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Medical Malpractice Update
Prepared For: CAS Annual Meeting 2003New Orleans
Prepared By: Carl X. Ashenbrenner, FCAS, MAAAMilliman USA
Sarah Dore, CPCUIndependent Consultant
Kathy PinkhamHealthcare FirstA Division of Arthur J. Gallagher & Co. – Kansas City
November 10, 2003
2 2
Overview of Presentation
Profile of the National Medical Malpractice Market
Current State of the Medical Malpractice Market
What the future holds – Solutions and Forecasts
Closing Thoughts & Questions
Attachments
3 3
Topic #1:Profile of the National Medical
Malpractice Market
4 4
Property/Casualty Direct Premiums Written by Line - 2002(Amounts in $000s)
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$160,000,000
HomeownersMultiple Peril
Private-PassengerAuto Liability &Physical Damage
Commerical AutoLiability &
Physical Damage
MedicalMalpractice
Other Property andCasualty
WorkersCompensation
34.72%35.34%
6.66%
10.60%
2.20%
10.49%
5 5
*Estimated per A.M. Best using net written premium
National Medical Malpractice MarketGrowth in Direct Written Premium
199119921993199419951996199719981999200020012002
National Medical Malpractice MarketGrowth in Direct Written Premium
Direct Written Premium (Billions)
3.2%
5.9% 4.9% 11,4% 5.2% 13.2%
52.8%
26.5%9.8%
6.5% (4.6%) (3.0%) 3.9% 6.7%
9.7% 3.2% (1.5%) (0.9%) 3.0% (0.4%) 4.9%
15.6%
22.5%
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
6 6
National Medical Malpractice Market in 2002
With withdrawal from the market of the largest writer, the expectation was that the market share of the specialty writers (the so – called “bed pan mutuals”) would increase as this business was absorbed
As the next slide illustrates, the growth in market share was driven by the multi – line commercial writers rather than the specialty writers
7 7
National Medical Malpractice MarketCommercial Carriers vs. Specialty Writers in 2001 and 2002
2001 2002
Multi-Line Commercial
Writers42%
Publicly Traded Specialty Writers
14%
Non-Publicly Traded
Specialty Writers
44%
Multi-Line Commercial
Writers35%
Publicly Traded Specialty Writers
20%
Non-Publicly Traded
Specialty Writers
45%
Based on Distribution of Top 20 Writers
8 8
Profitability of the National Medical Malpractice Market
Underwriting Results
Investment Results
Overall Profitability
9 9
National Medical Malpractice MarketHistorical Combined Ratio
0.0%
25.0%
50.0%
75.0%
100.0%
125.0%
150.0%
175.0%
19781979
19801981
19821983
19841985
19861987
19881989
19901991
19921993
19941995
19961997
19981999
20002001
2002
Loss LAE Expense Dividend
1010
National Medical Malpractice MarketInvestment Gain Ratio
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1111
National Medical Malpractice MarketPre-Tax Operating Margin
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1212
Myth or Reality?
There is a public perception that malpractice premiums are increasing to cover the losses that insurance carriers have suffered in the stock market
The reality is, that while investment returns are down, this is driven by a decline in interest rates, and not the stock market The overwhelming majority of invested assets for the
specialty carriers are in fixed income securities
1313
Medical Malpractice Specialty WritersComposition of 2002 Invested Assets
Other11%
Bonds77%
Affiliated Stock3%
Stocks9%
Bonds Stocks Affiliated Stock Other
14
Medical Malpractice Specialty WritersSummary of Yearly Change in A.M. Best Ratings
Change CategoriesYear No Change Upgraded Downgraded Change to NR-x* Total2000 50 3 3 0 562001 43 6 7 0 562002 42 2 8 2 542003 33 1 14 5 53
* x = 1 - 5Source: Yearly publication of Best's Key Rating Guide
15
Insolvencies in the Medical Malpractice Market1992-2003
0
1
2
3
4
5
6
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1616
Insolvency Conclusion
Most companies that went insolvent were domiciled in “crisis” states
Most of these states have prior approval rate filing
Many of the larger companies that went insolvent expanded rapidly into new markets/territories/states before insolvency
1717
Topic #2: Current State of the Medical
Malpractice Market
1818
National Medical Malpractice MarketTop 20 Writers - 1978
1978 NetWritten
Rank Company Premium Market Share1 St. Paul Group $137,564,000 11.3%2 Aetna Life & Cas Grp 113,539,000 9.3%3 Medical Liability Mutual Insurance Company 99,340,000 8.2%4 Farmers Ins Grp 95,719,000 7.9%5 Medical Protective 71,219,000 5.9%6 Hartford Ins Group 54,092,000 4.4%7 Teledyne Group 53,904,000 4.4%8 Chubb Grp of Ins Cos 43,170,000 3.5%9 Illinois State Med Interins Exch 38,522,000 3.2%10 PHICO Group 24,660,000 2.0%11 CNA Insurance Companies 24,022,000 2.0%12 NORCAL Mutual Insurance Company 23,882,000 2.0%13 Southern California Physicians Ins Exch 22,310,000 1.8%14 Medical Interinsurance Exchange 21,558,000 1.8%15 The Doctors Company Interins Exch 19,456,000 1.6%16 American International Group 18,909,000 1.6%17 Pennsylvania Medical Society Liab Ins Co 17,289,000 1.4%18 PICO Group 16,511,000 1.4%19 Florida Physicians Insurance Reciprocal 14,599,000 1.2%20 USF&G Group 14,561,000 1.2%
Total Top 20 $924,826,000 76.0%Total US $1,216,217,000 100.0%
1919
National Medical Malpractice Market
Top 20 Writers
2002 Direct Written PremiumRank Company ($000's) % Growth Type of Company Market Share
1 MLMIC Group $958,842 36.1% Specialty - Mutual 10.7%2 American International Group 642,410 180.0% Multi-Line - Public 7.2%3 Ge Global Insurance Holding Company 633,229 56.4% Multi-Line - Public 7.1%4 Proassurance Corp Grp 443,275 30.5% Specialty - Public 5.0%5 Zurich American Ins Group 416,496 31.8% Multi-Line - Public 4.7%6 Doctors Company Group 404,949 49.1% Specialty - Reciprocal 4.5%7 Health Care Indemnity Inc 340,927 18.5% Specialty - Captive 3.8%8 CNA Insurance Group 329,422 31.2% Multi-Line - Public 3.7%9 FPIC Insurance Group Inc 291,530 44.6% Specialty - Public 3.3%
10 ISMIE Group 260,757 25.5% Specialty - Mutual 2.9%11 Norcal Group 246,744 -0.7% Specialty - Mutual 2.8%12 St. Paul Companies 217,997 -62.6% Multi-Line - Public 2.4%13 Mag Mutual Insurance Group 212,654 65.3% Specialty - Mutual 2.4%14 Allianz Insurance Group 207,381 -11.0% Multi-Line - Public 2.3%15 Markel Corporation Grp 186,205 123.7% Multi-Line Public 2.1%16 Physicians Reciprocal Ins 185,332 8.7% Specialty - Reciprocal 2.1%17 Promutual Companies 179,791 31.1% Specialty - Mutual 2.0%18 Fairfax Financial 177,194 105.4% Multi-Line - Public 2.0%19 A.P. Capital 176,627 19.9% Specialty - Public 2.0%20 State Volunteer Mutual 163,859 36.3% Specialty - Mutual 1.8%
Total Top 20 $6,675,621 23.4% 74.8%Total US $8,928,252 22.5% 100.0%
2020
National Medical Malpractice MarketTop 10 States
2002
Rank State
Direct Written Premium ($000's)
Market Share by State
Market Share of Top 2 Writers
1 New York $1,079,014 12.1% 68.6%2 Florida 825,203 9.2% 35.5%3 California 797,544 8.9% 36.4%4 Texas 583,954 6.5% 36.9%5 Illinois 556,041 6.2% 54.3%6 Pennsylvania 462,574 5.2% 39.8%7 Ohio 461,462 5.2% 26.7%8 New Jersey 415,865 4.7% 67.4%9 Georgia 315,961 3.5% 50.1%
10 Tennessee 291,865 3.3% 55.4%Total Top 10 $5,789,483 61.2% XXTotal US $8,928,252 100.0% 17.9%
2121
Direct Written PremiumTop Ten
Second Ten
Third Ten
Fourth Ten
Remainder of States
National Medical Malpractice – Rankings of Premium by State
2222
The AMA’s Crisis States In June of 2002, the American Medical Association released the results of a survey of its members, intended to evaluate the impact of the Professional Liability market on Access to Healthcare
The survey focused on whether the Professional Liability market was causing physicians to: Leave their current state of practice; Retire early; or Abandon high – risk services
Based on the survey results, the AMA classified: 12 states as in crisis 30 states (plus D.C.) as showing problem signs 8 states currently ok
2323
The AMA’s Crisis States In March of 2003 the AMA updated its survey results:
18 states in crisis 26 states (plus D.C.) showing problem signs 6 states currently ok
In July of 2003 the AMA again updated its survey results: 19 states in crisis 25 states (including D.C.) showing problem signs 6 states not experiencing problems
• Note: In August of 2003, one of these six states (Indiana) indicated a 72.6% increase would be implemented in fees for its patients compensation fund
2424
State of the Med Mal Industryas of July 2003
States in crisis
States showing problem signs
States showing no problem signs
Source: American Medical Association
19
25
6
2525
AMA States Identified as not Experiencing Problems -
Existence of Patients Compensation Fund and/or Cap on Damages
Existence PCF Statutory Limitationsof Attachment Non-Economic Total
State PCF Point Damages DamagesCalifornia No $250,000 NoneColorado No $250,000 $1,000,000Indiana Yes $250,000 None $1,250,000Louisiana Yes $100,000 None $500,000*New Mexico Yes $200,000 None $600,000*Wisconsin Yes $1,000,000 $350,000 (i) None* Total Damages Excludes Future Medical Costs
(i) Cap indexed with inflation
26
Big Newsin
Small Town
MUST SELL TO PAY
MALPRACTICE INSURANCE
MUST SELL TO PAY
MALPRACTICE INSURANCE
2727
Crisis is Real
Affordability IssueDoctors closing practices
Doctor’s Dilemma Insurers cannot make a profit and doctors
cannot afford the coverage. Rate increases are not the answer. The industry has to find a new way to manage the risk.
Extreme Measures RRGs, New Companies, Off-Shore Insurers
2828
Medicare vs. Malpractice Rates
Two major problems in current market: Affordability Availability
To address affordability, we compared Medicare reimbursement rates to medical malpractice rates for different states and specialties
2929
Medicare Reimbursement Rates
Overview of Rating ProcessThree cost factors for each procedure:
Work Expense Malpractice
Relativities by state/territory for each of the three factors
3030
Medicare vs. Malpractice Rates
Comparison Medical Malpractice Rates to Medicare Reimbursement Rates
Southern California - Internal Medicine
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Malp
racti
ce M
anua
l Rate
$0
$10
$20
$30
$40
$50
$60
$70
Medi
care
Reim
burs
emen
t
Manual Rate Medicare Reimbursement
Comparison Medical Malpractice Rates to Medicare Reimbursement Rates
Cook County, IL - Internal Medicine
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Malp
racti
ce M
anua
l Rate
$0
$10
$20
$30
$40
$50
$60
$70
Medi
care
Reim
burs
emen
t
Manual Rate Medicare Reimbursement
3131
Medicare vs. Malpractice Rates
Comparison Medical Malpractice Rates to Medicare Reimbursement Rates
Cook County, IL - OB/GYN
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Malp
racti
ce M
anua
l Rate
$0
$500
$1,000
$1,500
$2,000
$2,500
Medi
care
Reim
burs
emen
t
Manual Rate Medicare Reimbursement
Comparison Medical Malpractice Rates to Medicare Reimbursement Rates
Cook County, IL - Internal Medicine
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Malpr
actic
e Man
ual R
ate
$0
$10
$20
$30
$40
$50
$60
$70
Medic
are R
eimbu
rseme
nt
Manual Rate Medicare Reimbursement
3232
Medicare vs. Malpractice Rates
Comparison Medical Malpractice Rates to Medicare Reimbursement Rates
Dade County, FL - General Surgery
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Malp
racti
ce M
anua
l Rate
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
Medi
care
Reim
burs
emen
t
Manual Rate Medicare Reimbursement
Comparison Medical Malpractice Rates to Medicare Reimbursement Rates
Dade County, FL - OB/GYN
$0
$50,000
$100,000
$150,000
$200,000
$250,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Malpr
actic
e Man
ual R
ate$0
$500
$1,000
$1,500
$2,000
$2,500
Medic
are R
eimbu
rseme
nt
Manual Rate Medicare Reimbursement
3333
Conclusions and Observations
Medicare reimbursement rates declined for higher risk specialties (Surgery and OB/GYN) while Medical Malpractice rates increased substantially
Reimbursements not keeping up with medical malpractice rates
Medicare reimbursements slow to changes
3434
Conclusions and Observations….(Continued)
Higher severity specialties getting less reimbursement
Will need to see more patientsUse extenders more oftenMay lead to increased claims and severity
3535
Topic #3:What the Future Holds – Solutions and Forecasts
3636
Historical Problems
1970’s - Multi-line companies withdrew from the market – availability problem Solution - Physician owned insurers were
formed
1980’s – Rates increased substantially after prolonged soft market (affordability) Solution – Form changed from Occurrence to
Claims-Made coverage
3737
Current Problems
Companies withdrawing – availabilitySubstantial rate increases – affordabilityCapacity ConstraintsClaim Severity increasingHealthcare process – physicians must see
more patients or use extendersNursing shortage
3838
Current “Solutions”
PhysiciansPolicy changes – lower limits, deductiblesCaptives formingPhysicians “going bare”Hospitals providing coverageLeaving states / changing practices
3939
Current “Solutions”
InsurersRe-Underwriting BookRetrenching back to core businessStates/Specialties/Territory RestrictionsNew business moratoriumsUsing broad-brushed underwriting approach
4040
Prognosis and Proposals
Governmental Alliance for Healthcare Reform
• Administrative compensation system• Reasonable compensation for avoidable injuries
Reliable Medical Justice Act: Immunity from lawsuits with early offer of compensation for injury
Allow no-fault on certain specialties: OB, Trauma, Emergency
4141
Prognosis and Proposals
Governmental (continued…)
States establish an administrative board to evaluate compensation
Establish special Health Care Courts with binding rules on causation, compensation, standards of care and related issues.
Current AMA agenda for capping pain and suffering awards
State Compensation Funds
4242
Prognosis and Proposals
Physician Train physicians and other medical staff to treat
patients better• Set patient expectations properly
• Reinforce expectations frequently
• Spend more quality time with patients – accept reduction in patients seen per day, in order to reduce claims and insurance costs
• Gather patient feedback, have it evaluated independently
• Obtain real informed consent
4343
Prognosis and Proposals
Insurer Reduce the number of claims – stop paying off
illegitimate claims to make them go away Ask physicians to retain some risk through deductibles Work only with physicians who will follow best
practices and who will insist that patients recognize their role in maintaining their own health and in keeping malpractice insurance costs manageable
Change form to recognize arbitration agreements
4444
Prognosis and Proposals
Underwriting Use more efficient ways of evaluating risk
• Number of patients• Number of high-risk patients• Quality of care measurements• Adherence to standards of care, as set by specialty
colleges• Identify types of procedures that generate claims• Evaluate error-management programs in hospitals
and practices• Evaluate patient advocacy programs
4545
Prognosis and Proposals
Underwriting Develop more coverage options
• Defense costs inside policy limits (46% of claims cost is litigation)
• Examination of alternative dispute resolution and ombudsman mediator program
• Tail limits as extension of last limits
4646
Prognosis and Proposals
Actuary More detailed review of losses to drill down to
causation, rather than classifying and penalizing areas of practice
Recommend evaluative measures of these causes for the underwriter
Study the practices of low-risk doctors and develop rating factors based on those factors
Identify common factors among high-risk patients – i.e., help physicians select patients who won’t sue them
4747
Prognosis and Proposals
Actuary (continued …) Create a measuring tool to evaluate the risk profile of
physicians• Identify the risk characteristics of physicians who have been
sued
• Build a national database that provides a risk profile
• Use the risk profile to load individual physicians’ rates
• Encourage high-risk physicians to leave the patient care area of medicine
• Establish price tags for behavior modification tools
4848
Topic #4:Closing Thoughts
& Questions
4949
Thank You!Carl X. Ashenbrenner, FCAS, MAAAMilliman USAcarl.ashenbrenner@milliman.com(262) 784-2250
Sarah Dore, CPCUIndependent ConsultantSKIDOOR@aol.com(630) 357-9176
Kathy PinkhamHealthcare FirstA Division of Arthur J. Gallagher & Co. – Kansas Citykathy_pinkham@ajg.com(816) 395-8501
5050
ATTACHMENTS
5151
Medicare Reimbursement RatesMedicare Reimbursement Rate Example
California - Los Angeles 2002 Cesarean DeliveriesWork Expense Malpractice TOTAL
RVU 24.43 15.73 4.38 State/Territory Relativity 1.056 1.139 0.955 Adjusted RVU 25.80 17.92 4.18 Conversion Factor 933.87$ 648.56$ 151.42$ 36.20$ Percentage/Total 54% 37% 9% 1,733.85$
Illinois - Chicago 2002 Cesarean DeliveriesWork Expense Malpractice TOTAL
RVU 24.43 15.73 4.38 State/Territory Relativity 1.028 1.092 1.797 Adjusted RVU 25.11 17.18 7.87 Conversion Factor 909.11$ 621.80$ 284.92$ 36.20$ Percentage/Total 50% 34% 16% 1,815.83$
Illinois - Chicago 2002 Office VisitWork Expense Malpractice TOTAL
RVU 0.72 0.71 0.03 State/Territory Relativity 1.028 1.092 1.797 Adjusted RVU 0.74 0.78 0.05 Conversion Factor 26.79$ 28.07$ 1.95$ 36.20$ Percentage/Total 47% 49% 3% 56.81$
5252
Frequency By Specialty
0
1
2
3
4
5
6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37
Specialty
10 Y
ear
Freq
uenc
y
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