Medical malpractice insurance premium rates have increased significantly over the past ten years. A crisis of affordability occurs when premium costs increase substantially relative to their historical rate of increase. This crisis had its effect on physicians, patients, and payers.

Statistical evidence suggests that the professional liability insurance component of the Centers for Medicare and Medicaid Services (CMS) Medicare Economic Index Market Basket  real rates increased by 71 percent from 1991 to 2003. The health care market has undergone a great change due to the legal responsibility on physicians. A recent study by the Government Accountability Office (GAO) cites that rising premiums have influenced physicians to move into defensive medical practice wherein they avoid performing high risk surgeries or surgeries which are likely to have complications  at times even in life saving situations. This avoids their legal liability. Physicians are facing the brunt of medical malpractice costs that any other health care professional.

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It is difficult to hold a hospital or other healthcare system liable for a medical error so malpractice awards are usually levied against individual physicians.Average premiums for all physicians nationwide rose by 15 percent between 2000 and 2002, almost twice as fast as total health care spending per person during the same period. (Source: Office of the Actuary at the Centers for Medicare and Medicaid Services, a Congressional Budget Office study. January 2004).Sharp increases in medical malpractice premiums have been affecting health care services such as hospitals, nursing homes and nurse practitioners since the late 1990s. This theory has been researched by the American Hospital Association in March 2003. The survey reports ‘increases of double or more’ in the respondent’s medical malpractice premiums by 48.7 percent of the respondents over the previous two years.

Another 21.4 percent report a rate of increase of between 50 percent and 99 percent during the same period of time. It has been established by the American Health Care Association in 2004 that average medical liability insurance premiums for nursing homes rose by 131, 143 and 51 percent in 2001, 2002 and 2003 respectively. This study clearly suggests medical liability insurance premiums have been on the increase. Nursing homes with fewer than 250 beds were far more affected with a rate hike of greater than 70 percent from 2002 to 2003.Insurance companies also restricted their coverage based on geographic location, area of expertise and provider’s claims history. Some discontinued providing the service.

For example, in late 2001, St. Paul Companies, then the second largest medical malpractice firm in the country announced that the market would be segmented over a two-year period as its existing insurance contracts expired. Their clients included 750 hospitals and 42,000 physicians in 45 states. Other major carriers such as Medical Inter-Insurance Exchange (MIXX), PHICO, Legion, Frontier and Reliance followed the same strategy. These firms altogether had been covering around 14 percent of the national market before their withdrawals from the malpractice insurance market.

This drastic step taken by the insurance firms have worst affected surgeons and internists. Surveys carried out by Medical Liability Monitor show that premium increases for obstetrician/gynecologist, general surgeons and internists was definitely higher that nine percent, hovering in double digits every year between 1999 and 2002. The percentage hike in medical malpractice premiums varied for every field of medical expertise. Internists saw a 62.25 percent hike; general surgeons saw a 58.13 percent increase and OB/GYNs saw a 46.5 percent increase from July 1999 to July 2002.  The increase in annual income was only 28.

45, 39.75 and 32.64 percent over the same period for office-based internists, surgeons and OB/GYNs respectively.Strangely, hikes in malpractice premiums and withdrawals in insurance providers have been unreasonable if geographically analysed. The highest premium increases for internal medicine, general surgery was 38 percent in Wyoming from 2001 to 2002, compared with 113 percent in Virginia.

Internists in rural Pennsylvania saw a 73 percent increase in premiums.  For OB/GYNs in Lackawanna County, Pennsylvania premiums tripled. Hospitals in Pennsylvania reported an 81 percent increase in malpractice insurance premiums from 2001 to 2002. The increase in premium rates was on an average 48 percent in the state’s Northeast region to 115 percent in the Southeast region. In 2003, hospitals in Texas paid $5,500 per bed for medical malpractice insurance premiums and litigation costs. This was almost double the national average of $2,290 per bed. Apart from increase in premium rates, the withdrawals of insurance service providers have also occurred during the same period. In Florida between the late 1990s and 2002, active professional liability providers dropped by more than 80 percent, from 66 to 12.

In Missouri, the Missouri State Medical Association reported that more than 30 insurance companies were qualified to provide liability insurance in 2001, but in 2003 there were only 3. In Arkansas, there were 88 such companies in 1996 and only 9 of them remained in 2003, of which only 4 were writing new policies.The deficiency in such malpractice insurance exposes health care providers to significant financial risks. But they dared to ‘go bare’ (carrying no insurance). In 2004, among the 47,700 physicians in Florida, more than 5 percent did not have malpractice insurance coverage. More than 20 percent in Miami-Dade County also carried no insurance.

In the same year, the American Medical Association (AMA) declared 20 states to be ‘crisis states’, implying that the increase in malpractice insurance premiums are causing physicians to “limit services, retire early, or move to a state with reforms where premiums are more stable.” A 2002 ACOG survey of OB/GYNs reported that 76 percent of respondents in 9 states with a liability insurance crisis have been forced to withdraw, change place, modify their surgical procedures or become more selective in choosing their patients especially in the area of obstetrics. Crises of affordability tend to vary not just across states but also within states by region (urban areas may experience greater increases than rural areas) and clinical specialty (most affected are obstetrics-gynecology, neurosurgery, general surgery, other surgical subspecialties, radiology, orthopedics and emergency medicine).The increasing premium rates or non availability of medical malpractice insurance may also affect the incoming supply of health care professionals in their choice of specialties and area of practice. A 2003 online AMA survey of medical students’ has confirmed such fears. Respondents of this survey have confirmed that 50 percent would take the medical liability circumstances into consideration when they choose their specialty and 39 percent would decide where to practice after medical school depending on the medical malpractice market in the area.

The results of this survey make disastrous implications on the health care market. There would certainly be a reduced supply of health care providers in some specialities and in some geographical areas. If rural areas where family practitioners play a critical role are considered, obstetric branches in hospitals have dropped from 38.6 percent in 1993 to 25.5 percent in 2000.This pattern of premium increase and exit of insurance providers in not new to medical malpractice market. The trend was set in the mid-1970s when medical malpractice insurance premiums were increasing in some areas by as much as 500 percent per year. Intervention from the public and policy-makers was necessitated during this period.

Insurers got tougher with underwriting—they declined to renew policies for doctors who experienced a claim, did not write any new policies, or wrote new policies only for the best risks or withdrew completely from the market. A professional liability insurance crisis also occurred in the mid-1980s which affected not only the medical community but other professions as well. The nationwide cost of physicians’ medical liability insurance tripled in the 1980’s, rising from $1.7 billion in 1982 to $5.6 billion in 1989 The average annual growth rate in physicians’ liability premiums was more than four times the general inflation rate over the same period and also was higher than the medical cost index. Even the rate of increase in inflation rate was lower than the liability premiums. Between 1988 and 1991, premiums paid by community health centers rose from $30 million to $60 million.

One flavor of malpractice crisis is a crisis of availability: insurers exit the market, deciding it is not profitable enough or is too volatile and unpredictable. This phenomenon in the last three decades makes one wonder what the underlying causes are and why earlier efforts aimed at addressing the problems failed to work.Studies do show a high prevalence of error in medicine. Two large studies inspected the probability of in-hospital injuries attributable to negligence. But there is still scope for research in this area. Today’s malpractice crisis differs from previous crisesin that there is a greater public understanding of how often medical error occurs.  In November 1999, The Institute of Medicine’s November 1999 report, To Err Is Human: Building a Safer Health System, brought wide attention to the issue.

The study estimated that 44,000 to 98,000 hospital deaths per year are attributed to medical errors Even the lower estimate of 44,000 placed the number of deaths in hospitals attributable to medical errors were more than those from motor vehicle accidents, breast cancer and AIDS in the same year. The IOM estimates are based on findings of two studies : New York Study and Colorado/Utah Study . The first study analyzed chart data from a large sample of hospital admissions in New York in 1984 and the other that analyzed a smaller yet still substantial sample of hospital admissions in Colorado and Utah in 1992. The proportion of negligence-induced injuries in hospitals was being estimated.

  York and Colorado/Utah studies concluded that 0.9 and 1.1 percent of hospitalizations, respectively, ended with negligent injuries. But these studies do not confirm whether increasing premiums during medical malpractice insurance crises are due to changes in the incidence of negligence. Health care professionals are of the view that errors during treatment are unavoidable. They enjoy the support of insurance providers, while stating that the current medical malpractice insurance crisis is due to LITIGATION.

The juries in the American society are the main reason for the upward trend of insurance premiums and the exit of insurance carriers as they are sympathetic towards the claimants. There is ample statistical evidence to prove this argument. The New York study suggests that 17 percent of medical malpractice claims are due to negligence and the Colorado/Utah study found negligence to be responsible for 22 percent of the claims. Most of the claims are closed in favor of plaintiffs. Only 13.8 percent of plaintiffs received some payment in 2003. The fact of the issue is that the medical professionals were not necessarily responsible but for 30 percent.

In many claims the defendants may challenge the verdict, but this will result in a high financial cost. On average, it costs $87,720 per claim when the defendant prevails in court and even if the case is dropped or dismissed, the cost involved would be $17,408.   In case of such claims which are in favor of the plaintiff, awards amounts have increased substantially. Between 1997 and 2002, the median jury award almost doubled, from $157,000 to $300,000; between 1997 and 2003 the median out-of-court settlement amount doubled from $100,000 to $200,000.Claims with payout more than 1 million dollars has also increased. The Physician Insurers Association of America (PIAA) reported that percentage of million-dollar awards doubled in 1998 and almost 8 percent of all malpractice awards exceeded $1 million in 2003. Litigation is more in certain medical specialties than others.The above theory has been refuted by consumer rights protection groups and trial lawyers.

Their argument is that the current shortage of affordable malpractice insurance is due to crisis in INSURANCE. They have evidence to suggest that the rate of increase in insurance premiums were much higher than the rate of medical malpractice. According to their theory the data sources used by insurance companies and medical professionals are imperfect and the methodologies used are faulty. For example, a recent research paper using the Texas closed claims database found almost no change in the number of paid claims larger than $250,000 between 1990 and 2000, other factors like population growth and inflation remaining constant. Overall jury awards or large claims (>$250,000) did not increase significantly in Texas between 1988 and 2002. However, during this period, medical malpractice premiums increased by 135 percent. The paper thus concluded that the higher malpractice insurance premiums in Texas in recent years most likely reflected changes in the insurance market and not an increase in claim payouts.

In Florida, premiums increased from 33 percent to 150 percent for different specialties in 2001 and 2002. However, data from the Department of Insurance indicate that the average medical malpractice claim was $256,464 in 2002 — almost no change from 1999’s $256,743 figure –, and the total payout was $334.4 million in 2002, even lower than the $379.7 payout in 1999 without adjusting for inflation. Advocates of consumer rights and trial lawyers opine that the prevailing factors in the medical liability insurance market is not influenced by the litigation system in the country. On the contrary, factors such as the insurance business cycle, the profit motive of insurance companies, the fall in their investment income, the need to avoid downgrades and the absence of price pressures were some of the factors influencing hike in premium rates and the withdrawal of some insurance carriers from the market.

For the first two episodes of malpractice premium increases the cause was both the frequency and severity of claims. But in the recent past the frequency of medical malpractice claims appears to have not risen. So this is not a reason for the shortage of affordable liability insurance. A 2003 Department of Justice study of medical malpractice trials and verdicts in large counties in the U.S. did not show much difference in the number of claims filed in state courts in 1996 and 2001. Other research shows claims have increased in absolute terms but the number of claims per physician has not altered or in some cases has declined.

The severity of claims has given rise serious arguments between the insurance company/medical professional camp and the trial lawyer/consumer advocacy camp. The argument is about the accuracy of the data sources. The two main data sources most cited for medical malpractice payouts by insurance companies and health care providers and their trade associations are the Jury Verdict Research (JVR) and PIAA.

There is also a third data source, the National Practitioner Data Bank (NPDB), which is being used only recently. Some benefits of the PIAA data is that it has details on claims that are not ultimately paid. Such data helps in analyzing the percentage of claims ruled in favor of the plaintiff. It also contains information on severity of damage caused, specialty of defendant and type of malpractice related to each claim. This helps in correlating claim frequencies and severity with claim characteristics that are not available in NPDB. But PIAA’s major drawback is that it collects information only from its member companies, and not all member companies respond to data collection requests. It may be stated that the paid medical malpractice claims that are reported to PIAA only account for 12 percent of those reported to NPDB.

NPDB undeniably is the more reliable source for calculating the distribution of payments to medical malpractice claims. The JVR data only include information on cases closed with jury awards. This contributes to 6.75 percent of all malpractice claims, according to PIAA.

This is a major disadvantage of the JVR data as it overestimates the average medical malpractice claim payouts because jury awards are on average higher than out-of-court settlement amounts. Another disparity is that the PIAA reports that the national average of claims won by plaintiffs stood around 14 percent in 2003 while JVR data reveal that 42 percent of claims in their database were won by plaintiffs in 2002. Compared with the third data source, the NPDB, both JVR and PIAA contain a much smaller proportion of medical malpractice claims with a payout. The NPDB, maintained by the Department of Health and Human Services (DHHS), is considered the most all-inclusive source of medical malpractice claim payments. This data source has been compiled by the Health Care Quality Improvement Act of 1986. Data collection started in 1990 and by the end of 2003 DHHS had received around 245,000 reports on medical malpractice cumulatively.

NPDB data’s implications are different from that of the above. Between 1997 and 2000 there was a 35 percent increase, from $100,000 to $135,000, in the median medical malpractice payment. This cannot be viewed as an incredible hike as the growth in the national health-care expenditures was 31 percent over the same period. Even private single-coverage health insurance had increased to 37 percent at this time. The consumer rights activists and trial lawyers attribute a different reason for the incredible increase in premium rates and affordability crisis.

They point hands at the business cycles and under-performing investment markets. It is natural for any industry to thrive on a profit-motive. So when there are returns from the investment and when underwriting generates income, more and more insurance carriers enter the market. Competition builds up which encourages more underwriting and lowering of premiums to improve business. This results in the lessening of profit margin.The insurance companies are forced to react as a consequence by restrictions in underwriting and increments in premium rates.

Due to macroeconomic conditions, the rise in such premium is more for every fall in the investment income. The inefficient companies are then forced to withdraw from the market. At the end  of this cycle, competition is eliminated and surviving companies rule the market and charge higher premiums and a new business cycle starts.

The National Association of Insurance Commissioners’ data analysis shows a fall in the returns from investment from around 5.8 percent in 1998 to 4 percent in 2002, which is 30 percent.  The Americans for Insurance Reform, a nationwide union of consumer, have researched on this topic in 2002 after examining medical malpractice premiums, jury awards, settlement costs and other costs related to medical malpractice lawsuits over the past three decades. The reports concluded that: (1) the medical malpractice insurance payout amount has not increased strikingly but in fact has been unwavering and practically constant after adjusting for inflation in medical costs; and (2) medical malpractice insurance premiums charged by insurance companies have been fluctuating due to the state of the economy, showing a downward trend when the economy was strong and inclining when the economy weakened, thus reflecting insurance companies’ realized and expected investment income from premiums. These reports have been reiterated by the 2003 General Accounting Office study. This study also concludes that investment income was among many factors that contributed to the extreme increases in medical liability insurance premiums although it identified rising medical malpractice claims as the primary cause for rate increases, especially over the long run.The tort system in this country is one of the major reasons for the moderating trends. The tort reform is utilized for compensating victims of accidental injuries caused by another party’s negligence.

In other words, this system is used by patients for compensation when they suffer injury that may be attributed to negligence by a health care provider. But the defendants, called tort feasors, in this case suffer monetary as well as non-monetary cost. The non-financial costs include time and stress involved in defending a tort lawsuit.  This system is basically designed to serve the role of deterring future negligence. Tort reform refers to changes in legislations, at the state or the federal level, with regard to tort liability. These reforms were implanted to get rid of tort pressure by reducing the occurrence and strictness of tort claims. California’s Medical Injury Compensation Reform Act (MICRA) is the most successful among the tort reforms which went into effect in 1975. This is cited as the model for most medical malpractice liability reform.

MICRA fixed a descending scale for attorneys’ emergency fees; shortened the statue of limitations to one year after the detection of an injury or three years after the injury; allowed offsetting of security sources in the final award and periodic payment of future economic damages; and most importantly, capped non-economic damages at $250,000 without adjustment for inflation over time. Efficiency and equality should be the main aim of the tort system.  The advocates of tort reform are of the view that the existing medical malpractice liability system in most states is both expensive and futile in accomplishing the expectations of reimbursement and deterrence. It has not met the efficiency goal according to them . It has also been criticized that the compensation amount rarely reaches the hands of the real victim, under the current medical malpractice liability system. Most of the negligent unfavorable events go unreported.

According to the 1992 Colorado/Utah study, 3 percent of such adverse events in medical treatment were taken to the court. . Out of this 3 percent, more than 75 percent (certainly a high figure) does not contain the negligence element of a tort and therefore were worthless. In 2003, direct medical malpractice costs, including benefits paid or expected to be paid to the party that suffered injury, defense costs and administrative costs, totaled almost $27 billion, or $91 per person living in the United States. This indicates that a major portion of medical malpractice related spending is accounted for by administrative and legal costs. Assuming administrative and legal costs for medical malpractice claims were comparable to those for other tort claims, less than half of the $27 billion would have been collected by medical malpractice claimants in 2003. This medical malpractice liability pressure has also given rise to some unpleasant situations like the practice of defensive medicine.Defensive medicine has been defined as ‘a deviation from what the physician believes is sound practice, and is generally so regarded, induced by a threat of liability’.

This has mainly taken place due to the malpractice threat. The upcoming of defensive medicine is a threat to the well being of society as health care will deteriorate. Defensive medicine can be of two types. Positive defensive medicine is the one where the patient is made to spend unnecessarily. The procedures, laboratory tests are enhanced and extra costs are made to incur. This has increased the nation’s health care expenditures.

Though not correctly measured due to difficulty in measuring, the cost of positive defensive medicine is definitely not small according to different studies. A 1994 Lewin-VHI study estimated defensive medicine costs at $12 billion annually. Kessler and McClellan (1996) estimated the same to be $50 billion. The extra tests and procedures advised by health care professional increased the risk for the patients. As they are medically unnecessary, they cal also be life threatening.

It is estimated that in 2001, about 7.5 million unnecessary surgeries were performed among the top 50 medical and surgical procedures and these surgeries were responsible for more than 37,000 deaths and cost $122 billion (in 1974 dollars).Negative defensive medicine is the case when physicians avoid risk involving surgeries and procedures in order to eliminate chances of bringing a malpractice lawsuit. This attitude of the physicians leads to reduced health care especially to the poor and inaction during life saving situations. Poor people and people in rural areas are more affected. Also patients with such disorders which have a high risk of adverse outcome are greatly affected.

Such compromises in the management of chronic diseases affect the long-term health of communities. In spite of all the precautions taken by the physicians, future negligence is still a possibility. Communication between doctors and patients cease due to the fear of information leakage.  Doctors do not discuss among themselves about their experience with adverse events even though such conversation could benefit not only themselves but their colleagues and patients. Supporters of tort reforms also provide proof to support their theory that some medical malpractice reforms accomplished their goals of cutting both damage awards and malpractice premiums, as a result eliminating liability pressures on health care providers. It is estimated that the average recovery by Alabama plaintiffs decreased by about $20,000 after a $400,000 cap on non-economic damages, a $250,000 cap on punitive damages and a $1 million cap on wrongful deaths were installed in Alabama in 1987.62 The same study also found that the average awards by Alabama plaintiffs almost doubled after the caps were ruled unconstitutional by the Alabama Supreme Court in 1991, 1993 and 1995 respectively. Another study revealed that enacting state-level award caps on non-economic damages or both economic and non-economic damages could lower medical malpractice underwriters’ loss ratio by 11.

7% and their earned premium per physician by 12.7 percent. However, consumer advocacy groups and trial lawyers recommend changes in the regulation of the insurance industry will put an end to the current medical malpractice crisis as it is not a liability crisis.

They cite California’s Proposition 103 as the standard for such regulation. Their view is that Proposition 103, passed in 1988, and not MICRA which went into effect in 1975, has kept medical liability insurance accessible and affordable for medical providers in California. It is evident that California suffered increasing medical malpractice premiums and exit of insurance firms from the state in the mid-1980s, in spite of MICRA being in effect for a decade. From the mid-1970s to the mid-1980s California was closely following the trend of the rest of the country in medical malpractice premiums.

This pattern was disturbed when Proposition 103 was passed in 1988. Since then California’s medical malpractice insurance market has been relatively unwavering. Proposition 103 keeps medical malpractice premiums under control. Their crisis management measures include a 20 percent insurance premium rollback in 1988; a one-year freeze on premiums after the rollback. Further some long term measures include imposing rigid disclosure; necessitating prior approval by insurance companies for premium rate increases; permitting consumers to take legal action on insurance rate hikes; and repealing anti-competitive laws to encourage market competition and reduce individual insurance companies’ authority to fix premium rates. With the help of this Proposition 103, the premium increases proposed by insurance companies have been kept under control by the public and the Insurance Commissioner.

Practical applications of the Proposition 103 are: the rate increase requested by the largest insurance provider in California was cut by 71 percent and the rate increase put forward by the fifth largest medical malpractice insurance provider was cut to almost a third and the rate adjustment proposed by the second largest malpractice underwriter was rejected altogether. The Foundation for Taxpayer and Consumer Rights (FTCR), a nonprofit organization, alone has reportedly cut down increases in physician premium in recent years by nearly $50 million. Using state-level medical malpractice premium data from Medical Liability Monitor (MLM) and malpractice claim payout data from NPDB, Baicker and Chandra the three decades since MICRA was enacted.

Using the seasonally adjusted annual CPI published by the Bureau of Census, a cap of a quarter million dollars in 1975 amounts to $854,000 in 2003, more than three times of the original cap.  The data used in the analysis determine to a great extent the real picture. Consistency in the data available is lacking in this area. There is a need for proper and reliable data on the frequency of claims against health care providers and the severity of malpractice claims measured by total payouts to the injured party. In absence of accurate data it is difficult to establish the relationship between malpractice claims and rapid insurance increases.

It is equally intricate to assert whether tort reforms were effective in curbing premium hikes. The three major data sources for malpractice claims: JVR, PIAA or NPDB do not cover all malpractice claims made against health care providers in the US. These three data sources cater to different aspects. JVR collects data consisting of only claims settled in court; PIAA collects data on both jury awards and cases settled outside of court, but their survey is done on a selected portion of its members. NPDB is more all-inclusive compared to the above two, having vital statistics on all claims against medical practitioners that ended with a positive payout. Some of its restrictions have been pointed out by the 2000 GAO report.

  Their criticisms vary from considerable underreporting and incomplete information to imprecise and even ambiguous information. NPDB does not include malpractice claims made against institutions such as hospitals and nursing homes which are largely responsible for medical malpractice claims.First step to determine the reason for the current medical malpractice crisis is collection of an extensive and comprehensive data. Without the availability of ample data it is impossible to point out whether the medical malpractice crisis is due to an Insurance crisis or Litigation crisis. In spite of this major constraint of non availability of data,   appropriate remedies have to be discovered to tackle the exorbitant increases in medical malpractice insurance premium rate and retrenchment of insurance suppliers. In the absence of proper remedies public health would suffer.

Deterioration in public health, escalation of medical expenditures and non availability of proper health care will be some of issues to be tackled, if affordable medical malpractice insurance worsens.