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ASA NEWSLETTER
 
 
June 2002
Volume 66
Number 6
 

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.



    Edward C. Mills is President and Chief Executive Officer, Preferred Physicians Medical Risk Retention Group, Inc., Mission, Kansas.

 


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