Rise in medmal premiums prompts dispute over potential of profiteering

But real reason may be more complicated, analysts say

Malpractice insurers are stinging from charges of profiteering from insurance premiums by new data showing costs rising dramatically as claims drop. Some of this information may make risk managers wonder if they have been overcharged by insurers who say they are barely scraping by.

But before you pick up the phone and give your insurance broker an earful, you might want to hear the other side of the story.

The data in a recent study are misleading, say some prominent insurance industry players, and the charges of profiteering come from an outfit that calls itself a consumer advocate group but is primarily concerned with opposing tort reform.

The claims in the recent report will be troubling to risk managers who struggle every year to get the best malpractice premiums and still see costs rise. There may be reason to question your insurance provider more closely and to understand the issues on a deeper level, but Healthcare Risk Management editorial advisory board member R. Stephen Trosty, JD, MHA, CPHRM, director of risk management for American Physicians Assurance Corp. in East Lansing, MI, says the claims of profiteering are unfounded.

"This is not an accurate and valid study, and I'm afraid it's going to upset people unnecessarily," says Trosty, whose employer is criticized in the report. "It does not take into account the realities of the industry."

Group has ties to Michael Moore, Erin Brockovich

The key conclusion in the report, "Falling Claims and Rising Premiums in the Medical Malpractice Insurance Industry," is that medical malpractice insurance rates for doctors have skyrocketed in recent years even though claim payments are down.

"These findings suggest that doctors have been price-gouged for several years as insurance industry profits have ballooned to unprecedented levels," the report says. It cites AIG, which is under investigation by state and federal authorities for its business practices, and Health Care Indemnity Inc., a subsidiary of HCA, the largest for-profit hospital chain, as among the worst offenders.

The study was prepared by former Missouri Insurance Commissioner Jay Angoff and was commissioned by the Center for Justice & Democracy (CJ&D) in New York City and coreleased by several other advocacy organizations, including Alliance for Justice, Consumer Federation of America, Public Citizen, USAction, and U.S. PIRG.

CJ&D describes itself as a group "that works to educate the public about the importance of the civil justice system and the dangers of so-called 'tort reforms.' CJ&D fights to protect the right to trial by jury and an independent judiciary for all Americans." The CJ&D web site (www.centerjd.org) offers a promotional video titled "Trial Lawyers, The Last Line of Defense."

In addition to a host of law professors, two of the most prominent members of the CJ&D Board of Advisors are filmmaker Michael Moore and legal activist Erin Brockovich, whose story was told in the movie starring Julia Roberts.

Based on info supplied under oath

Trosty notes that CJ&D is clearly opposed to tort reform, making it a friend of trial attorneys even if there is no formal association with them.

"We're going to see more of these studies, not fewer, and risk managers need to look closely at who is doing the study," he says. "If they are just fronting for trial lawyers or another group, they already have a preset message and there's the old adage that you can make data fit any message you want to deliver."

But there is no denying that some of the group's conclusions are intriguing and potentially troubling for risk managers.

The CJ&D report is an analysis of the 2000-2004 performance of each of the 15 largest AM Best-rated malpractice insurers in the United States. The conclusions are based upon an examination, for the first time, of statements supplied under oath to state insurance departments by the nation's top medical malpractice insurers. The report charges that the insurance industry has been overcharging providers significantly despite the fact that their claims payments, in real terms, have dropped since 2000.

CJ&D claims that contrary to the impression they have given health care providers and the general public, the losses that medical malpractice insurers predict they will pay in the future — the insurers' purported basis for current rate hikes — are down as well. Trosty says the report is wrong on that count.

Group: Numbers don't jibe with industry claims

Angoff says the leading malpractice insurers' Annual Statements indicate that they have been raising their premiums even though both their actual claims payments and their projected future claims payments have been falling.

"The Annual Statement data thus prove that doctors have been overcharged during the last several years," Angoff says. "Those overcharges are obviously bad news for doctors, but they have resulted in good news for investors in the leading pure malpractice insurance stocks, which have doubled during the last three years while the stock market, as a whole, has remained flat."

Joanne Doroshow, executive director of CJ&D, says no amount of explanation from the insurance industry can counter the cold, hard facts in the report.

"To put it bluntly, if you look at what the insurance companies say about why they raise premiums, and then look at the data in this report, the numbers just don't add up," she says. "The facts are very simple: Medical malpractice payouts are down yet insurance companies have significantly increased premiums. This shows that the entire campaign to limit liability for doctors over the last several years by capping compensation to injured patients has been a fraud, and that based on these data, insurers must know that it has been a fraud."

Report raises concern about overpricing

Two state attorneys general and one state insurance commissioner have spoken out in response to the report, strongly condemning the actions by insurers to dramatically raise insurance rates for doctors while claims are dropping.

In a written statement, Connecticut Attorney General Richard Blumenthal, JD, said, "The numbers underscore the need for much tougher, more aggressive oversight to prevent and punish profiteering. Federal and state regulators should thoroughly scrutinize recent rate increases and take appropriate corrective action."

Missouri Attorney General Jay Nixon, JD, said "the data in the Annual Statements filed under oath with state insurance departments, which this report discloses, call into question much of what the medical malpractice insurance industry has been saying publicly during the past several years. There is no excuse for malpractice insurers doubling their rates while their claims payments decrease."

Michigan Office of Financial and Insurance Services Commissioner Linda A. Watters said, "We are definitely disturbed by the numbers in this report, which offers evidence that doctors may be paying excessive premiums. In the market competition study that we recently issued, we considered loss ratios below 50% as patently excessive. If these carriers truly have loss ratios that are this low and yet they are still increasing rates, one has to wonder if they're gouging."

PIAA says study intentionally misleads

Nonsense, says Lawrence Smarr, president of the Physician Insurers Association of America, the trade group that represents some of the biggest insurers. He says Angoff has long argued that insurance industry greed is the primary cause of rising premiums, and he charges that Angoff misuses data to prove his point.

In particular, Smarr points to Angoff's claim that between 2000 and 2004, "the amount the major medical malpractice insurers have collected in premiums has more than doubled, while their claims payouts have remained essentially flat."

"This is, of course, not true," he says. "The methodology he uses to arrive at this predetermined and erroneous conclusion is intentionally misleading and does not comport with widely accepted analytical standards."

If the conclusions in the report were true, Smarr says, the medmal industry would be thriving as it overcharged its customers and put the money in the bank. The truth, he notes, is that medmal insurers have been going out of business in record numbers recently.

Smarr offers this list of what he calls major methodological flaws in the study that render the conclusions useless:

1. The study purposely excludes up to one-half of all insurer's costs.

Angoff's analysis inexplicably fails to take into account both allocated loss adjustment expenses (defense costs) and underwriting expenses (operating costs) paid or incurred, he says. These expenses together can equal the actual claim amounts paid out by an insurer and are directly related to the insuring and paying of claims, he adds.

2. The analysis compares apples to oranges in terms of time frames for claims.

Smarr says Angoff compares premiums written in a calendar year to claim payments made in the same year. While this would seem on the surface to make sense, it is actually not correct, he says. Medical liability is a "long-tail" line of insurance, and it usually takes between four and five years for a medical incident to work its way through the claim and adjudication/settlement process. Therefore, the premiums collected in any given year have absolutely nothing to do with the payments made in that same year (for which premiums were paid, on average, four or five years earlier). No legitimate actuary would ever make this kind of comparison, Smarr says.

Trosty explains further that the typical medmal case can take five to eight years for resolution, and so it doesn't make sense to compare this year's premiums to this year's claims. Juries are returning larger verdicts, he notes, so insurers must plan accordingly.

"What a company is paying out today is based on a premium that was probably paid five, six, seven years ago, at the rate providers were paying back then," Trosty says. "So you can't simply look at premiums today and claims today."

3. Angoff uses incorrect and misleading surplus calculation.

Angoff says that insurers have accumulated "record amounts" of surplus, but Smarr says he then cherry-picks which data-years to use in his calculation. He uses only the last three years, 2002-2004, because those years deviate from the surplus-consuming trend of the industry's past.

4. Risk-based capital smoke and mirrors mislead.

Smarr says Angoff inappropriately uses the National Association of Insurance Commissioners' (NAIC) risk-based capital standards to claim that insurers have more than adequate surplus. The NAIC however, states that insurers should seek to maintain surplus levels above the required minimum.

5. The analysis purposely leaves out the largest U.S. medmal insurance company.

Smarr charges that Angoff did this because the premium and cost data from the largest company, Medical Liability Mutual Insurance Co., would have thrown off his calculations and made his conclusions harder to reach.

Industry trying to catch up after deficit

Trosty suggests that risk managers should use the CJ&D study as an opportunity to more fully understand why they pay the premiums they do. Sit down with your insurance provider and ask for a thorough explanation of how the premium is priced, he says, with an eye beyond those factors unique to your own organization. A good discussion may put some fears to rest and it also will arm you in case your boss comes down the hall and asks why you let the insurance rip you off with high premiums.

Trosty notes that the insurance industry still is trying to catch up after years of charging premiums that were too low, based on claims, and that is why so many insurers have gone out of business or stopped offering medmal in some markets.

"A significant number of insurers went belly up in the last five years, and a large reason for that is that they were not charging adequate premiums," he says. "There was so much competition that everyone was trying to undercut each other. But that caught up to some companies and the dollars weren't there to pay off the claims, and they went bankrupt."

Trosty also points out that in most cases the insurance companies cannot just raise their premiums as much as they want. Rather, most states require the insurer to submit the proposed increases for approval, with proof that the increase is justified by actual claims payout and the company's surplus. Insurers are required to hold a certain surplus in reserve to account for any future increases in expenses.

"After companies started going out of business, state insurance departments started looking more closely at surpluses and found that some companies did not have enough in reserves to cover future claims," Trosty says. "So part of what we've been seeing is a correction of that problem. That effort to improve reserves has been going on for years, and that is part of the increase we've seen in premiums."

The insurance industry is, by its nature, dependent on predicting the future, Trosty says. Charging premiums based on today's statistics is never enough, because the company must have the money in future dollars to pay claims, and those claims may be higher than they are today. Jury verdicts are increasing in both severity and frequency, he notes, so insurers must plan for larger payouts in the future.

"If premiums only increased literally by the amount of today's losses, in 10 or 15 years you'd have no medical malpractice insurance companies in existence," he says. "Future losses and payouts are not going to be what they are today. The money you pay in premiums is not to pay today's claims, but rather it's to pay claims five or six years from now when we know statistically that claims will be higher."