Malpractice claims flat; premiums soar
BY JENNY ANDERSON THE NEW YORK TIMES

Net claims for medical malpractice paid out by 15 leading insurance companies have remained flat over the past five years, while net premiums have surged 120 percent, according to a new study released Thursday.
   The study, compiled from regulatory filings by insurers to state regulators, was conducted by the Center for Justice and Democracy, a consumer advocacy group in New York, with assistance from some former state-level insurance regulators.
   Between 2000 and 2004, the increase in premiums collected by the leading 15 medical malpractice insurance companies was 21 times as great as the increase in the claims they paid, according to the study.
   Of the 15 companies examined, nine are mutual insurers owned by their policyholders, three are publicly traded stocks but are part of larger conglomerates and three are publicly traded and focus primarily on medical malpractice. The stock prices of those three companies have each risen more than 100 percent since May 2002. (The Standard & Poor’s 500 stock index has risen about 10 percent over the same period.)
   "In recent years, medical malpractice hasn’t been unprofitable, but it’s been phenomenally profitable," said Jay Angoff, the former state insur- ance commissioner of Missouri and a consultant on the study.
   Insurance industry officials not only disagree with Angoff and the study but also discredit the methodology. They say that it is unfair to compare the premiums that insurance companies charge with claims paid, because it often takes eight to 10 years for the claims to materialize, so companies have to set aside extra reserves.
   "It’s a meaningless comparison that no respectable actuary would consider," said Lawrence Smarr, president of the Physicians Insurers Association of America, the trade group representing physician-owned insurance companies.
   Industry officials instead look at incurred losses, which include what insurance companies pay in claims as well as what they set aside for reserves to pay for future claims. The study, for its part, emphasizes that incurred losses are not payments the insurer has made but rather are estimates of claims.
   The reason malpractice insurance is on the rise, Smarr says, is claim costs have risen as juries have awarded higher awards to plaintiffs, which insurance companies have used as the basis for why they have to settle more claims.
   "The real problem is claim severity," he said. "It means that juries are awarding higher amounts and jury verdicts drive the potential cost of the claim so that makes settlements rise. We know that that average cost is rising at about 6 percent per year."
   According to the association’s data, which are collected on a voluntary basis by its membership, 70 percent of malpractice cases closed in 2003 were dismissed, 24 percent were settled, 5 percent were tried and found in favor of the defendant and 0.8 percent were settled in favor of the plaintiff.
   But it is that nearly 1 percent that drives the costs, according to advocates for a national limit on what juries can award in medical malpractice cases.
   "We have a proven record of the fact that the premiums will come down when you get strong liability reform — that’s why we’re pushing caps on noneconomic damages," said Edward Hill, the president of the American Medical Association.
   Insurance companies set rates, collect premiums and then estimate how much they will need to pay in claims. While they wait to pay those claims, they invest the money. A variety of reasons, including poor investment performance and rising reinsurance costs, have contributed to rising costs.
   Insurers look at incurred losses, which include money set aside for future reserves, as well as ratios, which include the administrative and legal cost of underwriting new business. The most commonly cited profitability measure is the ratio of all the costs of doing business — underwriting, legal and administrative — to the premiums earned. Angoff contests the methodology used by insurers.
   "The argument that they have to raise rates because their incurred losses are going up, I don’t buy it, because incurred losses are estimates and the estimate of future losses can only rationally be built on their paid losses," Angoff said. The numbers in the study, said the Connecticut attorney general, Richard Blumenthal, "cast a completely different picture than the public or many public officials have assumed."
   "They have the potential to alter the debate fundamentally from seeming to cast the rapacious personal injury lawyers as the complete culprits and the insurers as innocent bystanders with doctors as victims to the insurers as equally responsible, if not more so," Blumenthal said.

This story was published Friday, July 08, 2005