Effectiveness of Malpractice Tort Effectiveness of Malpractice Tort Reforms: The Relation Between Loss and Reforms: The Relation Between Loss and

PremiumPremium

Arthur Gurevitch, PhDArthur Gurevitch, PhD

Milliman USA

Manifestations of the Manifestations of the Current Malpractice CrisisCurrent Malpractice Crisis

Withdrawal of St. Pauls’ in December Withdrawal of St. Pauls’ in December 2001 followed by PHICO, Reliance, 2001 followed by PHICO, Reliance, Frontier, Miix, and Farmer’s.Frontier, Miix, and Farmer’s.

Reports in the popular press of Reports in the popular press of dramatic increases in premium and dramatic increases in premium and decrease in availability of coverage.decrease in availability of coverage.

““Strikes” and other political activity by Strikes” and other political activity by physicians.physicians.

Proposals/ legislation at national and Proposals/ legislation at national and state level for “tort reform”.state level for “tort reform”.

Milliman USA

A June 2002 Wall Street Journal Article A June 2002 Wall Street Journal Article SetSet the Stage for the Current Debate the Stage for the Current Debate

“while malpractice litigation has a big effect on premiums, insurers’ pricing and accounting practices have played an equally important role. Following a cycle that recurs in many parts of the business…(insurers) sell malpractice coverage … at rates that proved inadequate to cover claims”

Milliman USA

Plaintiffs’ Attorneys and “Consumer Advocates” Plaintiffs’ Attorneys and “Consumer Advocates” Have Extended These Arguments in their Fight Have Extended These Arguments in their Fight

Against Tort ReformsAgainst Tort Reforms

Premium increases have not been “unusual”Premium increases have not been “unusual”– ““malpractice insurance costs have risen at half the rate malpractice insurance costs have risen at half the rate

of medical inflation”of medical inflation”

Claims are not increasingClaims are not increasing– ““the spike in medical liability premium was caused by the spike in medical liability premium was caused by

the insurance cycle, not by new claims or skyrocketing the insurance cycle, not by new claims or skyrocketing jury verdicts”jury verdicts”

Tort reforms will reduce neither claims nor premiumTort reforms will reduce neither claims nor premium– ““nothing about California’s experience suggests that nothing about California’s experience suggests that

limiting jury awards will reduce malpractice premiums”limiting jury awards will reduce malpractice premiums”

Milliman USA

Research OverviewResearch Overview How have losses and premium grown over How have losses and premium grown over

the past few years?the past few years?

Do states with strong tort-reforms have lower Do states with strong tort-reforms have lower losses? Lower premiums?losses? Lower premiums?

What is the “insurance cycle” impact on the What is the “insurance cycle” impact on the cost of malpractice coverage?cost of malpractice coverage?

Milliman USA

To Evaluate the Current Malpractice Crisis, We To Evaluate the Current Malpractice Crisis, We Examined Annual Statement Premium and Examined Annual Statement Premium and

National Practitioner Data Base LossesNational Practitioner Data Base Losses

– – Premium –Premium –Annual StatementsAnnual Statements

Written Premium, for Written Premium, for Medical Mal.Medical Mal.

Includes Hospitals & Includes Hospitals & PhysiciansPhysicians

Aggregate for State by Aggregate for State by Policy YearPolicy Year

No Self Insurance or No Self Insurance or State Fund DataState Fund Data

– – Loss –Loss –

National Practitioner National Practitioner Data BankData Bank

Physician OnlyPhysician Only Closed with LossClosed with Loss No LAENo LAE By Year ClosedBy Year Closed Not Designed as an Not Designed as an

Analytical DatabaseAnalytical Database

Milliman USA

Written Premium Increased Written Premium Increased Dramatically in 2001Dramatically in 2001

0.80

1.00

1.20

1.40

1.60

1997 1998 1999 2000 2001 2002

Year

Per

Cap

ita W

ritte

n P

rem

ium

(199

7 =

1.0)

Milliman USA

Losses began a rapid Losses began a rapid increase in 2000increase in 2000

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1997 1998 1999 2000 2001 2002 2003

Year Closed

Loss

Per

Phy

sici

an(1

997

= 1.

0)

Prorated June Data

Milliman USA

Severity Rose Dramatically During Severity Rose Dramatically During This Period. Frequency Has Been This Period. Frequency Has Been

Unchanged.Unchanged.

0.75

1.00

1.25

1.50

1997 1998 1999 2000 2001 2002 2003

Year Closed

Rel

ativ

e F

requ

ency

or

Sev

erity

(1

997=

1.0)

Frequency Severity

Prorated June Data

Milliman USA

There Was a Clear and Dramatic There Was a Clear and Dramatic Change Between 1999 & 2001Change Between 1999 & 2001

0.80

1.00

1.20

1.40

1.60

1997 1998 1999 2000 2001 2002 2003

Year

Per

Cap

ital L

oss

or P

rem

ium

(199

7 =

1.0)

Premium Losses

Prorated June Data

Milliman USA

Losses Are Dramatically Lower Losses Are Dramatically Lower in States With Award Capsin States With Award Caps

0

2,500

5,000

7,500

10,000

1997 1998 1999 2000 2001 2002 2003

Year Closed

Lo

ss P

er P

hys

icia

n (

Pu

re P

rem

ium

)

States with Caps States without Caps

Milliman USA

This is Due to Lower Severity …This is Due to Lower Severity …

0

100,000

200,000

300,000

400,000

1997 1998 1999 2000 2001 2002 2003

Year Closed

Sev

erity

(

$ Lo

ss p

er C

laim

)

States with Caps States without Caps

Milliman USA

And Also Lower FrequencyAnd Also Lower Frequency

1.00

1.50

2.00

2.50

3.00

1997 1998 1999 2000 2001 2002 2003

Year Closed

Freq

uenc

y (C

laim

s pe

r 100

Phy

sici

ans)

States with Caps States without Caps

Milliman USA

But Premium is Also Lower in But Premium is Also Lower in States With Caps on AwardsStates With Caps on Awards

5,000

7,500

10,000

12,500

15,000

17,500

1997 1998 1999 2000 2001 2002

Year

Prem

ium

($) p

er P

hysi

cian

States with Caps States without Caps

Milliman USA

We Found a Correlation Between Premium We Found a Correlation Between Premium and Loss Over Time and Between Statesand Loss Over Time and Between States

y = 0.6769x + 6582.9R2 = 0.2715

0

5,000

10,000

15,000

20,000

25,000

30,000

0 5,000 10,000 15,000 20,000

Loss ($) per Physician

Prem

ium

($) p

er P

hysi

cian

Milliman USA

The Simple Model Had More Predicative The Simple Model Had More Predicative Power for States With Over 400 NPDB Power for States With Over 400 NPDB

Cases Per YearCases Per Year

-100%

-75%

-50%

-25%

0%

25%

50%

75%

100%

0 500 1,000 1,500 2,000 2,500

NPDB Cases per Year

Acc

urac

y of

For

ecas

t -

Rel

ativ

e R

esid

ual

Milliman USA

These 9 States Account for Over These 9 States Account for Over 60% of National Malpractice60% of National Malpractice

California*California* FloridaFlorida IllinoisIllinois Michigan*Michigan* New JerseyNew Jersey

New YorkNew York OhioOhio PennsylvaniaPennsylvania TexasTexas

* States With Caps

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Additional Analysis of Premium and Additional Analysis of Premium and Loss for the 9 States Yielded a Loss for the 9 States Yielded a

Powerful Regression ModelPowerful Regression Model

Regression StatisticsMultiple R 0.882 R Square 0.779 Adjusted R Square 0.761 Standard Error 1,617.97 Observations 54

Coefficients P-valueIntercept (5,833.59) 0.0170 Nat Loss -1 1.81 0.0000 Loss -1 0.25 0.1028 Loss -2 0.75 0.0001 % State Fund (11,700.57) 0.0000

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Over 75% of the Variability in Over 75% of the Variability in Premium Can Be Explained With a Premium Can Be Explained With a

Simple, Loss Based ModelSimple, Loss Based Model

5,000

10,000

15,000

20,000

25,000

5,000 10,000 15,000 20,000

Forecast Premium

Act

ual P

rem

ium

States With Caps States Without Caps

Milliman USA

Equally Important Are the Equally Important Are the Metrics That Had No Significant Metrics That Had No Significant

Effect on PremiumEffect on PremiumCurrent LossCurrent LossLosses Older Than 3 yearsLosses Older Than 3 years Interest Rate (5 year Treasury)Interest Rate (5 year Treasury)Average Case AgeAverage Case AgeDiscount Rate (Interest & Age)Discount Rate (Interest & Age)% PIAA (Mutual) Market Share% PIAA (Mutual) Market ShareCompetitive IndicesCompetitive Indices

Milliman USA

The Model Predicts The Model Predicts Stable Rates for 2003Stable Rates for 2003

Top 9 States

5,000

10,000

15,000

20,000

1997 1998 1999 2000 2001 2002 2003

Policy Year

Pre

miu

m p

er P

hysi

cian

Forecast Actual

Milliman USA

SummarySummary

Despite Claims to the ContraryDespite Claims to the Contrary

Premium increases have not been “unusual”Premium increases have not been “unusual”

Claims are not increasingClaims are not increasing

Reforms will reduce neither claims nor premiumReforms will reduce neither claims nor premium

Between 1997 & 2003 overall per capita Between 1997 & 2003 overall per capita premium has increased 50%premium has increased 50%

Between 1997 & 2003 per capita losses Between 1997 & 2003 per capita losses have increased 35%have increased 35%

The evidence supports the effect of reforms The evidence supports the effect of reforms in reducing claims & premiumin reducing claims & premium