Future looks bleak as malpractice premiums continue upward spiral
Future looks bleak as malpractice premiums continue upward spiral
Insurers increasing rates to make up for past mistakes, rise in jury awards
Malpractice insurance premiums have dramatically increased in the past year and the future looks just as bad, maybe worse. Insurance industry analysts are warning risk managers to brace for sharply increased insurance premiums in the next year as insurers try to adjust to a decade of underpricing their products.
Rates are soaring higher than anyone has seen since the mid-1980s, with many insurers raising rates more than 30%. The sharp increases began in 2000, when insurers began to feel the effects of years of price competition that left many insurers unprepared for the cost of claims. The trend picked up speed in 2001, and observers say they see worse days ahead.
"It looks pretty grim," says R. Stephen Trosty, JD, MA, director of risk management at American Physicians Assurance Corp. in East Lansing, MI. "I don’t think we’ve seen the crest yet. It can still get worse before it starts getting better."
Trosty agrees with most other observers that the health care industry will see at least another year of increasing malpractice insurance premiums before costs level out. Similar concerns come from Larry Smarr, president of the Physician Insurers Association of America, a national association of 53 physician- and dentist-owned or directed medical liability insurance companies that collectively insure more than 235,000 physicians and dentists. "Things will get worse," he says. "It’s not good news. It’s bad and it’s going to get worse, I’m afraid."
Increases across the board
Thirty-percent increases are the norm in some states and for some insurers, but financial analyst A.M. Best reports that even the insurers considered most conservative with rates — those owned by doctors and hospitals — are increasing premiums by 10% to 18%. With the recent increases, doctors in New York and Florida commonly pay more than $100,000 for $1 million in coverage.
Many insurers also are reducing coverage amounts and raising deductibles, another way to raise the overall cost of insurance. Insurers blame the increases on the recent trend toward larger jury awards, saying they are only passing on the cost of doing business. The number of malpractice cases has held steady for years, but Jury Verdict Research in Horsham, PA, reports that the average jury award was $3.49 million in 1999, up an astounding 79% from $1.95 million in 1993.
Malpractice cases are costing more these days, but analysts say that is not the only reason for the huge increase in rates. Perhaps even more influential is the fact that insurers grossly miscalculated insurance premiums in the 1990s. The result was that health care providers were getting a sweet deal for years and now the premiums are being raised to rates that more accurately reflect the insurers’ costs.
Smarr explains that the chain of events started in 1983, when "claim frequency was headed up like a rocket." The insurers raised rates, but then claim frequency peaked a few years later. Since medical malpractice claims are paid about 54 months after they happen, it takes a while for the industry to recognize a change in direction. That meant rates were too high in the late 1980s and companies had a lot of excess profits.
Those profits and the too-high rates allowed companies to get very competitive. Too competitive, it turned out. "We had it good for a while and never realized it," Trosty says. "Unfortunately, sometimes in the desire to increase business a company doesn’t always remain true to solid underwriting procedures. They take on more risk for less money because they want the business. After a while, that’s going to catch up to you."
And it did in the mid- to late 1990s, Trosty says. Insurers were hit with a double whammy when they realized they had underpriced their coverage, and then claims severity shot through the roof as well. The 1990s were really a buyer’s market for malpractice insurance — though anyone paying the bills for an OB/GYN practice would find that hard to believe — and reinsurance was easy to get. (Reinsurance is like insurance for the insurance company; it pays when the insurance company has a big claim to cover.) Since reinsurance is a key hurdle in entering the insurance market, many new insurance companies flooded the market and offered very competitive rates.
"They came in with low prices to entice customers, sometimes known as buying business," Trosty says. "The result was that a lot of carriers were pricing premiums below where they needed to be, let alone enough to make a profit. That’s why you saw a lot of carriers go in to bankruptcy or other dire financial straits."
When insurers started paying more for claims, reinsurers started paying more than they expected to cover the insurers’ losses so they started going out of business. Suddenly, reinsurance wasn’t so easy to find and wasn’t so cheap. In some parts of the market, such as long-term care, claims frequency and severity increased even more and forced many insurers out of the market.
All of those factors came together at the same time, and malpractice insurers suddenly woke up from their 1990s stupor and started raising rates as fast as they could print the notification letters. Trosty points to another factor that may have increased claims frequency and severity in the past couple of years. The 1999 Institute of Medicine (IOM) report on medical errors, To Err is Human, greatly increased awareness among the general public of medical errors, and Trosty hypothesizes that it could have prompted lawsuits.
"The IOM report had gone a long way toward educating the medical community and patients, but sometimes it makes people look harder at things they might have dismissed," he says. "And it drew attention to the fact that the medical community is not always forthright about medical errors and injuries, and that has caused some anger. With the anger comes the desire to get the answers or to get even."
Position yourself for best rates
Ongoing developments in the health care system could aggravate the situation and spur even higher rates in the next few years, Smarr predicts. Efforts to make it easier for patients to sue health plans could affect insurance rates, for instance, because plaintiffs will find a way to include providers in those cases.
"And if we don’t get tort reform, I only see rates going higher," he says. "A million-dollar payment is not a big deal anymore, and until we get a hold on the trial attorneys and how they are milking the system, I see no end in sight."
The future looks expensive, so Trosty says risk managers should react by positioning themselves for the very best rates available. If you want to lessen the pain of the increases, show the insurer that you’re a good risk. (See article, right, for more on how to get the best rate.)
Smarr says there also is a lesson to be learned from the experience. Even though the health care industry as a whole benefited for years from low insurance rates, some providers were burned when those insurers went out of business or suffered other financial problems that compromised their coverage. And many others are having to deal with the sudden budget crisis of insurance premium increases in the double digits. Watch for deals that sound too good to be true.
"Everyone should be aware that there really is no free lunch in this business," he says. "When you see one carrier offering a product at a greatly discounted price, you need to take a long hard look at that company. You may end up with no insurance."
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