Are caps the answer to the malpractice crisis?

OB/GYN News, Nov 15, 2004 by Richard E. Anderson, Joanne Doroshow

YES

There are multiple fires burning in our health care system, but the malpractice insurance crisis is among the most serious, and ironically, the one that can be most easily remedied. Caps on noneconomic damages are a critical first step.

Today, half the neurosurgeons, and one-third of obstetricians, orthopedists, and emergency room physicians report a claim every year. Though 80% of all these claims close without payment, they cost nearly $25,000 each.

Meanwhile, the cost of paid claims is skyrocketing. The median jury award has doubled since 1997, and the average malpractice jury award exceeds $3.5 million.

As a result, over the past 3 years insurers have paid out $1.40 in claims losses and expense for every dollar of premium. Accordingly, rates have risen 15%-20% per year for the past 3 years, but this average figure is much lower in states with effective tort reform and much higher in states without it.

And very little of this has to do with true medical malpractice. In fact, the Harvard Medical Practice Study found that there is no relation between the presence or absence of medical negligence and the outcome of malpractice litigation. The only variable that predicts outcome is degree of injury.

There are also a number of assiduously cultivated myths about insurance companies. But first, please take note that two-thirds of physicians are insured by mutual or reciprocal insurers that are owned by the policyholders themselves, not shareholders. In addition, insurance is a heavily regulated industry and in most states, rates require the approval of the department of insurance before they can be implemented.

Insurers are also accused of trying to recoup stock market losses, but the easily verifiable facts are that only 10% of assets are in stocks and even more to the point, not one malpractice insurer has had a single year of negative investment income.

California's Medical Injury Reform Act (MICRA) provides an excellent answer to today's problems that should be adopted nationwide now. MICRA's four principal provisions include a $250,000 no exceptions cap on noneconomic damages only, a collateral source rule to prevent double payment for the same injury, a periodic payments provision to allow an award to be paid over time, and an attorney contingency fee limitation, which limits an attorney to a $221,000 fee (plus all expenses) for winning a $1 million claim.

Because of MICRA, malpractice premiums in California have decreased by 33% (in constant dollars) since 1976. This is equivalent to an actual rate of increase of less than 3% per year for more than 25 years. Since there is no litigation lottery, valid claims settle one-third faster in California than in the rest of the country.

Periodic payments allow the system to absorb large judgments without bankruptcy and ensure that money is available at the time it is actually needed.

And MICRA does not impair attorney access. California is a litigious state and frequency is still 50% higher than nationwide, but an injured patient keeps $179,000 more of a million dollar award than he or she would in a state with a 40% contingency fee.

It is not a perfect solution but it is a very good one, and we know, we do not speculate, that it works.

Richard E. Anderson, M.D., is chairman and CEO of The Doctor's Company, a physician-owned malpractice insurer based in Napa, Calif.

NO

Damage caps and tort reform are essentially limits on the power and authority of juries in this country, interfering with one of our fundamental constitutional rights.

But there are really no data to support solving what is really an insurance problem for doctors with such a drastic measure. For starters, the volcanic eruptions in malpractice insurance premiums that have occurred three times in the last 30 years have all been caused by insurance company business practices and the investment cycle, not runaway juries.

Insurance companies make most of their money off of investments, and when the economy has a downturn and interest rates drop, insurers always respond by dramatically increasing rates.

This increase is compounded by the underpricing of policies that goes on during the price war that occurs when companies are profiting from their investments.

The response from insurers is always the same: Blame the lawyers; it's not our fault. It's simply not believable that juries have awarded large verdicts during the periods of each of those economic downturns but have stopped for the 10-15 years between these cycles. And it's not true.

Let's consider what insurers are actually paying out, since they are the ones that are raising premiums on physicians.

After adjustment of malpractice insurance payouts for inflation and for the number of doctors, payouts have stayed fairly constant over the last decade.

The average payout for insurers is about $30,000 per claim. The average payout when money is awarded is about $107,000. Overall, the total payout for medical malpractice insurers in the United States is about $4 billion a year, which is about half of what we spend annually on cat and dog food.