MEDICAL LIABILITY “Availability & Affordability

& the Medical Malpractice Act”

Bob Kellogg

April, 2012

Practice Resource Group of New Mexico

- Success Series -

Contents• Physician Facts – Medical Liability Insurance – USA• Tort Environment, Medical Malpractice Act of 1976• Patients Compensation Fund • Competition; Insurers, TDC (APCapital)• Profitability• Claim Frequency & Severity & Comparisons• New Mexico Problems• A Cure for Medical Malpractice• Conclusions• Insurance Department • Questions & Answers

Statistics - Medical Liability, USA

• 100,000 lives are impacted each day due to medical mistakes

• Each day, 100 medical errors take place• Three times per day, wrong side surgery happens

(mostly breast surgery mistakes)• Each year, 15,000 instruments are left in patients• Three most common & expensive claims:

– Birth trauma, brain injury, mis-diagnosis• “Hospital are no place for sick people”

– Infections cause more deaths than malpractice

Statistics - Medical Liability, USA

• The American Medical Association reports that an average of 95 medical liability claims are filed for every 100 physicians, almost one per doc.

• Nearly 61% of all physicians over 55 have been sued at least once.

• Before the age of 40, more than 50% of obstetricians/gynecologists have already been sued.

• Ninety percent of general surgeons age 55 and over have been sued.

• In the US, it is not a matter of “IF” an independent healthcare provider will be sued, it is a matter of “WHEN”!!!

Statistics - Medical Liability, USA• The AMA reports that the severity of claims is on the rise

(… as are the number of trial attorney’s AND the funding of trial bar associations).

• While the vast majority of claims are dropped or decided in favor of physicians as “meritless,” the cost of defending docs is costly to the national health care costs and patient care.

• The average defense cost for a dropped claim is $22,000, and over $100,000 for cases that go to trial. Defense costs are as high as 48% of the incurred losses, compared to an average 16% for casualty insurance claims.

• Some feel these costs are “validation” for the need for national and state healthcare intervention/reform ????

Statistics - Medical Liability, USA• Today, some constituencies claim physicians practice “self

defense medicine” which may (?) increase healthcare costs as much as by 30% (?) or more. This may (?) also reduce lawsuits? Who knows with absolute certainty ????????????

• Shortage of physicians:– By 2025, the US will be short by 159,300 docs– New Mexico is currently short 2000 docs, 400 primary care

• Incomes of independent physicians has been reduced significantly in last 20 years.– Current average income is $146,000

• More deaths occur by healthcare provider and hospitals errors than by gun owners.

Statistics - Medical Liability, USA

• Exit of Travelers Insurance from Medical (Malpractice ) Professional Liability (MPL) insurance in 1975 created.

• Travelers inability to obtain rate adequacy lost nearly $1.50 for every $1.00 earned, creating an insurance crisis, but also opportunities for state and regional insurers to expand.

• Led to the formation of New Mexico Physicians Mutual Liability Company (purchased by APCapital in 1999).

• Nationally, MPL Liability premium accounts for approximately 4% of all insurance company premiums in all property/casualty lines… over $10 billion.

• Rates have increased 300% in the last dozen years, despite most states having passed “reform” laws that benefited insurers and healthcare providers.

Tort Environment in New Mexico• In New Mexico, the Medical Malpractice Act of 1976 is the legal/regulatory

template for healthcare providers and insurers• A pure form of “comparative negligence.” Thus, a claimant’s negligence

will never bar recovery but, instead will only reduce the claimant’s recovery in proportion to his fault.

• In any lawsuit to which comparative negligence applies, a tortfeasor is only liable for that portion of the judgment equal to his share of the fault.

• In New Mexico, hospitals are not generally liable for the acts of independent contractors who are members of medical staff, only for their “employees.”

• Any medical malpractice action for injury or wrongful death must be brought within three years from the date when the alleged incident occurred.

Tort Enviroment continued

• According to Swiss Reinsurance Company, New Mexico is a good state to do business in for insurers due to the low liability limits, pay-out caps and overall low jury awards.

• The New Mexico Medical Society (NMMS) and Greater Albuquerque Medical Association (GAMA) have effectively held the New Mexico Trial Bar “at bay” in their attempts legislate a raise current liability caps.

• Legislators were told an increase in the cap would increase medical liability premiums significantly... as much as 25%.

• Under the Medical Malpractice Act, independent healthcare providers must obtain liability coverage from an insurer on an occurrence based form, or maintain a cash deposit with the Superintendent of Insurance.

• New Mexico generally requires the use of expert testimony to prove a claim, unless the alleged negligence is so apparent as to be within a layman’s comprehension.

Patients Compensation Fund (PCF)

• The Patients Compensation Fund is the primary component of the 1976 Medical Malpractice Act (copied from Indiana).

• The PCF provides an excess layer of professional liability coverage for its member healthcare providers. Awards are capped at $600,000, except for medical care costs and punitive damages, which are not capped.

• All medical liability claims against healthcare providers in the PCF must be reviewed by the New Mexico Medical Review Commission before they can be filed in court..

• There is a three-year statute of limitations… except for minors under the age of six have until their ninth birthday to file a claim.

• The PCF is administered by the Superintendent of Insurance

Patients Compensation Fund (PCF)

• The PCF is funded solely through surcharges (ie. Premiums) levied against its healthcare providers.

• The latest actuarial study (summer 2011) evaluated the PCF to be solvent.

• Definition includes – “…doctors of medicine, hospital, outpatient healthcare facility, osteopathy, chiropractor, podiatrist, nurse anesthetist, or physician assistant”. Not business entity.

• We currently have approximately 1800 insured members in the PCF.

• To be eligible, a primary layer of annual occurrence form coverage of $200,000 (per occurrence) must be obtained from an authorized/approved insurance company.

• Unfortunately, not many insurance carriers are actively writing in New Mexico… nor many insurance agents are well-versed in this specialty line of insurance.

Insurers – Medical Liability• The top ten insurers in New Mexico write approximately $50

million of Direct Written Premium.• With the assistance of several prominent physicians, legislators

and the NMMS, New Mexico (like in most states), formed a mutual insurance entity known as New Mexico Physicians Mutual Liability Insurance Company (NMPMLIC) after Travelers Insurance Company decided to stop writing medical malpractice insurance in the 1970’s.

• This company was managed by New Mexico physicians and several hired insurance professionals.

• After financial struggles and pressure from audits from the New Mexico Insurance Department, NMPMLIC was acquired by APCapital (MICOA) domiciled in Lansing, Michigan.

• New management and financial surplus brought stability to the organization. The NMMS partnered with APCapital and endorsed their portfolio and presence.

Source: NAIC Supplement A to Schedule A to Schedule T, Highline Data Service

APCapital (APAssurance)The Doctors Company

• APCapital was a Michigan based multiple line insurance company that was formed by several regional insurers:– Michigan Physicians Mutual Insurance Company– Kentucky Medical Insurance Company– State Mutual Insurance Company– New Mexico Physicians Mutual Liability Company

• Management and policyholders (via proxy votes) decided to take the company public through a Initial Public Offering on NASDAQ in December 2000 (… call letters ACAP).

• The IPO was extremely successful, raising over $150 million.• APCapital was sold to The Doctors Company (TDC) in 2010.• Their book of business remains the largest entity insuring New

Mexico physicians, with approximately 60% of all medical liability writings.

Profitability - Loss Ratio• Incurred Loss Ratio + Expense Ratio = Combined Ratio• Typical Loss Ratio (75%) plus typical Expense Ratio (25%) =

Typical Combined Ratio (100%)• According to standard statutory accounting principles and AM

Best actuarial formulas, 100% Combined Ratio is BREAK-EVEN for insurance companies.

• Typical property/casualty insurers budget for a 100% Combined Ratio, and make their money on “investment Income”… above and beyond their break-even underwriting margin.

• The medical liability insurers are banking enormous profits, nationally and also in New Mexico (… see 2006 L/R).

• Very little competition in this specialty line detracts from lowering rates, particularly in New Mexico!

Source: NAIC Supplement A to Schedule A to Schedule T, Highline Data Service

PROFITABILITY• Medical Malpractice Liability has been the most profitable line

of insurance in the property/casualty industry each year over the last decade!

• Profitability is largely due to legislative REFORM in nearly every state in the US.

• Reform has come in the areas of:– Caps on non-economic damages (pain & suffering)– Caps on legal fees charged/collected– Coverage change from occurrence to claims-made form– Structured settlement

• Self defense medical practices• Insurers unwillingness to lower rates

Claim Frequency higher in New Mexico, but declining

Source: National Practitioner Data Bank, Public Use Data File; US Bureau of Labor Statistics

Paid Severity has been lower in the Mountain States

Source: National Practitioner Data Bank, Public Use Data File

(Claims limited to $1M)

Partially attributable to relatively low healthcare cost

Source: Centers for Medicare & Medicaid Services (2011). Health Expenditures by State of Residence

Claim comparison by type-note obstetrics claims

Source: National Practitioner Data Bank, Public Use Data File

Obstetrics - This despite New Mexico having a higher birthrate

Source: Centers for Disease Control and Prevention, National Center for Health Statistics

New Mexico has slightly more Death & Quad claims

Source: National Practitioner Data Bank, Public Use Data File

6.0%8.7%

38.7%

45.9%

“I’m Sorry” doesn’t mean I’m Liable

• Survey published in Health Leaders Media (February 2012) revealed 20% of physicians said in the last year, they had not fully disclosed an error because they were afraid of a lawsuit.

• University of Michigan Health System adopted an “I’m sorry” policy/strategy and cut litigation costs in half… and new claims declined by 40%.

• At least 36 states have adopted legislation that generally bar physicians’ expression of compassion/sympathy as admissions of liability.

• Rule of thumb: The rude get sued!!!

New Mexico Problems

• Illness is not limited to the Santa Fe corridor, where nearly 90% of our physicians practice.

• Employed physicians – increasing pattern of physicians to forgo independence, in favor of security of employment of hospitals/facilities.

• Unable to keep UNM Medical School graduates here in New Mexico.

• Other surrounding states offer more favorable and lucrative business opportunities… and better quality of life overall.

• In comparison to other states, statistics reveal New Mexico is generally in the lowest percentile of all the “bad” categories (education, poverty, crime, income).

New Mexico Problems

• Research and Polling - Brian Sanderoff survey to over 2500 New Mexico physicians:

• What are the “dissatisfiers” of practicing medicine in New Mexico?– 1.) Medicare and Medicaid reimbursement rate low.– 2.) Medical (Malpractice) Professional Liability

“availability” and “affordability.”– 3.) Quality of family life opportunities better

elsewhere, outside New Mexico.

Conclusions – Bob Kellogg

• New Mexico Medical Professional Liability premiums have increased faster than rate increases countrywide.

• The Doctors Company (APCapital) dominates in the market… few insurers are willing to file/comply with New Mexico Medical Malpractice Act (Occurrence Form mandate).

• Rates have increased nearly 300% over the last dozen years.• The Patients Compensation Fund appears to be solvent.• New Mexico claim frequency is higher than in most states, but

declining…and claim severity is lower.• The Insurance Department and legislature is reaching out to

insurers nationally, to come to New Mexico. Easier to do business with now than prior administrations (John Franchini background).

• Be informed buyers! Shop your Medical Professional Insurance and seek professional assistance with knowledgeable agents.

John Franchini Insurance Superintendent

• Medical Malpractice Act of 1976

• Current Regulatory Events– SB333 veto– Entity Coverage Gap– Potential upcoming Reform to the New

Mexico 1976 Medical Malpractice Act – PCF solvency (handout)

Tort Environment in New Mexico• The medical Malpractice Act of 1976 is the legal/regulatory

template for healthcare providers and insurers.• A pure form of “comparative negligence.” Thus, a claimant’s

negligence will never bar recovery but, instead will only reduce the claimant’s recovery in proportion to his/her fault.

• In any lawsuit to which comparative negligence applies, a tortfeasor is only liable for that portion of the judgment equal to his/her share of the fault.

• In New Mexico, hospitals are generally not sued for the acts of independent contractors (physicians) who are members of medical staff, only for “employees.”

• Any medical (malpractice) liability action for injury or wrongful death must be brought within three years from the date when the alleged incident occurred (Statute of Limitations).

Tort Environment in New Mexico

• According to Swiss Reinsurance Company, New Mexico is a good state to do business in for insurers due to low liability limits (pay-out caps) and overall low jury awards.

• The New Mexico Medical Society (NMMS) and Greater Albuquerque Medical Association (GAMA) have effectively held the New Mexico Trial Bar “at bay” in their attempts to legislate a significant raise in current liability caps.

• Legislators were told an increase in the cap would increase medical liability premiums… as much as 25%.

• Under the Medical Malpractice Act, independent healthcare providers must obtain liability coverage from an approved insurer on an “occurrence” based form, or maintain a cash deposit with the Superintendent of Insurance.

• New Mexico generally requires the use of expert testimony to prove a claim, unless alleged negligence is so apparent as to be within a layman’s comprehension.

QUESTIONS & ANSWERS

Member InformationEric Burgmaier, CPA Mark TobiassenBurgmaier and Associates, CPA’s Action COACH Business Consulting

(505) 299-8383 (505) 798-2552

Martha Carpenter Seth IngersollNAI Maestas and Ward Commercial Real Estate Premier Wealth Management

(505) 998-1567 seth@premierwealthmgt.com

Kristy Cothern Sherri WellsBank of Albuquerque Document Imaging of the Southwest

(505) 837-4242 (505) 821-0841

Bob Kellogg Scott WoodMesa Medical Insurance MedNet Revenue Recycle Management

(505) 270-6938 (505) 341-0070

Lyle PinoAccuStat Medical Transcription

(505) 828-4432

Burgmaier,