June 2002
Volume 66 |
Number 6
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| Why Are My Malpractice
Insurance Rates Increasing? |
Edward C. Mills, Board of Directors
Anesthesia Patient Safety Foundation
Today as anesthesiologists open the envelopes containing their
malpractice insurance premiums, they may be shocked to find significant
rate increases. These increases are not unique to anesthesiologists
and reflect ongoing changes in the malpractice insurance marketplace.
Volatile jury awards, increased defense costs and changes in the
medical malpractice insurance marketplace have combined to cause
a dramatic shift in the cost of professional liability insurance.
For a number of years, physicians have had the benefit of stable
or even declining malpractice rates. Anesthesiologists in particular
saw significant rate reductions given the advent of improved monitoring
devices, implementation of ASA practice guidelines and an increased
focus on patient safety. These developments, along with vigorous
competition among malpractice insurance carriers, ushered in a
sustained period of low and stable premiums. So what changed?
At the outset, we need to recognize that adverse patient outcomes
are the underlying factor in establishing rates. While the likelihood
that such adverse outcomes will result in litigation has not significantly
changed, the costs associated with both resolving and defending
claims has increased.
The ultimate cost to resolve a specific claim is influenced by
a number of factors. The nature of the injury, the extent to which
the medical care can be defended, the ability and willingness
of the physician to participate in the defense, the legal rules
governing the litigation and the effectiveness of counsel in presenting
each side of the case all contribute to a claimıs overall value.
The ever-increasing volatility in jury awards drives up settlement
costs and fosters an environment where both insurance companies
and their policyholder prefer settling cases.
Other factors also contribute to the underlying losses that are
the foundation of anesthesia rates, including the number of health
care providers involved in the claim and the amount of insurance
coverage available. With respect to anesthesiologists, the limits
of coverage required by hospitals is often higher than that of
the surgeons with whom anesthesiologists work. This disparity
frequently makes the anesthesiologist a more inviting target for
litigation, and this in turn increases the losses attributed to
their specialty. Settlement and defense costs attributed to anesthesiologists
also may be distorted when claims involving multiple health care
providers are defended by a single insurance company that may
allocate the loss among all of their insureds.
The combination of the above factors has caused the average severity
of our anesthesia claims to increase approximately 88 percent
from 1994 to 2000, while the frequency of claims has actually
declined.
Defense costs also continue to escalate. These costs include
attorney fees, expert witness fees and expenses of court reports,
travel costs, trial exhibits, etc. During the period from 1994
through 2000, our average cost for the defense of a claim increased
by 39 percent.
Overall these statistics indicate that premium rates for anesthesiologists
should have been increasing instead of remaining stable or even
declining as they did during this same period of time. This leads
to a second important influence on rates: market conditions.
During the period between 1994 and 2000, there was significant
competition within the insurance industry to insure anesthesiologists.
Anesthesiologists contributed to this price competition by frequently
moving their coverage from one carrier to another based primarily
on price. This competition prevented insurance companies from
implementing needed rate increases, despite the increased losses
noted above, without the risk of losing market share. Insurance
companies were able to offset significant losses through the use
of investment income. Today, with a substantial decline in interest
rates and stock prices, companies are unable to support their
claims and defense costs with investment income, and consequently,
companies must now raise rates to cover claim losses.
In addition, rates were further stabilized from 1994 to 2000
as competition for premium dollars fueled a period of both consolidation
and expansion within the malpractice insurance industry. A number
of companies pursued growth through mergers while other companies
attempted to expand beyond their traditional geographic territories.
Both scenarios placed a priority on substantial premium growth,
which is typically obtained by significantly underpricing the
cost of insurance. This was especially true as companies pushed
into unknown but volatile territories such as Florida, Pennsylvania
and Texas.
The disparity between the costs associated with insurance company
losses and the premiums being charged have become apparent over
the last three years. Several large companies have since become
insolvent, others have withdrawn from writing malpractice, and
many others have incurred sizeable underwriting losses. During
2000, the top 10 writers of malpractice insurance collected approximately
50 percent of all premiums written in the United States. Less
than two years later, six of these 10 companies no longer offer
malpractice coverage or have greatly reduced their premium volume.
The largest of these companies, St. Paul, has withdrawn from the
malpractice market completely.
As if these conditions alone were not enough to cause a dramatic
increase in insurance rates, the impact of the September 11 terrorist
attacks also must be included. Reinsurance rates, already on the
increase because of growing losses described above, are likely
to climb even higher as reinsurers attempt to respond to the magnitude
of the losses sustained.
In conclusion, the dramatic increase in malpractice insurance
costs is largely a combination of escalating costs of resolving
and defending claims, changes within the insurance industry and
a corresponding decline in interest rates and the stock market.
Given that rates are influenced by a number of factors [Table
1], it is nearly impossible to forecast the future. Absent
meaningful tort reform, the underlying losses are unlikely to
change. Continued consolidation or displacements within the industry
may reduce competition and thereby lessen the pressure to hold
down premiums, while a rebound in the stock market and increases
in interest rates would restore investment income and offset the
need for large increases in premiums. In the end, physicians in
general and anesthesiologists in particular should plan to pay
more for their malpractice insurance.
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Edward
C. Mills is President and Chief Executive Officer, Preferred
Physicians Medical Risk Retention Group, Inc., Mission, Kansas. |
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