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Tort Reform: No Solution

More than 98,000 die from medical errors each year

By J. LEE

The issue of caps on malpractice lawsuits is much more complicated than proponents of "tort reform" would lead us to believe. According to the Consumers Union, as many as 98,000 people die each year from medical errors, making them the eighth leading cause of death in the United States.

Bob Herbert of The New York Times writes: "The disinformation campaign of tort reform zealots, and their sustained attacks on the rights of patients who have been harmed by doctors, is disgraceful. The proper prescription for this apparently chronic disorder is a strong dose of the truth."

Capping medical malpractice awards for pain and suffering at $250,000 means that the suffering patient will be hard-pressed to find an attorney to represent him because it costs far more than that for an attorney to sue. What's more, say those who oppose caps, the paltry amount for a lifetime of suffering, blindness or paralysis can be equivalent to what some insurance executives earn in a week.

This divisive issue is split along party lines. Republicans are proponents of "tort reform", while Democrats are fighting caps on medical malpractice lawsuits as well as supporting a patient's bill of rights. Historically, Republicans have enjoyed massive campaign donations from the insurance and medical industries, while Democrats have relied on donations from trial lawyers. This year has been no different. But the issue is extremely complicated and, according to independent experts in the field, caps will not solve the problem of astronomical malpractice insurance premiums.

According to USA Today, the last time congress tried to pass national caps on malpractice awards, "Democrats argued that liability caps would be no cure for the problem. Senator Dick Durbin (D-IL) showed large photographs of patients disfigured or severely injured by poor medical care." He argued that a damage cap would deny them fair treatment.

According to The New York Times, when Republicans last tried to push through caps of $250,000 on pain and suffering damages, "three Republicans opposed limits: Michael D. Crapo of Idaho, Lindsey Graham of South Carolina and Richard C. Shelby of Alabama, who were courtroom lawyers before they entered politics." Despite President Bush's claims that malpractice lawsuits cost society between $60 billion and $100 billion a year, "the nonpartisan Congressional Budget Office reported in January that malpractice costs were less than 2 percent of overall health care spending and that even a 30 percent reduction in malpractice costs would lower health care spending by less than 0.5 percent."

A study by USA Today in 2003 found that "although some doctors in high-risk specialties face serious problems with insurance coverage, warnings of a serious national crisis are overblown. Most physicians are minimally affected, and the worst problems are concentrated in a handful of states."

The New York Times writes that the Government Accountability Office "found some places where people's access to emergency surgery and obstetrics had indeed become limited because doctors had left." But it then it said that "many reported doctor shortages could not be substantiated or did not result primarily from the cost of malpractice insurance."

According to Consumers Union, BusinessWeek presents the discussion this way: "...proponents of caps simply aren't coming up with facts to make their case. Instead, they're relying on scare stories &ndash always a bad starting point for making serious policy decisions." Some proposals they suggest are: to provide tax credits to doctors who are experiencing higher-than-average increases in malpractice premiums, repealing anti-trust exemption for insurance companies to prevent them from engaging in anti-competitive activity and "holding medical providers hostage to the economic cycles of the insurance industry."

To understand how lopsided premiums have become, imagine if all physicians pooled their premiums paid and divided the rates equally, each physician would pay about $10,000. Why are premiums so high for some and not for others? And why are some doctors paying $560,000 a year to their malpractice insurers? In the last three decades, insurance companies have learned to over-classify their risk pools, thereby reducing their number to specific specialties like obstetrics or neurosurgery in order to charge much more. As well, by not surcharging the handful of bad physicians in these specialties (known as experience loss rating), specialists such as surgeons with excellent reputations pay as much as incompetent ones with a large number of payouts to their injured patients.

The Consumers Union quotes the consumer advocacy group, the Center for Justice and Democracy, who describes the recent rhetoric of "tort reform" this way:

"It may be hard to understand why ?tort reform' is even on the national agenda at a time when insurance industry profits are booming, tort filings are declining, only 2 percent of injured people sue for compensation, punitive damages are rarely awarded, liability insurance costs for businesses are minuscule, medical malpractice insurance and claims are both less than 1 percent of all health care costs in America, and premium-gouging underwriting practices of the insurance industry have been widely exposed."

To support their claim, the Consumers Union points to a Time magazine article published on June 9, 2003, quoting findings from Weiss Ratings, an independent insurance rating agency: "...in states without caps on noneconomic damages, median annual premiums for malpractice coverage rose 36 percent from 1991-2002. But in states with caps, premiums rose even more &ndash 48 percent."

Illinois Issues Online writes that ISMIE, the non-profit Illinois State Medical Inter-insurance Exchange &ndash the largest provider of medical malpractice insurance in Illinois, "argues its average payout per claim increased nearly 60 percent from $385,000 in 2001 to $612,000 in 2003.

"Nationwide, the average payout has grown by about 8 percent annually, from $95,000 in 1986 to $320,000 in 2002, according to the Congressional Budget Office's January 2004 report. The cost of defending a malpractice suit also more than tripled, from $8,000 in 1986 to about $27,000 in 2002, the report says. Because it can take as long as five years for an insurance company to pay a claim, insurers rely on income earned from investing the money they receive from premium payments."

Writer Alan J. Ortbals interviewed Michael Schostok, past president of the Illinois Trial Lawyers Association in the Illinois Business Journal. Schostok pointed to the lack of competition as a major problem in Illinois.

Schostok said, "There is certain underwriting data ISMIE has and [it] claims is proprietary and on file with the Illinois Department of Insurance, and no other insurance company can gain access to it." Schostok cites ISMIE's keeping proprietary information private as a major reason why other carriers have not offered insurance to Illinois physicians.

"Having access to alleged proprietary information allows other insurance companies to correctly price their product &ndash as opposed to undercutting the market &ndash lowering the price of the premiums unreasonably," said Schostok. "That's one of the reasons some of these companies have left. They didn't have enough knowledge to adequately price their product."

According to the Illinois Business Journal, Schostok said there should also be a reduction of rating categories of medical malpractice liability premiums, according to physician type.

Said Schostok to the Illinois Business Journal, "ISMIE has 13 different rating categories," he said. "We're proposing to insurance experts a mandatory compression of those ratings categories to no more than eight." Compressing the rating categories, he said, would immediately lower the premiums of the highest-risk specialities by anywhere from 25 percent to 40 percent." For instance, "a physician paying $180,000 annually could likely see that premium reduced to $120,000 or $130,000 instantaneously. The other physicians in the state might be charged $500 to $1000 more, spreading that risk among a greater number of physicians," he added. "It's been done in other states. It can provide immediate relief and relief that would last a lot longer than just this one cycle. Of course, ISMIE's dead set against it."

According to a letter to the Chicago Sun-Times by Kevin J. Conway, current president of the Illinois Trial Lawyers Association, "The city should also review a June financial analysis of malpractice insurers based upon data from the Illinois Department of Insurance for the years 1985 through 2003, which revealed that ISMIE Mutual Insurance Co., the state's largest medical malpractice insurer, reported profits totaling $198 million. In 2003 alone, ISMIE reported a profit of $19 million." Some think that it is time to lower their premiums. Others say that insurance companies need to justify rate increases that exceed 10 percent a year to the Department of Insurance. But that is not how the insurance companies are operating today.

Many media sources have looked to the 2003 independent study by Weiss Ratings Inc. (www.weissratings.com/malpractice.asp.) as having the most reliable statistics to support taking time to weigh the complex issues before resorting to capping pain and suffering. As mentioned above, according to Weiss, not only did premiums increase in states with caps, they point to industry practices that may be complicating factors in the rise in premiums and payouts. These include:

  • "The medical inflation rate. "In the 12-year period through 2002, medical costs rose 75%.
  • Financial safety. "Based on the Weiss Safety Ratings....34.4% of the nation's med mal insurers are vulnerable to financial difficulties (those with a rating of D+ or lower) as compared to 23.9% of the property and casualty industry as a whole.
On the other hand, caps did reduce payouts.

  • Payouts reduced. "In states without caps, the median payout for the entire 12-year period was $116,297, ranging from $75,000 on the low end to $220,000 on the high end. In states with caps, the median was 15.7% lower, or $98,079, ranging from $50,000 to $190,000."
  • However, Weiss says that the study found that "Insurers continued to increase premiums at a rapid pace, regardless of caps.
  • In the 19 states with caps, the median annual premium increased by 48.2%, from $20,414 in 1991 to $30,246 in 2002
  • Among the 19 with caps, only two states, or 10.5%, experienced flat or declining medical malpractice premiums following the imposition of caps.
  • Meanwhile, among the 32 without caps, the record was actually much better: six states, or 18.7%, experienced flat or declining premiums.
  • Insurers in states with caps raised their premiums at a significantly faster pace than those in states without caps.
  • Even with the imposition of caps, insurers in nearly nine out of ten states continued to raise rates, while insurers in states without caps were actually more likely to hold or cut their premium rates.
  • In states with caps, insurers are more likely to charge med mal premiums exceeding the national median than those in states without caps."

Weiss found that "there are other, far more important factors driving the rise in med mal premiums than caps or medical malpractice payouts:

  • The most recent soft market lasted longer than usual &ndash 12 years, from 1987 to 1999 &ndash probably [because] they were able to aggressively underprice their policies, deliberately losing money in their underwriting, and still turn a profit overall
  • Data reported to the National Association of Insurance Commissioners (NAIC) show that medical malpractice insurers have been consistently under-reserving since 1997 &ndash to the tune of $4.6 billion through December 31, 2001." According to the Weiss study, "There is no doubt that the implementation of non-economic damage caps has resulted in lower claim payouts for insurers. For caps to be considered successful, however, the lower payouts would need to translate into lower medical malpractice premiums for medical professionals. The study writes that insurers, insurance regulators and insurance legislators are avoiding a much-needed post-mortem on what really went wrong in the property and casualty industry in general and in the med mal sector in particular."

    "Worst of all," Weiss writes, "many companies and legislators are using the insurance crises opportunistically to push tort reform."

    The Weiss study recommends the following:

    1. Legislators must immediately put all proposals involving non-economic damage caps aside. "The sacrifice by consumers plus a continuing &ndash and even worsening &ndash crisis for doctors" has produced the worst of both worlds. Neither party derived any benefit whatsoever from the caps, reports Weiss.
    2. Regulators must review and revise their parameters for approving rate increases. "The big lesson to be learned from the past decade is that it's dangerous to count on volatile investments &ndash especially common stocks &ndash to compensate for poor operations," the Weiss study reports.
    3. "Insurance companies must never again allow marketing to divert or pervert prudent actuarial analysis and planning.
    4. The medical profession must assume more responsibility for policing itself.
    5. Consumers must not relinquish their right to sue for non-economic damages until the medical profession and/or state and federal governments provide more adequate supervision and regulation of doctors, hospitals, and other health care providers."
    The Weiss study concludes that "The imposition of caps will not make a significant dent in the problem and may even have adverse impacts. It is no substitute for longer-term, fundamental solutions that address the actual factors behind the med mal crisis."

    Published: February 01, 2005
    Issue: Winter 2005