Medical Malpractice Insurance: Multiple Factors Have Contributed 
to Increased Premium Rates (27-JUN-03, GAO-03-702).		 
                                                                 
Over the past several years, large increases in medical 	 
malpractice insurance premium rates have raised concerns that	 
physicians will no longer be able to afford malpractice insurance
and will be forced to curtail or discontinue providing certain	 
services. Additionally, a lack of profitability has led some	 
large insurers to stop selling medical malpractice insurance,	 
furthering concerns that physicians will not be able to obtain	 
coverage. To help Congress better understand the reasons behind  
the rate increases, GAO undertook a study to (1) describe the	 
extent of the increases in medical malpractice insurance rates,  
(2) analyze the factors that contributed to those increases, and 
(3) identify changes in the medical malpractice insurance market 
that might make this period of rising premium rates different	 
from previous such periods.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-702 					        
    ACCNO:   A07395						        
  TITLE:     Medical Malpractice Insurance: Multiple Factors Have     
Contributed to Increased Premium Rates				 
     DATE:   06/27/2003 
  SUBJECT:   Insurance premiums 				 
	     Malpractice (medical)				 
	     Physicians 					 
	     California 					 
	     Florida						 
	     Minnesota						 
	     Mississippi					 
	     Nevada						 
	     Texas						 
	     Pennsylvania					 

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GAO-03-702

                                       A

June 27, 2003 Let er t Congressional Requesters

Since the late 1990s, premium rates for medical malpractice insurance have
increased dramatically for physicians in certain specialties and states. 1
These increases have raised concerns that many physicians will no longer
be able to afford malpractice insurance and may be forced to curtail or
discontinue providing services. These concerns have been heightened as
some large insurers, faced with declining profits, have either stopped
selling medical malpractice insurance or reduced their operations in a
number of states. But disagreement exists over the causes of increased
premium rates and what, if anything, should be done in response to the

current situation. For example, some have argued for tort reform as a
means of lowering certain awards in medical malpractice lawsuits and
advocate legislative changes at the state level designed to place a cap on
such awards. Others have argued for medical reforms as a means of reducing
the incidence of medical malpractice or for insurance reforms as a way to
moderate premium rate increases.

In response to these concerns, you asked us to determine the reasons
behind the recent increases in some medical malpractice insurance rates. 2
Our specific objectives were to (1) describe the extent of the increases
in

medical malpractice insurance rates, (2) analyze the factors that have
contributed to the increases, and (3) identify changes in the medical
malpractice insurance market that may make the current period of rising
premium rates different from earlier periods of rate hikes. We will also

1 Medical malpractice lawsuits are generally based on tort law, which
includes both statutes and court decisions. A tort is a wrongful act or
omission by an individual that causes harm to another individual.
Typically, a malpractice tort would be based on the claim that the health
care provider was negligent, had failed to meet the acceptable standard of
care owed to the patient, and thus had caused injury to the patient.

2 Some health care provider associations and others have expressed concern
over medical malpractice insurance premium rates for nursing homes and
hospitals, but this topic is outside the scope of our report.

issue a related report that describes the effect of rising malpractice
premiums on access to health care and related issues. 3 Recognizing that
the medical malpractice market can vary considerably across states, as
part of our review we judgmentally selected a sample of

seven states* California, Florida, Minnesota, Mississippi, Nevada,
Pennsylvania, and Texas* in order to conduct a more in depth review in
each of those states. Our sample contains a mix of states based on the
following characteristics: extent of any recent increases in premium
rates, status as a *crisis state* according to the American Medical
Association, presence of caps on noneconomic damages, state population,
and aggregate loss ratios for medical malpractice insurers within the
state. Except where noted otherwise, our analyses were limited to these
states. Within each state, we spoke to one or both of the two largest and
currently active medical malpractice insurers, 4 the state insurance
regulator, and the

state association of trial attorneys. In six states, we spoke to the state
medical association, and in five states, we spoke to the state hospital
association. To examine the extent of increases in medical malpractice
insurance rates in our sample states, we reviewed annual survey data

collected by a private company. 5 To analyze the factors contributing to
the premium rate increases in our sample states as well as nationally, we
reviewed data provided by medical malpractice insurers to state insurance
regulators, the National Association of Insurance Commissioners (NAIC), 6

3 For other related GAO products, see the list at the end of this report.
4 We determined the largest insurers in 2002 based on premiums written for
calendar year 2001. 5 The Medical Liability Monitor annually surveys
providers of medical malpractice insurance to obtain their premium base
rates for three different specialties: internal medicine, general surgery,
and obstetrics/ gynecology.

6 NAIC is a voluntary association of the heads of each state insurance
department, the District of Columbia, and four U. S. territories. NAIC
assists state insurance regulators by providing guidance, model (or
recommended) laws and guidelines, and information- sharing tools.

and A. M. Best 7 on insurers within our sample states as well as the 15
largest writers of medical malpractice insurance nationally in 2001 (whose
combined market share nationally was approximately 64.3 percent). We also
spoke with officials from professional actuarial and insurance

organizations and national trial attorney and medical associations and
reviewed their testimonies before Congress. In addition, we analyzed data
on medical malpractice claims collected by insurers, state regulators, and
others in our sample states as well as nationally. To analyze how the
national medical malpractice insurance market has

changed since previous periods of rising premium rates, we reviewed
studies published by NAIC, reviewed state insurance regulations and tort
laws, and spoke to the insurers and state insurance departments in our
sample states. We also spoke to officials from national professional
actuarial, legal, and insurance organizations. Appendix I contains a more
detailed description of our methodology.

Results in Brief Since 1999, medical malpractice premium rates for
physicians in some states have increased dramatically. Among the seven
states that we

analyzed, we found that both the extent of the increases and the premium
levels varied greatly not only from state to state but across medical
specialties and even among areas within states. For example, the largest
writer of medical malpractice insurance in Florida increased premium rates
for general surgeons in Dade County by approximately 75 percent from 1999
to 2002, while the largest insurer in Minnesota increased premium rates
for the same specialty by about 2 percent over the same period. The
resulting 2002 premium rate quoted by the insurer in Florida was $174, 300
a year, more than 17 times the $10,140 premium rate quoted by the insurer
in Minnesota. In addition, the Florida insurer quoted a rate for general
surgeons outside Dade County of $89,000 a year for the same coverage,
approximately 51 percent of the rate it quoted inside Dade

County. 7 A. M. Best is a rating agency that provides current or
prospective investors, creditors, and policyholders with independent
analyses of insurance companies* overall financial strength,
creditworthiness, ability to pay claims, and company activities.

Multiple factors have contributed to the recent increases in medical
malpractice premium rates in the seven states we analyzed. First, since
1998 insurers* losses on medical malpractice claims have increased rapidly
in some states. For example, in Mississippi the amount insurers paid
annually on medical malpractice claims, or paid losses, 8 increased by
approximately 142 percent from 1998 to 2001 after adjusting for inflation.
9 We found that the increased losses appeared to be the greatest
contributor to increased premium rates, but a lack of comprehensive data
at the

national and state levels on insurers* medical malpractice claims and the
associated losses prevented us from fully analyzing the composition and
causes of those losses. For example, data that would have allowed us to
analyze claim severity at the insurer level on a state- by- state basis or
determine how losses were broken down between economic and noneconomic
damages were unavailable. Second, from 1998 through 2001 medical
malpractice insurers experienced decreases in their investment income 10
as interest rates fell on the bonds that generally make up around 80
percent of these insurers* investment portfolios. While almost no medical
malpractice insurers experienced net losses on their investment

portfolios over this period, a decrease in investment income meant that
income from insurance premiums had to cover a larger share of insurers*
costs. Third, during the 1990s insurers competed vigorously for medical
malpractice business, and several factors, including high investment
returns, permitted them to offer prices that in hindsight, for some
insurers, did not completely cover their ultimate losses on that business.
As a result of this, some companies became insolvent or voluntarily left
the market,

reducing the downward competitive pressure on premium rates that had
existed through the 1990s. Fourth, beginning in 2001 reinsurance rates for
medical malpractice insurers also increased more rapidly than they had in

8 Paid losses are the cash payments insurers made in a given period, such
as a calendar year, on claims reported during both the current and
previous years. Incurred losses include the insurer*s expected costs for
claims reported in that year and adjustments to the expected costs for
claims reported in earlier years. In Mississippi, insurers* incurred
losses increased approximately 197.5 percent from 1998 to 2001, after
adjusting for inflation.

9 We adjusted for inflation using the consumer price index (CPI). The CPI
is a measure of the average change over time in the prices consumers pay
for a basket of goods and services. This report uses the CPI- U, which is
meant to reflect the spending patterns of urban consumers and covers about
87 percent of the total U. S. population.

10 In general, state insurance regulators require insurers to reduce their
requested premium rates in line with expected investment income. That is,
the higher the expected income from investments, the more premium rates
must be reduced.

the past, raising insurers* overall costs. 11 In combination, all of these
factors contribute to the movement of the medical malpractice insurance
market through cycles of hard and soft markets-- similar to those
experienced by the property- casualty insurance market as a whole-- during
which premium rates fluctuate. 12 Cycles in the medical malpractice market

tend to be more extreme than in other insurance markets because of the
longer period of time required to resolve medical malpractice claims, and
factors such as changes in investment income and reduced competition can
exacerbate the fluctuations.

While the medical malpractice insurance market as a whole had experienced
periods of rapidly increasing premium rates during previous hard markets
in the mid- 1970s and mid- 1980s, the market has changed considerably
since then. These changes are largely the result of actions insurers,
health care providers, and states have taken to address increasing premium
rates. Beginning in the 1970s and 1980s, insurers began selling *claims-
made* rather than *occurrence- based* policies, 13 enabling insurers to
better predict losses for a particular year. Also in the 1970s,
physicians, facing increasing premium rates and the departure of some
insurers, began to form mutual nonprofit insurance companies. Such
companies, which

may have some cost and other advantages over commercial insurers, now
comprise a significant portion of the medical malpractice insurance
market. More recently, an increasing number of large hospitals and groups
of hospitals or physicians have left the traditional commercial insurance
market and begun to insure themselves in a variety of ways* for example,
by self- insuring. While such arrangements can save money on
administrative costs, hospitals and physicians insured through these

arrangements assume greater financial responsibility for malpractice
claims than they would under traditional insurance arrangements and thus
may face a greater risk of insolvency. Finally, since periods of
increasing

11 Reinsurance is insurance for insurance companies, which insurance
companies routinely use as a way to spread the risk associated with their
insurance policies. 12 Some industry officials have characterized hard
markets as periods of rapidly rising

premium rates, tightened underwriting standards, narrowed coverage, and
the withdrawal of insurers from certain markets. Soft markets are
characterized by relatively flat or slowrising premium rates, less
stringent underwriting standards, expanded coverage and strong competition
among insurers.

13 Claims- made policies cover claims reported during the year in which
the policy is in effect. Occurrence- based policies cover claims arising
out of events that occurred but may not have been reported during the year
in which the policy was in effect. Most policies sold today are claims-
made policies.

premium rates during the mid- 1970s and mid- 1980s, all states passed at
least some laws designed to reduce medical malpractice premium rates. Some
of these laws are designed to decrease insurers* losses on medical
malpractice claims, while others are designed to more tightly control the
premium rates insurers can charge. These changes make it difficult to

predict how medical malpractice premiums might behave during future hard
and soft markets.

This report includes a matter that Congress may want to consider as it
looks for ways to improve the ability of Congress, state insurance
regulators, and others to analyze the current and future medical
malpractice insurance markets. Specifically, Congress may want to consider
encouraging NAIC and state insurance regulators to identify and collect
additional data necessary to evaluate the frequency, 14 severity, 15 and
causes of losses on medical malpractice claims.

We received comments on a draft of this report from NAIC*s Director of
Research. The Director generally agreed with the report*s findings and
matters for congressional consideration, and provided technical comments
that we have incorporated as appropriate. The Director*s comments are
discussed in greater detail at the end of this letter.

Background Nearly all health care providers, such as physicians and
hospitals, purchase insurance that covers expenses related to medical
malpractice claims,

including payments to claimants and legal expenses. The most common
physician policies provide $1 million of coverage per incident and $3
million of coverage per year. Today the primary sellers of physician
medical malpractice insurance are the physician- owned and/ or operated
insurance companies that, according to the Physician Insurers Association
of America, insure approximately 60 percent of all physicians in private
practice in the United States. Other health care providers may obtain
coverage through commercial insurance companies, mutual coverage
arrangements, or state- run insurance programs, or may self- insure (take

responsibility for claims themselves). Most medical malpractice insurance
policies offer claims- made coverage, which covers claims reported during

14 Claim frequency is the number of claims per exposure unit, such as a
single general practitioner. 15 Claim severity is the average loss per
claim.

the year in which the policy is in effect. A small and declining number of
policies offer occurrence coverage, which covers all claims arising out of
events that occurred during the year in which the policy was in effect.
Medical malpractice insurance operates much like other types of insurance,
with insurers collecting premiums from policyholders in exchange for an
agreement to defend and pay future claims within the

limits set by the policy. Insurers invest the premiums they collect and
use the income from those investments to reduce the amount of premium
income that would have been required otherwise. Claims against a
policyholder are recorded as expenses, or incurred losses, which are equal
to the amount paid on those claims as well as the insurer*s estimate of
future losses on those same claims. The liability associated with the

portion of these incurred losses that have not yet been paid by the
insurer is collectively known as the insurer*s loss reserve. In order to
maintain financial soundness, insurers must maintain assets in excess of
total

liabilities* including loss reserves and reserves for premiums received
but not yet earned 16 *to make up what is known as the insurer*s surplus.
State insurance departments monitor insurers* solvency by tracking, among
other measures, the ratio of total annual premiums to this surplus.
Medical malpractice insurers generally attempt to keep their surplus
approximately

equal to their annual premium income. Medical malpractice insurers
establish premium base rates for particular medical specialties within a
state and sometimes for particular geographic regions within a state.
Insurers may also offer discounts or add surcharges for the particular
characteristics of policyholders, such as claim histories or whether they
participate in risk- management programs. The premium rates are based on
anticipated losses on claims and related expenses, expected investment
income, the need to build a surplus, and, for for- profit insurers, the
desire to earn a reasonable profit for shareholders. In most states the
insurance regulators have the authority to approve or deny

proposed changes to premium rates. 16 Insurers collect premiums in advance
for coverage during a future period of time, and as that period of time
passes, those premiums are *earned.* Premiums related to periods of time
yet to pass are considered *unearned* and are a liability on the books of
the insurer.

For several reasons, accurately predicting losses on medical malpractice
claims is difficult. First, according to a national insurer association we
spoke with, most medical malpractice claims take an average of more than 5
years to resolve, including discovering the malpractice, filing a claim,
determining (through settlement or trial) payment responsibilities, if
any, and paying the claim. 17 In addition, some claims may not be resolved
for as long as 8 to 10 years. As a result, insurers often must estimate
costs years in

advance. Second, the range of potential losses is wide. Actuaries we spoke
with told us that individual claims with similar characteristics can
result in very different losses for the insurer, making it difficult to
predict the

ultimate cost of any single claim. Third, the predictive value of
historical data is further limited by the often small pool of relevant
policyholders. For example, a relevant pool of policyholders would be
physicians practicing a particular specialty within a specific state and
perhaps within a specific geographic area within that state. In smaller
states, and for some of the less

common but more risky specialties, this pool could be very small and
provide only a limited amount of data that could be used to estimate
future costs.

Medical malpractice insurance is regulated by state insurance departments
and subject to state laws. That is, insurers selling medical malpractice
insurance in a particular state are subject to that state*s regulations
for their operations within that state, and all claims within that state
are subject to that state*s tort laws. Insurance regulations can vary
across states, creating differences in the way insurance rates are
regulated. For example, one state insurance regulator we spoke with
essentially let the insurance market determine appropriate rates, while
another had an increased level of review, including approving specific
company rates on a case- by- case basis. NAIC assists state insurance
regulators in developing these regulations by providing guidance, model
(or recommended) laws and guidelines, and information- sharing tools.

In response to concerns over rising premium rates, physicians, medical
associations, and insurers have pushed for state and federal legislation
that would, among other things, limit the amount of damages paid out on

medical malpractice claims. A few states have passed legislation with such
limitations over the past several years, and federal legislation is
pending. On March 13, 2003, the House of Representatives passed the Help
Efficient,

17 Estimates of some individual insurers we spoke with ranged from around
3 years to over 5 years.

Accessible Low- Cost, Timely Healthcare (HEALTH) Act of 2003, which
includes, among other things, a limit on certain types of damages in
medical malpractice claims. On March 12, 2003, a similar bill of the same

name was introduced in the Senate, but as of June 2003, no additional
action had been taken.

Both the Extent of Beginning in 1999 and 2000, medical malpractice
insurers in our seven sample states increased their premium rates 18 for
the physician specialties

Increases in Medical of general surgery, internal medicine, and
obstetrics/ gynecology faster than

Malpractice Premium they had since at least 1992. These specialties were
the only ones for which

Rates and the Rates data were available, and 1992 was the earliest year
for which we could obtain comprehensive survey data. 19 However, both the
extent of these

Themselves Varied changes and the level of the premium rates insurers
charged varied greatly

across Specialties and across medical specialties, states, and even areas
within states. From 1999

States through 2002, one large insurer raised rates more for internal
medicine

than for general surgery, while another raised rates 12 times more for
general surgery than for internal medicine. Changes in premium base rates
among some of the largest insurers in each state ranged from a reduction
of about 9 percent for obstetricians and gynecologists insured by one
California company to an increase of almost 170 percent for doctors in the

18 In this report, premium rates are the base rates insurers submit to
state regulators along with a schedule of potential deductions or
additions related to the particular characteristics of policyholders. The
actual premium rate insurers charge individual policyholders varies from
the base rate. We could not determine the extent to which the actual
premium rates charged varied from the base rates, but among some of the
insurers we spoke with, the actual premium rates ranged from about 50 to
100 percent of the base rates over the past several years. Some market
observers and participants also told us that the discounts have decreased
over the last several years.

19 All premium rate information in this report is based on survey data
collected by the

Medical Liability Monitor, a newsletter that, among other things,
publishes the results of its annual surveys of the premium rates of
medical malpractice insurers. Comprehensive survey data was available for
years 1992 to 2002. The surveys, which are sent to medical malpractice
insurers, request premium rates for each state or smaller region for a
standard amount of coverage in three specialties* internal medicine,
general surgery, and obstetrics/ gynecology. The Medical Liability Monitor
selected these in order to have data representative of low-, medium-, and
high- risk specialties. In the survey results for 1999

through 2002, all 50 states were represented in the rate information that
companies provided. The premium rates collected in the survey are base
rates that do not reflect the discounts or the additional amounts insurers
charge, so actual premium rates can vary from the premium rates given in
the survey.

same specialty in one area of Pennsylvania. 20 At the same time, premium
rates for the same amount of coverage for the same medical specialty
varied by a factor of as much as 17 among states* that is, the rate in one

state was 17 times higher than the rate in a different state. Premium
Rates Have Grown

As figure 1 shows, premium base rates varied across our seven sample
Rapidly since 1998 for

states from 1992 to 1998 but for most insurers remained relatively flat.
Certain Specialties in Some

Beginning in 1999 and 2000, however, most of these insurers began States

increasing their rates in larger increments. Many of the increases were
dramatic, ranging as high as 165 percent, although some rates remained
flat. Figure 2 shows the percentage increase in premium rates for the
largest insurers in our seven sample states from 1999 through 2002. 21 In
the Harrisburg area of Pennsylvania, for example, the largest insurer
increased premium base rates dramatically for three specialties:
obstetrics/ gynecology (165 percent), general surgery (130 percent), and
internal medicine (130 percent). At the same time, the consumer price
index (CPI)

increased by 10 percent. However, in California and Minnesota, premium
base rates for the same specialties rose between 5 and 21 percent and in
some cases fell slightly. The variations in the changes in premium base

rates among our sample states appears to be consistent with the changes in
states outside our sample, with insurers in some states raising premium
rates rapidly after 1999 and insurers in other states raising them very
little.

20 In this report, premium rates shown for Pennsylvania include a
surcharge for a mandatory professional liability catastrophe loss fund.
Policies purchased from an insurer provide coverage up to a specific
amount, and the loss fund then provides additional coverage. The amount
required to be covered by insurers has been increasing and the amount
covered by the loss fund has been decreasing. In 2002, insurers covered
the first $500,000 of any claim,

up to an annual limit of $1. 5 million, while the loss fund covered an
additional $400,000 per claim, up to an annual limit of $1.2 million.

21 We determined the largest insurers in each of our seven sample states
based on premiums written in 2001.

Figure 1: Premium Base Rates of the Largest Insurers in Seven Selected
States for Three Medical Specialties, 1992* 2002 120

Dollars in thousands General surgery 100

80 60 40 20

0 1992

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 40 Dollars in thousands

Internal medicine 30 20 10

0 1992

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 150 Dollars in thousands
Obstetrics/ gynecology 120 90 60 30

0 1992

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Pennsylvania Medical
Society Liability Insurance Company in Philadelphia, Pennsylvania (1997-
2002) Texas Medical Liability Trust in El Paso,Texas (1996- 2002)

Medical Insurance Exchange of California in Clark County Nevada (1993-
2002) Doctors Company in northern California First Professionals Insurance
Company in Palm Beach County, Florida Medical Assurance of Mississippi in
Mississippi Midwest Medical Insurance Company in Minnesota

Source: GAO analysis of annual surveys by the Medical Liability Monitor.

Note: Premium rates shown are annual premium rates for a claims- made
policy with a cap of $1 million per incident and $3 million per year.

Figure 2: Percentage Changes in Premium Base Rates of the Largest Medical
Malpractice Insurers in Seven Selected States for Three Medical
Specialties, 1999* 2002

200 Percentage increase General surgery

Cal. Fla. Minn. Miss. Nev. Pa. Tex. 150

130 120

95 104

100

82 75 75

73 51 50

50

31 18 14 21 15

10 5 2

4

0 150 Percentage increase

Internal medicine

130

120

Cal. Fla. Minn. Miss. Nev. Pa. Tex. 108 98 98

96

90

82 73 60

52 50

40

30

21 15 18 10 10

5 5 2

4

0 200 Percentage increase

Obstetrics/ gynecology

165

150

Cal. Fla. Minn. Miss. Nev. Pa. Tex. 110

100

99 50 60 62

50

21 43 43

30 18 15

26 21 10

5 2

4

0

-9

-50 CPI

CPI County)

Insurance Florida)

Florida) Florida)

Insurance Nevada)

California County)

area) area)

Liability area)

Liability area)

Liability area)

area) Care General California)

Exchange California)

Physician's California)

Physician's Beach, Insurance of (Minnesota)

Assurance (Mississippi) Exchange

of Texas, Texas, Assurance Texas, County, (rest County, Clark Society
Society Society Medical Medical Angeles of CumulativeMedical (northern
Insurance (northern California Diego, California (Palm Medical Medical
Insurance (Philadelphia (Pittsburgh (Harrisburg Paso, Medical (Dallas,
Cumulative (San (Los Professionals (Dade Professionals Company (Clark
Exchange outside Medical Medical Medical Texas (El Texas (Amarillo,
Company Medical California Southern Southern First Assurance First Company
Midwest ofMississippi Medical Insurance Company Company Company Trust
Trust of Exchange Exchange Company California (Nevada, of Doctor's
Insurance Insurance Medical Medical Pennsylvania LiabilityInsurance
Pennsylvania LiabilityInsurance Pennsylvania Insurance Source: GAO
analysis of annual surveys by the Medical Liability Monitor.

The Level of Premium Rates We found that premium rates quoted by insurers
in our seven sample states

Also Varied across varied across medical specialties and states. According
to some of the

Specialties and States insurers and actuaries we spoke with, the
differences in rates reflect the

costs associated with medical malpractice claims against physicians in
particular specialties. Specialties with a high risk of large or frequent
losses on medical malpractice claims will have higher premium rates. For
example, in 2002 the largest medical malpractice insurer in Texas quoted a
base rate for the same level of coverage of $92, 000 to obstetricians and
gynecologists, $71,000 to general surgeons, and $26,000 to internists.
Figure 3 shows the premium rates quoted by the largest medical malpractice

insurers in our sample states for these three specialties. 22 Premium
rates quoted by insurers in our seven sample states for the same medical
specialty also varied across states and geographic areas within states
(see fig. 3). Some of the insurers and actuaries we spoke with told us
that these variations also reflect differences in insurers* loss
experiences in those venues. As figure 3 shows, the largest insurer in
Florida quoted a premium base rate of $201,000 for obstetricians and
gynecologists in Dade County, while the largest insurer in California
quoted a premium based rate of $36,000 for similar physicians in northern
California. Within Florida, the same large insurer quoted a premium base
rate of $103,000 for obstetricians and gynecologists outside of Dade
County* approximately 51 percent of the Dade County rate. Within
Pennsylvania, the largest insurer quoted a premium base rate of $64,000
for doctors in Philadelphia* approximately 83 percent more than the rate
it quoted outside the city.

22 Not all of the insurers included in figs. 3 and 4 are the same, as data
that would have allowed us to complete the same analyses for all of the
insurers was not available.

Figure 3: 2002 Medical Malpractice Insurance Premium Base Rates of the
Largest Insurers in Seven Selected States for Three Medical Specialties

200 Dollars in thousands

General surgery

174 Cal. Minn. Miss. Pa.

Tex. Nev. 150 100

89 85

71 Fla.

50 51

50

27 34 33

28 34

22 10

0 60

Dollars in thousands

56

Internal medicine 50

Cal. Minn. Miss. Pa. Tex. Nev. 40 30

29 26

24

20

Fla. 12 12

11 13

14

10

6 4 5

6

0 250 Dollars in thousands

Obstetrics/ gynecology

Cal. 201 Minn. Miss. Pa.

Tex. Nev. 200 150

142 103

92

100

85 55

Fla. 64

50

36 45 35 43

31 17

0 of

Trust Company

Norcal Physician's

Exchange Insurance

Florida) Insurance Florida)

Liability area)

area) territory)

territory) Exchange

Nevada) California

County) of California) California)

California) (Minnesota)

Assurance (Mississippi) Society Society Liability rated LiabilityTrust

rated of Clark Doctor's (northern (central California Insurance County,
(rest Medical Medical (Philadelphia (Pittsburgh Medical Medical Insurance
County, Exchange of (southern Professionals (Dade Professionals Company
Midwest InsuranceCompany Mississippi Medical Medical highest Texas lowest
(Clark outside Southern First Company First nsylvania Company Company
Texas (Texas's (Texas's Medical California Insurance Pen Insurance
Pennsylvania LiabilityInsurance of (Nevada, Medical Source: GAO analysis
of annual surveys by the Medical Liability Monitor.

Note: Premium rates shown are annual premium base rates for coverage under
a claims- made policy with a cap of $1 million per incident and $3 million
per year.

Multiple Factors Have Insurers* losses, declines in investment income, a
less competitive climate,

Contributed to the and climbing reinsurance rates have all contributed to
rising premium

rates. First, among our seven sample states, insurers* losses have
increased Increases in Medical

rapidly in some states, increasing the amount that insurers expect to pay
Malpractice Premium

out on future claims. Second, on the national level insurers* investment
Rates income has decreased, so that insurance companies must increasingly
rely on premiums to cover costs. Third, some large medical malpractice

insurers have left the market in some states because selling policies was
no longer profitable, reducing the downward competitive pressure on
premium rates that existed through most of the 1990s. Last, reinsurance
rates for some medical malpractice insurers in our seven sample states
have increased substantially, increasing insurers* overall costs. In
combination, all the factors affecting premium rates and the availability
of medical malpractice insurance contribute to the medical malpractice
insurance cycle of hard and soft markets. While predicting the length,
size and turning points of a cycle may be impossible, it is clear that the
relatively long period of time required to resolve medical malpractice
claims makes the cycles more extreme in this market than in other
insurance markets.

Increased Losses on Claims Like premium increases, annual paid losses and
incurred losses for the

Are the Primary Contributor national medical malpractice insurance market
began to rise more rapidly

beginning in 1998. 23 After adjusting for inflation, we found that the
average to Higher Medical

annual increase in paid losses from 1988 to 1997 was approximately 3.0
Malpractice Premium Rates

percent but that this rate rose to 8.2 percent from 1998 through 2001.
Inflation- adjusted incurred losses decreased by an average annual rate of
3.7 percent from 1988 to 1997 but increased by 18.7 percent from 1998 to
2001. Figure 4 shows paid and incurred losses for the national medical
malpractice market from 1975 to 2001, adjusted for inflation.

23 Over the past several years, some large medical malpractice insurers in
some states have become insolvent. Such insolvencies may have caused
aggregate paid losses in those states to be understated to an unknown
extent, because while the insurer may still be paying

medical malpractice claims, they may no longer be reporting those payments
to NAIC or state regulators.

Paid and incurred losses give different pictures of an insurer*s loss
experience, and examining both can help provide a better understanding of
an insurer*s losses. 24 Paid losses are the cash payments an insurer makes
in

a given year, irrespective of the year in which the claim giving rise to
the payment occurred or was reported. Most payments made in any given year
are for claims that were reported in previous years. In contrast, incurred
losses in any single year reflect an insurer*s expectations of the amounts
that will be paid on claims reported in that year. Incurred losses for a
given year will also reflect any adjustments an insurer makes to the
expected amounts that must be paid out on claims reported during previous
years. That is, as more information becomes available on a particular
claim, the insurer may find that the original estimate was too high or too
low and must make an adjustment. If the original estimate was too high,
the adjustment will decrease incurred losses, but if the original estimate
was too low, the adjustment will increase them.

Incurred losses are the largest component of medical malpractice insurers*
costs. For the 15 largest medical malpractice insurers in 2001* whose
combined market share nationally was approximately 64.3 percent*

incurred losses (including both payments to plaintiffs to resolve claims
and the costs associated with defending claims) comprised, on average,
around 78 percent of the insurers* total expenses. Because insurers base
their premium rates on their expected costs, their anticipated losses will
therefore be the primary determinant of premium rates.

24 According to at least one insurer, the best measure of the results from
policies may be the ultimate paid losses on the claims reported that year,
which insurers could compare to the premiums charged for the policies in
question. However, as paid losses are not entirely known for at least 3 to
5 years after they claims are reported, such information is not completely
available for the years 1998 through 2002.

Figure 4: Inflation- Adjusted Paid and Incurred Losses for the National
Medical Malpractice Insurance Market, 1975* 2001 (Using the CPI, in 2001
Dollars)

7,000 Dollars in millions

6,000 5,000 4,000 3,000 2,000 1,000

0 1975

1976 1977

1978 1979

1980 1981

1982 1983

1984 1985

1986 1987

1988 1989

1990 1991

1992 1993

1994 1995

1996 1997

1998 1999

2000 2001

Direct losses incurred in 2001 dollars Direct losses paid in 2001 dollars
Source: GAO analysis of A. M. Best data.

The recent increases in both paid and incurred losses among our seven
sample states varied considerably, with some states experiencing
significantly higher increases than others. From 1998 to 2001, for
example,

paid losses in Pennsylvania and Mississippi increased by approximately
70.9 and 142.1 percent, respectively, while paid losses in California and
Minnesota increased by approximately 38. 7 and 8.7 percent, respectively
(see fig. 5). 25 Because paid losses in any single year reflect primarily
claims

reported during previous years, these losses may not be representative of
claims that were reported during the year the losses were paid.

25 To better show annual changes in the states with smaller total losses,
in both figs. 5 and 6 we have separated our seven sample states into two
groups, those with smaller total losses and those with greater total
losses.

Figure 5: Inflation- Adjusted Aggregate Paid Losses for Medical
Malpractice Insurers in Seven Selected States, 1975- 2001 (Using the CPI,
in 2001 Dollars)

600 Dollars in millions

500 400 300 200 100

0 1975

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 California Florida
Pennsylvania Texas

80 Dollars in millions

70 60 50 40 30 20 10

0 1975

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Minnesota
Mississippi Nevada

Source: GAO analysis of A. M. Best data.

From 1998 to 2001, aggregate incurred losses increased by large amounts in
almost all of our seven sample states. As shown in figure 6, the highest
rates of increase in incurred losses over that period were experienced by
insurers in Mississippi (197.5 percent) and Pennsylvania (97.2 percent).
Even in California and Minnesota, states with lower paid losses from 1998
through 2001, insurers experienced increases in incurred losses of
approximately 40.5 and 73.2 percent, respectively, over the same period.
As noted above, incurred losses in any single year reflect insurers*
expectations of future paid losses associated with claims reported in the
current year* that is, claims that will be paid, on average, over the next
3

and one- half years (according to one industry association). And because
insurers* incurred losses have increased recently, insurers are expecting
their paid losses to increase over the next several years.

Figure 6: Inflation- Adjusted Aggregate Incurred Losses for Medical
Malpractice Insurers in Seven Selected States, 1975- 2001 (Using the CPI,
in 2001 Dollars)

800 Dollars in millions

700 600 500 400 300 200 100

0 1975

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 California Florida
Pennsylvania Texas 120

Dollars in millions 100

80 60 40 20

0 -20

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Minnesota

Mississippi Nevada

Source: GAO analysis of A. M. Best data.

Increased Losses Lead to Higher According to actuaries and insurers we
spoke with, increased paid losses

Premium Rates raise premium rates in several ways. First, higher paid
losses on claims

reported in current or previous years can increase insurers* estimates of
what they expect to pay out on future claims. Insurers then raise premium
rates to match their expectations. In addition, large losses (particularly
paid losses) on even one or a few individual claims can make it harder for
insurers to predict the amount they might have to pay on future claims.
Some insurers and actuaries we spoke with told us that when losses on
claims are hard to predict, insurers will generally adopt more
conservative expectations regarding losses* that is, they will assume
losses will be toward the higher end of a predicted range of losses.
Further, large losses on individual claims can raise plaintiffs*
expectations for damages on similar claims, ultimately resulting in higher
losses across both claims that are settled and those that go to trial. As
described above, this tendency in turn can lead to higher expectations of
future losses and thus to higher

premium rates. Finally, an increase in the percentage of claims on which
insurers must make payments can increase the amount that insurers expect
to pay on each policy, resulting in higher premium rates. That is,
insurers expecting to pay out money on a high percentage of claims may
charge more for all policies in order to cover the expected increases.

Comprehensive Data on the A lack of comprehensive data at the national and
state levels on insurers*

Composition and Causes of medical malpractice claims and the associated
losses prevented us from Increased Losses Were Lacking

fully analyzing both the composition and causes of those losses at the
insurer level. 26 For example, comprehensive data that would have allowed
us to fully analyze the severity of medical malpractice claims at the
insurer level on a state- by- state basis did not exist. To begin with,
data submitted by insurers to NAIC on the number of claims reported to
insurers are not

broken out by state. Rather, insurers that operate in a number of states
report the number of claims for all their medical malpractice insurance
policies nationwide. Also, while NAIC does collect data that can be used
to measure the severity of claims paid in a single year (number of claims
per state), NAIC began this effort only in 2000. As a result, we could not
gather enough data to examine trends in the severity of paid claims from
1998 to 2002 at the insurer level. Similarly, comprehensive data did not
exist that

would have allowed us to analyze claim frequency on a state- by- state
basis. As noted above, data that insurers submit to NAIC on the number of
claims reported were not broken out by state prior to 2000. In addition,
insurers do 26 Some additional data on medical malpractice claims, not
connected to individual insurers, were available and were analyzed in a
separate report. See GAO- 03- 836.

not submit information on the number of policies in effect or the number
of health care providers insured. Finally, medical associations we spoke
with in our sample states had not compiled accurate data on the number of
physicians practicing within those states. As a result, we could not
analyze changes in the frequency of medical malpractice claims in our
sample states at the insurer level.

Data that would have allowed us to analyze how losses were divided between
settlements and trial verdicts or between economic and noneconomic damages
were also not available. First, insurers do not

submit information to NAIC on the portion of losses paid as part of
settlements and the portion paid as the result of a trial verdict, and no
other comprehensive source of such information exists. However, all eight
insurers and one of the trial lawyers* associations we spoke with provided
certain estimates about claims. The estimates of three insurers on the
percentage of claims resulting in trial verdicts ranged from 5 to 7
percent. The estimates of four insurers and 1 state trial lawyers*
association of the

percentage of trial verdicts being decided in favor of the insured
defendant ranged from 70 to 86 percent. The estimates of four insurers and
one state trial lawyers* association of the portion of claims resulting in
payment to the plaintiff ranged from 14 to 50 percent. Second, no
comprehensive source of information exists on the breakdown of losses
between economic damages, such as medical costs and lost wages, and
noneconomic damages, such as compensation for pain and suffering. Several
of the insurers and trial lawyers* associations we spoke with noted

that settlement amounts are not formally divided between these two types
of damages and that consistent, comprehensive information on trial
judgments is not collected. Furthermore, while judgment amounts obtained
at trial may be large, several of the insurers we spoke with said that
they most often do not pay amounts beyond a policyholder*s policy limits.
27 Data on the final amounts insurers pay out on individual judgments are
not

collected, although they are reported in the aggregate as part of paid
losses in insurers* financial statements.

27 Some insurers we spoke with told us that they can be liable for amounts
beyond a policy*s limits if the policyholder requests that the insurer
settle with the plaintiff for an amount equal to or less than the policy
limit, but the insurer takes the case to trial, loses, and a judgment is
entered in an amount greater than the policy limits. Insurers in
California, Florida, and Texas told us that payments beyond policy limits
posed significant issues in their states.

While losses on medical malpractice claims increase as the cost of medical
care and the value of lost wages rise, losses in some states have far
outpaced such inflation. Insurance, legal, and medical industry officials
we spoke with suggested a number of potential causes for such increases.
These potential causes included a greater societal propensity to sue; a
*lottery mentality,* where a lawsuit is seen as an easy way to get a large
sum of money; a sicker, older population; greater expectations for medical
care because of improved technology; and a reduced quality of care and the
breakdown of the doctor- patient relationship owing, for example, to
factors such as the increasing prevalence of managed care organizations.
While we could not analyze such potential causes for increased losses,
understanding them would be useful in developing strategies to address
increasing medical malpractice premium rates. That is, because losses on
claims have such a profound effect on premium rates, understanding the
reasons those losses have increased could make it easier to devise actions
to control the rise in premium rates. 28 Medical Malpractice

State laws restrict medical malpractice insurers to conservative Insurers*
Investment investments, primarily bonds. In 2001, the 15 largest writers
of medical malpractice insurance in the United States 29 invested, on
average, around Income Has Decreased

79 percent of their investment assets in bonds, usually some combination
of U. S. Treasury, municipal, and corporate bonds. While the performance
of some bonds has surpassed that of the stock market as a whole since
2000, annual yields on selected bonds since 2000 have decreased steadily
since then (table 1).

28 State laws for resolving medical malpractice claims may also affect the
extent to which losses increase in a particular state. The effect of state
laws on losses and premium rates is discussed in greater detail in GAO-
03- 836.

29 As reported by A. M. Best. These insurers included a combination of
commercial companies and physician- owned nonprofit insurers. Some of
these insurers sold more than one line of insurance, and changes in
returns on investments might not be reflected equally in the premium rates
in each of those lines.

Table 1: Annual Yields for Selected Bonds, 1995* 2002, and Average Return
on Investment Assets, 1997* 2002, for the 15 Largest Writers of Medical
Malpractice Insurance in 2001

1995 1996 1997 1998 1999 2000 2001 2002

5- Year U. S. Treasury securities 6.38 6. 18 6. 22 5.15 5.55 6.16 4.56
3.82 10- Year U. S. Treasury securities 6.57 6. 44 6. 35 5.26 5.65 6.03
5.02 4.61

5- Year AAA- rated municipal bonds 4.57 4. 41 4. 34 3.97 4.18 4.72 3.63
3.16

10- Year AAA- rated municipal bonds 5.04 4. 91 4. 75 4.31 4.62 4.97 4.28
4.05

5- Year AAA- rated corporate bonds 6.71 6. 49 6. 52 5.61 6.17 6.96 5.24
4.45

10- Year AAA- rated corporate bonds 6.93 6. 77 6. 66 5.74 6.38 7.09 5.92
5.42

Average return on investment assets for 15 largest insurers a a 5.6 5. 5
5. 2 5. 6 5.0 4.0 b

Source: GAO analysis of data from A. M. Best, the Federal Reserve, and the
Bond Market Association. a Data for 1995 and 1996 were not readily
available.

b Complete information was not available for the same companies in 2002.
The 2002 average return on investment was estimated based on the average
bond yield and the average ratio of the bond yield to the insurer*s return
on investment.

We analyzed the average investment returns of the 15 largest medical
malpractice insurers of 2001 and found that the average return fell from
about 5.6 percent in 2000 to an estimated 4.0 percent in 2002. However,
none of the companies experienced a net loss on investments at least

through 2001, the most recent year for which such data were available.
Additionally, almost no medical malpractice insurers overall experienced
net investment losses from 1997 to 2001.

Medical malpractice insurers are required by state insurance regulations
to reflect expected investment income in their premium rates. That is,
insurers are required to reduce their premium rates to consider the income
they expect to earn on their investments. As a result, when insurers
expect

their returns on investments will be high, as returns were during most of
the 1990s, premium rates can remain relatively low because investment
income covers a larger share of losses on claims. Conversely, when
insurers expect their returns on investments will be lower* as returns
have

been since around 2000* premium rates rise in order to cover a larger
share of losses. During periods of relatively high investment income,
insurers can lose money on the underwriting portion of their business yet

still make a profit. That is, losses from medical malpractice claims and
the associated expenses may exceed premium income, but income from
investments can still allow the insurer to operate profitably. Insurers
are not allowed to increase premium rates to compensate for lower- than-
expected returns on past investments but must consider only prospective
income from investments.

None of the insurers that we consulted regarding this issue told us
definitively how much the decreases in investment income had increased
premium rates. But we can make a rough estimate of the relationship
between return on investment and premium rates. When investment

income decreases, holding all else constant, income from premium rates
must increase by an equal amount in order for the insurer to maintain the
same overall level of income. Thus the total amount of investment assets
relative to premium income determines how much rates need to rise to

compensate for lost investment income. Table 2 presents a hypothetical
example. An insurer has $100, 000 in investment assets and in the previous
year received $25,000 in premium income, for a ratio of investment assets
to premium income of 4 to 1. If the return on investments drops 1
percentage point and all else remains constant, the insurer must raise
premium rates by 4 percent in order to compensate for the reduced
investment income. If the return on investments drops by 2 percentage
points, premium rates must rise by 8 percent to compensate.

Table 2: Hypothetical Example of How Premium Rates Change When the Return
on Investments Falls

Example 1 Example 2 Example 3

(a) Total investment assets $100,000 $100,000 $100, 000 (b) Original total
premium income $25,000 $25,000 $25, 000

(c) Percentage point drop in return on investments 1% 2% 3% (d) Drop in
investment income [( a) x (c)] $1,000 $2, 000 $3, 000

Total premium income required to make up for drop in investment income [(
b) + (d)] $26,000 $27,000 $28, 000 Percentage increase in premium income
required [( d) / (b) x 100] 4% 8% 12%

Source: GAO analysis. Note: The examples given assume that all else holds
constant and that the insurer must obtain the full amount of additional
funds required in the following year, even though the insurer would earn
interest on those funds and thus would not need to increase premium rates
by the full amount. Such an assumption may overstate the extent to which
premium rates must be increased. The examples also do not take into
account the fact that insurers look prospectively at trends in interest
rates when estimating their anticipated investment income. By not taking
into account a downward trend in interest rates, such as the one that has
existed since 2000, our examples may understate the needed increase.

This relationship can be applied to the 15 largest medical malpractice
insurers* countrywide* from 2001. Data show that in 2001 the insurers*
total investment assets were, on average, around 4.5 times as large as the
amount of premium income they earned for that year. Applying the
relationship established above and holding other factors constant, a drop

of 1 percentage point in return on investments would translate into
roughly a 4. 5 percent increase in premium rates. 30 As a result, if
nothing else changed, the approximately 1.6 percentage point drop in the
return on investments these insurers experienced from 2000 through 2002
would have resulted in an increase in premium rates of around 7.2 percent
over the same 2- year period.

30 Insurers in states where it takes more time to resolve medical
malpractice claims would be more affected by changes in interest rates
than insurers in states where it takes less time to resolve claims.

Downward Pressure on Since 1999, the profitability of the medical
malpractice insurance market as

Premium Rates Has a whole has declined* even with increasing premium
rates* causing some Decreased as Profitability

large insurers to pull out of this market, either in certain states or Has
Declined

nationwide. Because fewer insurers are offering this insurance, there is
less price competition and thus less downward pressure on premium rates.
According to some industry and regulatory officials in our seven sample
states, price competition during most of the 1990s kept premium rates from
rising between 1992 and 1998, even though losses generally did rise. In
some cases, rates actually fell. For example, during this period premium

rates for obstetricians and gynecologists covered by the largest insurer
in Florida* a state where these physicians are currently seeing rapid
premium rate increases* actually decreased by approximately 3.1 percent.
Some industry participants we spoke with told us that, in hindsight,
premium rates charged by some insurers during this period may have been
lower than they should have been and, after 1998, began rising to a level

more in line with insurers* losses on claims. Some industry participants
also pointed out that this pricing inadequacy was masked to some extent by
insurers* adjustments to expected losses on claims reported during the
late

1980s as well as their high investment income. For many insurers the
incurred losses associated with the policies sold during the late 1980s
turned out to be higher than the actual losses for the same policies,
resulting in high levels of reserves. During the 1990s, as insurers
eliminated these redundant reserves by adjusting their current loss
reserves for these previous overestimates, current calendar year incurred
losses fell and reported income increased. These adjustments, together
with relatively high levels of investment income, allowed insurers to keep
premium rates

flat and still remain profitable. Selling Medical Malpractice

Beginning in the late 1990s, medical malpractice insurers as a whole began
Insurance Has Become Less

to see their profits fall. Figure 7 shows the return on surplus* also
called Profitable

return on equity* for the medical malpractice insurance industry as a
whole. Profitability began declining faster in 1998 and in 2001 dropped
considerably even as premium rates were increasing in many states,
resulting in a negative rate of return, or loss. Some of the factors
pushing premium rates upward were also factors in insurers* declining
profitability: higher losses on medical malpractice claims, higher
reinsurance costs, and falling investment income.

Figure 7: Net Profit or Loss as a Percentage of Net Worth for Medical
Malpractice Insurance Companies Nationwide, 1990* 2001

20 Percentage of net worth

17.4 15.9 15.5 15.4

15

13.7 12.7 12.6 12.6

10

7.6 5.4

5

5.1

0 -5

-4.7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: GAO
analysis of NAIC data.

Medical malpractice insurers in some of our sample states have experienced
particularly low levels of profitability since around 1998 (see fig. 8).
The loss ratio reported here is the ratio of incurred losses, not
including other expenses (often referred to as loss adjustment expenses)
related to resolving those claims, to the amount of premiums earned in a
given year. Loss ratios above 100 percent indicate that an insurer has
incurred more losses than premium payments, a sign of declining
profitability. Loss ratios in all seven sample states have increased since
1998, and except for California, all had loss ratios of more than 100
percent for 2001.

Figure 8: Aggregate Incurred Losses as a Percentage of Premiums Earned for
Medical Malpractice Insurers in Seven Selected States, 1975* 2001

200 Percentage

Percentages above 100 indicate that 150

losses from medical malpractice claims exceeded premiums for the year.

100 50

0 1975

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 California Florida
Pennsylvania Texas 200

Percentage Percentages above 100 indicate that 150

losses from medical malpractice claims exceeded premiums for the year.

100 50

0 -50

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Minnesota

Mississippi Nevada

Source: GAO analysis of A. M. Best data. Note: Incurred losses used in
this figure do not include other expenses related to resolving claims or
loss adjustment expenses.

As Profits Have Fallen, Insurers This declining profitability has caused
some large insurers either to stop

Have Left the Medical selling medical malpractice policies altogether or
to reduce the number

Malpractice Market they sell. For example, beginning in 2002 the St. Paul
Companies*

previously the second- largest medical malpractice insurer in the United
States* stopped writing all medical malpractice insurance because of
declining profitability. In 2001, St. Paul had sold medical malpractice
insurance in every state and was the largest or second- largest seller in
24 states. St. Paul was not alone. Other large insurers have also stopped
selling medical malpractice insurance in since 1999: PHICO Insurance
Company, which sold insurance primarily in six states, including Florida,
Pennsylvania, and Texas; MIIX Insurance Company, which sold insurance
primarily in five states, including New Jersey and Pennsylvania; and
Reciprocal of America, which sold insurance primarily in six states,
including Alabama, Mississippi, and Virginia. Other insurers reduced the
number of states in which they sold medical malpractice insurance: SCPIE
Indemnity Company, which in March 2003 essentially stopped selling
insurance outside of California, and First Professionals Insurance
Company, which has said that beginning in 2003 it will essentially stop
selling insurance outside of Florida.

When a large insurer leaves a state insurance market, the supply of
medical malpractice insurance decreases, and the remaining insurers may
not need to compete as much on the basis of price. In addition, the
remaining insurers are limited in the amount of insurance they can supply
to fill the gap, because state insurance regulations limit the amount of
insurance they can write relative to their surplus (the amount by which
insurers* assets exceed their liabilities). For mutual, nonprofit
insurers, increasing the surplus can be a slow process, because surplus
must generally be built through profits or by obtaining additional funds
from policyholders. Commercial insurers can obtain funds through capital
markets, but even then, convincing investors to invest funds in medical
malpractice insurance

when profits are falling can be difficult. Remaining Insurers Have

According to industry participants and observers, as the competitive
Increased Prices to Reflect

pressures on premium rates decreased, it appears that insurers were able
Expected Losses

to more easily and more quickly raise premium rates to a level more in
line with their expected losses. That is, absent competitive pressure that
may have caused insurers to keep premium rates at lower levels, which in

hindsight were perhaps too low for the ultimate losses the insurers would
have to pay, it appears that insurers were able to raise premium rates to
match their loss expectations. As noted earlier, losses increased to a
great

extent in some states, and thus some insurers may have increased premium
rates dramatically. While it appears clear that a reduction in price
competition has allowed insurers to more easily and more quickly increase
premium rates to a level more in line with insurers* expected losses, we
identified at least three factors that seem to suggest that these premium
rates are not inconsistent with expected losses. First, if the higher
premium rates were above what was justified by insurers* expected losses,
profitability would be increasing.

But profits are not increasing, indicating that insurers are not charging
and profiting from excessively high premium rates. Second, according to
some industry participants we spoke with, physician- owned insurers have
little incentive to overcharge their policyholders because those insurers
generally return excess earnings to their policyholders in the form of
dividends. Third, in most states the insurance regulators have the
authority

to deny premium rate increases they deem excessive. While the information
that state regulators require insurers to submit as justification for
premium rate increases varies across states, in general it includes data
on expected losses.

Reinsurance Premium Rates A further reason for recent increases in medical
malpractice premium rates Have Increased

in our seven sample states was that the cost of reinsurance for these
insurers has also increased, increasing the total expenses that premium
and other income must cover. Insurers in general purchase reinsurance, or
excess loss coverage, to protect themselves against large unpredictable
losses. Medical malpractice insurers, particularly smaller insurers,
depend heavily on reinsurance because of the potential high payouts on
medical malpractice claims. Reinsurance industry officials and medical
malpractice insurers we spoke

with told us that reinsurance premium rates have increased for two
reasons. First, reinsurance rates overall have increased as a result of
reinsurers* losses related to the terrorist attacks of September 11, 2001.
Second, reinsurers have seen higher losses from medical malpractice
insurers and have raised rates to compensate for the increased risk
associated with providing reinsurance to the medical malpractice market.
Some insurers and industry participants told us that reinsurance premium
rates had risen substantially since 1998, with the increases ranging from
50 to 100 percent. Other insurers told us that in order to keep their
reinsurance premium rates down, they increased the dollar amount on any
loss at which reinsurance would begin, essentially increasing the

deductible. Thus, while reinsurance rates may not have increased, the
amount of risk the medical malpractice insurers carry did. One insurer
estimated that while its reinsurance rates had increased approximately 50
percent from 2000 to 2002, this increase had resulted in only a 2 to 3
percent increase in medical malpractice premium rates.

The Medical Malpractice All of the factors affecting premium rates and
availability contribute to the

Insurance Market Moves length and amplitude of the medical malpractice
insurance cycle. Like

through Hard and Soft other property- casualty insurance markets, the
medical malpractice

Insurance Markets market moves through cycles of *hard* and *soft*
markets. Hard markets

are generally characterized by rapidly rising premium rates, tightened
underwriting standards, narrowed coverage, and often by the departure of
some insurers from the market. In the medical malpractice market, some
market observers have characterized the period from approximately 1998 to
the present as a hard market. (Previous hard markets occurred during the
mid- 1970s and mid- 1980s.) Soft markets are characterized by slowly
rising premium rates, less stringent underwriting standards, expanded
coverage, and strong competition among insurers. The medical malpractice
market from 1990 to 1998 has been characterized as a soft market.
According to a series of studies sponsored and published by NAIC in 1991,
such cycles have been present in the property- casualty insurance market
since at least 1926, and until the mid- 1970s lasted for an average of
approximately 6 years from the peak of one hard market to the next. 31
However, the cycle that began at the peak of the hard market in 1975
lasted for around 10 years. The current cycle has lasted for around 17
years*

since 1985* and it is not yet clear that the current hard market has
peaked. Cycles in the Medical

The medical malpractice insurance market appears to roughly follow the
Malpractice Market Tend to Be

same cycles as the overall property- casualty insurance market, but the
Volatile

cycles tend to be more volatile* that is, the swings are more extreme. We
analyzed the swings in insurance cycles for the medical malpractice market
and for the entire property- casualty insurance markets using annual loss
ratios based on incurred losses (see fig. 9). Our analysis showed that
annual loss ratios for medical malpractice insurers tended to swing higher
or lower than those for property- casualty insurers as a whole, reflecting
more extreme changes in insurers* expectations. Because premium rates

31 National Association of Insurance Commissioners, Cycles and Crises in
Property/ Casualty Insurance: Causes and Implications for Public Policy
(Kansas City, Mo.: 1991).

are based largely on insurers* expectations of losses, premium rates will
fluctuate as well.

Figure 9: Incurred Losses as a Percentage of Premium Income for Medical
Malpractice Insurers and Property- Casualty Insurers Nationwide, 1976*
2001 120

Percentage of premiums Percentages above 100 indicate that losses from
medical malpractice claims exceeded premiums for the year.

100 80 60 40

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Medical malpractice
insurers

All property casualty insurers Source: GAO analysis of A. M. Best and
National Association of Insurance Commissioners data.

The medical malpractice insurance market is more volatile than the
property- casualty insurance market as a whole because of the length of
time involved in resolving medical malpractice claims and the volatility
of the claims themselves. Several years may pass before insurers know and
understand the profits and losses associated with policies sold in a
single year. As a result, insurers may not know the full effects of a
change in an underlying factor, such as losses or return on investments,
for several

years. So while insurers in other markets that do not have protracted
claims resolutions can adjust loss estimates and premium rates more
quickly to account for a change in an underlying factor, medical
malpractice insurers may not be able to make adjustments for several
years. In the interim, medical malpractice insurers may unknowingly be
under- or over- pricing their policies.

When insurers do fully understand the effects of a change in an underlying
factor, they may need to make large adjustments in loss estimates and
premium rates. As a result, premium rates in the medical malpractice
insurance market may move more sharply than premium rates in other lines
of property- casualty insurance. For example, if insurers have been
unknowingly overestimating their losses and overpricing their policies, as
some insurers told us happened during the late 1980s, large liabilities
build up to cover the losses. When the insurers realize their estimates
have been too high, they must reduce those liabilities to reflect their
losses accurately. Reducing liabilities also reduces incurred losses and
therefore increases insurers* income, allowing insurers to charge lower
premium rates even in the face of increased losses and still maintain
profitable operations* a point some insurers made about the 1990s. But
when the liability account has been reduced sufficiently and income is no
longer increasing as a result of this adjustment, insurers may need to
raise premium rates to stay

profitable. The competition that can exist during soft markets and periods
of high investment income can further exacerbate swings in premium rates.
As noted earlier, competition among insurers can put downward pressure on
premium rates, even to the point at which the rates may, in hindsight,

become inadequate to keep an insurer solvent. When the insurance market
hardens, some insurers may leave the market, removing the downward
pressure on premium rates and allowing insurers to raise premium rates to
the level that would have existed without such competition. Because
competition may have kept rates low, the resulting increase in premium
rates that accompanies a transition to a hard market may be greater than
it would have been otherwise.

According to some industry experts, periods of high investment income can
bolster the downward pressure that exists during soft markets. That is,
high investment income can contribute to the increased profitability of an
insurance market. This profitability can, in turn, cause insurers to
compete for market share in order to take advantage of that profitability,
thereby forcing premium rates even lower. In addition, according to these
industry experts, high investment income allows insurers to keep premium
rates low for long periods of time, even in the face of increasing losses,
because investment income can be used to replace premium income, allowing
insurers to meet expenses. But if interest rates drop at the same time the

market hardens (and reduced interest rates can be a contributor to the
movement to hard market), insurers may have to increase premium rates

much more in a shorter period of time than they would have if investment
income had not allowed premium rates to remain lower to begin with.

Predicting and Moderating the While the medical malpractice insurance
market will likely move through

Cycle is Difficult more soft and hard markets in the future, predicting
when such moves

might occur or the extent of premium rate changes is virtually impossible.
For example, the timing and extent of the unexpected changes in the losses
that some researchers believe are responsible for hard markets are
virtually impossible to predict. In addition, as we have seen, many
factors affect premium rates, and it is just as difficult to predict the
extent of any future changes these factors might undergo. While interest
rates may be high during soft markets, it is not possible to predict how
much higher they

might be in the future and thus what effect they might have on premium
rates. Predicting changes in losses on medical malpractice claims would be
even harder, given the volatility of such losses. Further, some of the
factors

affecting premium rates, such as losses and competition, vary across
states, and the effect of soft or hard markets on premium rates in one
state could not be generalized to others. Finally, other conditions
affecting premium rates have changed since earlier hard and soft markets,
limiting our ability to make accurate comparisons between past and future
market cycles.

Similarly, agreement does not exist on whether or how insurance cycles
could be moderated. The NAIC studies mentioned above noted that the most
likely primary causes of insurance cycles* changes in interest rates and
losses* were not subject to direct insurer or regulatory control. 32 In

addition, the studies also observed that underpricing by insurers during
soft markets likely increases the severity of premium rate increases
during the next hard market. But they did not agree on the question of
using regulation to prevent such swings in premium rates. Such regulation
could be difficult, for two reasons. First, because losses on medical
malpractice

claims are volatile and difficult to predict, regulators could have
difficulty determining the appropriate level of premium rates to cover
those losses. In addition, restricting premium rate increases during
hardening markets could hurt insurer solvency and cause some insurers to
withdraw from a market with an already declining supply of insurance.

32 NAIC, Cycles and Crises.

The Medical The medical malpractice insurance market as a whole has
changed

Malpractice Insurance considerably since the hard markets of the mid-
1970s and mid- 1980s. These

changes have taken place over time and have been the result primarily of
Market Has Changed

actions insurers, health care providers, and state regulators have taken
to since Previous Hard address rising premium rates. For example, insurers
have moved from Markets occurrence- based to claims- made policies,
physicians have formed mutual nonprofit insurance companies that have come
to dominate the market, hospitals and groups of hospitals or physicians
have increasingly chosen to self- insure, and states have passed laws
designed to slow the increase in medical malpractice premium rates.

Beginning in the 1970s, In order to more accurately predict losses and set
premium rates, in the

Insurers Began Selling mid- 1970s most medical malpractice insurers began
to change the type of

Claims- Made Rather Than insurance policy they offered to physicians from
occurrence based to

Occurrence- Based Policies claims made. As we have noted, claims- made
policies cover claims

reported during the year the policy is in effect, while occurrence- based
policies cover claims arising out of events that occurred during the year
in which the policy was in effect. Because claims- made policies cover
only reported claims, insurers can better estimate the payouts they will
have to make in the future. Occurrence- based policies do not provide such
certainty, because they leave insurers liable for claims related to the

incidents that occurred during a given year, including those not yet
reported to the insurer.

Claims- made policies can create difficulties for physicians needing or
wanting to change insurers, however, because the physician rather than the
insurer retains the risk of claims that have not yet been reported to the
insurer. However, most companies today offer separate policies providing
coverage for claims resulting from incidents that may have occurred but
were not reported before the physician switched companies. The vast
majority of policies in existence today are claims- made policies. In each
of the seven states we studied, for example, the leading insurer*s
policies were predominantly (if not exclusively) claims- made. This change
in the type of policy sold means that any changes to premium rates during
future hard or soft markets may differ from such changes in previous such
markets.

Beginning in the Mid- 1970s, Faced with a surge in the frequency and
severity of claims, many of the forprofit

Groups of Physicians Joined insurers left the medical malpractice
insurance market in the mid1970s.

Together to Form Mutual At the time, medical malpractice insurance was
only a small portion Insurance Companies

of most of the insurers* overall business, so many companies chose simply
to discontinue their medical malpractice lines. However, this market
exodus led to a crisis of availability for physicians who wanted or needed
professional liability insurance. In response to this unmet demand,
physicians, often in connection with their state medical societies, joined
together to form physician- owned insurance companies. Initially,
physicians often needed to contribute capital in addition to their
premiums so that the companies would meet state capitalization
requirements.

These new physician- owned insurance companies differed from existing
commercial carriers in several ways. First, the physician- owned companies
wrote predominantly claims- made policies, which, as previously discussed,
allowed the insurers to more accurately predict losses and set premium

rates. Second, in their initial years the new companies themselves enjoyed
significant short- term cost savings over commercial companies. Most
medical malpractice claims take several years to be resolved, and the
policies offered by the physician- owned companies covered only future

incidents of malpractice, so the companies had no existing claims that
needed to be paid immediately. The commercial companies* occurrencebased
policies continued to provide coverage for malpractice that had occurred
before the new physician- owned companies began offering policies. Thus
the physician- owned companies would not incur the same level of
obligations as the existing carriers for several years, allowing the
physicians to pay an amount similar to the commercial premium and use much
of that money as capital contributions to surplus. Physician- owned
companies have several other advantages. To begin with, physician- owned
companies have a cost advantage because they do not need to provide

shareholders with profits. In addition, the physician- owned companies may
have some underwriting advantages over the for- profit entities, such as
an intimate knowledge of local doctors and hospitals and the legal customs
and climate. Finally, several insurers told us that these physician- owned
companies may have a different management philosophy than for- profit
companies, one that places greater emphasis on risk management and thus
lowers the incidence of claims. This philosophy may also extend to
defending claims more aggressively than traditional insurers.

Physician- owned and/ or operated 33 insurance companies have grown to
dominate the medical malpractice insurance market, despite the fact that
most of them have not had the same access to the traditional capital
markets as for- profit insurers and therefore have had to build up their
surplus through premiums and capital contributions. Although several
physician- owned and/ or operated insurance companies have expanded their
geographic presence and lines of insurance in the last decade, most of
these companies write insurance primarily in one state or a few states and
usually sell only medical malpractice liability insurance. Further, many
of the companies that had previously expanded have now retreated to their
original area and insurance line. As a result of this continuing change in
the composition of the medical malpractice insurance market, changes in
premium rates in the next soft market may be different from previous
markets, when commercial carriers dominated the market.

A Growing Number of Over the past several years, an increasing number of
individual hospitals

Individual Hospitals and and consortia of hospitals and physicians have
begun to self- insure 34 in a

Hospital and Physician variety of ways. Officials from the American
Hospital Association

Groups Have Begun SelfInsuring estimated that 40 percent of its member
hospitals are now self- insured. In

states such as Florida that allow individual physicians to self- insure,
individual health care providers are also insuring themselves. Other
hospitals and groups of physicians are joining alternative risk- sharing
mechanisms, such as risk retention groups 35 or trusts. 36 Although some
hospitals and physicians have used these alternatives in the past, some
industry experts we spoke to said that the increasing movement to such

33 Some companies that were originally physician- owned have become
publicly- held, physician- operated insurers. While those insurers must
now earn profits to satisfy shareholders, and thus do not have all of the
advantages that strictly physician- owned

insurers have, public, physician- operated insurers may have certain other
advantages, such as greater access to capital markets.

34 In general, self- insurance involves protecting against loss by setting
aside funds to cover potential claims rather than buying an insurance
policy. 35 A risk retention group is a state- chartered liability
insurance company owned by its policyholders that can be formed as a stock
or mutual insurance company. However, the Risk Retention Act of 1986
preempts certain aspects of state laws regulating the activities of risk
retention groups.

36 A trust consists of segregated accounts of health care entities that
simply estimate liabilities and set aside funds to pay them. Some trusts
are not required to have a surplus or reserves.

arrangements under the current market conditions indicates that some
health care providers are having difficulty obtaining insurance in the
traditional market.

While these arrangements could save money on the administrative costs of
insurance, they do not change the underlying costs of claims. Hospitals
and physicians insured through these arrangements often assume greater
financial responsibility for malpractice than they would under traditional
insurance arrangements and thus face a potentially greater risk of
insolvency. Although self- insured hospitals generally use excess loss
insurance for claims that exceed a certain amount, the hospitals must pay
the entire amount up to that threshold. Rather than a known number of
smaller payments on an insurance policy, the hospitals risk an unknown
number of potentially larger payments. And the threshold for excess loss
insurance is rising in a number of states. In Nevada, for example, some
hospitals* excess loss insurance used to cover claim amounts in excess of

$1 million but now covers amounts above $2 million, leaving self- insured
hospitals with $1 million more exposure per claim. Self- insured
physicians, who have no other coverage for large losses, risk their
personal assets with every claim. Hospitals and physicians are not the
only ones more at risk under these

alternative arrangements. Claimants seeking compensation for their
injuries may have more difficulty obtaining payments from some of these
alternative entities and self- insured hospitals and physicians, for
several reasons. First, these entities and the self- insured are subject
only to limited public oversight, as state insurance departments do not
regulate them.

Further, these entities do not participate in the state- run safety nets
that pay claims for insolvent insurance companies (state guaranty funds).
Once such a risk- sharing consortium fails, claimants may have no other
recourse but to try to enforce judgments against physicians personally.
But enforcing a judgment against a physician personally is generally more
difficult than obtaining payment under an insurance policy from a solvent
insurance company.

Data on these forms of insurance are sparse, so the extent to which
physicians and hospitals are using such arrangements is difficult to
measure. For example, NAIC and state insurance department data do not
include information on self- insurance or on most alternative risk-
sharing vehicles. In addition, one industry group has estimated that the
information available from A. M. Best, a recognized industry data source,
accounts for less than half the costs resulting from medical malpractice
claims. 37 Like the growth of physician- owned insurance companies,
however, the growth of such forms of insurance since the previous soft
market may affect the extent to which premium rates change in the next
soft market.

All States Have Passed Laws Since the medical malpractice crisis of the
mid- 1970s, all states have Designed to Reduce the

enacted some change in their laws in order to reduce upward pressure on
Growth of Medical medical malpractice premiums. Most of these changes are
designed to

Malpractice Premium Rates reduce insurers* losses by limiting the number
of claims filed, the size of awards and settlements, and the time and
costs associated with resolving

claims. Other changes are designed to help health care providers by more
directly controlling premium rates. Appendix II contains a more detailed
explanation of some of the types of legal changes that some states have
made, and appendix III contains more detail on the relevant laws in our

seven sample states. Most of the state laws aimed at controlling premium
rates attempt to reduce insurer losses related to medical malpractice
claims. Many of these laws have similar provisions, the most controversial
being the limitation, or cap, on subjective, nonmonetary losses such as
pain and suffering

(noneconomic damages). Several insurers and medical associations argue
that such a cap will help control losses on medical malpractice claims and
therefore moderate premium rate increases. But several trial lawyer and
consumer rights associations argue that such caps will limit consumers*
ability to collect appropriate compensation for their injuries and may not
reduce medical malpractice premium rates.

A cap on noneconomic damages may decrease insurers* losses on claims by
limiting the overall amount paid out by insurance companies, especially
since noneconomic damages can be a substantial portion of losses on some
claims. Further, such a limit may also decrease the number of claims

37 Tillinghast- Towers Perrin, U. S. Tort Costs: 2002 Update, Trends and
Findings on the Costs of the U. S. Tort System (Atlanta, Ga.: February
2003).

brought against health care providers. Plaintiffs* attorneys are usually
paid based on a percentage of what the claimant recovers, and according to
some trial attorneys we spoke with, attorneys may be less likely to
represent injured parties with minor economic damages if noneconomic
damages are limited.

Caps on noneconomic losses may have effects beyond reducing insurers*
costs. In theory, for example, after the frequency and severity of losses
have been reduced, insurers will decrease premium rates as well. Insurers

may also be better able to predict what they will have to pay out in
noneconomic damages because they can more easily estimate potential
losses, reducing the uncertainty that can give rise to premium rate
increases. Insurers reported that economic damages (generally medical

costs and lost wages), are more predictable than noneconomic damages,
which are generally meant to compensate for pain and suffering and thus
are very difficult to quantify. In addition to attempting to decrease
losses on medical malpractice claims, two of our sample states have passed
laws directly affecting premium rates and insurance regulations. In a 1988
referendum, California passed Proposition 103, which includes, among other
things, a 20 percent rollback of prices 38 for all property- casualty
insurers (including medical malpractice insurers), a 1- year moratorium on
premium rate increases, and a provision granting consumers the right to
challenge any commercial insurance rate increases greater than 15 percent.
In 1995, Texas passed legislation that required many insurance carriers,
including medical malpractice insurers, to reduce rates to a level deemed
by the Texas Department of Insurance to

be acceptable, allowing for a reasonable profit. Texas passed the
legislation in conjunction with changes to Texas* tort system. The
legislators wanted to avoid creating a windfall for insurers and believed
that the companies would not lower premium rates on their own until the
impact of the changes to the tort system could be actuarially determined.

Interested parties debate the impact these various measures may have had
on premium rates. However, a lack of comprehensive data on losses at the
insurance company level makes measuring the precise impact of the measures
impossible. As noted earlier, in the vast majority of cases,

38 The California Supreme Court allowed companies to decrease prices less
than 20 percent if a company could show that the rollback would make it
impossible to earn a reasonable profit.

existing data do not categorize losses on claims as economic or
noneconomic, so it is not possible to quantify the impact of a cap on
noneconomic damages on insurers* losses. Similarly, it is not possible to
show exactly how much a cap would affect claim frequency or claimshandling
costs. In addition, while most claims are settled and caps apply only to
trial verdicts, some insurers and actuaries told us that limits on damages
would still have an indirect impact on settlements by limiting potential
damages should the claims go to trial. But given the limitations on
measuring the impact of caps on trial verdicts, an indirect impact would
be even more difficult to measure. Further, state laws differ
dramatically, so

comparing their impact is difficult. For example, limitations on damages
can vary drastically in amount, type of damages covered, and how the
limitations apply. Some states have caps of $250,000 on noneconomic
damages, while other states have caps up to several times that amount.
Moreover, some dollar limits change over time* for instance, because they

are indexed to inflation* while others do not. Some states apply the cap
to all damages, including economic damages, and some apply the cap *per
occurrence* of malpractice. That is, the total amount collected by all
parties injured by an act of medical malpractice cannot exceed the cap,
regardless of how many physicians, hospitals, or other health care
providers may be partially liable for the injuries. In contrast, for
example, Nevada*s recently passed limitations on damages allow multiple
plaintiffs to collect the full limit from any number of responsible
defendants.

The filing and resolution of medical malpractice claims is regulated, to a
great extent, by states* tort and insurance laws. Changes to such laws can
thus have a great effect on both the frequency and severity of those
claims, which in turn can affect premium rates. Because many states have
made changes to these laws, it is difficult to predict the extent to which
premium

rates might change in future markets. Conclusions Multiple factors have
combined to increase medical malpractice premium

rates over the past several years, but losses on medical malpractice
claims appear to be the primary driver of increased premium rates in the
long term. Such losses are by far the largest component of insurer costs,
and in the long run, premium rates are set at a level designed to cover
anticipated costs. However, the year- to- year increase in premium rates
can vary substantially because of perceived future losses and a variety of
other

factors, including investment returns and reinsurance rates. Moreover, the
market for medical malpractice insurance is not national, but depends on
the varying framework of insurance, legal, and health care structures

within each of the states. As a result, both the extent and the effects of
changes in losses and other insurance- related factors on premium rates
also vary by state.

While losses aggregated for the industry as a whole have shown a
relatively consistent upward trend over time, the loss experience of any
single company is likely to vary from year to year and to increase more
rapidly in some years than in others. At the same time, because of the
long lag between collecting premium income and paying on claims, premium
rates for the next year must be high enough to cover claims that will be
reported that year, the majority of which will be paid over the next 3 to
5 years. And due to the volatility of the ultimate payouts on medical
malpractice claims, it is difficult for insurers to predict the amount of
those payouts with great certainty. As a result, changes in current losses
can have large effects on perceived or estimated future losses and
consequently on premium rates, because if insurers underestimate what will
be needed to pay claims, they risk not only future profits but potentially
their solvency.

However, factors other than losses-- such as changes in investment income
or the competitive environment-- can also affect premium rate decisions in
the short run. These factors can either amplify or reduce the effect of
losses on premium rates. For example, high expected returns on investment
may legitimately permit insurers to price insurance below the expected
cost of paying claims. But incorrect projections of continuing high
returns could cause insurers to continue to hold prices down for too long,
even though underlying losses may be rising. When such factors affect most
or all medical malpractice insurers, the result appears as a period of
stable or falling premium rates or a period of sharply rising rates. When
they alternate, these periods may describe the soft and hard phases of the
medical malpractice insurance cycle. Based on available data, as well as
our discussions with insurance industry

participants, a variety of factors combined to explain the malpractice
insurance cycle that produced several years of relatively stable premium
rates in the 1990s followed by the severe premium rate increases of the
past few years. To begin with, insurer losses anticipated in the late
1980s did not

materialize as projected, so insurers went into the 1990s with reserves
and premium rates that proved to be higher than the actual losses they
would experience. At the same time, insurers began a decade of high
investment returns. This emerging profitability encouraged insurers to
expand their

market share, as both the downward adjustment of loss reserves and high
investment returns increased insurers* income. As a result, insurers were

generally able to keep premium rates flat or even reduce them, although
the medical malpractice market as a whole continued to experience modestly
increasing underlying losses throughout the decade. Finally, by the mid-
to late 1990s, as excess reserves were exhausted and investment income
fell below expectations, insurers* profitability declined. Regulators

found that some insurers were insolvent, with insufficient reserves and
capital to pay future claims. In 2001, one of the two largest medical
malpractice insurers, which sold insurance in almost every state,
determined that medical malpractice was a line of insurance that was too
unpredictable to be profitable over the long term. Alternatively, some
companies decided that, at a minimum, they needed to reduce their size and
consolidate their markets. These actions, taken together, reduced the
availability of medical malpractice insurance, at least in some states,
further exacerbating the insurance crisis. As a result of all of these
factors, insurers continuing to sell medical malpractice insurance
requested and received large rate increases in many states. It remains to
be seen whether these increases will, as occurred in the 1980s, be found
to have exceeded those necessary to pay for future claims losses, thus
contributing to the beginning of the next insurance cycle.

While this explanation accounts for observed events in the market for
medical malpractice insurance, it does not provide answers to other
important questions about the market for medical malpractice insurance,
including an explanation of the causes of rising losses over time. The
data currently collected do not permit many of the analyses that would
provide answers to these questions. This lack of data is due, in part, to
the nature of NAIC*s and states* regulatory reporting requirements for all
lines of insurance, which focus primarily on the information needed to
evaluate a company*s solvency. Most insurance regulators do not collect
the data that would allow analyses of the severity and frequency of
medical malpractice claims for individual insurer operations within
specific states. Moreover, insurers are generally not required to submit
to NAIC or state regulators

data that would show how insurers losses are divided between settlements
and trial verdicts or between economic and noneconomic damages. Finally,
the increasing use of insurance or self- insurance mechanisms that are not

subject to state or NAIC reporting requirements further complicates a
complete analysis. While more complete insurance data would help provide
better answers to questions about how the medical malpractice insurance
market is working, other data would be equally important for analyzing the
underlying causes of rising malpractice losses and associated costs. These
data relate to factors outside the insurance industry, such as policies,
practices, and outcomes in both the medical and legal arenas.

However, collecting and analyzing such data were beyond the scope of this
report. Matter for

Health care providers have suffered through three medical malpractice
Congressional

insurance *crises* in the past 30 years. Each instance has generated
competing claims about the extent of the problem, the causes, and the
Consideration

possible solutions. In each instance, a lack of necessary data has
hindered and continues to hinder the efforts of Congress, state
regulators, and others to carefully analyze the problem and the
effectiveness of the solutions that have been tried. Because of the
potential for future crises, and in order to facilitate the evaluation of
legislative remedies put in place by various

levels of government, Congress may want to consider taking steps to ensure
that additional and better data are collected. Specifically, Congress may
want to consider encouraging NAIC and state insurance regulators to
identify the types of data that are necessary to properly evaluate the

medical malpractice insurance market* specifically, the frequency,
severity, and causes of losses* and begin collecting these data in a form
that would allow appropriate analysis. Included in this process would be
an analysis of the costs and benefits of collecting such data, as well as
the extent to which some segments of this market are not captured by
current data- gathering efforts. Such data could serve the interests of
state and federal governments and allow both to better understand the
causes of recurring crises in the medical malpractice insurance market and
formulate the most appropriate and effective solutions.

NAIC Comments and NAIC*s Director of Research provided us with oral
comments on a draft of

Our Evaluation this report. The Director generally agreed with the
report*s findings,

conclusions, and matter for congressional consideration. Specifically, the
Director agreed that the medical malpractice markets are not national in
nature and vary widely with regard to their insurance markets, regulatory
framework, legal environment, and health care structures. Furthermore, the
Director stated that the medical malpractice insurance industry has shown
an upward trend in losses over time and that this rise can be attributed
to a variety of causes that are difficult to measure or quantify. The
Director also said that he does not believe that excess profits by
insurers are in evidence.

The Director told us that NAIC is working on a study of the medical
malpractice marketplace that he hopes will be ready for distribution in
the

summer of 2003. The Director stated that NAIC, like GAO, had identified
many data limitations that make the study of this line of insurance
difficult. As a result, the Director generally agreed with our matter for
congressional

consideration that Congress consider encouraging NAIC and state regulators
to identify and collect additional information that could be used to
properly evaluate the medical malpractice insurance market. The

Director stated that while such efforts would require some additional
resources, the costs would not be prohibitive and the efforts would
provide needed information. The Director also provided technical comments,
which we have incorporated into the report as appropriate.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies of this report to the
Chairmen of the Senate Committee on Governmental Affairs and its
Subcommittee on Oversight of Government Management, the Federal Workforce,
and the District of Columbia; the Chairman of the House Committee on the
Judiciary; and the Chairman of the House Committee on Energy and Commerce.
We will also send copies of this report to other interested congressional
committees and members, and we will make copies available to others on
request. In addition, the report will be available at no charge on the GAO
Web site at http:// www. gao. gov.

If you or your staffs have any questions regarding this report, please
contact me or Lawrence Cluff at (202) 512- 8678. Additional contributors
are acknowledged in appendix IV.

Richard J. Hillman Director, Financial Markets and

Community Investment

List of Requesters

The Honorable Richard J. Durbin Ranking Minority Member Subcommittee on
Oversight of Government Managment,

the Federal Workforce, and the District of Columbia Committee on
Governmental Affairs United States Senate

The Honorable John Conyers, Jr. Ranking Minority Member Committee on the
Judiciary House of Representatives

The Honorable John D. Dingell Ranking Minority Member Committee on Energy
and Commerce House of Representatives

The Honorable Marion Berry The Honorable Joseph M. Hoeffel The Honorable
Alan B. Mollohan The Honorable Dennis Moore The Honorable Nick J. Rahall
II The Honorable Max Sandlin House of Representatives

Appendi Appendi xes I x Scope and Methodology Recognizing that the medical
malpractice market can vary considerably across states, we judgmentally
selected a sample of seven states in order to conduct a more in- depth
review in each of those states. Except where otherwise noted, our analyses
were limited to these states. We selected our sample so that we would have
a mix of states based on the following characteristics: extent of recent
increases in premium rates, status as an American Medical Association
crisis state, presence of caps on

noneconomic damages, state population, and aggregate loss ratio for
medical malpractice insurers within the state. The states we selected were
California, Florida, Minnesota, Mississippi, Nevada, Pennsylvania, and

Texas. Within each state we spoke to one or both of the two largest and
currently active sellers of medical malpractice insurance, the state
insurance regulator, and the state association of trial attorneys. In six

states, we spoke to the state medical association, and in five states, we
spoke to the state hospital association. Due to time constraints, we did
not speak to the medical or hospital associations in Texas or the hospital
association in Florida. We used information obtained from these
organizations to help answer each of our objectives and, as outlined
below, also performed additional work for each objective.

To examine the extent of increases in medical malpractice insurance rates
for the largest insurers in our sample states, we reviewed annual survey
data on medical malpractice premium rates collected by a private data
collection company. While individual insurers determine whether to

respond to the survey, we believe the data to be representative for the
three medical specialties for which the company collects data* internal
medicine, general surgery, and obstetrics/ gynecology* because of both the
number of insurers responding to the survey and the states represented by

them. The premium rates collected in the survey are base rates, which do
not reflect discounts or additional charges by insurers, so the actual
premium rates charged by insurers can vary from the premium rates
collected in the survey. We could not determine the extent to which the
actual premium rates charged varied from the base rates, but among the
insurers we spoke with, the actual premium rates charged in 2001 and 2002
ranged from about 50 to 100 percent of the base rates. We did not test the
reliability of the survey data.

To analyze the factors contributing to the premium rate increases in our
sample states and other states, we examined data from state insurance
regulators, the National Association of Insurance Commissioners (NAIC), A.
M. Best, the Securities and Exchange Commission, and the Physician
Insurers Association of America on insurers in our sample states as well
as

the medical malpractice insurance market as a whole. We did not verify the
reliability of these data. Where possible, we obtained data from 1975 to
the present. As noted earlier in this report, comprehensive, reliable data
that would have allowed us to quantify the effect of individual factors on
medical malpractice premium rates did not exist. We also reviewed relevant
academic studies and industry guidance. In addition, we spoke with
officials from the insurers and state insurance departments in our sample
states, as well as professional actuarial and insurance organizations. To
analyze factors that were likely to vary among states* losses on medical
malpractice claims, reinsurance rates, and competition among insurers* we
reviewed data for one or both of the two largest and active medical
malpractice insurers in our samples states. We also reviewed aggregate
data on losses for all insurers in each state as well as the U. S. medical
malpractice insurance market as a whole. To analyze factors that were
likely to be common among medical malpractice insurers in all states*
investment income and the presence of an insurance cycle* we reviewed
either A. M Best data for the 15 largest medical malpractice insurers as
of 2001 (whose combined market share nationally was approximately 64.3
percent), or NAIC data for all medical malpractice insurers reporting data
to NAIC. Also as noted earlier in this report, data and scope limitations
prevented us from fully analyzing the factors behind increased losses from
medical malpractice claims.

To analyze how the national medical malpractice insurance market has
changed since previous periods of rising premium rates, we reviewed
studies published by NAIC; analyzed insurance industry data compiled by
NAIC and A. M. Best; reviewed tort laws across all states and state

insurance regulations; spoke with insurers and state insurance regulators
in our sample states; and spoke with officials from national professional
actuarial, insurance, legal, consumer rights, medical, and hospital
organizations.

We conducted our work from July 2002 through June 2003 in accordance with
generally accepted government auditing standards.

Appendi I I x Legal Summary Each state*s tort laws generally govern the
way in which medical malpractice claims or lawsuits are resolved. As
discussed in this report, most state laws aimed at controlling premium
rates attempt to reduce insurer losses related to medical malpractice
claims. Although these laws take many different forms, they usually have
at least some of the provisions summarized in this appendix. State courts
have dealt differently with these

kinds of provisions, and some states have found that some of these kinds
of provisions are unconstitutional. The provisions summarized in this
appendix are not the only ones that might impact the treatment of medical
malpractice claims in states* tort systems.

Limits on Damages. Damages in medical malpractice cases usually consist of
two categories, economic damages and noneconomic damages. (Although
punitive damages can be available in cases of gross negligence

and outrageous conduct of the health care provider, juries rarely award
punitive damages in medical malpractice cases.) Economic damages generally
consist of past and future monetary damages, such as lost wages or medical
expenses. Noneconomic damages generally consist of past and future
subjective, non- monetary loss, including pain, suffering, marital

losses, and anguish. Although some states have limits on the total amount
of damages recoverable in a medical malpractice suit, most states with
limits, as well as pending federal legislation, have emphasized a limit
only on noneconomic damages. As discussed in this report, limitations on
damages can vary drastically in amount, type of damages covered, and

application. As mentioned in this report, limitations on damages can
impact frequency of lawsuits as well. Plaintiffs* attorneys are usually
paid based on a percentage of what the claimant recovers, and according to
some trial attorneys we spoke to, attorneys may be less likely to
represent an injured party with minor economic damages if noneconomic
damages are limited. One consumer rights group told us that suits with
limited economic

damages are typical in cases where the plaintiff is not working and does
not have substantial costs of future medical care.

Evidence of Collateral Source Payments. At common law, or without any
legislative intervention, a plaintiff would be able to recover all damages
sustained from a liable defendant, even if the plaintiff were going to
receive money from other sources, called *collateral sources,* like health
insurance policies or Social Security. Some states have modified this
common law rule with statutes that allow defendants to show that the
claimant is going to receive funds from collateral sources that will

compensate the claimant for damages he or she is attempting to collect
from the defendant. These statutes authorize, to various extents,
decreasing the defendant*s liability by the amount the claimant will
receive from other sources. In the state summaries in appendix III, if a
state has not modified the common law rule regarding collateral sources,
the chart will say *no modification.*

Joint and Several Liability. Joint and several liability is the common law
rule that a plaintiff can collect the entire judgment from any liable
defendant, regardless of how much of the harm that defendant*s actions

caused. Some states have eliminated joint and several liability, making
each defendant responsible for only the amount or share of damage he or
she caused the plaintiff. Other states have eliminated joint and several
liability only for noneconomic damages. Some states have eliminated joint
and several liability for defendants responsible for less than a specified
percentage of the plaintiff*s harm; for example, if a defendant is less
than 50

percent responsible, that defendant might need to pay only for that
percentage of the plaintiff*s damages. Attorney Contingency Fees. Most
plaintiff attorneys are paid on a

contingency fee basis. A contingency fee is one in which the lawyer,
instead of charging an hourly fee for services, agrees to accept a
percentage of the recovery if the plaintiff wins or settles. Some states
have laws that limit attorney contingency fees. For example, in California
a plaintiff*s attorney can collect up to 40 percent of the first $50, 000
recovered, 33 percent of the next $50,000 recovered, 25 percent of the
next $500, 000 recovered, and 15 percent of any amount exceeding $600,000.
Provisions that decrease

attorneys* financial incentives to accept cases could decrease the number
of attorneys willing to take the cases. These limits were based on the
belief that they would lead to more selective screening by plaintiffs*
attorneys to ensure that the claims filed had merit. In the state
summaries in appendix III, if a state does not have limits in place
specifically for attorneys in medical malpractice cases, the chart will
say *no modification.*

Statute of Limitations. The amount of time a plaintiff has to file a claim
is known as the *statute of limitations.* Some states have reduced their
statutes of limitations on medical malpractice claims. This decrease could
limit the number of cases filed by claimants. Special time requirements
for minors are not noted on the summaries in appendix III.

Periodic Payment of Damages. Defendants traditionally pay damages in a
lump sum, even if they are being collected for future time periods, such
as

future medical care or future lost wages. However, some states allow or
require certain damages to be paid over time, such as over the life of the
injured party or period of disability, either through the purchase of an
annuity or through self- funding by institutional defendants. Some
insurers we spoke with said that purchasing annuities can reduce insurers*
costs, and that periodic payments better match damage payments to future
medical costs and lost earnings incurred by injured parties, assuring that
money will be available to the injured party in the future. A consumer
rights group we spoke with told us that, because periodic payments stop at
the death of an injured party, there may be unsatisfied medical bills at
the time of the injured party*s death.

Expert Certification. Many states require that medical experts certify in
one way or another the validity of the claimant*s case. These statutes are
designed in part to keep cases without merit, also known as frivolous
cases, out of court. Expert certification requirements also have the
potential to get as many relevant facts out in the open as early as
possible, so that settlement discussions are fruitful and it becomes
unnecessary to take as many cases to trial, thus decreasing the claims-
handling costs of the case.

Arbitration. Some states have enacted arbitration statutes that address
medical malpractice claims specifically. Some of these statutes require
that the arbitration agreement meets standards that are designed to alert
the patient to the fact that he is waiving a jury trial through the use of
a specific

size of font, or by specifying the precise wording that must be contained
in the agreement. Although most courts have held that medical malpractice
claims can properly be submitted to arbitration, litigation involving the
arbitration statutes has involved issues such as whether the patient knew
he was waiving the right to a jury trial, whether the patient who agrees
to arbitration had appropriate bargaining strength, and whether third
parties have authority to bind others to arbitration.

By providing an option for arbitration, parties can avoid the larger
expense of taking claims to court. However, some industry experts said
that these arbitration provisions may not be binding and may result in the
losing party deciding to take the case to court in any event, so
arbitration can simply increase expenses without affecting the ultimate
resolution of the dispute.

Advanced Notice of Claim. Advanced- notice- of- claim provisions require
claimants to give defendants some period of time, 90 days for example,
prior to filing suit in court. Some insurers and plaintiffs* attorneys we
spoke with said that this requirement aids plaintiffs and defendants in
resolving meritorious claims outside of the court system and allows
plaintiffs* attorneys to obtain relevant records to determine whether a
case has merit. However, another group we spoke to said that the advanced
notice of claim provision in that group*s state was ineffective.

Bad Faith Claims. As mentioned in this report, some insurers we spoke with
told us that they can be liable for amounts beyond an insurance policy*s
limits, if the policyholder requests the insurer to settle with the
plaintiff for an amount equal to or less than the policy limit, and the
insurer takes the case to trial, loses, and a judgment is entered in an
amount greater than the policy limits. Industry experts we spoke to said
that, under those circumstances, the insurer could be liable for acting in
*bad faith.* In some states, like Nevada, this bad faith claim can be
brought only by the insured physician; that is, the physician can seek
payment from the insurance company if the physician has paid a plaintiff
beyond a policy*s limits. In contrast, in Florida, the plaintiff can sue a
physician*s insurer directly for the insurer*s alleged improper conduct in
medical malpractice cases. The difficulty of establishing that an insurer
acted in bad faith varies according to state law. Insurers in three of our
study states* Texas, California, and Florida* said that bad faith
litigation was a substantial issue in their states.

Appendi I I I x State Summaries This appendix describes the specific
medical malpractice insurance environment in each the seven sample states
we evaluated for this report. (See figs. 10- 16.) Market Description 
Typical Coverage Type and Limit. This section summarizes the type of
medical malpractice insurance coverage typically issued in the state, as

well as the standard coverage limits of these policies. Coverage limits
can range from $100,000/$ 300,000 to up to $2 million /$ 6 million. The
lower number is the amount the insurer will pay per claim and the higher
number is the total the insurer will pay in aggregate for all claims
during a policy period. There are several types of insurance coverage
available.

 Occurrence- based insurance provides coverage for claims that arise from
incidents that occur during the time the insurance policy is in force,
even if the policy is not continued. Claims that arise from incidents
occurring during the policy period that are reported after the policy*s
cancellation date are still covered in the future.

 Claims- made insurance provides coverage for claims that arise from
incidents that occur and are reported during the time the insurance policy
is in force.  Prior acts coverage is a supplement to a claims- made
policy that can

be purchased from a new carrier when changing carriers. Prior acts
coverage covers incidents that occurred prior to the switch to a new
carrier but had not been previously reported.

 Tail coverage is an option available from a former carrier to continue
coverage for those dates that the claims- made coverage was in effect. 
Regional Differences. This section notes any major regional differences

in premium rates quoted by insurers within the state using the base rate
for general surgery as a comparison. The Medical Liability Monitor
annually surveys providers of medical malpractice insurance to obtain

their premium base rates for three specialties: internal medicine,
obstetrics/ gynecology, and general surgery. In the state summaries,
descriptions of regional differences in premium rates are based on

Medical Liability Monitor information.

 Frequency and Severity. This section describes the extent to which
insurers and state regulators we spoke with believe frequency and severity
are changing in each state. Frequency is usually defined as the number of
claims per number of doctors, counting doctors in different specialties as
more or fewer doctors depending on the risk associated with the specialty.
Severity is the average loss to the insurer per claim. Insurer
Characteristics

 Insurer Characteristics. This section describes the various types of and
Market Share

insurers present in each of the states. In addition to traditional
commercial insurance companies, the following entities or arrangements can
provide liability protection:  Physician insurer associations or
physician mutuals are physician owned and operated insurance companies
that provide medical

liability insurance.  Reciprocals are similar to mutuals, except that an
attorney- in- fact

often manages the reciprocal.  Risk retention groups are insurance
companies owned by policyholders. Risk retention groups are organized
under federal law* the Liability Risk Retention Act of 1986.

 Trusts are a form of self- insurance and consist of segregated accounts
of health care entities that estimate liabilities and set aside funds to
cover them.

 Market Share. This section describes the medical malpractice market in
each of the states. Recent changes in the market are also noted in this
section.

 Joint Underwriting Association (JUA). This section details whether a
state has created a JUA and the extent of its use. A JUA is a
statesponsored association of insurance companies formed with statutory
approval from the state for the express purpose of providing certain
insurance to the public.

Rate Regulation This section describes the regulatory scheme employed by
each state. Statutory requirements generally provide that insurance rates
be adequate,

not excessive, and not unfairly discriminatory. The degree of regulation
of medical malpractice insurance rates varies from state to state. States
may have *prior approval* requirements in which all rates must be filed
with the insurance department before use and must be either approved or
disapproved by the department of insurance. Other states have *file and
use* provisions in which the insurers must file their rates with the
state*s insurance department; however, the rates may be used without the
department*s prior approval.

State Tort Laws This section identifies key components of each state*s
efforts to address the medical malpractice insurance situation by
targeting ways in which medical malpractice claims are processed through
the court system. The

following legal provisions are summarized for each state:  Limits on
Damage Awards  Collateral Source Rule  Periodic Award Payments 
Pretrial Expert Certification  Attorney Contingency Fees  Joint and
Several Liability

 Statute of Limitations  Bad Faith Claims Appendix II has a description
of each of these provisions, in addition to other provisions that are not
summarized herein, but that might impact

medical malpractice claims. For the information on state provisions in
appendix III, we relied upon a summary of state tort laws compiled by the
National Conference of State Legislatures (NCSL) in October of 2002. We
independently reviewed selected sections of the NCSL summary for

accuracy, and supplemented the NCSL information with information from
interviews with industry officials. The state laws summarized herein might
have changed since the date of the NCSL publication. Additionally, as
noted in appendix II, the state tort laws summarized in this appendix are
not the

only ones that might impact the treatment of medical malpractice claims in
states* tort systems.

Figure 10: California

California Market description:

State specifics

Typical coverage type and limit-- Coverage is predominately claims- made.
Typical policy limits are $1 million per incident/$ 3 million cumulative
for the policy year.

Regional differences-- Insurers generally divide California into two
rating areas- northern and Population: 33,871,648 southern California.
Insurers typically reported higher rates for general surgery in southern

Size (land area): 155,959 sq miles

CA

California counties.

Density: 217.2 pp/ sq. mi

Frequency and severity-- The California Department of Insurance (CDI) and
insurers believe severity is increasing in California and has led to
increases in insurer losses.

Insurer characteristics and market share: Premium Rates: General Surgery
for Seven California Insurers

Insurer characteristics-- The California Medical ($ 1M/$ 3M mature claims-
made coverage)

Association stated that most physicians in California purchase medical
malpractice coverage from 50 Premium (dollars in thousands)

physician owned companies (Doctors Co., MIEC, Norcal), commercial carriers
(SCIPIE), or CAP/ MPT, a physician cooperative in which physicians assume
40

responsibility for the liabilities. Market share-- Based on A. M. Best and
NAIC data, the companies with a 5% or more market share in 30

California (2001) were Norcal (21%), SCIPIE (13%), Doctor's Co. (11%),
CAP/ MPT (9%), and Truck Insurance Exchange (6%).

20 1992

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Rate regulation:

Prior to 1988 and the passage of Proposition 103, California had an open
filing system and had limited

Clarendon Nat. Ins. Co. in San Bernadino County interaction with its
malpractice insurers. Proposition 103

Cooperative of American Physicians, Inc. Mutual Protection Trust in
Southern California requires prior approval of insurer rates.
Additionally, if a

commercial carrier requests an increase of greater than Doctors' Company
in San Bernadino County 15 percent, the Commissioner of Insurance must
grant a

public hearing upon request. At the time of passage, Medical Insurance
Exchange of California (MIEC) in San Bernadino County insurers were also
required to roll back their rates by giving a refund to their clients.

NORCAL Mutual Insurance Co. in Southern California

State tort laws:

Northwest Physicians Mutual Insurance Co in the Los Angeles area

Limits on damage awards-- $250,000 limit on noneconomic damages, applied
per occurrence, Southern California Phys. Ins. Ex. (SCPIE Indemnity Cos)
in Riverside County and not indexed for inflation. Collateral source
rule-- Discretionary offset for collateral Direct Losses Paid Compared to
Direct Losses Incurred

sources introduced at trial.

California 1975- 2001

Periodic award payments-- Mandatory periodic payment of future damages
over $50,000 (upon request).

800 Losses (in millions of 2001 dollars)

Pretrial expert certification-- Generally, no expert certification is
required for medical malpractice 600

cases in California.

Attorney contingency fees-- Limited to 40% of the first 400

$50,000, 33.3% of the next $50,000, and 25% of the next $500,000, and 15%
of any amount 200

exceeding $600,000.

Joint and several liability-- No joint and several liability 0

for noneconomic damages.

Statute of limitations-- Plaintiffs must file within one year 1975 1977
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 of discovery
of injury or within three years of the injury, whichever is first.

Direct losses incurred

Bad faith claims-- Insurers consider this to be a significant problem in
California. Direct losses paid

Sources: U. S. Census Bureau, 2000 (top box); GAO analysis of Medical
Liability Monitor data (middle box); GAO analysis of A. M. Best data
(bottom box).

Figure 11: Florida Florida Market description:

State specifics

Typical coverage type and limit-- Many physicians are reducing the amount
of coverage purchased. For example, in 2002, First Professionals Insurance
Company (FPIC) sold almost exclusively claims- made policies with a
$250,000 limit. Population: 15,982,378

Regional differences-- Insurers typically reported higher rates for
general surgery in Dade and Broward

Size (land area): 53,927 sq miles

FL

Counties. According to the Florida Medical Association (FMA), Dade County
has the highest premium

Density: 296.4 pp/ sq. mi rates in the United States. Frequency and
severity-- FPIC believes claim frequency and severity have gone up
significantly in the last

several years, with frequency responsible for the increased insurer
losses.

Insurer characteristics and market share: Premium Rates: General Surgery
for Eight Florida Insurers

Insurer characteristics-- FMA stated that very few insurers in

($ 1M/$ 3M mature claims- made coverage)

Florida are currently physician owned. The state Department of Insurance
(DOI ) believes more hospitals

200 Premium (dollars in thousands)

are self- insuring, more doctors are using the state JUA, and many doctors
are going without insurance. FPIC-- currently writing in 6 states-- will
only write in Florida

150

beginning in 2003.

Market share-- Based on A. M. Best and NAIC data, the companies with a 5%
or more market share in Florida

100

(2001) were FPIC (17%), Health Care Indemnity Inc. (14%), Pronational
Insurance Company (9%), and Truck Insurance Exchange (5.4%).

Joint Underwriting Association-- Florida has a JUA, which

50

acts as an insurer of last resort. The number of health

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 care providers
using the JUA has increased from around 20 in 2000 to 400 in 2001

American Healthcare Indemnity Co. (SCPIE Cos.) in Dade County

Rate regulation:

Florida is a use and file state. There is no allowable deviation American
Physicians Assurance Corp. (AP Capital) in Dade County

from the approved rate filing, which must include all possible adjustments
to the base rate.

Clarendon Nat. Ins. Co. in Dade County

State tort laws:

First Professionals or Florida Physicians Insurance Co. (FPIC) in Dade
County

Limits on damage awards-- Where parties agree to binding arbitration
(requires defendant admit fault), noneconomic

Medical Assurance in Dade County damages are limited to $250,000; where
plaintiff refuses to arbitrate, noneconomic damages are limited to

Michigan Physicians Mutual Liability Co. (MICOA) in Dade County $350,000.
The limits are applied per plaintiff.

Collateral source rule-- Mandatory offset of collateral sources
ProNational Ins. Co. in Dade County

by court, unless sources have subrogation rights. Periodic award
payments-- Periodic payment of future

Direct Losses Paid Compared to Direct Losses Incurred

damages allowed if damages exceed $250,000.

Florida 1975- 2001

Pretrial expert certification-- Verified medical expert opinion required
at the time of notice of intent to initiate litigation. 800

Losses (in millions of 2001 dollars)

Attorney contingency fees-- Separate sliding scales for cases settling at
various points of the judicial process.

600

Joint and several liability-- Sliding scale for defendant's
responsibility, depending on whether plaintiff had any responsibility for
harm and how responsible the

400

defendant is for the harm. For example, if the plaintiff is not at fault
and the defendant is less than 10%

200

responsible, the defendant need not pay more than the percentage for which
defendant was found responsible.

0

Statute of limitations-- Plaintiff must file within two years of

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
occurrence or discovery, but not more than four years from occurrence.

Bad faith claims-- The Florida Department of Insurance said Direct losses
incurred

that bad faith lawsuits are having a significant impact on insurer losses
and, therefore, on premium rates.

Direct losses paid Sources: U. S. Census Bureau, 2000 (top box); GAO
analysis of Medical Liability Monitor data (middle box); GAO analysis of
A. M. Best data (bottom box).

Figure 12: Minnesota Minnesota Market description:

State specifics

Typical coverage type and limit-- Coverage is predominately claims- made.
Typical policy limits are $1 million per incident/$ 3 million cumulative
for the policy year, although some physicians purchase $2 million /$ 4
million coverage.

Population: 4,919,479

Regional differences-- Insurers typically treat Minnesota as single rating
area.

Size (land area): 79,610 sq miles

MN

Frequency and severity-- According to the Minnesota Medical Association
(MMA), there has been a slight

Density: 61.8 pp/ sq. mi increase in the severity of claims in the past
several years and no observed increase in frequency.

Insurer characteristics and market share: Premium Rates: General Surgery
for Four Minnesota Insurers

Market share-- According to A. M. Best, the companies with

($ 1M/$ 3M mature claims- made coverage)

a 5% or more market share in Minnesota in 2001 were Midwest Medical
Insurance Company (51%) and St. Paul 20

Premium (dollars in thousands)

(26%). The St. Paul Companies recently discontinued their medical
malpractice insurance line in Minnesota. Midwest Medical Insurance Company
is now the leading

medical malpractice insurer in Minnesota; it grew over 50% in the last two
years.

15

Joint Underwriting Association-- In Minnesota, the JUA is considered the
insurer of last resort. As of 1/ 2002, the JUA had 8 policies but by 10/
2002 it had 168 policies, mostly for nursing homes.

Rate regulation: 10

The state regulatory body-- Minnesota Department of Commerce-- emphasizes
the market itself as the most effective regulator of premium rates in the
state. Minnesota has a file and use system. In 2001, Minnesota began to
allow a "speed to market" filing procedure for companies that

5

meet certain stability and history requirements. 1992 1993 1994 1995 1996
1997 1998 1999 2000 2001 2002 State tort laws:

Limits on damage awards-- No limit on economic or American Physicians
Assurance Corp. (AP Capital)

noneconomic damages.

Collateral source rule-- Minnesota requires a mandatory Doctors' Company

offset of collateral sources by court if defendant introduces evidence of
payments made to plaintiff.

Midwest Medical Insurance Co. (MMIC aka Midwest Mutual)

Periodic award payments-- Allows discretionary periodic payment of future
damages if damages exceed $100,000.

Michigan Physicians Mutual Liability Co. (MICOA)

Pretrial expert certification-- With the initial filing, plaintiff's
expert must certify defendant deviated from the

Direct Losses Paid Compared to Direct Losses Incurred

applicable standard of care and that deviation caused

Minnesota 1975- 2001

plaintiff's injuries. After 180 days, expected trial expert must certify
as to the substance of facts and opinions to which expert is expected to
testify, and grounds to

120 Losses (in millions of 2001 dollars)

support those opinions. 100

Attorney contingency fees-- No modification.

80

Joint and several liability-- Defendant liable only for up to four 60

times defendant's share of damages if less than 15%

40

responsible for harm; if more than 15% responsible,

20

defendant liable for entire amount of damages. After August 1, 2003,
defendent liable for proportioned share

0

of damages, if less than 50% responsible for harm; if

-20

more than 50% responsible, defendant liable for entire

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
amount of damages.

Statute of limitations-- Plaintiff must file within two years of
occurrence of malpractice or termination of treatment.

Direct losses incurred

Bad faith claims-- Insurer and medical society did not say these cases
were an issue in Minnesota.

Direct losses paid Sources: U. S. Census Bureau, 2000 (top box); GAO
analysis of Medical Liability Monitor data (middle box); GAO analysis of
A. M. Best data (bottom box).

Figure 13: Mississippi Mississippi Market description:

State specifics

Typical coverage type and limit-- The Mississippi Department of Insurance
(DOI) stated that insurance in the state is typically claims made.
Regional differences-- Insurers typically treat Mississippi as a single
rating area.

Population: 2,844,658

MS

Frequency and severity-- The DOI and Medical Assurance Company of
Mississippi (MACM) believe claim

Size (land area): 46,907 sq miles severity has grown significantly and has
led to increased insurer losses.

Density: 60.6 pp/ sq. mi

Insurer characteristics and market share: Premium Rates: General Surgery
for Four Mississippi Insurers

Insurer characteristics-- According to a 2003 DOI survey, ($ 1M/$ 3M
mature claims- made coverage)

some physicians are moving from the admitted market to the surplus market.
DOI stated that some physicians are

35 Premium (dollars in thousands)

going without formal insurance right now and hospitals might be moving to
form risk retention groups or self- insure, but that captives are not
allowed under state law. 30

Market share-- Based on A. M. Best and NAIC data, the companies with a 5%
or more market share in Mississippi (2001) were MACM (34%), Reciprocal of

25

America (21%), St. Paul Companies (10%), Doctors Insurance Reciprocal
(8%), and the Doctor's Company (6%). DOI stated that MACM is the largest
writer in

20

Mississippi with an estimated market share of 60 percent. Most licensed
companies, including MACM are at no growth. Several companies-- St. Paul,
Reciprocal of America, ProAssurance-- have pulled out of the market or 15

are reducing exposure.

Joint Underwriting Association-- DOI is currently investigating whether a
JUA would be worthwhile.

10 Rate regulation:

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 The DOI stated that
most medical malpractice insurance in Mississippi is presently being
written in the non- admitted

Doctors' Company market (surplus lines), which is not rate or form
regulated. DOI does not regulate the rates or forms of MACM because

Medical Assurance Co of Miss (MACM) it is a non- profit, mutual insurance
corporation.

Medical Assurance of West Virginia (Part of ProAssurance)

State tort laws:

Limits on damage awards-- $500,000 limit on noneconomic P- I- E Mutual
Ins. Co.

damages, increasing to $750,000 on July 1, 2011 and $1,000,000 on July 1,
2017; limit does not apply in

Direct Losses Paid Compared to Direct Losses Incurred

disfigurement cases or at the judge's discretion.

Mississippi 1975- 2001

Collateral source rule-- No modification.

Periodic award payments-- No provisions for such payments.

120 Losses (in millions of 2001 dollars)

Pretrial expert certification-- Plaintiff's attorney must file a
certificate of expert consultation, unless an exception to that general
rule applies.

80

Attorney contingency fees-- No limitation.

Joint and several liability-- There is no joint and several liability for
noneconomic damages in medical malpractice 40

cases. For economic damages, Mississippi has a sliding scale, where
defendants less than 30% responsible pay only their proportionate share,
but defendants over 30%

0

responsible pay up to 50% of economic damages.

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Statute of limitations-- Plaintiff must file within two years of the
malpractice of reasonable discovery of malpractice or seven years of the
act.

Direct losses incurred

Bad faith claims-- The insurer we spoke to said that it has not yet been
sued for bad faith.

Direct losses paid Sources: U. S. Census Bureau, 2000 (top box); GAO
analysis of Medical Liability Monitor data (middle box); GAO analysis of
A. M. Best data (bottom box).

Figure 14: Nevada Nevada Market description:

State specifics

Typical coverage type and limit-- Most policies are claims- made, with the
exception of a few physicians in low- risk specialties. In Nevada, most
physicians are required to have $1 million/$ 3 million coverage.

NV

Frequency and severity-- The State Department of Insurance (DOI) has
closed- claim data indicating that

Population: 1,998,257 frequency has increased over the past several years.
The DOI believes this increase in severity is one

Size (land area): 109,826 sq miles of the main reasons insurer losses are
increasing in Nevada. The Nevada State Medical Association

Density: 18.2 pp/ sq. mi does not believe frequency is increasing in
Nevada. Regional differences-- Insurers reporting to the Medical Liability
Monitor survey typically charge higher

premiums for general surgery in Las Vegas and Clark County.

Insurer characteristics and market composition: Premium Rates: General
Surgery for Eight Nevada Insurers

Insurer characteristics-- In 2002, the state created Medical

($ 1M/$ 3M mature claims- made coverage)

Liability Association of Nevada (MLAN). Although initially organized by
the Insurance Commissioner, it will be an

100 Premium (dollars in thousands)

independent insurer and has the ability to convert to a mutual in the
future. Also in 2002, Nevada Mutual

80

Insurance Company (NMIC), a physician owned company, was formed and
entered the market.

60

Market share-- Based on A. M. Best and NAIC data, the companies with a 5%
or more market share in Nevada

40

(2001) were St. Paul (32%), Health Care Indemnity Inc. (13%), the Doctors
Company (9%), Physician Insurance

20

Company of Wisconsin (6%), and Chicago Insurance

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Company (6%). St.
Paul acquired Nevada Medical Liability Insurance (NMLI) in the mid 1990s,
and captured a majority market share in Nevada. In December 2001,

American Healthcare Indemnity Co. (SCPIE Cos.) in Clark County St. Paul
announced it would be exiting the medical malpractice business.

American Physicians Assurance Corp. (AP Capital) in Clark County

Rate regulation:

Doctors' Company in Clark County The DOI requires prior approval of rates.

Medical Insurance Exchange of California (MIEC) in Clark County

State tort laws:

Limits on damage awards-- $350,000 limit on noneconomic Michigan
Physicians Mutual Liability Co. (MICOA) in Clark County

damages, with exception for cases of gross malpractice or special
circumstances. Cap is applied per plaintiff and

Phys. Ins. Co. of Wisconsin (PlC Wisconsin) in Clark County per defendant.

Collateral source rule-- Courts allow offsets in damages P- I- E Mutual
Ins. Co. in Clark County

against health care providers in the amount received from a collateral
source, including any prior payment by Nevada Med. Liab. Co. (NML Ins.
Co.) in South Region the defendant health care provider.

Periodic award payments-- Claimant may elect to receive

Direct Losses Paid Compared to Direct Losses Incurred

award for future damages in a lump sum reduced to

Nevada 1975- 2001

present value, if approved by the court, or by an annuity.

Pretrial expert certification-- Expert certification required to support
allegations; expert must practice or have 100

Losses (in millions of 2001 dollars)

practiced in area similar to practice related to alleged

80

malpractice.

Attorney contingency fees-- No modification.

60

Joint and several liability-- There is no joint and several liability in
Nevada in medical malpractice cases.

40

Statute of limitations-- Plaintiff must file within three years

20

from the injury or two years from the discovery of the injury, whichever
is first.

0

Bad faith claims-- The insurer we spoke to said it had not

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
faced many bad faith claims in Nevada. Direct losses incurred

Direct losses paid Sources: U. S. Census Bureau, 2000 (top box); GAO
analysis of Medical Liability Monitor data (middle box); GAO analysis of
A. M. Best data (bottom box).

Figure 15: Pennsylvania Pennsylvania Market description:

Typical coverage type and limit-- Until recently, insurers in Pennsylvania
were still offering State specifics

occurrence coverage. By 2003, virtually all of the insurers in
Pennsylvania will offer only claims- made policies. PA requires $500,000
of private insurance; Mcare-- the state sponsored patient

Population: 12,281,054

PA

liability fund-- will insure above this amount to $1.2 million.

Size (land area): 44,817 sq miles

Frequency and severity-- The Pennsylvania Insurance Department (PID)
believes severity has

Density: 274 pp/ sq. mi recently increased in PA. Both PID and
Pennsylvania Medical Society Liability Insurance Company (PMSLIC) believe
this change in severity is responsible for increasing insurer losses.

Regional differences-- Most insurers charge higher rates for general
surgery around Philadelphia.

Insurer characteristics and market share: Premium Rates: General Surgery
for Seven Pennsylvania Insurers

Insurer characteristics-- As of 2002, the largest

(mature claims- made coverage* see market description for coverage limits)

remaining medical malpractice insurer in the state is PMSLIC, a physician-
owned stock company. Other

60 Premium (dollars in thousands)

entities writing in the state are commercial companies, the state Joint
Underwriting Association,

50

and self- insured academic health centers.

40

Market share-- Based on A. M. Best and NAIC data, the companies with a 5%
or more market share in

30

Pennsylvania (2001) were PMSLIC (19%), MIIX

20

Insurance Company (14%), Medical Protective Company (8%), TriCentury
Insurance Company

10

(6%), Lexington Insurance Company (5.2%), and

0

VHA Risk Retention Group Inc. (5.1%). Several large 1992 1993 1994 1995
1996 1997 1998 1999 2000 2001 2002 medical malpractice insurersc-- Phico,
MIIX, and

Princeton-- will have ceased writing in Pennsylvania by the end of 2003.

PHICO Insurance Co. in Delaware and Philadelphia Counties

Joint Underwriting Association-- The JUA covers around 5 hospitals and
1500 physicians and expects 1,000 Pennsylvania Medical Society Liability
Insurance Co. (PMSLIC) in Philadelphia area more physicians to seek
coverage in the next year.

P- I- E Mutual Ins. Co. in Delaware and Philadelphia Counties

Rate regulation:

The PID generally utilizes a file and use system with the Clarendon Nat.
Ins. Co. in Delaware and Philadelphia County

exception that it will review requests for more than a 10% increase in
premium. PID only reviews small

Professionals Advocate in Philadelphia and Delaware Counties commercial
risks- those under $25,000 in premium- and

ProNational Ins. Co. in Philadelphia relies on the market to regulate
large commercial risks.

State tort laws:

Princeton Insurance Company

Limits on damage awards-- No limit on economic or

Direct Losses Paid Compared to Direct Losses Incurred

noneconomic damages.

Collateral source rule-- No modification.

Pennsylvania 1975- 2001

Periodic award payments-- No specific provisions for periodic award
payments.

500 Losses (in millions of 2001 dollars)

Pretrial expert certification-- Plaintiff's attorney must

400

sign the original complaint, certifying that the attorney has contacted an
expert who will attest to

300

the plaintiff's case.

200

Attorney contingency fees-- No modification.

Joint and several liability-- If the defendant is less than

100

60% responsible for the harm, defendant is liable for only proportional
share of ultimate judgment.

0

Statute of limitations-- Plaintiff must file within two years

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 of
malpractice or discovery of injury.

Bad faith claims-- The insurer we spoke to said that this Direct losses
incurred was not a big issue in Pennsylvania.

Direct losses paid Sources: U. S. Census Bureau, 2000 (top box); GAO
analysis of Medical Liability Monitor data (middle box); GAO analysis of
A. M. Best data (bottom box).

Figure 16: Texas Texas Market description:

State specifics

Typical coverage type and limit-- Majority of coverages written are claims
made. Some physicians have recently lowered their coverage limits; many
now have $500,000 rather than the $1 million. Frequency and severity-- A
Texas Medical Association (TMA) study has shown frequency and

Population: 20,851,820

TX

severity increasing in Texas. The Texas Department of Insurance (DOI)
believes increases in

Size (land area): 261,797 sq miles both severity and frequency have led to
increased insurer losses.

Density: 79.6 pp/ sq. mi

Regional differences-- Most insurers reporting to the Medical Liability
Monitor survey charge higher rates for general surgery in urban areas such
as Dallas and Houston, and the border county El Paso.

Insurer characteristics and market share: Premium Rates: General Surgery
for Four Texas Insurers

Insurer characteristics-- Licensed medical malpractice

($ 1M/$ 3M mature claims- made coverage)

insurance carriers cover one third of physicians, unlicensed Texas Medical
Liability Trust (TMLT)

90 Premium (dollars in thousands)

covers one third, and one third are covered by alternative forms of
insurance.

Market share-- Based on A. M. Best and NAIC data, the companies with a 5%
or more market share in Texas (2001) were TMLT (22%), Health Care Inemnity
Inc. 60

(16%), and Medical Protective Company (10%). As of 2002 there were only
four main writers of medical malpractice insurance in Texas, down from 17
in 2001. Some went out of business, others discontinued writing in Texas.

Joint Underwriting Association-- Formed in 1975, the

30

state JUA grew from 100 to 1,800 policies from the late 1990s to January
2003.

Rate regulation:

Texas is a file and use state. In the mid 1990s, the state mandated a
rollback in premiums.

0 1992

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 State tort laws:

Limits on damage awards-- Approximately $1.3 million Texas Medical
Liability Trust in El Paso County

cap on noneconomic damages in wrongful death cases. Texas applies the
limit per plaintiff, per

Amer Physicians Insurance Exchange in Hidalgo County defendant, and
adjusts the limit for inflation. Collateral source rule-- No
modifications.

Medical Assurance in Dallas County

Periodic award payments-- No specific provision for periodic award
payments.

Direct Losses Paid Compared to Direct Losses Incurred

Pretrial expert certification-- Plaintiff must file either

Texas 1975- 2001

cash, a cost bond, or an expert report within 90 days of filing suit.
Plaintiff must also serve expert report on 500

Losses (in millions of 2001 dollars)

each defendant within 180 days of filing suit.

Attorney contingency fees-- No modification.

400

Joint and several liability-- Defendants can be liable for payment of
entire award if they are at least 51%

300

responsible for plaintiff's damages.

200

Statute of limitations-- Plaintiff must file the case within two years of
occurrence or discovery of the

100

malpractice.

0

Bad faith claims-- TMLT said bad faith claims are a significant problem.

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Direct losses incurred

Direct losses paid Sources: U. S. Census Bureau, 2000 (top box); GAO
analysis of Medical Liability Monitor data (middle box); GAO analysis of
A. M. Best data (bottom box).

Appendi V I x GAO Contacts and Staff Acknowledgments GAO Contacts Richard
J. Hillman, (202) 512- 8678 Lawrence Cluff, (202) 512- 8023
Acknowledgments In addition to those individuals named above, Patrick
Ward, Melvin Thomas, Andrew Nelson, Heather Holsinger, Rudy Chatlos,
Raymond

Wessmiller, Rachel DeMarcus, and Emily Chalmers made key contributions to
this report.

Related GAO Products

Medical Malpractice: Effects of Varying Laws in the District of Columbia,
Maryland, and Virginia. GAO/ HEHS- 00- 5. Washington, D. C.: October 15,
1999.

Medical Malpractice: Federal Tort Claims Act Coverage Could Reduce Health
Centers' Costs. GAO/ HEHS- 97- 57. Washington, D. C.: April 14, 1997.

Medical Liability: Impact on Hospital and Physician Costs Extends Beyond
Insurance. GAO/ AIMD- 95- 169. Washington, D. C.: September 29, 1995.

Medical Malpractice Insurance Options. GAO/ HEHS- 94- 105R. Washington, D.
C.: February 28, 1994.

Medical Malpractice: Maine's Use of Practice Guidelines to Reduce Costs.
GAO/ HRD- 94- 8. Washington, D. C.: October 25, 1993.

Medical Malpractice: Estimated Savings and Costs of Federal Insurance at
Health Centers. GAO/ HRD- 93- 130. Washington, D. C.: September 24, 1993.

Medical Malpractice: Medicare/ Medicaid Beneficiaries Account for a
Relatively Small Percentage of Malpractice Losses. GAO/ HRD- 93- 126.
Washington, D. C.: August 11, 1993.

Medical Malpractice: Experience with Efforts to Address Problems.

GAO/ T- HRD- 93- 24. Washington, D. C.: May 20, 1993.

Practitioner Data Bank: Information on Small Medical Malpractice Payments.
GAO/ IMTEC- 92- 56. Washington, D. C.: July 7, 1992.

Medical Malpractice: Alternatives to Litigation. GAO/ HRD- 92- 28.
Washington, D. C.: January 10, 1992.

Medical Malpractice: Data on Claims Needed to Evaluate Health Centers'
Insurance Alternatives. GAO/ HRD- 91- 98. Washington, D. C.: May 2, 1991.

Medical Malpractice: A Continuing Problem With Far- Reaching Implications.
GAO/ T- HRD- 90- 24. Washington, D. C.: April 26, 1990.

(250093)

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Report to Congressional Requesters

June 2003 MEDICAL MALPRACTICE INSURANCE

Multiple Factors Have Contributed to Increased Premium Rates

GAO- 03- 702

Letter 1 Results in Brief 3 Background 6 Both the Extent of Increases in
Medical Malpractice Premium Rates

and the Rates Themselves Varied across Specialties and States 9 Multiple
Factors Have Contributed to the Increases in Medical

Malpractice Premium Rates 15 The Medical Malpractice Insurance Market Has
Changed since Previous Hard Markets 37

Conclusions 43 Matter for Congressional Consideration 46 NAIC Comments and
Our Evaluation 46

Appendixes

Appendix I: Scope and Methodology 49

Appendix II: Legal Summary 51

Appendix III: State Summaries 55 Market Description 55 Insurer
Characteristics and Market Share 56 Rate Regulation 56 State Tort Laws 57

Appendix IV: GAO Contacts and Staff Acknowledgments 66 GAO Contacts 66
Acknowledgments 66

Related GAO Products 67 Tables Table 1: Annual Yields for Selected Bonds,
1995* 2002, and Average

Return on Investment Assets, 1997* 2002, for the 15 Largest Writers of
Medical Malpractice Insurance in 2001 25 Table 2: Hypothetical Example of
How Premium Rates Change When the Return on Investments Falls 27

Figures Figure 1: Premium Base Rates of the Largest Insurers in Seven
Selected States for Three Medical Specialties,

1992* 2002 11

Figure 2: Percentage Changes in Premium Base Rates of the Largest Medical
Malpractice Insurers in Seven Selected States for Three Medical
Specialties, 1999* 2002 12 Figure 3: 2002 Medical Malpractice Insurance
Premium Base Rates

of the Largest Insurers in Seven Selected States for Three Medical
Specialties 14 Figure 4: Inflation- Adjusted Paid and Incurred Losses for
the

National Medical Malpractice Insurance Market, 1975* 2001 (Using the CPI,
in 2001 Dollars) 17 Figure 5: Inflation- Adjusted Aggregate Paid Losses
for Medical

Malpractice Insurers in Seven Selected States, 1975- 2001 (Using the CPI,
in 2001 Dollars) 19 Figure 6: Inflation- Adjusted Aggregate Incurred
Losses for Medical

Malpractice Insurers in Seven Selected States, 1975- 2001 (Using the CPI,
in 2001 Dollars) 21 Figure 7: Net Profit or Loss as a Percentage of Net
Worth for

Medical Malpractice Insurance Companies Nationwide, 1990* 2001 29 Figure
8: Aggregate Incurred Losses as a Percentage of Premiums

Earned for Medical Malpractice Insurers in Seven Selected States, 1975*
2001 30 Figure 9: Incurred Losses as a Percentage of Premium Income for

Medical Malpractice Insurers and Property- Casualty Insurers Nationwide,
1976* 2001 34 Figure 10: California 59 Figure 11: Florida 60 Figure 12:
Minnesota 61 Figure 13: Mississippi 62 Figure 14: Nevada 63 Figure 15:
Pennsylvania 64 Figure 16: Texas 65

Abbreviations

AMA American Medical Association CAP/ MPT Cooperative of American
Physicians/

Mutual Protection Trust CDI California Department of Insurance CPI
Consumer Price Index DOI Department of Insurance FMA Florida Medical
Association FPIC First Professionals Insurance Company JUA Joint
Underwriting Association MACM Medical Assurance Company of Mississippi
MIEC Medical Insurance Exchange of California MIIX Medical Inter-
Insurance Exchange MLM Medical Liability Monitor MMIC Midwest Medical
Insurance Company NAIC National Association of Insurance Commissioners
NMIC Nevada Mutual Insurance Company NSCL National Conference of State
Legislatures PIAA Physician Insurers Association of America PID
Pennsylvania Insurance Department PMSLIC Pennsylvania Medical Society
Liability Insurance

Company SCPIE Southern California Physicians Insurance Exchange TMA Texas
Medical Association TMLT Texas Medical Liability Trust

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

a

GAO United States General Accounting Office

Since 1999, medical malpractice premium rates have increased dramatically
for physicians in some specialties in a number of states. However, among
larger insurers in the seven states GAO analyzed, both the premium rates
and the extent to which these rates have increased varied greatly (see
figure). Multiple factors, including falling investment income and rising
reinsurance

costs, have contributed to recent increases in premium rates in our sample
states. However, GAO found that losses on medical malpractice claims*
which make up the largest part of insurers* costs* appear to be the
primary driver of rate increases in the long run. And while losses for the
entire

industry have shown a persistent upward trend, insurers* loss experiences
have varied dramatically across our sample states, resulting in wide
variations in premium rates. In addition, factors other than losses can
affect premium rates in the short run, exacerbating cycles within the
medical malpractice market. For example, high investment income or
adjustments to account for lower than expected losses may legitimately
permit insurers to price insurance below the expected cost of paying
claims. However, because of the long lag between collecting premiums and
paying claims, underlying losses may be increasing while insurers are
holding premium rates down, requiring large premium rate hikes when the
increasing trend in losses is recognized. While these factors may explain
some events in the medical malpractice market, GAO could not fully analyze
the composition and causes of losses at the insurer level owing to a lack
of comprehensive data.

GAO*s analysis also showed that the medical malpractice market has changed
considerably since previous hard markets. Physician- owned and/ or
operated insurers now cover around 60 percent of the market, self-
insurance has become more widespread, and states have passed laws designed
to reduce premium rates. As a result, it is not clear how premium rates
might behave during future soft or hard markets.

Medical Malpractice Premium Base Rates for Obstetricians and Gynecologists
Quoted by Larger Insurers in 1998 and 2002 in the Seven States GAO Visited
(Dollars in Thousands)

Source: GAO analysis of annual surveys by the Medical Liability Monitor.

PMSLIC (Philadelphia, Pennsylvania)

TMLT (El Paso,

Texas) MIEC

(Clark County, Nevada) MMIC

(Minnesota) MACM (Mississippi) FPIC (Dade

County, Florida) FPIC

(rest of Florida) Doctor's

Company (northern California) 0

50 100

150 200

250

34 31 140

201 76

103 18 17 37 45

95 142

29 64 58

92 1998 2002

Over the past several years, large increases in medical malpractice
insurance premium rates have raised concerns that physicians will no
longer be able to afford malpractice insurance and will be forced to
curtail or discontinue

providing certain services. Additionally, a lack of profitability has led
some large insurers to stop selling medical malpractice insurance,
furthering concerns that physicians will not be able to obtain coverage.
To help Congress better understand the reasons

behind the rate increases, GAO undertook a study to (1) describe the
extent of the increases in medical malpractice insurance

rates, (2) analyze the factors that contributed to those increases, and
(3) identify changes in the medical malpractice insurance market that
might make this period of rising premium rates different from previous
such periods. GAO is not recommending executive action. However, to
further the understanding of conditions in current and future medical
malpractice markets,

Congress may wish to consider encouraging the National Association of
Insurance

Commissioners and state insurance regulators to identify and collect
additional, mutually beneficial data

necessary for evaluating the medical malpractice insurance market.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 702. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Richard J. Hillman at (202) 512- 8678 or

[email protected] gao. gov. Highlights of GAO- 03- 702, a report to congressional
requesters

June 2003

MEDICAL MALPRACTICE INSURANCE

Multiple Factors Have Contributed to Increased Premium Rates

Page i GAO- 03- 702 Medical Malpractice Insurance

Contents

Contents

Page ii GAO- 03- 702 Medical Malpractice Insurance

Contents

Page iii GAO- 03- 702 Medical Malpractice Insurance

Page 1 GAO- 03- 702 Medical Malpractice Insurance United States General
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Appendix I

Appendix I Scope and Methodology

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Appendix II

Appendix II Legal Summary

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Appendix II Legal Summary

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Appendix II Legal Summary

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Appendix III

Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix III State Summaries

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Appendix IV

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