STATEMENT
OF THE
PHYSICIAN INSURERS ASSOCIATION OF
AMERICA
Presented by
Lawrence E. Smarr, President
Physician Insurers Association of
America
Before a hearing of the
United States House of
Representatives
Committee on the Judiciary
Regarding:
H.R.5 - The Help Efficient,
Accessible, Low-cost, Timely Healthcare (HEALTH) Act of 2003
March 4, 2003
STATEMENT
OF THE
PHYSICIAN INSURERS ASSOCIATION OF AMERICA
Presented by:
Lawrence E. Smarr, President
Physician Insurers Association of America
Before a hearing of the
United States House of Representatives
Committee on the Judiciary
Regarding:
H.R.5 - The Help Efficient, Accessible, Low-cost,
Timely Healthcare (HEALTH) Act of 2003
March 4, 2003
________________________________________________________________
INTRODUCTION
Chairman Sensenbrenner, Congressman Conyers and
Committee Members, I am Lawrence E. Smarr, President of the Physician Insurers
Association of America (PIAA). Thank you
for allowing me the opportunity to appear before you today and speak about the
need for the enactment of H.R.5, The Help Efficient, Accessible, Low-cost,
Timely Healthcare (HEALTH) Act of 2003.
As we all know, professional liability insurance
premiums for doctors and hospitals are rapidly rising in many states to levels
where they cannot afford to pay them.
These increased premiums are caused by the ever-increasing size of
medical liability insurance payments and awards. The unavoidable consequence is that physicians
are moving away from crisis states, reducing the scope of their practices, or
leaving the practice of medicine altogether.
Likewise, hospitals are being forced to close facilities and curtail
high-risk services because they can no longer afford to insure them.
DOCTORS INSURING DOCTORS
The PIAA is an association comprised of professional
liability insurance companies owned and/or operated by physicians, dentists,
and other health care providers.
Collectively, our 43 domestic insurance company members insure over
300,000 doctors and 1,200 hospitals in the United States and our nine
international members insure over 400,000 health care providers in other
countries around the world. The PIAA
member insurance companies can also be characterized as health care
professionals caring for the professional liability risks of their colleagues -
doctors insuring doctors, hospitals insuring hospitals. We believe that the physician owned/operated
company members of the PIAA insure over 60% of America=s doctors.
Unlike the multi-line commercial carriers, medical liability insurance
is all that the PIAA companies principally do, and they are here in the market
to stay.
The PIAA was formed 26 years ago at a time when
commercial insurance carriers were experiencing unanticipated losses and exited
the market, leaving doctors, hospitals and other health care professionals no
choice other than to form their own insurance companies. A quarter century has passed, and I am proud
to say that the insurers who comprise the PIAA have become the driving force in
the market, providing stability and availability for those they insure.
When the PIAA and many of its member companies were
formed in the 1970=s, we faced a professional liability market not unlike
that which we are experiencing today. At
that time, insurers, all of which were general commercial carriers, were
experiencing rapidly increasing losses, which caused them to consider their
continuance in the market. Many of the
major carriers did indeed exit the market, leaving a void that was filled by
state and county medical and hospital associations across the country forming
their own carriers. Again we see the
commercial carriers, such as St. Paul, exiting the market. But, this time, the provider owned carriers
are in place and are indeed providing access to insurance and stability to the
market.
Unfortunately, the recent exodus from and
transformation of the market is of such magnitude that the carriers remaining
do not have the underwriting capacity to take all comers. Facing ever-escalating losses of their own,
many of the carriers remaining in the market are forced to tighten their
underwriting standards and revise their business plans with regard to their
nature and scope of operations. This
includes the withdrawal from recently expanded markets, which adds to the
access to insurance problem caused by carriers exiting altogether.
My goal here today is to discuss what the PIAA sees
as the underlying causes of the current medical liability crisis. I want to stress that I believe that this
situation should be characterized as a medical liability crisis, and not a
medical liability insurance crisis. The
PIAA companies covering the majority of the market are in sound financial
condition. The crisis we face today is a
crisis of affordability and availability of insurance for health care
providers, and more importantly, the resulting growing crisis of access to the
health care system for patients across the country.
INSURANCE INDUSTRY UNDERWRITING
PERFORMANCE
Medical liability insurance is called a long-tail
line of insurance. That is because it
takes on average two years from the time a medical liability incident occurs
until a resulting claim is reported to the insurer, and another two and
one-half years until the average claim is closed. This provides great uncertainty in the rate
making process, as insurers are forced to estimate the cost of claims which may
ultimately be paid as much as 10 years after the insurance policy is
issued. By comparison, claims in
short-tail lines of insurance, such as auto insurance, are paid days or weeks
after an incident.
Over the past three years medical liability insurers
have seen their financial performance deteriorate substantially due to the
rapidly rising cost of medical liability claims. According to A.M. Best (Best), the leading insurance
industry rating agency, the medical liability insurance industry incurred $1.53
in losses and expenses for every dollar of premium they collected in 2001. While data for 2002 will not be available
until the middle of this year, Best has forecast that the industry will incur
$1.41 in losses and expenses in 2002, and $1.34 in 2003. The impact of insurer rate increases accounts
for the improvement in this statistic.
However, Best also calculates that the industry can only incur $1.14 2 in losses and expenses in order to operate on a
break-even basis. This implies that
future rate increases can be expected as the carriers move toward profitable
operations.
The physician owned/operated carriers that I
represent insure a substantial portion of the market (over 60%). Each year, an independent actuarial firm
(Tillinghast Towers-Perrin) provides the PIAA with a detailed analysis of
annual statement data filed by our members with the National Association of
Insurance Commissioners (NAIC). This
analysis is very revealing with regard to the individual components of insurers
financial performance.
Exhibit 1 below details the operating experience of
32 physician owned/operated insurance companies included in the analysis. A widely relied upon insurance performance
parameter is the combined ratio, which is computed by dividing insurers= incurred losses and expenses by the premiums they
earn to offset these costs. For these
companies, this statistic has been deteriorating (getting larger) since 1997,
with major increases being experienced in 2000 and 2001.
EXHIBIT 1
For calendar year 2001, the combined ratio (including
dividends paid) was 141, meaning that total losses and dividends paid were 41%
more than the premiums collected. Even
when considering investment income, net income for the year was a negative ten
percent. This follows a meager 4 percent
net income in 2000. This average
experience is indicative of the problems being experienced by insurers in
general, and demonstrates the carriers= needs to raise rates to counter increasing
losses. All of the basic components of
the combined ratio calculation (loss and loss adjustment expense, underwriting
expense) have risen as a percentage of premium for all years shown. The only declining component has been
dividends paid to policyholders.
To compare this group of PIAA companies with the
industry, Exhibit 2 is taken from the 2002 edition of Best=s Aggregates and Averages. This
shows that medical malpractice is the least profitable property and casualty
line of insurance in 2001, following reinsurance, which has been greatly
impacted by the World Trade Center losses.
The adjusted combined ratio for the entire industry is 153, as compared to
141 for the PIAA carriers represented on Exhibit 1.
EXHIBIT 2
THE ROLE OF INVESTMENT INCOME
Investment income plays a major role for medical
liability insurers. Because medical
liability insurance is a Along tail@ line of insurance, insurers are able to invest the
premiums they collect for substantial periods of time, and use the resulting
investment income to offset premium needs.
As can be seen on Exhibit 3, investment income has represented a
substantial percentage of premium, and has played a major role in determining
insurer financial performance. However,
investment income as a percentage of premium has been declining in recent years
primarily due to historic lows in market interest rates.
EXHIBIT 3
Contrary to the unfounded allegations of those who
oppose effective tort reforms, medical liability insurers are primarily
invested in high grade bonds and have not lost large amounts in the stock market. As can be seen in Exhibit 4, the carriers in
the PIAA survey have been approximately 80% invested in bonds over the past
seven years.
EXHIBIT 4
As shown on Exhibit 5, stocks have averaged only
about 11% of cash and invested assets, thus precluding major losses due to
swings in the stock market. Unlike
stocks, high grade bonds are carried at amortized value on insurer=s financial statements, with changes in market value
having no effect on asset valuation unless the underlying securities must be
sold.
EXHIBIT 5
The experience of the PIAA carriers is confirmed on
an industry-wide basis through data obtained from the NAIC by Brown Brothers
Harriman, a leading investment and asset management firm. Brown Brothers reports that AOver the last five years, the amount medical
malpractice companies has invested in equities has remained fairly
constant. In 2001, the equity allocation
was 9.03%.@ As Exhibit 6
shows, medical liability insurers invested significantly less in equities than
did all property casualty insurers.
EXHIBIT 6
Source: Brown Brothers Harriman & Co., Insurance Industry Asset
Allocation Study using NAIC data
Brown Brothers states that the equity investments of
medical liability companies AYhad returns similar to the market as a whole. This indicates that they maintained a
diversified equity investment strategy.
The Brown Brothers report further states:
Since medical malpractice companies did not have an
unusual amount invested in equities and what they did was invested in a
reasonable market-like fashion, we conclude that the decline in equity
valuations is not the cause of rising medical malpractice premiums.
While insurer interest income has declined due to
falling market interest rates, when interest rates decline, bond values
increase. This has had a beneficial
effect in keeping total investment income level when measured as a percentage
of total invested assets. This is shown
in Exhibit 7 below. Thus, the assertion
that insurers have been forced to raise their rates because of bad investments
is simply not true.
EXHIBIT 7
Source: A.M. Best Aggregates & Averages,
1997 through 2002 Editions,
(Predominantly Medical Malpractice Insurers).
THE INSURANCE CYCLE
Opponents of effective tort reform claim that
insurance premiums in constant dollars increase or decrease in direct
relationship to the strength or weakness of the economy, reflecting the
industry=s investment performance. The researchers at Brown Brothers also tested
this theory, and found no correlation between changes in generally accepted
economic parameters (Gross Domestic Product (GDP) and 5-year treasury bond
rates) with direct medical liability premiums written. In fact, Brown Brothers conducted 64
different regression analyses between the economy, investment yield, and
premiums, and found no meaningful relationship.
The report produced by Brown Brothers states:
Therefore, we can state with a fair degree of certainty
that investment yield and the performance of the economy and interest rates do
not influence medical malpractice premiums.
INSURER SOLVENCY
A key measure of financial health is the ratio of
insurance loss and loss adjustment expense (amounts spent to handle claims)
reserve to surplus. This ratio has
deteriorated (risen) for the PIAA carriers since 1999 to a point where it is
approximately two times the level of surplus, as shown on Exhibit 8 below.
EXHIBIT 8
The relationship between reserves (amounts set aside
to pay claims) and surplus is important, as it is a measure of the insurer=s ability to contribute additional amounts to pay
claims in the event that original estimates prove to be deficient. At the current approximately two-to-one
ratio, these carriers in aggregate are still in sound financial shape. However, any further deterioration in surplus
due to underwriting losses will cause a deterioration in this important
benchmark ratio indicating an impairment in financial condition. Under current market conditions,
characterized by increasing losses and declining investment interest income,
the only way to increase surplus is through rate increases.
Net premiums written as compared to surplus is
another key ratio considered by regulators and insurance rating agencies, such
as A.M. Best. This statistic for the
companies in the PIAA survey has also been deteriorating (rising) since 1999,
showing a 50% increase in the two years ending in 2001. The premium-to-surplus ratio is a measure of
the insurer=s ability to write new business. In general, a ratio of one-to-one is
considered to be the threshold beyond which an insurer has over-extended its
capital available to support its underwritings.
As can be seen on Exhibit 9, this statistic has also
deteriorated, and the carriers in aggregate are approaching one-to-one. As the carriers individually approach this
benchmark, they will begin to decline new risks, causing further availability
problems for insureds. Rate increases
the carriers are taking also have an impact on this important ratio as well as
new business written.
EXHIBIT 9
THE CAUSE OF THE CRISIS
The effects described in the previous pages were
caused by the convergence of six driving
factors making for the perfect storm,
as follows:
_ Dramatic long term paid
claim severity rise
_ Paid claim frequency
returning and holding at high levels
_ Declining market interest
rates
_ Exhausted reserve
redundancies
_ Rates becoming too low
_ Greater proportion of
large losses
The primary driver of the deterioration in the
medical liability insurance industry performance has been paid claim severity,
or the average cost of a paid claim, and their associated expenses. The National Association of Insurance
Commissioners (NAIC) confirmed this in a February 7, 2003 letter to Senator
Judd Gregg, which states in part: AThe preliminary evidence points to rising loss costs
and defense costs associated with litigation as the principal drivers of medical
malpractice prices.@ (letter attached)
EXHIBIT 10
Exhibit 10 shows the average dollar amount paid in
indemnity to plaintiffs on behalf of individual physicians since 1988. The mean payment amount has risen by a
compound annual growth of 6.9% during this period, as compared to 2.6% for the
Consumer Price Index (CPIu). The data
for Exhibit 10, as well as that for slides which follow, comes from the PIAA
Data Sharing Project. This is a medical
cause-of-loss database, which was created in 1985 for the purpose of
identifying common trends among malpractice claims. PIAA member companies use the database for
risk management and patient safety purposes.
To date, over 180,000 claims and suits have been reported to the
database.
Allocated loss adjustment expenses (ALAE) for claims
reported to the Data Sharing Project have also risen at alarming rates. ALAE are the amounts insurers pay to handle
individual claims, and represent payments principally to defense attorneys, and
to a lesser extent, expert witnesses.
Average amounts paid for three categories of claims are shown
below. As can be seen, the average
amount spent for all claims in 2001 has risen to just under $30,000.
EXHIBIT 11
One very troubling aspect of medical malpractice
claims is the proportion of those filed which are ultimately determined to be
without merit. Exhibit 12 shows the
distribution of claims closed in 2001 as reported to the PIAA Data Sharing
Project. Sixty-one percent of all claims
filed against individual practitioners were dropped or dismissed by the
court. An additional 5.7% were won by
the doctor at trial. Only 33.2% of all
claims closed were found to be meritorious, with most of these being paid
through settlement. Of all claims
closed, more than two-thirds had no indemnity payment to the plaintiff. When the claim was concluded at verdict, the
defendant prevailed an astonishing 80% of the time. This data clearly shows that those attorneys
trying these cases are woefully deficient in recognizing meritorious actions to
be pursued to conclusion.
Analyses performed by the PIAA have shown that of all
premium and investment income available to pay claims, only 50% ever gets into
the hands of truly injured patients, with the remainder being principally paid
to attorneys, both plaintiff and defense.
Something is truly wrong with any system that consumes 50% of its
resources to deliver the remainder to a small segment of those seeking
remuneration.
EXHIBIT 12
A review of the average claim payment values for the
latest year reported to the PIAA Data Sharing Project (2001) is revealing. As shown on Exhibit 13, the mean settlement
amount on behalf of an individual defendant was just over $299,000. Most medical malpractice cases have multiple
defendants, and thus, these values are below those, which may be reported on a
per case basis. The mean verdict amount
last year was almost $497,000 per defendant.
EXHIBIT 13
Exhibit 14 shows the mean expense payment for claims
by category of disposition. As can be
seen, the cost of taking a claim for each doctor named in a case all the way
through trial is fast approaching $100,000.
EXHIBIT 14
Exhibit 15 shows the distribution of claims payments
at various payment thresholds. It can be
readily seen that the number of larger payments are growing as a percentage of
the total number of payments.
EXHIBIT 15
This is especially true for payments at or exceeding
$1 million, which comprised almost eight percent of all claims paid on behalf
of individual practitioners in 2001 (Exhibit 16). This percentage has doubled in the past four
years, and clearly demonstrates why insurers are facing dramatic increases in
the amounts they have to pay for reinsurance.
While medical liability insurers are reinsured by many of the same
companies having high losses from the World Trade Center disaster, their
medical liability experience was rapidly deteriorating prior to September 11,
2001.
EXHIBIT 16
In addition to rising claim severity, like all other
investors, medical liability insurers have faced declining market interest
rates. Eighty percent of PIAA insurers= investments are placed in high-grade bonds. Exhibit 17 shows the long-term decline in
high-grade bond earnings. As can be
seen, this is not a recent phenomenon, but a long term trend.
Critics of the medical liability insurance industry
say that insurers= reliance on investment income to offset premiums has
caused turmoil in the marketplace, implying that the use of investment income
is a bad thing. Nothing could be further
from the truth. If insurers did not ever
use investment income to offset premium needs, then rates would always be 30 -
40% higher than otherwise necessary. The
role market interest rates play in determining pricing in medical liability
insurance (and other lines as well) is a fact of life which we cannot control.
EXHIBIT 17
THE ANSWER
Medical liability insurers and their insureds have
faced dramatic long-term rises in paid claim severity, which is now at
historically high levels. Paid claim
frequency (the number of paid claims) is currently remaining relative constant,
but has risen significantly in some states.
While interest rates will certainly rise and fall in future years,
nothing has been done over the past three decades to stem the ever-rising
values of medical malpractice claim payments or reduce the number of meritless
claims clogging up our legal system at great expense - except in those few
states that have effective tort reforms.
In many states not having tort reforms, costs have truly become
excessive, and insurers are forced to set rates at levels beyond the abilities
of doctors and hospitals to pay. States
having tort reforms, such as California, provide a compelling example that
demonstrates how such reforms can lower medical liability costs and still
provide adequate indemnification for patients harmed as a result of the
delivery of health care.
The following reforms are those which the PIAA
advocates be adopted at the federal level, which we also feel should be the
standard for any state reforms enacted.
They are based on the reforms found in the Medical Injury Compensation
Reform Act (MICRA) which became effective in California in 1976 and which have
been successful in compensating California patients and ensuring access to the
health care system since their enactment.
EXHIBIT 18
The keystone of the MICRA reforms is the $250,000 cap
on non-economic damages (pain and suffering) on a per-incident basis. Under MICRA, injured patients receive full
compensation for all quantifiable damages, such as lost income, medical
expenses, long-term care, etc. In
addition, injured patients can get as much as one-quarter million dollars for
pain and suffering. Advising juries of
economic damages that have already been paid by other sources serves to reduce
double payment for damages. An important
component of MICRA is a reasonable limitation on plaintiff attorney contingency
fees, which can be 40% or more of the
total amount of the award. Under MICRA,
a trial lawyer must be satisfied with only a $220,000 contingency fee
for a $1 million award.
A Gallup poll published on February 5, 2003 by the National
Journal indicates that 57% of adult Americans feel there are too many
lawsuits against doctors, and 74% feel that we are facing a major crisis
regarding medical liability in health care today. Seventy-two percent of respondents favored a
limit on the amount that patients can be awarded for their emotional pain and
suffering. Only the trial lawyers and
their front groups disagree, seeing their potential for remuneration being
reduced. Especially displeasing to them
is MICRA=s contingency fee limitation, which puts more money
in the hands of the injured patient (at no cost reduction to the insurer).
The U.S. House of Representatives adopted legislation
containing tort reforms similar to MICRA, including a $250,000 cap on
non-economic damages, for the seventh time in September of last year. HR 4600, known as the HEALTH Act, was
introduced and adopted on a bi-partisan basis.
The Congressional Budget Office (CBO) conducted an extensive review of
the provisions of HR 4600, and reported to Congress that if the reforms were
enacted, AYpremiums for medical malpractice insurance ultimately
would be an average of 25 percent to 30 percent below what they would be under
current law.@
The CBO found that HR 4600 reforms would result in
savings of $14.1 billion to the federal government through Medicare and other
health care programs for the period 2004 - 2012. An additional $7 billion of savings would be
enjoyed by the states through their health care programs. The CBO=s analysis did not consider the effects that federal
tort reform would have on reducing the incidence of defensive medicine, but did
acknowledge that savings were likely to result.
EXHIBIT 19
The US Department of Health and Human Services
published a report on July 24, 2002, which evaluated the effects of tort
reforms in those states that have enacted them.
As stated in Exhibit 20, HHS found that practitioners in states with
effective caps on non-economic damages were currently experiencing premium
increases in the 12 - 15% range, as compared to average 44% increases in other
states.
EXHIBIT 20
Annual data published by the National Association of
Insurance Commissioners (NAIC) also documents the savings California
practitioners and health care consumers have enjoyed since the enactment of
MICRA over 25 years ago. As shown in
Exhibit 21, total medical liability premiums reported to the NAIC since 1976
have grown in California by 167%, while premiums for the rest of the nation
have grown by 505%. These savings can
only be attributed to MICRA.
EXHIBIT 21
These savings are clearly demonstrated in the rates
charged to California doctors as shown in Exhibit 22. Successful experience in California and other
states makes it clear that MICRA style tort reforms do work without lowering
health care quality or limiting access to care.
EXHIBIT 22
PROP 103 HAD NO EFFECT ON CALIFORNIA MEDICAL
LIABILITY PREMIUMS
In an effort to derail desperately needed tort
reforms as described above, the Association of Trial Lawyers of America and
related individuals and groups have stated that the beneficial effects of MICRA
as shown on Exhibit 21 are due to Proposition 103, a ballot initiative passed
in 1988 aimed primarily at controlling auto insurance costs. The ballot initiative passed by a 51%
majority vote, with voters in only 7 of California=s 58 counties approving the measure. The major changes made by Prop 103 include:
_ Making the insurance
commissioner of California an elected, rather than appointed, official;
_ Giving the insurance
commissioner authority to approve rate changes before they can take effect;
_ Requiring insurers to
reduce rates by 20 percent from their levels on November 8, 1987;
_ Requiring auto insurance
companies to offer a 20 percent Agood driver discount.@
_ Requiring auto insurance
rates to be determined primarily by four factors;
_ Allowing for payment of Aintervenor fees@ to outside groups that intervene in hearings
conducted by the Department of Insurance.
Medical liability insurers were not the intended
target of Prop 103, but were covered by the resulting regulations. However, Prop 103 did not have any
substantive effect on reducing medical liability insurance rates. Prop 103 did have the effect of freezing most
insurance rates in California until as late as 1994. This all came at a time
when medical liability insurers across the nation were seeing their rates level
off or even decline.
Prop 103 added a provision to the California
Insurance Code at Section 1861.01, which required insurers to roll back their
rates to 20 percent lower than those in effect on November 8, 1987. However, this is not what happened to medical
malpractice insurers.
One major California insurer, the NORCAL Mutual
Insurance Company reached the very first consent agreement of any insurer with
the California Department of Insurance in November of 1991. To satisfy the requirements of Prop 103,
NORCAL was specifically permitted to declare a one-time 20% return of premium
for policyholders insured between November 8, 1988 and November 8, 1989 as a
dividend by March 31, 1992. NORCAL was
not required to roll back its rates as a result of Prop 103. As NORCAL was already paying dividends
exceeding 20% per year during the period in question, no additional monies were
returned to policyholders as a result of Prop 103. The experience of other California physician
owned companies, such as The Doctors= Company and the Medical Insurance Exchange of
California, was similar to that of NORCAL.
Even if California medical liability insurers had been required to
reduce rates by 20%, this in no way could explain the wide gap in experience
shown on Exhibit 21.
CONCLUSION
Increasing medical malpractice claim costs, on the
rise for over three decades, have finally reached the level where the rates
that insurers must charge can no longer be afforded by doctors and
hospitals. These same doctors and
hospitals cannot simply raise their fees, which are limited by government or
managed care companies. Many doctors
will face little choice other than to move to less litigious states or leave
the practice of medicine altogether.
Legislators are now challenged with finding a
solution to the medical liability insurance affordability and availability
dilemma - a problem long in coming that has truly reached the crisis
stage. The increased costs being experienced
by insurers (largely owned/operated by health care providers) are real and
documented. It is time for Congress to
put an end to the wastefulness and inequities of our tort legal system, where
only 50% of the monies available to pay claims are paid to indemnify the only
30% of claims filed with merit and the expenses of the remainder. The system works fine for the legal
profession, which is why trial lawyers and others fight so hard to maintain the
status quo.
The PIAA strongly urges members of the House to pass
effective federal health care liability reform, thereby stopping the exodus of
health care professionals and institutions which can no longer afford to fund
an inequitable and inefficient tort system which benefits neither injured
plaintiffs or the health care community.