Topics

• Impact of Managed Care on Medical Malpractice• Hospital Exposure Base• Policy Terms and Conditions Actuaries need to be

aware of• Medical Malpractice Loss Development Patterns• Data Sources

Impact of Managed Care on Medical Malpractice

• Affect of Gatekeeper roll for primary care physicians –shifted liability between classes – Family Practitioners and Internists now responsible for

all direction of care.• RESULT – Huge increase in failure to diagnose claims

– Nurses, CRNA, Nurse Practitioners – Responsible for direct care of patients pushed down to lower classes

• RESULT – Physician, Surgeon and Allied Health professional class relativities are more compact now.

Impact of Managed Care on Medical Malpractice

• Move to more outpatient treatment rather than inpatient hospital treatment– RESULT – Complete change in measurement

of exposure to malpractice for hospitals

Exposure Base for Hospitals

• What about Bed Equivalents?– Historically, hospital malpractice rated on a per

bed basis. – Now with less patient time in a “bed”,

underwriters have developed “bed equivalents”– So, for example, 1000 outpatient visits is the

equivalent of what used to be the exposure from having 1 bed in the hospital.

Exposure Base for Hospitals

Where do Bed Equivalents come from???

Don’t be fooled – They were made up!• By Brokers

• By Underwriters

Hospital Exposures

• Are primary Bed Equivalents a good exposure base for excess MedMal claims?– Current Bed equivalent calculations result in fairly flat

exposures over time – Most excess MedMal claims come from “bad babies”– Other sources of major MedMal claims are failure to

diagnose in the emergency room.– Current weightings in use do not differentiate much

between a hospital that does many deliveries versus one that does not.

Hospital Exposures Relativities

Hospital Exposures Exposure Unit A B C D E F G H I J

371 Each Acute Care Bed Count 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.0043 Each Pysch Beds 0.50 0.50 0.50 0.68 1.00 1.00 0.72 0.71

- Each Chemical Dependence Beds 0.35 0.35 0.31 0.62- Each Sanitarium Beds 0.60 0.60158 Each Extended Care Beds 0.07 0.07 0.07 0.20 0.05 0.11

63 Each Bassinets 1.00 3.00- Each NICU Incubators 3.00

121 PER 100 In Patient Surgeries 0.50 1.67 1.67 0.13 1.67 0.96 0.111,255 PER 100 Emergency Room Visits 0.30 0.29 0.29 3.83 0.29 0.10 0.34 10.00 1.57

186 PER 100 Out Patient Surgeries 0.40 0.40 0.40 0.07 0.40 0.59 10.00 0.081,660 PER 100 Out Patient Visits 0.05 0.03 0.05 0.86 0.05 0.07 0.06 0.08 4.00 0.92

77 PER 100 Deliveries 0.10 0.13 0.13 0.26 0.13 0.05 0.02 12.00- PER 100 Home Health Visits 0.03 0.18 0.19- PER 100 Psych Days 0.01 0.14 0.14 0.43

- PER 100 Counseling/Therapy OPV 0.05- Each Residents 2.00307 Each Employed Physicians 3.00 4.00 2.09 1.50

Total Bed Equivalents 1,978 2,321 1,137 7,334 1,159 1,077 734 1,189 21,421 4,865

1M/3M Base Rate 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$

1M/3M Base Premium 4,946,168$ 5,802,420$ 2,843,070$ 18,335,922$ 2,896,820$ 2,692,494$ 1,835,500$ 2,972,120$ 53,553,000$ 12,161,879$

Impact of Tort Reform on Medical Malpractice

• Survey of states with Tort Reform– California – Micra – effective in keeping phys/Surg rates

down due to cap on pain and suffering awards.– Texas – virtually worthless. Most value came from no

venue shopping. – Michigan – seems to be helping. Noticeable decrease in

severity of claims in Oakland and Wayne counties.– Illinois – worthless.

• Does MICRA really protect the high excess insurers?

Medical Malpractice Jury Verdicts greater than $10 Million

# Verdicts Greater than Maximum State 10,000,000$ VerdictNY 80 116,000,000$ TX 34 312,765,777$ CA 32 214,450,000$ IL 20 56,000,000$ PA 18 118,000,000$ FL 15 20,000,000$ MI 8 35,800,000$ OH 8 17,050,000$ AL 7 65,000,000$ MA 6 26,500,000$ NC 5 35,000,000$ dc 4 24,297,777$ MO 4 25,330,000$ NJ 4 35,000,000$ WI 4 24,700,000$ SC 3 18,285,000$ CT 2 27,000,000$ GA 2 45,000,000$ KY 2 23,530,746$ MD 2 26,000,000$ MN 2 65,000,000$ OR 2 17,774,000$ WA 2 16,200,000$ AZ 1 12,000,000$ CO 1 14,545,900$ ID 1 23,038,540$ IN 1 10,000,000$ KS 1 23,600,000$ NV 1 17,000,000$ OK 1 10,100,000$ RI 1 11,037,964$ VA 1 25,000,000$ WV 1 10,000,000$

Loss Development Patterns in Medical Malpractice

• Differ by– Carrier

• Reserve Adequacy (check Paid to Incurred ratios as compared to benchmark LDFs)

• Settlement Philosophy – Defend to the End

– Settle Quick to avoid large Verdicts

– (check ALE ratio to Indemnity)

– Jurisdiction – Different states have different laws which affect the reporting and payment of claims

Average Lag betweenState Incident date and Trial DateIN 12.0 CT 9.5 NY 9.3 IL 7.5 NJ 7.0 CO 7.0 KS 7.0 MA 6.3 ID 6.0 OK 6.0 PA 5.7 CA 5.5 OH 5.5 NC 5.4 MI 5.4 KY 5.0 MD 5.0 AZ 5.0 AL 4.8 WI 4.5 MN 4.5 FL 4.4 TX 4.1 DC 4.0 RI 4.0 MO 3.8 GA 3.5 OR 3.5 WV 3.0 WA 2.5 SC 1.0 NV - VA -

Total 6.4

Changes in LDFs –External Causes

• Tort Reform – affect on reporting patterns especially for claims made forms– Example – 1995 Tort Reform in Illinois caused huge

increase in reported claims just prior to effective date of legislation

– Current – Nebraska, lawyers are holding back reporting of claims while waiting supreme court ruling on constitutionality of current damage cap

• Market Cycle – Claims made form can change behavior with the ups and downs of market cycle– Risks or brokers dumping claims runs on carriers under

expiring programs. Policy wording important!

Hospital Loss Development

Primary 1M limits xs SIR 4M xs 1M xs SIR 5M xs 5M xs SIR

Age Report Year Accident Year Report Year Accident Year Report Year Accident Year

12 13.604 156.148 77.438 418.000 48.162 173.58524 4.163 10.734 5.766 22.310 48.162 173.58536 1.683 4.585 1.954 9.188 10.647 173.58548 1.377 2.378 1.557 4.415 4.423 18.86960 1.204 1.711 1.317 2.678 2.719 10.61672 1.113 1.502 1.186 2.618 1.941 7.19384 1.063 1.359 1.110 2.138 1.545 5.17496 1.036 1.261 1.040 1.819 1.327 3.920

108 1.020 1.190 1.024 1.601 1.201 3.105120 1.012 1.140 1.015 1.447 1.125 2.555

Policy Terms and Conditions

• Actuaries don’t get very involved in reviewing the policy terms and conditions

• However, small changes in terms can have big effect on pricing model

• Example – Definition of a claim has changed from being on a per person basis to being an occurrence in which all related events are considered one claim. This was done so the primary insurers would not be exposed to multiple policy years on an individual event. Obviously, this is the proper thing to do for a primary insurer.

• The effect to the excess carrier, however• is that now the size of loss distribution has

changed, making claims larger than before since the claims of multiple defendants involved with one incident are added together. Example would be 2 doctors and a hospital sued for a poor outcome from the delivery of a baby and all being covered by the same insurer.

• Effect of Batching Claims Clause• Guaranteed Tail pricing in a soft market• Definition of what constitutes a reported claim

under a claims made policy• ALE included as part of loss or pro rata

Aggregate Exposure

• The true disaster in medical Malpractice – Aggregate Drop down

• Possible pricing models – simulation vs Gamma distribution of aggregate losses

• Rule of Thumb – Set aggregate on SIR at least 2 times expected loss

Available Sources of Data

• ISO – Most MedMal companies do not report to ISO• Jury Verdict Research Data – West Law and others –

Publishes annual review of jury verdicts for medical malpractice

• NPDB – National Practitioner Database• Florida database- This site, which is maintained on the Internet

by the Florida Department of Insurance, offers information on the claims paid by malpractice insurance companies for doctors, hospitals, and even lawyers in Florida for the last 20 years.

• Conning Report• Medical Liability Monitor (Rate Survey)

Available Sources of Data

• Best Week – Rate Filings available on line• Crittendon’s Medical Insurance News• Actuarial Consulting Firms – 1 time studies• Wellington Actuarial Services

MedMal Fast Stats

Loss Cost Trend Statistics on state basis

Updated and published 3 times a year

Contact: xactuary@mindspring.com