Insurer Provides Interesting Perspective on Tort Reform in the Medical Malpractice Arena

"No perfect solution to the problem of rising premiums and compensation for damages"
For as long as I can remember, the issue of tort reform has been front and center for every orthopaedic surgeon. Traditionally, it has been at the top of the list of "must haves" for the legislative agenda when orthopaedic surgeons visit Capitol Hill each spring.

In 1975, California enacted the Medical Injury Compensation Reform Act and most tort reform efforts since then have tried to incorporate caps on noneconomic damages. Although efforts on the federal level have not been successful to date, many states have effectively changed the conversation around tort reform and made substantial changes. In most cases, it has been the medical associations and societies that have attempted these reforms independent of others affected by the current tort system, which encompasses medical and nonmedical.

To gain additional perspective, I spoke with Michael F. Morgan, vice president of business development of CMIC Group, a provider of professional liability insurance and services to doctors, hospitals, and healthcare professionals.

Dr. Marks: Every tort reform hearing has one constant—patient advocate groups and trial lawyers showing severely injured patients and arguing that any legislative changes will put the rights of individuals to be compensated at risk. It is difficult to determine the best way to balance the need for compensation resulting from medical malpractice with the high medical costs and malpractice premiums. To address the rising costs and availability of malpractice insurance, limits on damage awards have been implemented and joint and several liability have been eliminated. With that in mind, when insurance carriers are looking to determine premium rates, what do they look for?

Mr. Morgan: Frequency and severity are two essential components that insurance carriers examine when evaluating a market and determining premium rates. Frequency reflects the number of lawsuits filed, while severity reflects the cost to settle the lawsuits. Stringent risk management methods, better training, defensive medicine, and loss-prevention tools are examples of the many methods that have been effective at reducing frequency.

Dr. Marks: As a medical community, we've been better able to utilize risk management tools and decrease frequency. How have we done with respect to severity?
Mr. Morgan: Unfortunately, severity is not within the medical community's control. Driven by the costs involved to settle and the high costs associated with litigation, severity continues to climb steadily. Decisions on whether to settle or defend a case often come down to the evidence that will be presented at a trial. This evidence can only be evaluated after a lengthy litigation process that includes expensive experts, numerous depositions, and legal fees that most often do not erode the policy limits and must be factored into the insurance carriers' premiums.

Dr. Marks: What sort of tort reform have we seen?

Mr. Morgan: Tort reform has been enacted in more than half the states in this country, along with limits on attorney fees. It should be noted that tort reform has focused on limiting the noneconomic damages, so we are essentially talking about compensation for pain and suffering. In 1975, California was the first state to pass tort reform and, in 2003, Texas passed a law limiting noneconomic damages. While sovereign immunity laws protect many hospitals, there have been many debates at the federal level about enacting legislation that would override all existing state laws governing malpractice lawsuits. Some states have passed laws only to have them overturned on constitutional grounds. This happened in Illinois when the Supreme Court overturned the state's 2005 medical malpractice reform law.

Dr. Marks: What other strategies have been implemented to decrease the costs associated with medical malpractice?

Mr. Morgan: To mitigate the costs associated with medical malpractice, many hospitals and large physician groups have elected to self-insure and have adopted creative ways to cut costs. For example, the captive self-insurance industry has blossomed with offshore captives providing coverages and third-party administrators handling claims. Captives—insurance vehicles that are wholly owned by their policyholders—are a way for hospitals and physician groups to self-insure. The downside is that they put the hospitals' and groups' capital at risk. Captives must be formed in a specific U.S. state or foreign country known as a captive domicile, which has enabling legislation.

Conduct of traditional insurers is governed by insurance regulatory agencies in the state in which they are domiciled or registered to conduct business. Since captives are not insurance companies, they are not subject to these regulations but instead are subject to specific regulations governing captives. Captives have been around for more than 100 years, and it's estimated that there are more than 7,000 captives globally, with the largest numbers located in Bermuda and the Cayman Islands. Whether these vehicles are better than traditional insurers or if they will continue to work in the long run is still unknown. In the end, they face the same issues traditional insurance carriers have faced in dealing with the frequency and severity challenges.

Dr. Marks: Do you have any final words of wisdom?

Mr. Morgan: Determining whether tort reform in medical malpractice cases is necessary often depends on whom you ask and who has the most to gain or lose. There is no perfect solution to the problem of rising premiums and compensation for damages. The need for caps on damages will always come down to what really helps patients, allows for the return of high-risk medical specialists and procedures to certain areas, and the availability of affordable medical malpractice insurance and healthcare coverage.

Michael R. Marks, MD, MBA, is a member of the AAOS Medical Liability Committee, AAOS Patient Safety Committee, and mentor for the AAOS Communications Skills Mentoring Program. He is president of Marks Healthcare Consulting. He can be reached at markshcconsulting@gmail.com.

Editor's note: Articles labeled Orthopaedic Risk Manager (ORM) are presented by the Medical Liability Committee under the direction of John P. Lyden, MD, and Michael R. Marks, MD, MBA, ORM co-editors. Articles are provided for general information and are not legal advice. For legal advice, consult a qualified professional. Email your comments to feedback-orm@aaos.org or contact this issue's contributors directly.

Learn More About the Medical Liability Committee
The AAOS Medical Liability Committee works in conjunction with the AAOS Council on Advocacy on all liability issues, and together with the AAOS Office of Government Relations monitors policy developments and advocates for medical liability reform on both the state and federal level. For more information please visit: www.aaos.org/advocacy/MLR/.

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