When the latest medical malpractice premium notice arrives at a physician’s office, it is not often for a small amount. Even practices that have avoided expensive lawsuits or claims are not shielded from rising premiums. Often, it seems that rising medical malpractice premiums are like death and taxes: inevitable.
Medical malpractice premiums differ from one state to another and among specialties, yet they are all driven by the same factor: the cost of risk. Insurance carriers evaluate the cost of risk by actuarially assessing the probability of errors, the cost associated with defending claims, the cost of potential settlements, and organizational operational costs.
In addition to state mandates regarding medical malpractice coverage, many hospitals and ambulatory surgery centers (ASCs) require coverage, and their limits may differ from state requirements.
Insurance carriers care about hard and soft markets. In hard markets, carriers lose money, so relatively few carriers offer coverage. In hard markets, insurance is difficult—if not impossible—to obtain until premiums rise to offset the risk involved. In soft markets, carriers make money, so there is usually an influx of new carriers willing to write new policies at lower premiums than those that currently exist. This has occurred twice in Connecticut during my 30-year professional career. In each case, new carriers entered the market with very low premiums and ultimately wreaked havoc, as many physicians switched to low-cost insurers. In many cases, they offered $3 million/$6 million coverage for the same premium that doctors had been paying for $1 million/$4 million coverage, which seemed like a good deal. However, this led to an increase in settlement requests. When looking for a settlement, a plaintiff’s lawyer likely wants to reach the maximum amount of the policy.
Unfortunately, as lawsuits developed, the new carriers exited the market, which left many physicians without coverage and searching for policies. Switching carriers when a company has departed a state requires a physician to buy tail coverage (defined as coverage for past potential acts that may come to light in the future). In addition to the annual premium, he or she must pay to cover prior acts. The adage “buyer beware” has never been truer. If a low premium seems too good to be true, it probably is.
We have seen the transition of many orthopaedic surgeons to hospital employment. This shift in practice setting is also significantly changing the insurance market. Hospital-employed physicians are generally self-insured by their hospitals; hence, the pool of physicians seeking insurance in the open market is decreasing. This reduction in market size has stimulated competition among insurers, who are trying to maintain their market share.
The defense of a claim requires an attorney, team of experts, claims adjuster, and support personnel. The length of time it takes to resolve a lawsuit, coupled with the rising costs of skilled attorneys and experts, has been a primary factor driving costs for medical malpractice lawsuits. If a lawsuit eventually goes to trial, the cost of that alone often reaches six figures. Insurance carriers are very selective about which cases to take to trial, which is why most medical malpractice lawsuits result in verdicts in favor of the defense. On the surface, that may appear to be good news for insurance companies because they do not pay settlements; however, the costs associated with the defense of those cases are significant drivers of premiums. Experts involved in a case are another significant cost driver. The liability limits of a policy are directly related to the amount of any award. All the costs associated with the defense of a case are separate and ultimately increase the cost of the entire case.
Settlements are the most significant driver of malpractice premiums. Case values are determined by several factors. Economic costs are quantifiable, and there is a cottage industry of experts who can discuss future anticipated costs that drive those numbers. Noneconomic costs, or pain and suffering aspects of a lawsuit, are the most open to interpretation. Most settlements have nondisclosure agreements, so jury verdicts are frequently used as a negotiating tactic to drive the value of a case. The large, so-called runaway verdicts are often used to attempt to set a new baseline that drives up settlements.
Another component to premium determination is the insurance carrier’s cost of operations. Underwriting operations, loss-prevention departments, claim departments, and expensive information technology systems, in combination with distribution, marketing, and corporate management costs, ultimately add to premiums. Companies have looked at various ways to limit the expenses of marketing directly to customers to avoid commissions and other costs associated with third-party underwriting and claims service administrators.
No insurance company determines a premium without factoring in the time value of settlements. Premiums set today are reflective of a potential settlement three to five years in the future, when a case may ultimately be settled. The variables involved in that are complex, from interest earned on premiums to changes in the ligation climate. When companies forecast this incorrectly, they must use rate increases to recover that which was lost.
Tort reform has also had a significant impact on litigation and settlement costs, but this effect does more to stabilize existing premiums.
The medical malpractice insurance market is constantly in flux. Recently, the medical malpractice markets have been characterized by stable and often lower rates, higher dividend paybacks, availability of higher limits, and flexible contracts. This has been driven primarily by competition and because carriers are looking for opportunities to increase or hold onto their markets as a result of offshore captive self-insurance plans that provide alternatives to hospitals and large physician groups. Carriers are consolidating and cutting costs, and there has been a decline in the number of lawsuits filed, resulting in the use of prior reserves to lower premiums.
The drivers of malpractice insurance premiums are multifactorial. States that have been successful with tort reform, such as those that have caps on noneconomic damages, have stabilized their markets. Insurance is purchased to protect against potential risk and loss. In most cases, physicians have options in the insurance market to buy or defer insurance, such as life insurance, disability insurance, and cyber security insurance. With few exceptions, there is no deferment option for malpractice insurance; it’s mandated by most states. Premium determination is the result of the market type (hard or soft), which has a direct result on the number of carriers offering policies.
Finally, the type of company writing the policy frequently determines the cost of premiums. Simply put (excluding captives), they are either mutual insurance or public companies. A mutual insurance company is entirely owned by its policyholders, and profits are either retained within the company or rebated to policyholders in the form of dividend distributions or reduced future premiums. A stock insurance company is owned by investors who have purchased company stock, and profits are distributed to the investors without necessarily benefiting the policyholders. Their primary purpose is to enhance value for stockholders, not policyholders.
The next time you receive a premium notice, I hope you have a better understanding of how that premium was determined.
Michael R. Marks, MD, MBA, is a member of the AAOS Medical Liability Committee, a member of the AAOS Patient Safety Committee, and a mentor in the AAOS Communications Skills Mentoring Program. He can be reached at firstname.lastname@example.org.