Medical Malpractice Insurance: Multiple Factors Have Contributed
to Premium Rate Increases (01-OCT-03, GAO-04-128T).
This testimony focuses on the factors that have contributed to
the recent increases in insurance premium rates and the
differences in rates among states that have passed varying levels
of tort reform laws. Our findings are based on two reports we
recently issued addressing various aspects of the recent
increases in medical malpractice insurance rates. Recognizing
that the medical malpractice market varies considerably across
states, as part of these reviews we judgmentally selected a
number of states and conducted more in-depth reviews in each of
those states. Both our analyses and our conclusions are based in
part on data and information we received from the states we
visited and in part on analyses of national data from various
sources.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-128T
ACCNO: A08637
TITLE: Medical Malpractice Insurance: Multiple Factors Have
Contributed to Premium Rate Increases
DATE: 10/01/2003
SUBJECT: Financial analysis
Insurance premiums
Liability insurance
Malpractice (medical)
State law
Torts
California
Florida
Minnesota
Mississippi
Nevada
Pennsylvania
Texas
Colorado
West Virginia
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GAO-04-128T
United States General Accounting Office
GAO Testimony
Before the Subcommittee on Wellness and Human Rights, Committee on
Government Reform, House of Representatives
For Release on Delivery Expected at 2:00 p.m. EDT
Wednesday, October 1, 2003 MEDICAL MALPRACTICE INSURANCE
Multiple Factors Have Contributed to Premium Rate Increases
Statement of
Richard J. Hillman, Director
Financial Markets and Community Investment
Kathryn G. Allen, Director
Health Care - Medicaid and Private Health Insurance Issues
GAO-04-128T
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to discuss our work examining recent
increases in premium rates for medical malpractice insurance and the
effect of certain tort reform laws on premium growth. Since the late
1990s, medical malpractice insurance rates have increased dramatically for
physicians in certain specialties in some states. These increases have
heightened concerns that some health care providers may no longer be able
to afford malpractice insurance, resulting in shuttered practices and
reducing access to high-risk services. In response, some states have
recently revised or have considered revising their tort laws, sometimes
placing caps on damages in malpractice lawsuits, and the Congress is
considering similar legislation.1
Our testimony today will focus on the factors that have contributed to the
recent increases in insurance premium rates and the differences in rates
among states that have passed varying levels of tort reform laws. Our
findings are based on two reports we recently issued addressing various
aspects of the recent increases in medical malpractice insurance rates.2
Recognizing that the medical malpractice market varies considerably across
states, as part of these reviews we judgmentally selected a number of
states and conducted more in-depth reviews in each of those states.3 Both
our analyses and our conclusions are based in part on data and information
we received from the states we visited and in part on analyses of national
data from various sources.
In summary, multiple factors have contributed to the recent increases in
medical malpractice premium rates in the states we analyzed. First, since
1998, insurers' losses on medical malpractice claims have increased
rapidly in some states. We found that the increased losses appeared to be
the greatest contributor to increased premium rates, but a lack of
1For example, on March 13, 2003, the House of Representatives passed the
Help Efficient, Accessible, Low-cost, Timely Healthcare (HEALTH) Act of
2003 (H.R. 5); on June 27, 2003, a similar version (S.11) of this bill was
introduced in the Senate.
2U.S. General Accounting Office, Medical Malpractice Insurance: Multiple
Factors Have Contributed to Increased Premium Rates, GAO-03-702
(Washington, D.C.: June 27, 2003), and Medical Malpractice: Implications
of Rising Premiums on Access to Health Care, GAO-03-836, (Washington,
D.C.: Aug. 8, 2003).
3The states we visited were, for GAO-03-702, California, Florida,
Minnesota, Mississippi, Nevada, Pennsylvania, and Texas; and for
GAO-03-836, California, Colorado, Florida, Minnesota, Mississippi,
Montana, Nevada, Pennsylvania, and West Virginia.
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 to 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 income4 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 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, did not completely cover the ultimate losses some insurers
experienced on that business. As a result, 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 the past, raising insurers' overall costs.5
In combination, all of these factors have contributed to the movement of
the medical malpractice insurance market through hard and soft phases-
similar to the cycles experienced by the property-casualty insurance
market as a whole-and premium rates have fluctuated with each phase.6
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.
4In 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 lowered.
5Reinsurance is insurance for insurance companies. They routinely use
reinsurance as a way to spread the risk associated with the insurance they
sell.
6Some 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 slow rising premium rates,
less stringent underwriting standards, expanded coverage, and strong
competition among insurers.
In an attempt to constrain increases in medical malpractice premium rates,
states have adopted various tort reform measures.7 Of particular focus
recently have been tort reform measures that include placing caps on
monetary awards for noneconomic damages-such as pain and suffering-that
may be paid to plaintiffs in a malpractice lawsuit. Available data, while
somewhat limited in scope, indicate that rates of premium growth have been
slower on average in states that have enacted tort reforms with
noneconomic damage caps than in states with more limited reforms. Premium
rates reported for three specialties-general surgery, internal medicine,
and obstetrics and gynecology-were relatively stable on average in most
states from 1996 through the late 1990s and then began to rise, but more
slowly, in states with certain noneconomic damage caps. For example, from
2001 through 2002 average premium rates rose approximately 10 percent in
the four states with noneconomic damage caps of $250,000 but approximately
29 percent in states with more limited tort reforms. As we have discussed,
premium rate increases are influenced by multiple factors, and our
analyses did not allow us to determine the extent to which the differences
premium rate increases at the state level could be attributed to tort
reform laws or to other factors.
Overall, adequate data do not exist that would allow us and others to
provide definitive answers to important questions about the market for
medical malpractice insurance, including an explanation of the causes of
rising losses over time and the precise effect of tort reforms on premium
rates. This lack of data is due, in part, to the nature of regulatory
reporting requirements for all lines of insurance, which focus primarily
on the information needed to evaluate a company's solvency. However,
comprehensive data on individual awards actually paid in malpractice cases
are also lacking, as are data on conditions in the health care sector that
might affect the incidence and severity of medical malpractice suits.
Background Nearly all health care providers buy medical malpractice
insurance to protect themselves from potential claims that could otherwise
cause financial distress or even bankruptcy. Under a malpractice insurance
7Medical malpractice lawsuits are generally based on principles of tort
law. A tort is a wrongful act or omission by an individual that causes
harm to another individual. To reduce malpractice claims payments and
insurance premiums and for other reasons, some have advocated changes to
tort laws, such as placing caps on the amount of damages or limits on the
amount of attorney fees that may be paid under a malpractice lawsuit.
These changes are collectively referred to as "tort reforms."
contract, the insurer agrees to investigate claims, to provide legal
representation for the health care provider, and to accept financial
responsibility for payment of any claims up to a specified monetary level
during an established time period. The insurer provides this coverage in
return for a fee-the medical malpractice premium. The most common
physician policies provide coverage limits of $1 million per incident and
$3 million per year.
Since 1999, medical malpractice premium rates for physicians in some
states have increased dramatically. Among the states that we analyzed,
however, 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 of $89,000 a
year for the same coverage for general surgeons outside Dade County, or
about half the rate it quoted inside Dade County.
In order to improve the affordability and availability of malpractice
insurance and to reduce pressure on providers who could be faced with
heavy liabilities, all states have adopted varying types of tort reform
legislation. Tort reforms are generally intended to limit the number of
malpractice claims or the size of payments in an effort to reduce
malpractice costs and insurance premiums. Among the various types of tort
reform measures adopted by states during the past three decades, caps on
noneconomic damage awards have been the focus of particular interest. They
have also been an issue of some debate.8 Noneconomic
8Other tort reform measures adopted by states include placing caps on
economic and punitive damages; abolishing the "collateral source rule"
that prevents a defendant from introducing evidence that the plaintiff's
losses and expenses have been paid in part by other parties such as health
insurers or prevents damage awards from being reduced by the amount of any
compensation plaintiffs receive from third parties; abolishing "joint and
several liability" to ensure that damages are recovered from defendants in
proportion to each defendant's degree of responsibility, not each
defendant's ability to pay; placing limits on fees charged by plaintiffs'
lawyers; imposing stricter statutes of limitations that shorten the time
injured parties have to file a claim in court; and establishing pretrial
screening panels to evaluate the merits of claims before proceeding to
trial.
damages are awarded to plaintiffs in a medical malpractice suit to
compensate for harm that is not easily quantifiable, such as pain and
suffering. Proponents of caps believe that such limits can help reduce the
rate of growth in malpractice insurance premiums by, among other things,
helping to prevent excessive awards and overcompensation and by ensuring
more consistency in jury verdicts. In contrast, opponents of these caps
believe that factors other than award amounts affect malpractice insurance
premiums and that caps can result in undercompensation for severely
injured persons. Congress is currently considering federal tort reform
legislation that includes several of the measures states have adopted,
including placing caps on noneconomic and punitive damages.
Multiple Factors Have Among the factors that have contributed to increases
in medical
malpractice premium rates are insurers' losses, declines in investment
Contributed to the income, a less competitive climate, and climbing
reinsurance rates. We Increases in Medical found that increased losses
appeared to be the greatest contributor to
premium rate increases, but a lack of comprehensive data at the national
Malpractice Premium and state levels on claims and associated losses
prevented us from fully Rates analyzing the composition and causes of
those losses at the insurer level.
Rising Paid Losses Increase Insurers' Expectations of Required Premiums
In the long term the price insurers need to charge for their premiums is
the sum of actual paid losses and expenses, plus a reasonable return in a
competitive market.9 Paid losses, one of the two ways that insurers define
losses, are the cash payments insurers make in a given year, irrespective
of the year in which the claim giving rise to the payments occurred or
were reported. Most payments made in any given year are for claims that
were reported in previous years. Medical malpractice insurers saw these
losses begin to rise rapidly in 1998.
Short-term changes in rates-from year-to-year-are affected by incurred
losses, which, in contrast to paid losses, reflect an insurer's
expectations of the amounts it will have to pay on claims reported in that
year and any adjustments, whether up or down, to the amounts the company
expects to
9 We identified several factors suggesting that this market was not
anticompetitive. That is, these factors suggested that insurers in this
market were not charging premium rates that were inconsistent with
expected losses.
pay out on claims from previous years that are still pending.10 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) accounted for around 78 percent, on
average, of the insurers' total expenses.
Figure 1 helps illustrate the relationship between incurred and paid
losses and between short-term and long-term determinants of changes in
premium rates. The figure shows paid and incurred losses for the national
medical malpractice market from 1975 to 2001, adjusted for inflation.
After adjusting for inflation, we found that the average annual increase
in paid losses from 1988 to 1997 was approximately 3.0 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.
10 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.
Figure 1. Inflation-Adjusted Paid and Incurred Losses for the National
Medical Malpractice Insurance Market, 1975-2001 (Using the CPI, in 2001
dollars)
The recent increases in both paid and incurred losses among our seven
sample states11 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
Minnesota and California increased by approximately 8.7 percent and 38.7
percent, respectively.
According to actuaries and insurers contacted with, increased losses
affect premium rates in several ways. First, increasing levels of paid
losses on claims reported in current or previous years can increase
insurers'
11For analysis of the medical malpractice insurance market, we visited
seven states- California, Florida, Minnesota, Mississippi, Nevada,
Pennsylvania, and Texas. We selected these states because they contained a
mix of characteristics, including the extent of any recently reported
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.
estimates of what they expect to pay out on future claims. Insurers then
raise premium rates to match their expectations. In addition, large 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 paid losses for 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 also 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.
Declining Investment Income Has Affected Premiums
State laws restrict medical malpractice insurers to conservative
investments, primarily bonds. In 2001, the 15 largest writers of medical
malpractice insurance in the United States12 invested, on average, around
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 have decreased steadily since 2000. We
analyzed the average investment returns of the 15 largest medical
malpractice insurers in 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. We roughly estimated that, all
else held constant, the 1.6 percent decrease in average investment return
from 2000 to 2002 would have resulted in an increase in premium rates of
approximately 7.2 percent over the same period.
12As reported by A.M. Best. These insurers included a combination of
commercial companies and non-profit physician-owned 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
of each of those lines.
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 to be high, as returns were during
most of the 1990s, premium rates can remain relatively low because
investment income will cover a larger share of losses on claims.
Conversely, when insurers expect their returns on investments to be
lower-as returns have been since around 2000-premium rates rise in order
to cover a larger share of losses on claims. During periods of relatively
high investment income, insurers can lose money on the underwriting
portion of their business but still make a profit. Although losses from
medical malpractice claims and the associated expenses may exceed premium
income, 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.
Downward Pressure on Premium Rates Has Decreased as Profitability Has Declined
Since 1999, the profitability of the medical malpractice insurance market
as a whole has declined-even with increasing premium rates-causing some
large insurers to pull out of the market in some states or even
nationwide. With fewer insurers 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, premium rates were kept from rising between 1992 and 1998, in
part, by price competition, even though losses generally did rise. In some
cases, premium 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 might
have been lower than they should have been. As a result, the premium
increases that began in 1998 were actually bringing premiums more in line
with insurers' losses on claims. Some industry participants also pointed
out that the pricing inadequacies of the 1990s were to some extent masked
by insurers' adjustments to expected losses on claims reported during the
late 1980s and by their high investment income.
According to industry participants and observers, as the competitive
pressures on premium rates decreased, insurers apparently were able to
raise premium rates to a level more in line with their expected losses
relatively quickly and easily. That is, absent the competitive pressure
that may have caused insurers to keep premium rates lower, insurers were
able to raise premium rates to match their loss expectations.
Reinsurance Premium The rising cost of reinsurance was an additional
reason for the recent
Rates Have Increased increases in medical malpractice premium rates in
our seven sample states. Insurers in general purchase reinsurance to
protect themselves against large unpredictable losses. Medical malpractice
insurers, particularly smaller insurers, depend heavily on reinsurance
because of the potentially high payouts on medical malpractice claims.
The Medical Malpractice Market Moves through Hard and Soft Insurance Cycles
The medical malpractice insurance market appears to roughly follow the
same "hard" and "soft" cycles as the overall property-casualty insurance
market. However, the cycles tend to be more volatile-that is, the swings
are more extreme-because of the length of time involved in resolving
medical malpractice claims and the volatility of the claims themselves.
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.
States with Tort Reforms that Include Certain Noneconomic Damage Caps Had Lower
Recent Growth in Malpractice Insurance Premium Rates
In order to constrain the rate of growth in malpractice insurance
premiums, states have adopted various tort reform measures, some of which
include placing caps on monetary awards for noneconomic damages. Premium
rates reported for the physician specialties of general surgery, internal
medicine, and obstetrics and gynecology-the only specialties for which
data were available-were relatively stable on average in most states from
the mid- to late 1990s and then began to rise, but more slowly among
states with certain noneconomic damage caps.13 From 1996 to 2000, average
premium rates for all states changed little, as did average premium rates
for states with certain caps on noneconomic damages and states with
limited reforms, increasing or decreasing annually by no more than about 5
percentage points on average.14 After 2000, premium rates began to rise
across most states on average, but more slowly among states with certain
noneconomic damage caps. In particular, from 2001 to 2002, the average
rates of increase in the states with noneconomic damage caps of $250,000
and $500,000 or less were 10 and 9 percent, respectively, compared with 29
percent in the states with limited reforms (see fig. 2).15
13Premium rate data are reported by the Medical Liability Monitor (MLM).
MLM is a private research organization that annually surveys professional
liability insurance carriers in 50 states and the District of Columbia to
obtain their base premium rates for the specialties of internal medicine,
general surgery, and OB/GYN.
14We focused our analysis on those states with noneconomic damage caps as
a key tort reform because such caps are included in proposed federal tort
reform legislation and because published research generally finds these
caps to have a greater impact on medical malpractice premium rates and
claims payments than some other tort reform measures.
15Because research suggests that any impact of tort reforms on premiums
can be expected to follow the implementation of the reforms by at least 1
year, we grouped states into their respective categories based on reforms
in place as of 1995 and reviewed premium rate data for the period 1996
through 2002. Four states had noneconomic damage caps of $250,000
(California, Colorado, Montana, Utah), 8 states had noneconomic damage
caps of $500,000 or less (Hawaii, Louisiana, Massachusetts, Michigan,
Missouri, North Dakota, South Dakota, and Wisconsin), and 11 states had
limited reforms, defined as no damage caps of any type or collateral
source reforms (Arkansas, District of Columbia, Kentucky, Mississippi,
Nevada, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and
Wyoming). We categorized the remaining 28 states as "other reforms" for
analysis purposes, indicating they had a noneconomic or total damage cap
greater than $500,000, any punitive damage cap, or any collateral source
rule reform.
Figure 2: Premium Rates for Three Physician Specialties Rose After 2000,
but to a Lesser Extent in States with Noneconomic Damage Caps
Notes: GAO analysis of MLM base premium rates, excluding discounts,
rebates, and surcharges, reported for the specialties of general surgery,
internal medicine, and OB/GYN.
Premiums are adjusted for inflation to 2002 dollars.
aThis category excludes states with caps of $250,000.
The recent increases in premium rates were also lower for each reported
physician specialty in the states with these noneconomic damage caps. From
2001 to 2002, the average rates of premium growth for each specialty in
the states with these noneconomic damage caps were consistently lower than
the growth rates in the limited reform states (see fig. 3).
Figure 3: Recent Premium Growth Was Lower for Three Physician Specialties
in States with Noneconomic Damage Caps
Note: GAO analysis of MLM base premium rates, excluding discounts,
rebates, and surcharges, reported for the specialties of general surgery,
internal medicine, and OB/GYN.
Premiums are adjusted for inflation to 2002 dollars.
aThis category excludes states with caps of $250,000.
Other studies have found a relationship between direct tort reforms that
include noneconomic damage caps and lower rates of growth in premiums.16
For example, in a recent analysis of malpractice premiums in states with
and without certain medical malpractice tort limitations, the
Congressional Budget Office (CBO) estimated that certain caps on damage
awards in combination with other elements of proposed federal tort reform
legislation would effectively reduce malpractice premiums on average by 25
to 30 percent over the 10-year period from 2004 through
16Direct reforms are limits on amounts that can be recovered in a
malpractice action including caps on noneconomic or total damages,
abolition of punitive damages, collateral source rule reforms, and
abolition of mandatory prejudgment interest.
2013.17 A 1997 study that assessed physician-reported malpractice premiums
from 1984 through 1993 found that direct reforms, including caps on damage
awards, lowered the growth in malpractice premiums within 3 years of their
enactment by approximately 8 percent.18
Differences in malpractice premiums across states are influenced by
several factors other than noneconomic damage caps. First, the manner in
which damage caps are administered can influence the ability of the cap to
restrain claims and thus premium costs. Some states permit injured parties
to collect damages only up to the specified level of the cap regardless of
the number of defendants, while other states permit injured parties to
collect the full cap amount from each defendant named in a suit.
Malpractice insurers informed us that imposing a separate cap on amounts
recovered from each of several defendants increases total claims payouts,
which can hinder the effectiveness of the cap in constraining premium
growth. Second, tort reforms unrelated to caps can also affect premium and
claims costs. For example, California tort reform measures include not
only a $250,000 cap but also allow other collateral sources to be
considered when determining how much an insurer must pay in damages and
allow periodic payment of damages rather than requiring payment in a lump
sum, among other measures. Malpractice insurers told us that these
provisions, in addition to the cap, have helped to constrain premium
growth in that state. In contrast, while Minnesota has no caps on damages,
it has experienced relatively low growth in premium rates. Trial attorneys
say this development is the result of mandatory prescreening requirements
that have reduced claim costs, and thus premiums, by preventing some
meritless claims from going to trial. Third, state laws and regulations
unrelated to tort reform, such as premium rate regulations, vary widely
and can influence premium rates. Finally, insurers' premium pricing
decisions are affected by their losses on medical malpractice claims and
income from investments, and other market conditions as we previously
discussed. Because of these various factors, we could not determine the
extent to which differences in premium rates across states were
attributable solely to damage caps or also to these additional factors.
17U.S. Congress, Congressional Budget Office, Cost Estimate: H.R. 5 - Help
Efficient, Accessible, Low-cost, Timely Healthcare (HEALTH) Act of 2003
(March 2003).
18Daniel P. Kessler and Mark B. McClellan, "The Effects of Malpractice
Pressure and Liability Reforms on Physicians' Perceptions of Medical
Care," Law and Contemporary Problems, vol. 670, no. 1 (1997): 81-106.
Comprehensive Data on the Composition and Causes of Increased Losses Were
Lacking
Conclusions
A lack of comprehensive data at the national and state levels on medical
malpractice claims filed against various insurers and the losses
associated with these claims prevented us from answering important
questions about the market for medical malpractice insurance, including
exactly why losses are rising over time and, as just noted, the extent to
which tort reforms may have affected premium rates. For example,
comprehensive data that would have allowed us to fully analyze the
frequency and severity of medical malpractice claims at the insurer level
on a state-by-state basis did not exist. As a result, we could not
determine the extent to which increased losses were the result of an
increased number of claims, larger claims, or some combination of both. In
addition, data that would have allowed us to analyze how losses were
divided between settlements and trial verdicts or between economic and
noneconomic damages were not available. Insurers do not submit information
to the National Association of Insurance Commissioners on the portion of
losses paid as part of a settlement and the portion paid as the result of
a trial verdict, and no other comprehensive source of such information
exists. As a result, we could not analyze the effect of certain tort
reforms on noneconomic losses, and thus on premium rates.
While more complete data on the insurance industry would help provide
better answers to questions about how the medical malpractice insurance
market is working, other data are equally important to 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 our reviews.
As we have discussed, multiple factors, including falling investment
income and rising reinsurance costs, have contributed to recent increases
in premium rates in our sample states. However, we 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.
We have also seen that the severe premium rate increases of the last few
years followed a period of relatively stable premium rates in the early
1990s, when insurers had excess reserves and sufficient investment
income to keep rates low. But by the mid- to-late 1990s, as insurers
exhausted their excess reserves and investment income fell below
expectations, the profitability of malpractice insurance had declined.
Regulators found that some insurers were insolvent, and in 2002 one of the
two largest medical malpractice insurers, which had been selling insurance
in almost every state, stopped selling medical malpractice insurance
altogether. Other companies reduced the amount of insurance they sold and
consolidated their markets, resulting in large rate increases in many
states. It remains to be seen whether these increases will be found to
have exceeded those necessary to pay for future claims losses, as they did
in the 1980s.
Tort reforms, particularly those that limit noneconomic damages, have
frequently been proposed as a means of controlling increases in medical
malpractice insurance premium rates. While the limited available data
indicate that premium rates have grown more slowly in states with tort
reform laws that include certain caps on noneconomic damages, a lack of
comprehensive data prevented us from determining the exact effects of
these laws on premium rates. Tort reforms and other actions that reduce
insurer losses below what they otherwise would have been should ultimately
slow the increase in premium rates, if all else holds constant. But
several years may have to pass before insurers can quantify and evaluate
the effect of the laws on losses from malpractice claims and before an
effect on premium rates is seen.
More time is also needed before we can determine whether the medical
malpractice insurance market will continue its cycle from the current hard
to a soft phase and thus are better able to understand the part the cycle
itself has played in the rise in premium rates. However, any evaluation of
the effect of tort reforms and cyclical behavior on premium rates requires
sufficient data. In order for Congress and others to better understand
conditions in the medical malpractice market and the effects of the
actions that have already been or will be taken, better data need to be
collected, including more comprehensive data on insurers' losses, jury
verdicts in malpractice cases, and conditions in the medical industry that
might affect the incidence and severity of medical malpractice suits.
Without question, the absence of such data complicates the ability of
insurers, regulators, and the Congress to understand current market
conditions and to formulate effective, sustainable solutions.
Contacts and Acknowledgements
(250161)
Mr. Chairman, this concludes our prepared statement. We would be pleased
to answer any questions you or other members of the subcommittee may have
at this time.
For further information regarding this testimony, please contact Richard
J. Hillman at (202) 512-8678 or Kathryn G. Allen at (202) 512-7059.
Individuals from our Financial Markets and Community Investment team
making key contributions to this testimony include Lawrence Cluff, Patrick
Ward, Melvin Thomas, and Andrew Nelson. Individuals from our Health Care
team making key contributions to this testimony include Randy DiRosa and
Corey Houchins-Witt.
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