any other challenge facing America's 
health care today, even the challenge of the uninsured.
    My family had insurance when Tony was injured. We had good 
insurance. What we did not have was a doctor, and now no money 
can relieve our pain and suffering, but knowing that others may 
not have to go through this, and what we have gone through, 
goes a long way in helping us heal.

                           prepared statement

    Mr. Chairman, I know of your efforts to see America through 
this crisis, and I know it is important to you and important to 
the President. I know the priority Congress is placing on doing 
something, and doing something now. Today, I pledge to you my 
complete support. It is my prayer that no woman or anyone 
anywhere else will ever have to go through what I have gone 
through, and what I continue to go through every day with my 
two children and a husband I dearly love.
    Thank you.
    [The statement follows:]
                   Prepared Statement of Leanne Dyess
    Chairman Specter, Ranking Member Harkin, distinguished members of 
the Senate Appropriations Committee: It's an honor for me to sit before 
you this afternoon--to open up my life, and the life of my family, in 
an attempt to demonstrate how medical liability costs are hurting 
people all across America. While others may talk in terms of economics 
and policy today, I want to speak from the heart.
    I want to share with you the life my two children and I are now 
forced to live because of a crisis in health care that I believe can be 
fixed. And when I leave and the lights turn off and the television 
cameras go away, I want you--and all America--to know one thing, and 
that is that this crisis is not about insurance. It's not about 
doctors, or hospitals, or even personal injury lawyers. It's a crisis 
about individuals and their access to what I believe is, otherwise, the 
greatest health care in the world.
    Our story began on July 5 of last year, when my husband Tony was 
returning from work in Gulfport, Mississippi. We had started a new 
business. Tony was working hard, as was I. We were doing our best to 
build a life for our children, and their futures were filled with 
promise. Everything looked bright. Then, in an instant, it changed. 
Tony was involved in a single car accident. They suspect he may have 
fallen asleep, though we'll never know.
    What we do know is that after removing him from the car, they 
rushed Tony to Garden Park hospital in Gulfport. He had head injuries 
and required immediate attention. Shortly thereafter, I received the 
telephone call that I pray no other wife will ever have to receive. I 
was informed of the accident and told that the injuries were serious. 
But I cannot describe to you the panic that gave way to hopelessness 
when they somberly said, ``We don't have the specialist necessary to 
take care of him. We need to airlift him to another hospital.''
    I couldn't understand this. Gulfport is one of the fastest growing 
and most prosperous regions of Mississippi. Garden Park is a good 
hospital. Where, I wondered, was the specialist--the specialist who 
could have taken care of my husband?
    Almost six hours passed before Tony was airlifted to the University 
Medical Center--six hours for the damage to his brain to continue 
before they had a specialist capable of putting a drain into his head 
to relieve the pressure on his brain--six unforgettable hours that 
changed our life.
    Today Tony is permanently brain damaged. He is mentally 
incompetent, unable to care for himself--unable to provide for his 
children--unable to live the vibrant, active and loving life he was 
living only moments before his accident.
    I could share with you the panic of a woman suddenly forced into 
the role of both mother and father to her teenage children--of a woman 
whose life is suddenly caught in limbo, unable to move forward or 
backward. I could tell you about a woman who now had to worry about the 
constant care of her husband, who had to make concessions she thought 
she'd never have to make to be able to pay for his therapy and care. 
But to describe this would be to take us away from the most important 
point and the value of what I learned.
    Chairman Specter, I learned that there was no specialist on staff 
that night in Gulfport because rising medical liability costs had 
forced physicians in that community to abandon their practices. In that 
area, at that time, there was only one doctor who had the expertise to 
care for Tony and he was forced to cover multiple hospitals--stretched 
thin and unable to care for everyone. Another doctor quit his practice 
just days before Tony was admitted because his insurance company 
terminated all of the medical liability policies nationwide. That 
doctor could not obtain affordable coverage. He could not practice. And 
on that hot night in July, my husband and our family drew the short 
straw.
    I have also learned that Mississippi is not unique, that this 
crisis rages in states all across America. It rages in Nevada, where 
young expectant mothers cannot find ob/gyns. It rages in Florida, where 
children cannot find pediatric neurosurgeons. And it rages in 
Pennsylvania, where the elderly who have come to depend on their 
orthopedic surgeons are being told that those trusted doctors are 
moving to states where practicing medicine is affordable and less 
risky.
    The real danger of this crisis is that it is not readily seen. It's 
insidious, like termites in the structure of a home. They get into the 
woodwork, but you cannot see the damage. The walls of the house remain 
beautiful. You don't know what's going on just beneath the surface. At 
least not for a season. Then, one day you go to hang a picture or shelf 
and the whole wall comes down; everything is destroyed. Before July 5, 
I was like most Americans, completely unaware that just below the 
surface of our nation's health care delivery system, serious damage was 
being done by excessive and frivolous litigation--litigation that was 
forcing liability costs beyond the ability of doctors to pay. I had 
heard about some of the frivolous cases and, of course, the awards that 
climbed into the hundreds of millions of dollars. And like most 
Americans I shook my head and said, ``Someone hit the lottery.''
    But I never asked, ``At what cost?'' I never asked, ``Who has to 
pay for those incredible awards?'' It is a tragedy when a medical 
mistake results in serious injury. But when that injury--often an 
accident or oversight by an otherwise skilled physician--is compounded 
by a lottery-like award, and that award along with others make it too 
expensive to practice medicine, there is a cost. And believe me, it's a 
terrible cost to pay.
    Like most Americans, I did not know the cost. I did not know the 
damage. You see, Mr. Chairman, it's not until your spouse needs a 
specialist, or you're the expectant mother who needs an ob/gyn, or it's 
your child who needs a pediatric neurosurgeon, that you realize the 
damage beneath the surface.
    From my perspective, sitting here today, this problem far exceeds 
any other challenge facing America's health care--even the challenge of 
the uninsured. My family had insurance when Tony was injured. We had 
good insurance. What we didn't have was a doctor. And now, no amount of 
money can relieve our pain and suffering. But knowing that others may 
not have to go through what we've gone through could go a long way 
toward helping us heal.
    Chairman Specter, I know of your efforts to see America through 
this crisis. I know this is important to you, and that it's important 
to the President. I know of the priority Congress is placing upon doing 
something . . . and doing it now. Today, I pledge to you my complete 
support. It is my prayer that no woman--or anyone else--anywhere will 
ever have to go through what I've gone through, and what I continue to 
go through every day with my two beautiful children and a husband I 
dearly love.

    Senator Specter. Thank you very much, Mrs. Dyess. The 
situation that you characterize is obviously a very tragic one. 
I note that in the last year Mississippi did enact legislation 
capping noneconomic damages, and limiting the issue on venue, 
but of course that reform came much too late in your husband's 
case.
    Dr. McCombs, you started off with a comment about what is 
going on in Pennsylvania by way of changes in legislation, 
referring to what Governor Rendell has said in your testimony. 
There have been a number of changes on joint and several 
liability and on venues so that cases cannot all be brought in 
Philadelphia County. They have to be brought in the county 
where the incident occurred.
    The issue of the caps is a very critical one, and the 
suggestion has been made, as I had mentioned earlier, of a 
certain category of cases like the one that Mrs. McDougal 
testified to about the double mastectomy. There is a concern 
about large verdicts in cases which do not warrant that, and I 
would be interested in your view as to having caps imposed at 
the national level.
    Of course, Pennsylvania has a constitutional amendment 
prohibiting caps, which is the reason Pennsylvania cannot 
handle it as Mississippi handled it, by imposing caps on the 
State level, but what would you think if a precedent was 
followed like the one in Michigan, where damages are limited 
very sharply, except in a category of three matters, where 
there is death, serious impairment of bodily function, or 
permanent serious disfigurement, like Mrs. McDougal's case? 
What would your thinking on that be?
    Dr. McCombs. Mr. Chairman, first of all, let me 
congratulate your subcommittee on assembling such a powerful, 
moving, and representative collection of witnesses today.
    Senator Specter. We tried to make it balanced so that every 
point of view would be heard. We face a very difficult 
legislative question here, and we are really trying to not only 
dig into the facts and find and analyze the complexities at 
many levels, but see really what we have to do to try to 
improve the situation.
    Dr. McCombs. We are very grateful for that.
    Senator, I am not a lawyer, I am not an insurance expert, I 
am a surgeon. My colleagues and I support very strongly the 
provisions that are included in the Greenwood legislation, H.R. 
5, which does include caps, as I understand it. There is a lot 
of controversy as to just how that should be applied, and 
whether or not some provision for catastrophic, I think was the 
term, or--I cannot remember exactly, but exceptions to that.
    The surgical community in Pennsylvania feels very strongly 
that the provisions that have already passed the legislature in 
Pennsylvania will help, although it will take a considerable 
amount of time for the effects of these to be seen, and 
ultimately we feel that caps will provide the balance that is 
going to be necessary to level the playing field, as I referred 
to earlier.
    Senator Specter. Mr. Hurley, from the insurance point of 
view, I would be interested in your views as to the impact on 
limiting claims which are frivolous, where you would require a 
certification in advance and could hold the lawyers personally 
accountable if the suit had no basis, in the context that I 
referred to earlier, where the hearing last month said that 
while 70 percent of the cases were won, the insurance companies 
had tremendous costs. How far do you think the limitations on 
frivolous suits would go in providing some realistic relief to 
insurance costs?
    Mr. Hurley. Mr. Specter, I think that the changes that you 
are discussing, or the proposed changes that you are discussing 
to find some way--for example, certificates of merit and those 
types of things, we probably have some examples of those in 
various States. The individual States have put some provisions 
in place from time to time that may be similar. Maybe we can 
get some guidance from that.
    But I think the insurance, the loss costs and the defense 
costs that insurance companies are dealing with would be 
obviously reduced by the fact that, if there was a provision in 
place that would stop claims from being filed and stop the 
expenditures that companies make, so that would be a savings 
that companies would reflect in their losses, and if losses go 
down, premiums go down, so there would be some savings if you 
could actually implement a provision that you would be assured 
would eliminate claims on which companies are spending moneys 
right now, yes.
    Senator Specter. Mr. Angoff, as an insurance regulator, you 
testified that even though the number of cases and the payments 
went down, the insurance premiums went up, and you described 
the anomalous result. Do you know why that was, or have a view 
on it?
    Mr. Angoff. Yes, I do, and this data is just from obviously 
Missouri. We only collect Missouri data. I do not know what the 
data is from other States, but in Missouri, claims went down, 
but because there was such a change in investment income, and 
because the cost of reinsurance went up so much, the overall 
costs of the insurers went up.
    In malpractice insurance particularly, investment income is 
very, very important, because in malpractice insurance, unlike, 
let us say, homeowners insurance, insurers hold onto their 
premium income for a long time, 6 years in malpractice 
insurance, less than a year in homeowners, so investment income 
is very, very important.
    So during the nineties, when the stock market was great, 
when interest rates were higher, the insurers made a lot on 
their investment income, they could cut rates. Today, when they 
are making nothing on their investment income, it is exactly 
the opposite situation, so they have got to raise rates even if 
their payments decrease. If their payments decrease a little, 
but their investment income decreases a lot, they have got to 
raise their rates.
    Senator Specter. Mr. Hurley, from an actuarial point of 
view, as you have analyzed what goes on with the insurance 
rates, to what extent is Mr. Angoff right, or is he totally 
wrong that the shifts in the investment markets have accounted 
for at least some, or if you can quantify, to what extent is 
the insurance company problem on raising rates?
    Mr. Hurley. I think, Mr. Specter, that Mr. Angoff is right 
to some point. Medical malpractice companies generally invest 
in bonds, fixed income instruments. They are not allowed to 
make up for past mistakes in investments. The ratemaking 
process, as mentioned in my testimony, is a forward-looking 
process.
    When we evaluate what rates to charge, or when companies 
evaluate what rates to charge, they consider the time value of 
money, as was described, how long they are going to hold that 
money until such time as they make payments. They estimate what 
a reasonable rate of return is that they can make 
prospectively, and they will set rates accordingly.
    When interest rates go down, as they have, that will put 
upward pressure on those rates in the absence of any other 
changes, so what Mr. Angoff has said to some degree is correct, 
but we cannot make up for past mistakes in investments, and the 
ratemaking process is a forward-looking process, but when 
interest rates go down, insurance rates will go up, because 
rates are made in contemplation of what investment income is 
going to be made prospectively.
    Senator Specter. From a legislative point of view, we are 
trying to assess how to cure the problem, and we are trying to 
apportion how much of it is due to a variety of factors. It 
would be very difficult for the Federal Government to get 
involved in insurance regulation. I think that is the last 
thing you want to have come out of Washington, is more 
regulation and picking up another line.
    This is sort of like the joint liability problem. 
Pennsylvania has eliminated joint and several liability, Dr. 
McCombs, so that it cannot all go to the deep pocket any more. 
It is a matter of proportional error, and now we are trying to 
find out what proportion of responsibility there is. Any ideas 
as to how we might deal, Mr. Hurley, with the insurance 
industry to deal with at least the portion of the problem 
attributed there?
    Mr. Hurley. Mr. Specter, I am not sure I understand what 
you are saying the problem is, as far as the insurance 
industry----
    Senator Specter. Well, part of the difficulty as Mr. Angoff 
described it, and you agree, comes because of insurance 
investments. If we are going to create a new system, if we are 
going to legislate at the Federal level, how can we deal with 
that aspect of the problem, or can we deal with it?
    Mr. Hurley. I would like to clarify what I hear you 
interpreting, your interpretation of my prior answer. I did not 
imply that there is a problem in that reaction of the insurance 
industry to changes in interest rates.
    The insurance industry is subject to regulation when it 
makes rates. They are reviewed at the State level in most 
jurisdictions, and those regulations require that the industry, 
when it sets rates, reflect investment income, so it must 
consider the time value of money when it sets rates, even in 
some States where the formula by which they do that is 
mandated, so they do consider that. When interest rates go 
down, then the rates must go up just to respond to that.
    I am not sure whether I think there is a problem that needs 
intervention from the Federal level as far as the insurance 
industry is concerned. I am not suggesting that would happen or 
be necessary as far as interest income is concerned, so I do 
not know that I agree with the premise.
    Senator Specter. Okay. Mr. Angoff, do you have any 
suggestion as to what might be done at the Federal level on the 
problem you identified?
    Mr. Angoff. Yes, and I agree, Mr. Chairman, insurance is 
State-regulated. In general the Federal Government does not 
have much to do with it, but I do think that if Congress either 
repealed or narrowed the McCarran-Ferguson antitrust exemption, 
that could have an effect.
    Senator Specter. How?
    Mr. Angoff. Okay, particularly in view of--McCarran-
Ferguson says, insurers are not subject to the antitrust laws 
except for boycott, coercion, and intimidation. What that means 
is, insurers are permitted to engage in anticompetitive 
activities, including agreeing on price, as long as it does not 
rise to the level of a boycott, of a total collective refusal 
to deal.
    Now, when investment income is high, the antitrust 
exemption is irrelevant. Insurers compete like crazy to cut 
price, so the antitrust exemption is irrelevant, but when 
investment income is low and insurers need to raise their 
prices, the antitrust exemption allows them to raise their 
prices without fear.
    Does that mean that they sit down in a smoke-filled room 
and agree on price? Not necessarily, but it does allow them to 
raise their prices collectively without the fear that companies 
in other industries have, so I think that that is one thing 
that Congress could do, and even if Congress did not want to go 
as far as repealing the exemption, I think it is very important 
for Congress to at least carve out a real boycott exception.
    The Scalia opinion in the Hartford Fire case, which was the 
Supreme Court case growing out of the last insurance crisis, 
very, very narrowly interprets the boycott exception so there 
is almost now a blanket exemption from the antitrust laws for 
insurers, so I do think that there is something in the area of 
narrowing the McCarran-Ferguson antitrust exemption that would 
be productive for Congress to pursue.
    Senator Specter. Dr. Holmes, this is a legal issue. It may 
be outside of your purview, but I would like to get your 
thinking on it. If we were to put caps on at the Federal level 
that would exclude this category of cases which has been 
excluded under somewhat analogous State law to exclude death, 
serious impairment of bodily function, or permanent serious 
disfigurement, how would you respond to that?
    Dr. Holmes. I would respond by saying that that definition 
may be so broad that the exception may become the rule, and I 
think that there may be cases where so-called egregious cases 
could fall outside of that standard cap, but I think the 
definition would have to be very narrow and very clearly 
defined.
    Senator Specter. Well, what would you say to Mrs. 
McDougal's case? She has a classical case where there are no 
real economic damages, that the economic damages are a very 
small part of what is involved here, so if you say noneconomic 
to a double mastectomy, would you agree that that kind of a 
case ought to be outside of the cap?
    Dr. Holmes. Well, I would like to say to Mrs. McDougal 
thank you for coming, and I found your story very powerful.
    Senator Specter. Dr. Holmes, I do not want to press you to 
answer that if you do not want to.
    Dr. Holmes. Oh, I am just trying to be kind.
    I think we are just looking at a system with limited 
resources. If that were not the case, I would be happy to see a 
great deal of compensation to a patient such as Mrs. McDougal, 
but I am troubled by the fact, for example, in Pennsylvania we 
have 30,000 physicians, and these premiums are spread among 
those 30,000 physicians in order to pay out these awards, and 
it just reaches the point where those 30,000 premiums cannot 
cover a certain dollar amount.
    The answer to your question is, within reason I think it is 
possible for certain cases to be deemed outside of that cap, 
but again, clearly defined.
    Senator Specter. Ms. Dyess, you had a personal experience 
and tragedy here. The Mississippi law was changed, much too 
late to affect your situation. Do you think there ought to be 
exceptions to the $250,000 or $350,000 cap on noneconomic 
damages?
    Ms. Dyess. In my particular case, what was passed in 
Mississippi would not have made us any difference, because I am 
not suing anybody. I do not have anybody to sue.
    Senator Specter. Well, there might have been a doctor 
available had things been different in Mississippi.
    Ms. Dyess. Say that last part again.
    Senator Specter. Doctors might not have moved away, a 
neurosurgeon might have been available at the hospital where 
your husband was taken. That is the contention here, that if 
the system had been structured differently, doctors would not 
have moved away, as Dr. Holmes moved from Scranton to 
Hagerstown. He did not move too far from Pennsylvania. He can 
come back. He is pretty close to the border.
    Ms. Dyess. Well, what we have to do is to work together. In 
your case, if something happened to you, I would want a doctor 
to be there. If Ms. McDougal needs further care for her 
injuries, I want there to be a doctor there. I want there to be 
medical assistance there for all of us, whatever it takes. 
Instead of taking care of a few, let us do what we can to take 
care of everybody.
    Senator Specter. Well, that is certainly the goal. I agree 
with you on that, Ms. Dyess.
    Dr. Berwick, you talked about a fair and reasonable 
compensation system, as you have testified. Do you have any 
suggestion as to what that would be?
    Dr. Berwick. I know its properties. At the moment, most 
injured patients never get compensated at all, and quite a 
proportion of the patients that do get compensated were not 
injured by negligence in a technical way, we have a 
maldistribution problem, not to mention the transactional costs 
of the system which bleed a tremendous amount of the money that 
changes hands away from the hands of the people like Mrs. 
McDougal who ought to get the money.
    Fair and reasonable to me means that most of the money that 
changes hands goes to injured parties and that it is reliable, 
that a patient who is injured in the United States knows that 
they will be compensated. That is what fair would mean. Today, 
by that standard it is quite unfair.
    Senator Specter. Dr. Berwick, this subcommittee has taken 
the lead, as you probably know, on increasing NIH funding from 
$12 billion to $27 billion, and when you talk about research, 
could we task NIH to do something here?
    Dr. Berwick. Absolutely, yes.
    Senator Specter. I would be interested in your suggestions, 
if you would provide them in writing. In the Institute of 
Medicine you are right in the heart of that approach. If you 
would give us an idea, we intend to press for additional funds.
    Dr. Berwick. Mr. Chairman, may I make a comment in addition 
to the written answer to your question? The investment in 
research we are making in biotechnology, knowing what drug to 
give or what operation to do, is extraordinary. It is world-
leading. We are way underinvested in understanding how to 
design systems to provide excellent system research that would 
make no more cases like Mrs. McDougal's occur. It is a 
scientific challenge with which we are not grappling. How can 
you make the pathology sequence 100 percent reliable? What is 
the design of that system? We know some of its properties, but 
we have not designed that system as a country.
    Senator Specter. Well, if you give us some ideas on systems 
research, I would be really interested to know.
    Dr. Berwick. Thank you for the invitation.
    Senator Specter. Because we have some sway, with all the 
money we are putting up there, if we have some good ideas.
    Ms. McDougal, what is your thinking on all of these 
efforts? In light of what you hear with Ms. Dyess, Dr. Holmes 
moved away, all of the difficulties, do you think that if we 
excluded these egregious cases or catastrophic cases, death, 
double mastectomy, or serious impairment of bodily function, 
that there ought to be caps on other matters?
    I am asking you for your feel of it, although this is not 
your area of expertise, obviously, but you have been very close 
to the system, and I would be interested in your thinking.
    Ms. McDougal. I believe in the Constitution and my right to 
trial with a jury by my peers. I believe they need to hear the 
individual facts of a case and make a decision. We trust them 
to make decisions about death sentences or murder convictions, 
but yet we do not trust them to determine what a specific case 
is worth.
    I know there are great costs associated with taking a case 
like mine, and I would have no recourse without an attorney. I 
do not think there is accountability for doctors. There are 
several components to it, but I do not believe to assign a 
cap--basically it takes away my rights that are awarded by the 
Constitution, that has been in effect over 215 years.
    Senator Specter. Well, thank you very much, ladies and 
gentlemen. We are wrestling with the problem with lots of 
hearings, lots of studies. A lot of Senators are working on it. 
This is one of the most intensely studied questions that we 
have in Washington today, and I think the testimony which has 
been given here is very, very helpful, so thank you.

                      PREPARED STATEMENTS RECEIVED

    We have received prepared statements from Senator Thad 
Cochran, the American Bar Association, the Alliance of 
Specialty Medicine, and the American College of Legal Medicine 
that will be placed in the hearing record.
    [The statements follow:]
               Prepared Statement of Senator Thad Cochran
    Mr. Chairman, thank you for holding this hearing on an issue that 
has seriously affected my state of Mississippi. Deputy Secretary Allen, 
thank you for joining us today to discuss this important issue. I also 
appreciated your visit to Mississippi last fall. I know you saw first 
hand some of the health care challenges we are facing. Your testimony 
today on behalf of the Department of Health and Human Services and the 
millions of Medicare and Medicaid beneficiaries you serve will be 
important for us to hear.
    The issues of medical liability, affordability and access to health 
care, and insurance coverage are serious challenges in my state and 
across the country. We have had numerous examples in Mississippi of 
physicians who have retired, left the state, or simply could not 
practice for some period of time due to an inability to attain 
liability insurance.
    Just last month, in my state over 530 physicians and 53 hospitals 
lost their malpractice coverage, and many could not find any 
replacement coverage. In Oxford, no internal medicine physician could 
find replacement coverage for weeks. They are now practicing again, but 
only with temporary coverage.
    Another situation that I know the Deputy Secretary is familiar with 
is in Natchez, where a group of physicians have moved across the river 
to Louisiana. On the Mississippi Gulf Coast, a group of physicians 
walked out because of the increases in their liability premiums. My 
state faces some of the most dramatic health challenges in our nation 
and cannot afford a decrease in access to physicians and hospitals.
    We realize the risk faced by insurers is spread across all states, 
and it affects physicians everywhere. If one state is in crisis, it has 
the potential to negatively affect many others. It is for these reasons 
that this issue has received national attention and requires serious 
consideration by the Congress.
                                 ______
                                 
                Letter From the American Bar Association
                                    Washington, DC, March 14, 2003.
Re March 13, 2003, hearing on Medical Liability Insurance

Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services, and 
        Education, Committee on Appropriations, U.S. Senate, 
        Washington, DC.
    Dear Senator Specter: On behalf of the American Bar Association 
(``ABA''), I would like to thank you for the opportunity to submit the 
ABA's views regarding medical professional liability, and we request 
that this letter be included in the record of the Subcommittee's March 
13, 2003, hearing entitled, ``Causes of the Medical Liability Insurance 
Crisis.''
    Insurance premiums in a number of areas are up significantly. A 
threshold question is ``why?'' The U.S. insurance market is intensely 
competitive, which has caused both dramatic increases and dramatic 
decreases in insurance rates over time. For example, competition caused 
insurance rates to be comparatively lower in the United States from 
1979 through 1983 than in other countries. When increases occurred in 
the United States between 1984 and 1986, they appeared more dramatic 
because they occurred against the background of the prior artificially 
low rates.\1\ That same cycle seems to be operating today.\2\ The 
General Accounting Office is currently examining the reasons for--and 
the role insurance companies have played in--rate increases.
---------------------------------------------------------------------------
    \1\ See Werner Pfennigstorf & Donald G. Gifford, A Comparative 
Study of Liability Law and Compensation Schemes in Ten Countries and 
the United States, 159 (Donald G. Gifford & William M. Richman, eds., 
commissioned by the Insurance Research Council) (1991).
    \2\ See Edward Wasserman, ``Blaming the Victim: Why are Liability 
Insurance Rates Soaring Again?'', Miami Herald, December 30, 2002; 
Zimmerman, Rachel and Oster, Christopher, ``Insurers'' Price Wars 
Contributed to Doctors Facing Soaring Costs,'' Wall Street Journal, 
June 24, 2002.
---------------------------------------------------------------------------
    For over 200 years, the authority to promulgate medical liability 
laws has rested with the states. This system, which allows each state 
autonomy to regulate the resolution of medical liability actions within 
its borders, is a hallmark of our American justice system. Because of 
the role they have played, the states are the repositories of 
experience and expertise in these matters. Legislation such as S. 607 
would pre-empt portions of the state medical and product liability 
laws, and, therefore, the ABA opposes enactment of S. 607.
    In addition to the policy reasons why this long- and effectively-
functioning liability system should not be altered by the U.S. 
Congress, it should be noted that the constitutionality of the 
amendment will surely be challenged based on constitutional separation-
of-powers grounds. The Supreme Court, in the recent decisions of Pegram 
et al v. Herdrich, 120 S.Ct. 2143 (2000), and Rush Prudential HMO, Inc. 
v. Moran, 122 S.Ct. 2151 (2002), continued to recognize that it is 
appropriate for the states to handle health accountability matters 
because health care is an area traditionally left to the states to 
regulate.
    Currently, states have the opportunity to enact and amend their 
tort laws, and the system functions well. Congress should not 
substitute its judgement for the systems which have thoughtfully 
evolved in each state over time. To do so would limit the ability of a 
patient who has been injured by medical malpractice to receive the 
compensation he or she deserves. This is especially problematic since 
such a patient already is in a very difficult position.
    When a car is hit by another car that has run a red light, it is 
relatively easy to know what caused the accident. But when, by way of 
example, a surgery patient wakes up to an unexpected bad outcome, he or 
she cannot possibly comprehend the cause. Those in the position to know 
what caused the bad outcome are the medical professionals. Because 
patients lack the necessary information, they often must file a claim 
to determine what happened. If it is without merit, it is in the 
patient's own interest to drop the claim, and thus many claims are 
dropped once the patient finds out the facts. And contrary to what some 
believe, juries do not favor plaintiffs over doctors in medical 
malpractice cases. Duke University School of Law Professor Neil 
Vidmar's extensive study of juries found that:

``[o]n balance, there is no empirical support for the propositions that 
juries are biased against doctors or that they are prone to ignore 
legal and medical standards in order to decide in favor of plaintiffs 
with severe injuries. This evidence in fact indicates that there is 
reasonable concordance between jury verdicts and doctors' ratings of 
negligence. On balance, juries may have a slight bias in favor of 
doctors.''

    See Medical Malpractice and the American Jury: Confronting the 
Myths about Jury Incompetence, Deep Pockets, and Outrageous Damage 
Awards, University of Michigan Press at page 182 (1995).
    In addition, he concludes at page 259 of his book that research 
``does not support the widely made claims that jury damage awards are 
based on the depth of the defendants' pockets, sympathies for 
plaintiffs, caprice, or excessive generosity.'' A survey of studies in 
the area by University of Missouri-Columbia Law Professor, Philip 
Peters, Jr. published in March 2002 likewise found that:

``[t]here is simply no evidence that juries are prejudiced against 
physician defendants or that their verdicts are distorted by their 
sympathy for injured plaintiffs. Instead, the existing evidence 
strongly indicates that jurors begin their task harboring sympathy for 
the defendant physician and skepticism about the plaintiff.''

    See Philip G. Peters, Jr., The Role of the Jury in Modern 
Malpractice Law, 87 Iowa L. Rev. 934 (2002).
    The ABA also opposes caps on pain and suffering awards. Those 
affected by caps on damages are the patients who have been most 
severely injured by the negligence of others. No one has stated that 
their pain and suffering injuries are not real or severe. These 
patients should not be told that, due to an arbitrary limit, they will 
be deprived of the compensation they need to carry on.
    Thank you for the opportunity to present our views on this issue.
                Sincerely,
                                                   Robert D. Evans.
                                 ______
                                 
        Prepared Statement of the Alliance of Specialty Medicine
            causes of the medical liability insurance crisis
    Chairman Specter, and Members of the Subcommittee, the Alliance of 
Specialty Medicine, a coalition of 13 medical organizations 
representing over 160,000 specialty care physicians in the United 
States, thanks you for holding this hearing and appreciates the 
opportunity to comment on the causes of the medical liability insurance 
system and the impact that our current medical litigation system is 
having on patient access to medical care, which necessitates the 
immediate need to enact federal medical liability reform legislation. 
While our nation is facing myriad problems with various other elements 
of our health care system, none is as pressing and immediate as the 
current medical liability crisis.
    And it is a crisis. The media now report on a daily basis that the 
situation has become so critical that many physicians are forced to 
limit services, move to other states where the medical liability system 
is more stable, or retire altogether. Much of the ``face'' of this 
crisis has centered around the great difficulties that pregnant women 
are having in finding obstetricians to deliver their babies, but the 
simple truth is that this is a problem that potentially affects all of 
our citizens: the mother whose little boy has fallen off of the jungle 
gym and needs an orthopaedic surgeon to fix his broken arm; the 
teenager who has been in a serious car accident and needs a 
neurosurgeon to treat his severe head injury; the woman who needs a 
pathologist to evaluate her Pap smear to screen for cervical cancer; 
the elderly man who has a poor heart and needs a cardiologist or 
cardio-thoracic surgeon to unblock a clogged artery or replace a 
failing valve; the woman who has a family history of breast cancer and 
needs a radiologist to perform a mammography to make sure she is cancer 
free; the business man who needs a gastroenterologist to treat his 
ulcer; the man who needs a urologist to screen for prostate cancer; and 
the list goes on and on.
 cause of the crisis: the current medical litigation system is out of 
                                control
    The root cause of this problem is quite simple: the unrestrained 
escalation of jury awards and settlements, in even a small number of 
medical liability cases, is driving up doctors' liability insurance 
premiums and is forcing some insurance companies out of business 
altogether. This problem is making it difficult, and sometimes 
impossible, for doctors to obtain affordable liability insurance so 
they can remain in practice. Adding to this is the fact that doctors 
distrust and fear the medical litigation system, causing them to alter 
the way they deliver medical care to their patients, and in some cases 
this fear is causing doctors to cease practicing altogether. There is a 
wide body of evidence to substantiate these conclusions:
Medical Liability Awards are On the Rise
    Medical liability awards have been growing steadily, and according 
to Jury Verdict Research data, from 1994 to 2000 the median jury award 
rose by 176 percent. The number of mega-verdicts is also on the rise, 
with the proportion of million dollar plus awards increasing 
dramatically over this same time period. In 1996, 34 percent of all 
jury awards exceeded $1 million. Four years later, the number of 
million dollar awards increased to 52 percent, and the average jury 
award in 2000 was nearly $3.5 million.
Medical Liability Insurance Premiums are Skyrocketing
    It is clear that the increasing number of multi-million dollar jury 
awards is driving up the costs of medical liability insurance and 
insurance companies are now paying out approximately $1.40 for every 
premium dollar collected. Obviously, this is not sustainable, and this 
trend is therefore forcing insurance companies, which must set their 
rates based on anticipated future losses, to steeply increase doctors' 
medical liability premiums to ensure adequate reserves to pay future 
judgments. As a result, over the past several years, physicians across 
the country have faced double, and sometimes triple, digit rate 
increases. Alliance members, including high-risk specialists like 
neurosurgeons, orthopaedic surgeons and emergency physicians, have been 
disproportionately affected by these premium increases. For example:
  --According to a national survey of neurosurgeons, between 2000 and 
        2002 the national average premium increase was 63 percent, from 
        $44,493 to $72,682. In some states, neurosurgeons are now 
        paying medical liability insurance premiums in excess of 
        $300,000 per year.
  --Utah orthopaedic surgeons have seen medical liability rate 
        increases of 60 percent since last year and in Texas they are 
        rising by more than 50 percent. In Pennsylvania, a survey 
        conducted in June 2002 revealed rate increases as high as 59 
        percent. In other areas of the country, orthopaedic surgeons 
        are finding that their premiums have risen by over 100 percent, 
        even if they have never had a claim filed against them.
  --Over the past several years, over 95 percent of emergency medicine 
        physicians have experienced medical liability premium 
        increases, with approximately 69 percent facing increases 
        between 60 to 500 percent. This is attributed to the fact that 
        emergency medicine physicians are almost always named in any 
        litigation that arises from a patient encounter that begins in 
        the emergency department. Since most hospital admissions now 
        come through the emergency department, these doctors are 
        experiencing steep premium rises even though the lawsuits 
        against them may have no merit and result in either dismissal 
        or a defendant's verdict.
  --Even those specialists who are not in high-risk categories are 
        affected by this upward trend in premium costs. For example, 80 
        percent of recently surveyed dermatologists reported that their 
        premiums increased last year and those dermatologists who were 
        insured by a state plan were paying nearly double what their 
        colleagues were paying in the private market.
Medical Liability Insurance is Unavailable
    Not only are medical liability insurance premiums rising at 
astronomical rates, but many doctors are also finding it increasingly 
difficult to obtain medical liability insurance at any price. Citing 
the increases in liability losses, several companies, including, St. 
Paul, MIXX, PHICO, Frontier Insurance Group and Doctors Insurance 
Reciprocal, have recently stopped selling medical liability insurance 
or have gone out of business, leaving thousands of doctors scrambling 
to find replacement coverage. Of the companies that have remained in 
the market, many are no longer renewing insurance coverage for existing 
policyholders and/or they are not issuing new insurance policies to new 
customers. This is particularly true in states that have no effective 
medical liability reform laws in place, where, for instance, in 
Mississippi fifteen insurers have left the market in the past five 
years. Alliance members have witnessed the impact of this problem first 
hand. For example:
  --In 2002, nearly 40 percent of orthopaedic surgeons in Pennsylvania 
        were not able to renew their medical liability coverage with 
        the same carrier and 31 percent did not find new coverage. 
        Close to 50 percent of Pennsylvania orthopaedic surgeons have 
        reported that their liability policies will not be renewed for 
        2003.
  --In 2002, 15 percent of dermatologists experienced difficulties 
        securing their liability insurance. In some cases, 
        dermatologists in solo practice who have never even been sued 
        were forced to turn to the state for coverage because the 
        remaining insurers in their area made a blanket decision to no 
        longer insure solo practice physicians, regardless of 
        specialty.
  --Today in Mississippi, the only way a neurosurgeon can even be 
        considered for coverage is if he or she joins an existing group 
        that already is covered by the state medical society's 
        insurance company. The other two companies providing insurance 
        coverage in Mississippi will not issue new policies for 
        neurosurgeons at all. In addition, neurosurgeons in Florida 
        have been unable to obtain medical liability insurance at any 
        cost, forcing them to ``go bare'' or self-insure.
  --Recently one internationally-recognized pathologist, who has never 
        had a claim filed against him, was turned down by three 
        insurers and a fourth offered him a policy that was simply too 
        expensive.
  --Three of four insurance carriers with the largest market share in 
        Missouri have stopped writing policies in that state. This 
        means that physicians can often obtain a quote from only one 
        company. For example, one group of 12 cardiologists could get 
        only one quote with an 80 percent increase for 2003.
Medical Litigation System Breeds Fear in Doctors
    Given the litigious nature of our society, every physician faces 
the reality that he or she may at some time be named in a medical 
liability lawsuit, whether meritorious or not, and the current medical 
litigation system breeds fear in all doctors. This fear of litigation, 
particularly among high-risk specialists, is a contributing factor in 
doctors' decisions to change the way in which they are practicing 
medicine. Data from a 2002 Harris Interactive study conducted for the 
Common Good, a bipartisan legal reform organization, validates this 
point. According to the data, nearly all physicians feel that 
unnecessary care is provided because of fear about litigation. To 
protect themselves in the event that they might be sued:
  --91 percent of doctors are ordering more tests than are medically 
        needed;
  --85 percent of doctors refer patients to specialists more often than 
        is necessary; and
  --73 percent of doctors suggest that patients have invasive 
        procedures to confirm medical diagnoses
    The report aptly concludes: ``From the increased ordering of tests, 
medications, referrals, and procedures to increased paperwork and 
reluctance to offer off-duty medical assistance, the impact of the fear 
of litigation is far-reaching and profound.''
  result of the crisis: patient access to medical care is in jeopardy
    There are many casualties of the current medical liability crisis--
but those affected the most are patients. Because the medical 
litigation system is broken, across the nation patients are finding it 
harder and harder to get access to the care they need, when they need 
it. As medical liability insurance becomes unaffordable or unavailable, 
more and more doctors, especially specialists, are no longer performing 
high-risk procedures, or they are being forced to move their practices 
to states with stable medical liability systems, or they are simply 
retiring from medical practice--all of which seriously impede patient 
access to care. Once gone, these doctors are hard to replace, and those 
states currently facing a medical liability crisis are having a 
difficult time recruiting new physicians to their communities adding to 
the shortage of doctors in many parts of the country. The combination 
of these factors is also now severely straining our nation's already 
stressed emergency medical system, as patients who have no access to 
doctors inevitably end up on the emergency department's doorsteps, 
further exacerbating the hospital emergency department overcrowding 
problem. A growing list of examples demonstrates just how serious this 
crisis is becoming:
Doctors are No Longer Performing Complex and High-Risk Medical 
        Procedures
    According to a nationwide survey conducted last year, 43 percent of 
neurosurgeons reported that they are no longer performing high-risk 
surgery such as treating brain aneurysms, removing brain and spinal 
tumors, or complex spinal surgery. In addition, many neurosurgeons are 
no longer serving on-call to hospital emergency departments or 
operating on children.
    A recent survey found that 55 percent of orthopaedic surgeons 
nationwide have reduced the type of operational procedures they 
perform, with 39 percent avoiding performing spine surgery and 48 
percent altering their practice in other ways, including eliminating 
emergency room call or trauma call.
    The elderly are particularly affected, as decreases in 
reimbursements for complex medical procedures have declined to the 
point where Medicare no longer even covers the cost of medical 
liability insurance. Specialists with a high volume of Medicare 
patients, such as cardiologists and cardio-thoracic surgeons, and their 
patients who need high-tech, lifesaving heart therapy, will feel the 
effects the most.
Doctors, Trauma Centers and Other Medical Providers are Closing their 
        Doors
    In the case of neurosurgery, in 2001 alone, 327 board certified 
neurosurgeons retired, representing an alarming 10 percent of the 
neurosurgical workforce in the United States. Recently, the only 
neurosurgeon practicing at Cottonwood Hospital in Salt Lake City, Utah 
quit practicing following a steep insurance premium increase.
    Recent press accounts are replete with stories about the closure of 
trauma centers in Pennsylvania, West Virginia, Nevada, Mississippi, 
Missouri and Florida because of a shortage of orthopaedic surgeons, 
neurosurgeons and other specialists available to provide emergency 
medical care. Chicago's trauma centers are also now vulnerable to 
closing or downgrading their status.
  --In the last 18 months, nearly 700 mammography facilities have 
        closed nationwide. The continued and steady closing of 
        mammography facilities throughout the country has led to 
        increased waiting times for women seeking both screening 
        mammograms and diagnostic mammograms. The longer waiting times 
        are now on the brink of affecting clinical outcomes for those 
        women who must wait for a possible diagnosis of breast cancer.
Doctors are Moving to States with a More Favorable Medical Liability 
        Climate
    Every state that is experiencing a medical liability crisis reports 
that doctors are leaving in droves in search of another location in 
which to practice where the medical litigation climate is more 
favorable. The list of states experiencing the exodus of doctors 
continues to grow, and as with other elements of this crisis, 
specialists are most likely to ``hit the road'' in search of a safe 
haven state. For instance:
  --Pennsylvania has been especially hard hit, and some counties no 
        longer have any practicing orthopaedic surgeons. For example, 
        Bedford County's only orthopaedic surgeon left the state in 
        October 2001, and Pike and Monroe Counties are down from nine 
        to five orthopaedic surgeons. Huntingdon County has just one 
        orthopaedic surgeon remaining to take trauma call at two 
        hospitals. The situation is the same in West Virginia, and a 
        number of orthopaedic surgeons either have left the state or 
        are scaling back their practices. At the end of 2002, five 
        orthopaedic surgeons in Parkersburg moved their practice to 
        Ohio.
  --Neurosurgery's survey data show that nearly 19 percent of 
        practicing neurosurgeons either plan to, or are considering, 
        moving their practice to another state where the medical 
        liability costs are relatively stable. Mississippi, for 
        instance, has lost 35 percent of its neurosurgeons in the past 
        two years, and the flight of neurosurgeons from Pennsylvania 
        and West Virginia mirrors the Mississippi experience.
The State of America's Health Now and in the Future is at Risk
    The combination of all the above factors is clearly placing the 
health of our nation's citizens at considerable risk. Because of the 
medical liability crisis, more and more people are finding it difficult 
to get the specialized medical attention they need, when they need it. 
This is causing a national health care emergency. Thus:
  --When patients can't find a specialist close to home, they must 
        sometimes travel great distances, often going out of state, to 
        get their medical care.
  --When fewer specialists are available, hospital emergency 
        departments and trauma centers must shut their doors, and 
        patients with emergency medical conditions lose critical life-
        saving time searching for an available emergency room.
  --When specialists stop performing high-risk medical services, 
        patients are often referred to academic medical centers, and 
        these medical facilities are already overburdened and are ill 
        equipped to handle the increase in patient volume.
  --When specialists retire at an early age, the looming shortage of 
        doctors is accelerated, which, if left unchecked will place 
        additional burdens on the health care system as the population 
        ages and requires more medical care from an increasingly 
        shrinking pool of practicing doctors.
  --When the practice of medicine becomes so uninviting, fewer and 
        fewer of our nation's best and brightest will want to become 
        doctors, thus jeopardizing our country's status as one of the 
        finest health care systems in the world.
    scope of the crisis: a national problem that requires a federal 
                                solution
    Those who oppose federal legislation to address this crisis cite 
various reasons to support their contention that this is not a national 
problem that merits a federal solution. In particular, they note that 
the regulation of insurance and health care are generally state issues, 
and therefore principles of Federalism preclude federal legislation to 
address this problem. They are, however, wrong. The undisputed truth is 
that this problem now touches nearly every American and a federal 
solution is therefore a national imperative. As the following 
demonstrate:
Nearly All States are Facing a Medical Liability Crisis
    The AMA has identified 12 states that are in a medical liability 
crisis for all physicians. These include: Florida, Georgia, 
Mississippi, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, 
Texas, Washington and West Virginia. However, for many high-risk 
specialties, like neurosurgery and orthopaedic surgery, the situation 
is even more widespread than the AMA reports. A 2002 national survey of 
neurosurgeons identified 25 states that are in a severe medical 
liability crisis, with an additional 12 states in potential crisis. In 
addition to those identified by the AMA, the crisis states for 
neurosurgery include: Alabama, Arkansas, District of Columbia, 
Illinois, Kentucky, Missouri, New Hampshire, North Carolina, South 
Carolina, Rhode Island, Tennessee, Utah and Virginia.
Every American Pays for the Costs of the Current Medical Litigation 
        System
    According to the U.S. Department of Health and Human Services 
(HHS), in its report entitled, ``Confronting the New Health Care 
Crisis: Improving Health Care Quality and Lowering Costs by Fixing our 
Medical Liability System,'' the current medical litigation system 
imposes enormous direct and indirect costs on the health care system. 
These costs are passed on to all Americans in the form of increased 
health insurance premiums, higher out-of-pocket medical expenses and 
higher taxes. The report estimates that enacting federal medical 
liability legislation could save between $60-108 billion in health care 
costs each year. These savings would in turn lower the cost of health 
insurance and make health care more affordable and available to many 
more Americans.
Federal Medical Liability Reform Will Save the Federal Government Money
    Each year, the Federal Government pays for the increased costs 
associated with the current medical litigation system through various 
health care programs, including Medicare, Medicaid, Community Health 
Centers and other health care programs for veterans and members of the 
armed forces. The Department of Health and Human Services estimates 
that the direct cost of medical liability insurance coverage and the 
indirect cost of defensive medicine, increases the Federal Government's 
costs of these health programs by $28.6 to $47.5 billion each year. In 
the above referenced report, HHS estimates that if reasonable limits 
were placed on non-economic damages, it would reduce Federal Government 
spending by $25.3 to $44.3 billion per year. The Congressional Budget 
Office (CBO), in its cost estimate of H.R. 4600, the HEALTH Act of 
2002, confirms that passage of federal medical liability reform 
legislation that includes a cap on non-economic damages will increase 
federal tax revenues, and at the same time reduce the costs of federal 
health care programs.
States Face Significant Barriers to Implementing Medical Liability 
        Reforms
    Many states face barriers--some legal and some political--to 
enacting effective medical liability reform laws. Some states, 
including Texas, Florida, Ohio and Pennsylvania, have enacted medical 
liability reform laws, only to have their state Supreme Courts strike 
them down as unconstitutional. New laws passed by Mississippi and 
Nevada face certain court challenge, and it will be years before it is 
determined whether these laws pass state constitutional muster. 
Finally, in some other states, the issue has become a political one, 
effectively killing any chances for passage. As a consequence, despite 
the increasing medical liability crisis in many of these states, they 
are effectively powerless to act to effectively solve the problem.
solution to the crisis: medical liability reform legislation patterned 
                        after california's micra
    Fortunately, Congress does not need to start from scratch and 
identify and implement a solution that is untested. Faced with a 
similar crisis in the early 1970's, the state of California, with 
bipartisan support, enacted the Medical Injury Compensation Reform Act 
or MICRA. The key elements of MICRA include:
  --Providing full compensation for all economic damages, including 
        medical bills, lost wages, future earnings, custodial care and 
        rehabilitation;
  --Placing a fair and reasonable limit of $250,000 on non-economic 
        damages, such as pain and suffering;
  --Establishing a reasonable statute of limitations for filing a 
        lawsuit;
  --Allowing for periodic payments of damages rather than lump sum 
        awards; and
  --Ensuring that the bulk of any award goes to the plaintiffs, not 
        attorneys
    The clear and simple truth is that MICRA works. For nearly three 
decades, this law has ensured that legitimately injured patients get 
unfettered access to the courts and receive full compensation for their 
injuries, while at the same time providing stability to the medical 
liability insurance market to ensure that doctors can remain available 
to care for their patients.
    Consider the following points about the effectiveness of MICRA:
MICRA Fully Compensates Injured Patients
    First and foremost, under MICRA, patients receive full compensation 
for legitimate injuries resulting from medical negligence. Detractors 
of federal reform legislation are attempting to obfuscate the facts by 
scaring the public and policymakers into believing that injured 
patients will only receive a maximum of $250,000 to compensate them for 
their injuries. This is simply not the case. Patients receive full 
compensation for all of their quantifiable needs, with up to an 
additional $250,000 for non-economic damages, such as pain and 
suffering. To demonstrate this fact, the Californians Allied for 
Patient Protection recently compiled a sample of total awards 
(including both economic and non-economic damages) provided to injured 
patients. For example:
  --December 2002.--$84,250,000 total award Alameda County 5 year-old 
        boy with cerebral palsy and quadriplegia because of delayed 
        treatment of jaundice after birth.
  --July 2002.--$12,558,852 total award Los Angeles County 30 year-old 
        homemaker with brain damage because of lack of oxygen during 
        recovery from surgery.
  --October 2002.--$59,317,500 total award Contra Costa County 3 year-
        old girl with cerebral palsy as a result of birth injury.
  --November 2000.--$27,573,922 total award San Bernardino County 25 
        year-old woman with quadriplegia because of failure to diagnose 
        a spinal injury.
MICRA Significantly Minimizes Premium Increases
    Opponents of reform cite statistics that over the past several 
years, premiums for doctors in California have also been rising; thus 
proving that MICRA does not have any impact in holding down the costs 
of medical liability insurance. While it is true that premiums are on 
the rise in nearly all states, including California, the rate of 
increase of premiums for California doctors is significantly lower than 
in other states, and over time, MICRA has, in fact, stabilized medical 
liability insurance premiums as compared to the rate of increase in the 
rest of the country. As the following chart demonstrates, from 1976 to 
2000, premiums for physicians in California have risen only 167 percent 
as compared to an increase of 505 percent for the entire United States.


    Data collected from high-risk medical specialties from 2000 to 2002 
also validate these trends. For example, according to a nationwide 
survey of neurosurgeons, the national average premium increase for 
California neurosurgeons was 39 percent as compared to 63 percent for 
neurosurgeons in the entire country. In addition, the same survey 
clearly demonstrated that the rate of increase for an individual 
neurosurgeon in Los Angeles, California, as compared to other 
neurosurgeons who practice medicine in crisis states where there are no 
reforms in place, is significantly lower. The average rate of increase 
for the neurosurgeons in these non-reform states was 143 percent as 
compared to just 8 percent in Los Angeles, CA.

----------------------------------------------------------------------------------------------------------------
                                                                                                    Percentage
                           State/City                                  2000            2002          Increase
----------------------------------------------------------------------------------------------------------------
Los Angeles, CA.................................................         $48,000         $52,000               8
West Palm, FL...................................................          58,000         210,000             262
Cleveland, OH...................................................          75,675         167,941             122
Oaklawn, IL.....................................................         110,000         282,720             157
Philadelphia, PA................................................          90,000         190,000             111
New York, NY....................................................         154,890         251,126              62

----------------------------------------------------------------------------------------------------------------
 Source.--American Association of Neurological Surgeons/Congress of Neurological Surgeons Nationwide Survey
  April 2002.

    The Alliance does acknowledge that despite the successful reforms 
contained in MICRA, the average medical liability claim in California 
has outpaced the rate of inflation. This is in large part due to the 
fact that economic damages are not limited under MICRA and have grown 
as a component of medical liability claims. Notwithstanding this, 
however, the undisputed fact remains that MICRA prevents runaway juries 
from awarding outrageous awards for subjective, arbitrary and often 
unquantifiable non-economic damages, which allows insurance companies 
to adequately predict future lawsuit awards, bring stability the health 
care delivery system.
Federal Government Validates that MICRA Works
    U.S. Government experts agree that MICRA does in fact hold down the 
costs of medical liability insurance, and over the years there have 
been a number of studies that have identified MICRA's $250,000 cap on 
non-economic damages as a critical element in stabilizing premium 
costs. For example, dating back to September 1993, the former U.S. 
Office of Technology Assessment (OTA), in a report entitled, ``Impact 
of Legal Reforms on Medical Malpractice Costs,'' concluded that caps on 
damages were consistently found to be an effective mechanism for 
lowering medical liability insurance premiums. Most recently, the 
previously referenced HHS report, ``Confronting the New Health Care 
Crisis''and the CBO cost estimate report of the HEALTH Act, came to the 
same conclusion.
justification for federal reform legislation: americans overwhelmingly 
                     support a micra-style solution
    Americans are becoming acutely aware of the impact that this crisis 
is having on our nation's health care system, and overwhelmingly favor 
having Congress pass legislation to reform the current medical 
liability system and create one that balances the rights of patients to 
seek and obtain appropriate compensation for injuries caused by medical 
negligence against the right of all our citizens to have continued 
access to medical care. Two recent polls clearly demonstrate this 
support. In January 2003, Gallup conducted a poll on this issue and 
found the following:
  --Americans believe that the medical liability insurance issue is 
        either a major problem (56 percent) or a health care crisis (18 
        percent);
  --72 percent favor passing a law that would limit the amount that 
        patients can be awarded for their emotional pain and suffering; 
        and
  --57 percent responded that they think patients bring too many 
        lawsuits against doctors
    These findings were confirmed most recently by a February 2003 
study conducted by Wirthlin Worldwide for the Health Coalition on 
Liability and Access, which found that:
  --84 percent of Americans are concerned that skyrocketing medical 
        liability costs could limit their access to care;
  --76 percent favor a federal law that guarantees injured patients 
        full payment for lost wages and medical costs and reasonable 
        limits on awards for ``pain and suffering'' in medical 
        liability cases; and
  --61 percent believe the number of medical liability lawsuits against 
        doctors is higher than justified.
                               conclusion
    We have reached a very important juncture in the evolution of the 
U.S. health care system. At a time when lifesaving scientific advances 
are being made in nearly every area of health care, patients across the 
country are facing a situation in which access to health care is in 
serious jeopardy. Thus, as the Congress deliberates the many facets of 
this issue, the Alliance urges you to continue to keep in mind that 
this issue is not about doctors, lawyers and insurance companies. 
Rather, it is about patients and their ability to continue to receive 
timely and consistent access to quality medical care. By reforming the 
medical litigation system, the crisis will ultimately be abated. 
Patients are calling for reform. Doctors are calling for reform. 
President Bush is calling for reform. The House of Representatives is 
calling for reform. And the Alliance now urges the Senate to heed these 
calls and, at a minimum, pass MICRA-style medical liability reform 
legislation so all Americans are able to find a doctor when they most 
need one. Ultimately, when the question ``Will your doctor be there?'' 
is asked, the answer must be an unqualified yes.
    Thank you for considering our comments and recommendations. The 
Alliance of Specialty Medicine, whose mission is to improve access to 
quality medical care for all Americans through the unified voice of 
specialty physicians promoting sound federal policy, stands ready to 
assist you on this and other important health care policy issues facing 
our nation.
                                 ______
                                 
           Letter From the American College of Legal Medicine
                             Kamensky & Rubinstein,
                            7250 N. Cicero Ave., Suite 200,
                                   Lincolnwood, IL, March 17, 2003.

Re Solutions to Medical Liability/Insurance ``Crisis''

Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services, and 
        Education, Committee on Appropriations, U.S. Senate, 
        Washington, DC.
    Dear Senator Specter: On behalf of the American College of Legal 
Medicine (``ACLM''), I would like to thank you for the opportunity to 
submit the ACLM's views regarding medical professional liability, and 
we request that this letter be included in the record of the 
Subcommittee's March 13, 2003 hearing entitled, ``Causes of the Medical 
Liability Insurance Crisis.''
    Much occurred late last week regarding medical liability, for 
example, passage by the House of H.R. 5 on March 13, 2003, hearings 
conducted by the Senate Appropriations Labor Subcommittee on Health, 
chaired by you on March 13, 2003, (looking into a compromise proposal 
on medical liability), and introduction, also on March 13, 2003, of S. 
607 by Senator Ensign and others of the Help Efficient, Accessible, 
Low-Cost, Timely Healthcare Act of 2003, or the HEALTH Act of 2003. The 
ACLM wishes to add to these developments and, thus, would like to add 
to the discussions put forth during your committee hearings (see 
below).
    First, the ACLM is in its 43rd year and is unique among medical 
legal and health care organizations in our country. The majority of its 
membership (1,200) is composed of individuals who possess both the 
medical and law degrees. Our membership also consists of physicians, 
attorneys, healthcare practitioners, those in government and those in 
academia. Our mission is to educate and train through our meetings, 
publications and advocacy, such as we are doing here, on issues 
affecting the country which are at the crossroads of medicine, law and 
health care.
    We understand that items put forth for consideration in the 
subcommittee hearings on March 13 included the following topics:

    ``Affidavits of meritoriousness and attorney sanctions for filing 
frivolous lawsuits; caps on non-economic damages with exceptions for 
serious cases; legislation to curb medical errors, and legislation to 
address instability within the insurance industry, including, perhaps, 
revisiting the McCarran Ferguson Act exemption.''

    Let us respond.
    Affidavits of meritoriousness or attorney sanctions for frivolously 
filed suits are already part of states' laws governing medical 
professional liability and civil litigation. Such legislation, if 
enacted on the federal level, would invade an area of states' rights 
that has never been an area intended for federal intervention. A 
reading of United States Supreme Court decisions, highlighted by the 
Pegram and Rush Prudential cases, clearly and unmistakenly show that 
health care is an area traditional left to the states to regulate. 
Affidavits of meritoriousness and attorney sanctions for filing 
frivolous cases surely fall within this area of state regulation.
    Federal legislation to curb medical errors is fraught with 
skepticism as well. We are not saying that there must not be a 
continued effort to stem the tide of medical errors in our nation's 
healthcare institutions, such as to prevent, for example, what occurred 
with that transplant patient at the Duke Medical Center recently, but 
the emphasis has to be on prevention of systems errors, not on errors 
committed individually by physicians leading to malpractice lawsuits. 
We question whether there can ever be any effective legislation on the 
federal level to stem the tide of systems' errors. This, we feel, is 
best left to states, their licensing boards and those regulatory 
entities governing hospitals and healthcare providers, like the Joint 
Commission on Accreditation of Healthcare Organizations (``JCAHO''), to 
regulate. If anything, if the subcommittee you chair wishes to consider 
and promote legislation in this area at all, perhaps it should be to 
strengthen the ability of licensing organizations, like the JCAHO, to 
conduct their affairs without the fear of having their work-product 
discovered by attorneys who would use same in cases of professional 
medical negligence. In other words, we feel that an effective peer 
review statute on the federal level to protect from discoverability 
records of entities that can ensure better quality of care and, thus, 
reduce system errors in our country's healthcare institutions would be 
in order.
    Further, there is, and well there should be, concern regarding the 
insurance industry. Surely, it serves a purpose in our country; we all 
need insurance and we are all insured for losses, be they from 
automobile collisions, for miscues as directors and officers sitting on 
corporate boards, or, as is quite prominent now, for professionals, 
like doctors, rendering professional services. But the insurance 
industry should not make up for losses incurred in financial 
instruments in which it invests by gouging professionals, notably 
doctors, for purposes here, in the form of skyrocketing insurance 
premiums.
    There is a hue and cry afoot mandating caps on damages, and that 
with caps, premiums will become more reasonable. Caps on non-economic 
damages do not lower malpractice premiums. They really never have. Our 
research has found so-called crises, such as in which we now find 
ourselves, have occurred cyclically over the last 40 years, and are 
driven by the inability of insurers to perform well in the markets in 
which insurance premiums are invested. Moreover, where caps have been 
imposed, research and empirical data have shown that premiums have not 
gone down; premiums still increase, and so have health care costs in 
considerable measure. Concomitantly, you and some of your colleagues in 
the Senate may be impressed by California's experience with their MICRA 
law, originally enacted in 1975. What you haven't been told, we 
suspect, is that also put in place legislatively by the California 
assembly in the 1980s was a law to roll back insurance premiums in that 
state; another state law there was enacted that provided for insurance 
premium increases only with prior approval of the insurance 
commissioner. And, yet, even with this legislation, malpractice 
premiums and health care costs have risen quite a bit.
    Further, we feel that to preclude serious injury from a cap raises 
constitutional problems based in large measure on equal protection 
standards. For example, is loss of sight in one eye a serious injury? 
How about a permanent limp? Or what about the death of a newborn--is 
that a serious enough injury to be precluded from caps? Also, we think 
ill-advised any federal government attempt to immerse itself in the 
business of defining what a serious injury' will be nationwide for 
purposes of exempting certain injuries from a cap.
    If caps on non-economic damages are not the reason for a spike now 
in malpractice insurance premiums, then what is the cause? To put the 
answer another way, the lower the return (due to down markets) on 
investments by insurers, the higher the cost of malpractice insurance. 
Ok, if this is what we opine as the cause for the malpractice crisis 
today, what is the solution?
    The solution is twofold. First, the exemption provided by the 
McCarran-Ferguson Act for the insurance industry should be taken away. 
This will allow for proper regulation of insurance rates. Second, and a 
proposal we have yet to see floated legislatively, is the following. We 
know physicians (nee, any one of us) do not wish to be at the receiving 
end of a lawsuit. It isn't being the defendant in a lawsuit that has 
prompted physicians to carry on marches or participate in work 
stoppages that have given rise to public scrutiny and have been the 
subject of media attention all over the country; it is physicians 
inability to pass on in some fashion the cost of malpractice insurance 
premiums. As we are sure of which you are well aware [certainly at 
least through your son's expertise as a lawyer representing injured 
persons], physicians are locked into the reimbursement rates they 
receive for patient care, either from health plans under which they are 
under contract in order to be provided a base of patients to care and 
treat, or through government programs, such as Medicare. Why can't, 
therefore, there be considered federal legislation that will provide 
that physicians and health care practitioners be allowed to pass along 
a certain portion of malpractice insurance rate increases (let's say, 
if malpractice insurance premiums exceed a certain, defined cap over a 
designated period), to the government and health care plans? In this 
way, the government and the current era of health care delivery, i.e., 
managed care, will take part in ensuring that insuring entities are 
brought under control and that we avoid the cyclical trends of every 
decade or so we are seeing now, viz, insuring the nation's doctors and 
their ability to treat and care for patients unimpaired by astronomical 
malpractice premiums. Again, nonetheless, we suspect that the McCarran-
Ferguson Act and its exemption will have to be revisited to order to 
consider the proposal we are putting forth here. But this proposal is a 
worthy alternative to anything suggested so far. Other alternatives in 
the form of tort reform have been shown to be a failure at lowering 
malpractice insurance premiums.
    To conclude, we feel to continue to blame states' legal justice 
systems for the ills we now see today involving physicians and medical 
liability is ill-founded and not based on other than emotion and a 
``the sky is falling'' mentality. It has always been easy to declare 
lawyers as a class of scapegoat for causing the malady seen once more, 
but that is created by insuring entities not making their profit 
margins in the financial markets. Now, though, is finally the time to 
separate fact from fiction. S. 607 should be voted down in the Senate 
by you and your colleagues.
    Thank you for the opportunity to consider our views on this issue.
            Sincerely,
                                         Miles J. Zaremski,
                                          Immediate Past President.

                         CONCLUSION OF HEARING

    Senator Specter. Thank you all very much for being here. 
That concludes our hearing.
    [Whereupon, at 11:54 a.m., Thursday, March 13, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

                                   

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