0 0 medical malpractice update prepared for:cas annual meeting 2003 new orleans prepared by:carl x....

1 1

Medical Malpractice Update

Prepared For: CAS Annual Meeting 2003New Orleans

Prepared By: Carl X. Ashenbrenner, FCAS, MAAAMilliman USA

Sarah Dore, CPCUIndependent Consultant

Kathy PinkhamHealthcare FirstA Division of Arthur J. Gallagher & Co. – Kansas City

November 10, 2003

2 2

Overview of Presentation

Profile of the National Medical Malpractice Market

Current State of the Medical Malpractice Market

What the future holds – Solutions and Forecasts

Closing Thoughts & Questions

Attachments

3 3

Topic #1:Profile of the National Medical

Malpractice Market

4 4

Property/Casualty Direct Premiums Written by Line - 2002(Amounts in $000s)

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

HomeownersMultiple Peril

Private-PassengerAuto Liability &Physical Damage

Commerical AutoLiability &

Physical Damage

MedicalMalpractice

Other Property andCasualty

WorkersCompensation

34.72%35.34%

6.66%

10.60%

2.20%

10.49%

5 5

*Estimated per A.M. Best using net written premium

National Medical Malpractice MarketGrowth in Direct Written Premium

199119921993199419951996199719981999200020012002

National Medical Malpractice MarketGrowth in Direct Written Premium

Direct Written Premium (Billions)

3.2%

5.9% 4.9% 11,4% 5.2% 13.2%

52.8%

26.5%9.8%

6.5% (4.6%) (3.0%) 3.9% 6.7%

9.7% 3.2% (1.5%) (0.9%) 3.0% (0.4%) 4.9%

15.6%

22.5%

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

6 6

National Medical Malpractice Market in 2002

With withdrawal from the market of the largest writer, the expectation was that the market share of the specialty writers (the so – called “bed pan mutuals”) would increase as this business was absorbed

As the next slide illustrates, the growth in market share was driven by the multi – line commercial writers rather than the specialty writers

7 7

National Medical Malpractice MarketCommercial Carriers vs. Specialty Writers in 2001 and 2002

2001 2002

Multi-Line Commercial

Writers42%

Publicly Traded Specialty Writers

14%

Non-Publicly Traded

Specialty Writers

44%

Multi-Line Commercial

Writers35%

Publicly Traded Specialty Writers

20%

Non-Publicly Traded

Specialty Writers

45%

Based on Distribution of Top 20 Writers

8 8

Profitability of the National Medical Malpractice Market

Underwriting Results

Investment Results

Overall Profitability

9 9

National Medical Malpractice MarketHistorical Combined Ratio

0.0%

25.0%

50.0%

75.0%

100.0%

125.0%

150.0%

175.0%

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

2002

Loss LAE Expense Dividend

1010

National Medical Malpractice MarketInvestment Gain Ratio

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1111

National Medical Malpractice MarketPre-Tax Operating Margin

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

1212

Myth or Reality?

There is a public perception that malpractice premiums are increasing to cover the losses that insurance carriers have suffered in the stock market

The reality is, that while investment returns are down, this is driven by a decline in interest rates, and not the stock market The overwhelming majority of invested assets for the

specialty carriers are in fixed income securities

1313

Medical Malpractice Specialty WritersComposition of 2002 Invested Assets

Other11%

Bonds77%

Affiliated Stock3%

Stocks9%

Bonds Stocks Affiliated Stock Other

14

Medical Malpractice Specialty WritersSummary of Yearly Change in A.M. Best Ratings

Change CategoriesYear No Change Upgraded Downgraded Change to NR-x* Total2000 50 3 3 0 562001 43 6 7 0 562002 42 2 8 2 542003 33 1 14 5 53

* x = 1 - 5Source: Yearly publication of Best's Key Rating Guide

15

Insolvencies in the Medical Malpractice Market1992-2003

0

1

2

3

4

5

6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1616

Insolvency Conclusion

Most companies that went insolvent were domiciled in “crisis” states

Most of these states have prior approval rate filing

Many of the larger companies that went insolvent expanded rapidly into new markets/territories/states before insolvency

1717

Topic #2: Current State of the Medical

Malpractice Market

1818

National Medical Malpractice MarketTop 20 Writers - 1978

1978 NetWritten

Rank Company Premium Market Share1 St. Paul Group $137,564,000 11.3%2 Aetna Life & Cas Grp 113,539,000 9.3%3 Medical Liability Mutual Insurance Company 99,340,000 8.2%4 Farmers Ins Grp 95,719,000 7.9%5 Medical Protective 71,219,000 5.9%6 Hartford Ins Group 54,092,000 4.4%7 Teledyne Group 53,904,000 4.4%8 Chubb Grp of Ins Cos 43,170,000 3.5%9 Illinois State Med Interins Exch 38,522,000 3.2%10 PHICO Group 24,660,000 2.0%11 CNA Insurance Companies 24,022,000 2.0%12 NORCAL Mutual Insurance Company 23,882,000 2.0%13 Southern California Physicians Ins Exch 22,310,000 1.8%14 Medical Interinsurance Exchange 21,558,000 1.8%15 The Doctors Company Interins Exch 19,456,000 1.6%16 American International Group 18,909,000 1.6%17 Pennsylvania Medical Society Liab Ins Co 17,289,000 1.4%18 PICO Group 16,511,000 1.4%19 Florida Physicians Insurance Reciprocal 14,599,000 1.2%20 USF&G Group 14,561,000 1.2%

Total Top 20 $924,826,000 76.0%Total US $1,216,217,000 100.0%

1919

National Medical Malpractice Market

Top 20 Writers

2002 Direct Written PremiumRank Company ($000's) % Growth Type of Company Market Share

1 MLMIC Group $958,842 36.1% Specialty - Mutual 10.7%2 American International Group 642,410 180.0% Multi-Line - Public 7.2%3 Ge Global Insurance Holding Company 633,229 56.4% Multi-Line - Public 7.1%4 Proassurance Corp Grp 443,275 30.5% Specialty - Public 5.0%5 Zurich American Ins Group 416,496 31.8% Multi-Line - Public 4.7%6 Doctors Company Group 404,949 49.1% Specialty - Reciprocal 4.5%7 Health Care Indemnity Inc 340,927 18.5% Specialty - Captive 3.8%8 CNA Insurance Group 329,422 31.2% Multi-Line - Public 3.7%9 FPIC Insurance Group Inc 291,530 44.6% Specialty - Public 3.3%

10 ISMIE Group 260,757 25.5% Specialty - Mutual 2.9%11 Norcal Group 246,744 -0.7% Specialty - Mutual 2.8%12 St. Paul Companies 217,997 -62.6% Multi-Line - Public 2.4%13 Mag Mutual Insurance Group 212,654 65.3% Specialty - Mutual 2.4%14 Allianz Insurance Group 207,381 -11.0% Multi-Line - Public 2.3%15 Markel Corporation Grp 186,205 123.7% Multi-Line Public 2.1%16 Physicians Reciprocal Ins 185,332 8.7% Specialty - Reciprocal 2.1%17 Promutual Companies 179,791 31.1% Specialty - Mutual 2.0%18 Fairfax Financial 177,194 105.4% Multi-Line - Public 2.0%19 A.P. Capital 176,627 19.9% Specialty - Public 2.0%20 State Volunteer Mutual 163,859 36.3% Specialty - Mutual 1.8%

Total Top 20 $6,675,621 23.4% 74.8%Total US $8,928,252 22.5% 100.0%

2020

National Medical Malpractice MarketTop 10 States

2002

Rank State

Direct Written Premium ($000's)

Market Share by State

Market Share of Top 2 Writers

1 New York $1,079,014 12.1% 68.6%2 Florida 825,203 9.2% 35.5%3 California 797,544 8.9% 36.4%4 Texas 583,954 6.5% 36.9%5 Illinois 556,041 6.2% 54.3%6 Pennsylvania 462,574 5.2% 39.8%7 Ohio 461,462 5.2% 26.7%8 New Jersey 415,865 4.7% 67.4%9 Georgia 315,961 3.5% 50.1%

10 Tennessee 291,865 3.3% 55.4%Total Top 10 $5,789,483 61.2% XXTotal US $8,928,252 100.0% 17.9%

2121

Direct Written PremiumTop Ten

Second Ten

Third Ten

Fourth Ten

Remainder of States

National Medical Malpractice – Rankings of Premium by State

2222

The AMA’s Crisis States In June of 2002, the American Medical Association released the results of a survey of its members, intended to evaluate the impact of the Professional Liability market on Access to Healthcare

The survey focused on whether the Professional Liability market was causing physicians to: Leave their current state of practice; Retire early; or Abandon high – risk services

Based on the survey results, the AMA classified: 12 states as in crisis 30 states (plus D.C.) as showing problem signs 8 states currently ok

2323

The AMA’s Crisis States In March of 2003 the AMA updated its survey results:

18 states in crisis 26 states (plus D.C.) showing problem signs 6 states currently ok

In July of 2003 the AMA again updated its survey results: 19 states in crisis 25 states (including D.C.) showing problem signs 6 states not experiencing problems

• Note: In August of 2003, one of these six states (Indiana) indicated a 72.6% increase would be implemented in fees for its patients compensation fund

2424

State of the Med Mal Industryas of July 2003

States in crisis

States showing problem signs

States showing no problem signs

Source: American Medical Association

19

25

6

2525

AMA States Identified as not Experiencing Problems -

Existence of Patients Compensation Fund and/or Cap on Damages

Existence PCF Statutory Limitationsof Attachment Non-Economic Total

State PCF Point Damages DamagesCalifornia No $250,000 NoneColorado No $250,000 $1,000,000Indiana Yes $250,000 None $1,250,000Louisiana Yes $100,000 None $500,000*New Mexico Yes $200,000 None $600,000*Wisconsin Yes $1,000,000 $350,000 (i) None* Total Damages Excludes Future Medical Costs

(i) Cap indexed with inflation

26

Big Newsin

Small Town

MUST SELL TO PAY

MALPRACTICE INSURANCE

MUST SELL TO PAY

MALPRACTICE INSURANCE

2727

Crisis is Real

Affordability IssueDoctors closing practices

Doctor’s Dilemma Insurers cannot make a profit and doctors

cannot afford the coverage. Rate increases are not the answer. The industry has to find a new way to manage the risk.

Extreme Measures RRGs, New Companies, Off-Shore Insurers

2828

Medicare vs. Malpractice Rates

Two major problems in current market: Affordability Availability

To address affordability, we compared Medicare reimbursement rates to medical malpractice rates for different states and specialties

2929

Medicare Reimbursement Rates

Overview of Rating ProcessThree cost factors for each procedure:

Work Expense Malpractice

Relativities by state/territory for each of the three factors

3030


Comparison Medical Malpractice Rates to Medicare Reimbursement Rates

Southern California - Internal Medicine

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Malp

racti

ce M

anua

l Rate

$0

$10

$20

$30

$40

$50

$60

$70

Medi

care

Reim

burs

emen

t

Manual Rate Medicare Reimbursement


Cook County, IL - Internal Medicine

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Malp

racti

ce M

anua

l Rate

$0

$10

$20

$30

$40

$50

$60

$70

Medi

care

Reim

burs

emen

t


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Cook County, IL - OB/GYN

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Malp

racti

ce M

anua

l Rate

$0

$500

$1,000

$1,500

$2,000

$2,500

Medi

care

Reim

burs

emen

t



Cook County, IL - Internal Medicine

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Malpr

actic

e Man

ual R

ate

$0

$10

$20

$30

$40

$50

$60

$70

Medic

are R

eimbu

rseme

nt


3232



Dade County, FL - General Surgery

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Malp

racti

ce M

anua

l Rate

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Medi

care

Reim

burs

emen

t



Dade County, FL - OB/GYN

$0

$50,000

$100,000

$150,000

$200,000

$250,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Malpr

actic

e Man

ual R

ate$0

$500

$1,000

$1,500

$2,000

$2,500

Medic

are R

eimbu

rseme

nt


3333

Conclusions and Observations

Medicare reimbursement rates declined for higher risk specialties (Surgery and OB/GYN) while Medical Malpractice rates increased substantially

Reimbursements not keeping up with medical malpractice rates

Medicare reimbursements slow to changes

3434

Conclusions and Observations….(Continued)

Higher severity specialties getting less reimbursement

Will need to see more patientsUse extenders more oftenMay lead to increased claims and severity

3535

Topic #3:What the Future Holds – Solutions and Forecasts

3636

Historical Problems

1970’s - Multi-line companies withdrew from the market – availability problem Solution - Physician owned insurers were

formed

1980’s – Rates increased substantially after prolonged soft market (affordability) Solution – Form changed from Occurrence to

Claims-Made coverage

3737

Current Problems

Companies withdrawing – availabilitySubstantial rate increases – affordabilityCapacity ConstraintsClaim Severity increasingHealthcare process – physicians must see

more patients or use extendersNursing shortage

3838

Current “Solutions”

PhysiciansPolicy changes – lower limits, deductiblesCaptives formingPhysicians “going bare”Hospitals providing coverageLeaving states / changing practices

3939

Current “Solutions”

InsurersRe-Underwriting BookRetrenching back to core businessStates/Specialties/Territory RestrictionsNew business moratoriumsUsing broad-brushed underwriting approach

4040

Prognosis and Proposals

Governmental Alliance for Healthcare Reform

• Administrative compensation system• Reasonable compensation for avoidable injuries

Reliable Medical Justice Act: Immunity from lawsuits with early offer of compensation for injury

Allow no-fault on certain specialties: OB, Trauma, Emergency

4141


Governmental (continued…)

States establish an administrative board to evaluate compensation

Establish special Health Care Courts with binding rules on causation, compensation, standards of care and related issues.

Current AMA agenda for capping pain and suffering awards

State Compensation Funds

4242


Physician Train physicians and other medical staff to treat

patients better• Set patient expectations properly

• Reinforce expectations frequently

• Spend more quality time with patients – accept reduction in patients seen per day, in order to reduce claims and insurance costs

• Gather patient feedback, have it evaluated independently

• Obtain real informed consent

4343


Insurer Reduce the number of claims – stop paying off

illegitimate claims to make them go away Ask physicians to retain some risk through deductibles Work only with physicians who will follow best

practices and who will insist that patients recognize their role in maintaining their own health and in keeping malpractice insurance costs manageable

Change form to recognize arbitration agreements

4444


Underwriting Use more efficient ways of evaluating risk

• Number of patients• Number of high-risk patients• Quality of care measurements• Adherence to standards of care, as set by specialty

colleges• Identify types of procedures that generate claims• Evaluate error-management programs in hospitals

and practices• Evaluate patient advocacy programs

4545


Underwriting Develop more coverage options

• Defense costs inside policy limits (46% of claims cost is litigation)

• Examination of alternative dispute resolution and ombudsman mediator program

• Tail limits as extension of last limits

4646


Actuary More detailed review of losses to drill down to

causation, rather than classifying and penalizing areas of practice

Recommend evaluative measures of these causes for the underwriter

Study the practices of low-risk doctors and develop rating factors based on those factors

Identify common factors among high-risk patients – i.e., help physicians select patients who won’t sue them

4747


Actuary (continued …) Create a measuring tool to evaluate the risk profile of

physicians• Identify the risk characteristics of physicians who have been

sued

• Build a national database that provides a risk profile

• Use the risk profile to load individual physicians’ rates

• Encourage high-risk physicians to leave the patient care area of medicine

• Establish price tags for behavior modification tools

4848

Topic #4:Closing Thoughts

& Questions

4949

Thank You!Carl X. Ashenbrenner, FCAS, MAAAMilliman [email protected](262) 784-2250

Sarah Dore, CPCUIndependent [email protected](630) 357-9176

Kathy PinkhamHealthcare FirstA Division of Arthur J. Gallagher & Co. – Kansas [email protected](816) 395-8501

5050

ATTACHMENTS

5151

Medicare Reimbursement RatesMedicare Reimbursement Rate Example

California - Los Angeles 2002 Cesarean DeliveriesWork Expense Malpractice TOTAL

RVU 24.43 15.73 4.38 State/Territory Relativity 1.056 1.139 0.955 Adjusted RVU 25.80 17.92 4.18 Conversion Factor 933.87$ 648.56$ 151.42$ 36.20$ Percentage/Total 54% 37% 9% 1,733.85$

Illinois - Chicago 2002 Cesarean DeliveriesWork Expense Malpractice TOTAL

RVU 24.43 15.73 4.38 State/Territory Relativity 1.028 1.092 1.797 Adjusted RVU 25.11 17.18 7.87 Conversion Factor 909.11$ 621.80$ 284.92$ 36.20$ Percentage/Total 50% 34% 16% 1,815.83$

Illinois - Chicago 2002 Office VisitWork Expense Malpractice TOTAL

RVU 0.72 0.71 0.03 State/Territory Relativity 1.028 1.092 1.797 Adjusted RVU 0.74 0.78 0.05 Conversion Factor 26.79$ 28.07$ 1.95$ 36.20$ Percentage/Total 47% 49% 3% 56.81$

5252

Frequency By Specialty

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3

4

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Specialty

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