Testimony for Missouri Department of Insurance Hearing on Medical Malpractice

Kathleen Pinkham, President
Healthcare First, a division of Arthur J. Gallagher & Co.
Kansas City

John Keane, President
The Keane Insurance Group, Inc.
St. Louis

We are pleased to submit this testimony today to express our view of the medical malpractice issues in Missouri. The issues surrounding medical malpractice are important to all Missourians.

Certainly, there is no lack of opinion on what is happening.

Doctors see skyrocketing premiums for medical malpractice insurance. They see their choices as ranging from dropping high-risk procedures to moving to another state to practice medicine, and even to ceasing practice entirely. Certainly, no one favors any of these choices, which can reduce the quality and even the availability of healthcare for Missourians.

Insurers see a legal environment that makes it difficult -- some have determined impossible -- to do business in the state of Missouri. We can assure you: No responsible insurer wants to threaten its very business base and its opportunity to provide insurance coverage in Missouri by doing anything other than appropriate and responsible assumption of these risks.

Caught in the middle are two groups: Missouri residents who want access to doctors while also wanting options for recourse when medical mistakes are made. And Missouri physicians, who seek to practice their profession and provide healthcare to Missourians without fear.

From whatever point one may view this situation, we can all agree that the current state of affairs hurts everyone and threatens to disrupt medical care.

That’s why we believed it was so important to participate in today’s hearing. As representatives of organizations that assess the legal culpability of medical and physician practices and then assume those risks by providing insurance, we come to this discussion with unique qualifications.

Nationally, Arthur J. Gallagher & Company insures more than 50,000 physicians. The Keane Insurance Group insures more than 2,100 physicians primarily in Missouri and Illinois.

In Missouri, combined, Gallagher and Keane in 2001 insured more than 3,000 physicians with more than $30 million in written premiums.

But that’s not the whole story. As program managers as well as brokers for medical practices, we each advise physicians on how they can pay reasonable premiums, if not lower their rates. As malpractice program managers, we work with insurance companies to underwrite risks and to develop criteria to set premiums.

As you can well imagine, this has not been easy for much of the past two years. It is the broker’s job to advise physicians regarding their options when faced with significant premium increases. The realities of the medical malpractice marketplace have made that much more complicated process.

As good stewards, it has been our practice to advise doctors of premium rate increases well before the deadline to renew their policy and seek alternatives. Many times, we seek quotes several months before renewal only to find insurance companies overwhelmed with requests. As a result, some quotes may finally arrive only one day before renewal.

In the meantime, physicians may independently seek options and sign on to a policy with only the premium cost in mind. Consequently, brokers are often caught in the middle as insurance companies raise rates and our physician clients desperately seek options.

Brokers make their livings not by raising premiums, but by researching the insurance markets that it is their business to know and by making sure that their clients are adequately covered for any risk they may have. Using this approach, we have worked very hard to find coverage for our physician clients in this difficult and unpredictable environment.

Realities of the Insurance Economy
What is that environment? Why are premiums going up?

Medical malpractice insurers – indeed, all insurance companies – must maintain adequate reserves to cover a loss that an insured may sustain. Managing these reserves includes investing the money responsibly and prudently, not only to maintain reserves but also to underpin profitability, the fundamental underlying motive for the conduct of business in our nation. Further, we must maintain these reserves for the long term to pay claims that may take three to five years to resolve.

It is no secret – indeed, it is an understatement to say -- that investments have been difficult to manage the past two years. Everyone – from the state to charitable foundations to individuals who invest in 401(k) pension plans – has been affected by the slumping economy since 2000. Insurance companies are not immune from this economic reality.

In good economic times, insurers pass the benefits of their investment success to customers in the form of lower premiums. Insurers with very competitive rates are very popular with physicians in good economic times because premiums are low. Rates are lower because insurers who manage their investments profitably can afford to charge an insurance premium that does not truly account for the level of risk being assumed.

Now, of course, our nation is in an economic downturn. These same insurers must return to pure underwriting approaches, where premiums produce enough reserves to cover claims. This is a good and prudent situation, since it ensures that there will be reserves to cover claims, so that the doctor and the patient are appropriately protected. Unfortunately, however, it usually means higher premiums must be charged than could be charged when investment income helped bolster reserves.

Essentially, then, those companies who charged lower premiums and saved physicians dollars in the good times now must raise premiums to a level that creates reserves adequate to pay clams in the bad economic times.

But there’s more. Dramatically higher jury awards and settlement costs are the rule, rather the exception, particularly for pain and suffering. As Donald Zuk, president of SCPIE Cos., California’s second-largest medical malpractice insurer, stated in this week’s edition of BestWeek, a respected trade journal, “nobody can calculate the potential pain and suffering cost “because one jury will look at it one way, and another will look at it differently.”

The effect is more than dramatic; it is potentially disastrous. Nationally, according to A.M. Best Company Inc., a leading insurance rating firm, medical malpractice insurers in 2001 paid $139 in claims for every $100 in premiums collected. That loss ratio, as we call it in the industry, is expected to rise again in 2002. Further, a firm called Jury Verdict Research reports that the median jury award for medical malpractice rose 43 percent from 1999 to 2000 and was higher than $1 million for the first time ever.

The immediate future does not bode well for those companies that will continue to offer medical malpractice insurance in Missouri. Trends -- positive or negative -- take three to five years to take hold. It takes a few years beyond that point for changes to take effect due to lag times associated with rate filing and the practice of implementing those changes only at the renewal of the policy. We can expect the current situation to continue for at least another 18 to 24 months.

No wonder A.M. Best points to medical malpractice as the worst performing line of property and casualty insurance. And no wonder that, in this environment, many insurers have chosen to withdraw from the market, exerting even more pressure on those few remaining companies that do offer medical malpractice insurance.

Reacting to Economic Pressure

These few remaining companies have responded to market conditions by substantially raising the bar when it comes to renewing and selling new policies. We have found in some parts of the state that physicians are able to renew policies at very reasonable rates. In other parts of the state, however, physicians are faced with either triple-digit increases or no options at all in the standard market.

Claims history also has dramatically affected cost and availability. Medical malpractice insurance companies in Missouri are tightening their underwriting standards, effectively eliminating a middle range of physicians who have never had problems before with their claim history. We’ve seen some companies accept only those physicians who have not had a claim for 10 years.

All of these factors are forcing many physicians into the non-standard insurance market, where the options are even less appealing. Such coverage is extremely expensive, the coverage very narrow, and the deductibles are high.

Physicians find themselves caught in a crunch, and their consternation is understandable. After all, premiums are exploding for all physicians, especially for specialists providing high-risk services.

Because of this situation, we’re seeing in Missouri what is happening in other states. Doctors are dropping high-risk procedures; they’re retiring early or seeking a more hospitable practice environment in another state.

While the situation you’ve heard described in this hearing today appears grim from the physicians’ perspective, there are solutions. Those solutions come with an understanding of the problem, specifically as it relates to Missouri. Understanding the true nature of the Missouri situation requires an accurate assessment of the facts.

The Missouri Market: The Facts

In announcing today’s hearing and its purpose, the department indicated the number of companies writing coverage for Missouri doctors rose from 27 to 32 in 2001.

In fact, the number of companies actively soliciting and accepting medical malpractice risk for standard market positions is much lower – fewer than five companies are carrying the brunt of this market.

In the department’s just released 2001 Missouri Medical Malpractice Insurance Report, the top six companies listed represented 87% of the market. Of those six, St. Paul Fire & Marine Insurance Co. stopped writing medical malpractice policies in early 2002, and Chicago Insurance Co. did so just this August. Those two companies represented 27% of the market in 2001.

The market leader with 26% of premium written in the state in 2001 was Intermed Insurance Co., according to the department’s report. Intermed is not writing any new business in Missouri now.

In the same announcement, the department said insurance companies calculate rates based on national experience, leading to higher rates. That’s not entirely the case.

Take, for example, Gallagher’s experience with Chicago Insurance. As a relatively new player in the Missouri market, Chicago Insurance had little premium and loss data specific to the state. Instead, the company based it rates on national experience to the extent where that experience was credible in Missouri. To complement this effort, the company employed a pure premium method, comparing the cost associated with providing coverage among leading writers in the state.

You can see in this example, then, that Chicago Insurance did what any good insurer would do: Gather as much credible data as possible based on as much local and national experience as possible. It was not simply relying on national data. The company established rates that best met the realities of the Missouri market.

The Missouri Legal Environment

Another factor to consider – higher judgments are allowed in Missouri due to joint and several liability and the erosion of the state’s cap on non-economic damages.

Joint and several liability allows an injured party to collect damages from multiple sources. Reform of this approach would eliminate the search for “deep pockets” and reduce the number of lawsuits against those minimally liable or otherwise on the edges of a medical situation.

The cap on non-economic damages in Missouri should be $250,000, a level found to be effective in California and other states in keeping malpractice insurance rates under control. At the same time, patients seeking recourse for medical mistakes still found they could have their issues addressed in a court of law.

The California Example

The California situation, in our view, is one that Missouri should emulate because it is an example of the good things that can happen when an environment is created in which medical malpractice insurance can be made available at the right price and the right service levels.

In the 1960s and early ‘70s, medical liability costs increased by 400% to 600% for some California physicians, the newsletter BestWeek reported this week.

In 1975, the Medical Injury Compensation Reform Act (MICRA) was passed to address much the same type of medical liability crisis Missouri is experiencing today.

In addition to establishing a $250,000 cap on non-economic damages, MICRA limited contingency fees to 40% of the first $50,000 awarded, 33% of the next $50,000, 25% of the next $500,000 and 15% of any amount greater than $600,000.

Patients are required to file a lawsuit within a year of discovering the injury and within three years of occurrence. They are required to file notice of intent to file a suit 90 days before filing. Among other provisions, binding arbitration of disputes is mandated.

To its credit, Missouri law already contains two provisions found within MICRA:

1. A collateral source provision, allowing doctors and defense attorneys to inform juries when an injured patient is already receiving compensation from another source, such as an insurer or family member. This avoids a plaintiff recovering compensation twice for the same injury.

2. Periodic payments for future damages, such as lost income, rather than in one lump sum. Insurers can then purchase discounted annuities to cover the costs, rather than drawing from reserves.

Since MICRA was passed in 1975, liability insurance premiums have been stabilized, even reduced for California physicians. It has created a reliable and predictable environment where insurers can offer policies at reasonable rates. And injured patients receive compensation more quickly. Virtually everyone, including groups organized to protect the rights of patients, are on record as supporting the results of such legislation.

Recommendations

For the insurance industry, we believe effective management of claims portfolios, combined with what we hope will be an improving economy, will allow for reasonable rates. At the same time, we must see improved underwriting management and a more predictable legal environment to create consistency in adjudication of professional liability claims and expected numbers and size of claims.

For physicians, we submit that improved risk management is an important piece of the solution. Granted, there are times a physician can practice good medicine with a bad result. Still, physicians must incorporate risk management standards throughout their practices and demonstrate reductions in the number of adverse outcomes and “near misses.”

For the state, we recommend the following:

* A change in joint and several liability provisions of Missouri law.

* A cap of $250,000 cap for non-economic damages.

* A standardized application form for medical malpractice insurance.

* Improved management of companies exiting the Missouri market, including a required renewal of policies until that insurance can be replaced.

* Better state rules regarding whom is responsible today for claims filed for actions in the distant past.

Finally, we recommend creating the mechanism for the establishment of a Joint Underwriting Association as an insurer of last resort for Missouri physicians. Such a vehicle reinforces confidence in the market by demonstrating to physicians and insurers alike that a mechanism is in place to protect physicians of all kinds and all specialties against medical malpractice claims.

All of this is possible. California sets the standard, and other state legislatures are following that example even as we speak here today. You can be assured that Healthcare First, Arthur J. Gallagher & Co. and The Keane Insurance Group will monitor this process in Missouri and is ready to assist or offer comment, as you desire in the interest of creating a vibrant and responsible medical malpractice insurance market in the state.

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