oversight

Medical Malpractice Insurance: Multiple Factors Have Contributed to Premium Rate Increases

Published by the Government Accountability Office on 2003-10-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               United States General Accounting Office

GAO                            Testimony
                               Before the Subcommittee on Wellness and
                               Human Rights, Committee on Government
                               Reform, House of Representatives

For Release on Delivery
Expected at 2:00 p.m. EDT
Wednesday, October 1, 2003 	   MEDICAL MALPRACTICE
                               INSURANCE
                               Multiple Factors Have
                               Contributed to Premium
                               Rate Increases
                               Statement of 


                               Richard J. Hillman, Director 

                               Financial Markets and Community Investment 


                               Kathryn G. Allen, Director 

                               Health Care - Medicaid and Private Health Insurance Issues 





GAO-04-128T 

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss our work examining recent
increases in premium rates for medical malpractice insurance and the
effect of certain tort reform laws on premium growth. Since the late 1990s,
medical malpractice insurance rates have increased dramatically for
physicians in certain specialties in some states. These increases have
heightened concerns that some health care providers may no longer be
able to afford malpractice insurance, resulting in shuttered practices and
reducing access to high-risk services. In response, some states have
recently revised or have considered revising their tort laws, sometimes
placing caps on damages in malpractice lawsuits, and the Congress is
considering similar legislation.1

Our testimony today will focus on the factors that have contributed to the
recent increases in insurance premium rates and the differences in rates
among states that have passed varying levels of tort reform laws. Our
findings are based on two reports we recently issued addressing various
aspects of the recent increases in medical malpractice insurance rates.2
Recognizing that the medical malpractice market varies considerably
across states, as part of these reviews we judgmentally selected a number
of states and conducted more in-depth reviews in each of those states.3
Both our analyses and our conclusions are based in part on data and
information we received from the states we visited and in part on analyses
of national data from various sources.

In summary, multiple factors have contributed to the recent increases in
medical malpractice premium rates in the states we analyzed. First, since
1998, insurers’ losses on medical malpractice claims have increased
rapidly in some states. We found that the increased losses appeared to be
the greatest contributor to increased premium rates, but a lack of


1
 For example, on March 13, 2003, the House of Representatives passed the Help Efficient,
Accessible, Low-cost, Timely Healthcare (HEALTH) Act of 2003 (H.R. 5); on June 27, 2003,
a similar version (S.11) of this bill was introduced in the Senate.
2
 U.S. General Accounting Office, Medical Malpractice Insurance: Multiple Factors Have
Contributed to Increased Premium Rates, GAO-03-702 (Washington, D.C.: June 27, 2003),
and Medical Malpractice: Implications of Rising Premiums on Access to Health Care,
GAO-03-836, (Washington, D.C.: Aug. 8, 2003).
3
The states we visited were, for GAO-03-702, California, Florida, Minnesota, Mississippi,
Nevada, Pennsylvania, and Texas; and for GAO-03-836, California, Colorado, Florida,
Minnesota, Mississippi, Montana, Nevada, Pennsylvania, and West Virginia.



Page 1                                                                       GAO-04-128T
comprehensive data at the national and state levels on insurers’ medical
malpractice claims and the associated losses prevented us from fully
analyzing the composition and causes of those losses. For example, data
that would have allowed us to analyze claim severity at the insurer level on
a state-by-state basis or to determine how losses were broken down
between economic and noneconomic damages were unavailable. Second,
from 1998 through 2001, medical malpractice insurers experienced
decreases in their investment income4 as interest rates fell on the bonds
that generally make up around 80 percent of these insurers’ investment
portfolios. While almost no medical malpractice insurers experienced net
losses on their investment portfolios over this period, a decrease in
investment income meant that income from insurance premiums had to
cover a larger share of costs. Third, during the 1990s, insurers competed
vigorously for medical malpractice business, and several factors, including
high investment returns, permitted them to offer prices that, in hindsight,
did not completely cover the ultimate losses some insurers experienced on
that business. As a result, some companies became insolvent or voluntarily
left the market, reducing the downward competitive pressure on premium
rates that had existed through the 1990s. Fourth, beginning in 2001,
reinsurance rates for medical malpractice insurers also increased more
rapidly than they had in the past, raising insurers’ overall costs.5 In
combination, all of these factors have contributed to the movement of the
medical malpractice insurance market through hard and soft phases—
similar to the cycles experienced by the property-casualty insurance
market as a whole—and premium rates have fluctuated with each phase.6
Cycles in the medical malpractice market tend to be more extreme than in
other insurance markets because of the longer period of time required to
resolve medical malpractice claims, and factors such as changes in
investment income and reduced competition can exacerbate the
fluctuations.



4
 In general, state insurance regulators require insurers to reduce their requested premium
rates in line with expected investment income. That is, the higher the expected income
from investments, the more premium rates must be lowered.
5
Reinsurance is insurance for insurance companies. They routinely use reinsurance as a
way to spread the risk associated with the insurance they sell.
6
 Some industry officials have characterized hard markets as periods of rapidly rising
premium rates, tightened underwriting standards, narrowed coverage, and the withdrawal
of insurers from certain markets. Soft markets are characterized by relatively flat or slow
rising premium rates, less stringent underwriting standards, expanded coverage, and strong
competition among insurers.



Page 2                                                                       GAO-04-128T
               In an attempt to constrain increases in medical malpractice premium
               rates, states have adopted various tort reform measures.7 Of particular
               focus recently have been tort reform measures that include placing caps
               on monetary awards for noneconomic damages—such as pain and
               suffering—that may be paid to plaintiffs in a malpractice lawsuit. Available
               data, while somewhat limited in scope, indicate that rates of premium
               growth have been slower on average in states that have enacted tort
               reforms with noneconomic damage caps than in states with more limited
               reforms. Premium rates reported for three specialties—general surgery,
               internal medicine, and obstetrics and gynecology—were relatively stable
               on average in most states from 1996 through the late 1990s and then began
               to rise, but more slowly, in states with certain noneconomic damage caps.
               For example, from 2001 through 2002 average premium rates rose
               approximately 10 percent in the four states with noneconomic damage
               caps of $250,000 but approximately 29 percent in states with more limited
               tort reforms. As we have discussed, premium rate increases are influenced
               by multiple factors, and our analyses did not allow us to determine the
               extent to which the differences premium rate increases at the state level
               could be attributed to tort reform laws or to other factors.

               Overall, adequate data do not exist that would allow us and others to
               provide definitive answers to important questions about the market for
               medical malpractice insurance, including an explanation of the causes of
               rising losses over time and the precise effect of tort reforms on premium
               rates. This lack of data is due, in part, to the nature of regulatory reporting
               requirements for all lines of insurance, which focus primarily on the
               information needed to evaluate a company’s solvency. However,
               comprehensive data on individual awards actually paid in malpractice
               cases are also lacking, as are data on conditions in the health care sector
               that might affect the incidence and severity of medical malpractice suits.


               Nearly all health care providers buy medical malpractice insurance to
Background 	   protect themselves from potential claims that could otherwise cause
               financial distress or even bankruptcy. Under a malpractice insurance



               7
                Medical malpractice lawsuits are generally based on principles of tort law. A tort is a
               wrongful act or omission by an individual that causes harm to another individual. To
               reduce malpractice claims payments and insurance premiums and for other reasons, some
               have advocated changes to tort laws, such as placing caps on the amount of damages or
               limits on the amount of attorney fees that may be paid under a malpractice lawsuit. These
               changes are collectively referred to as “tort reforms.”



               Page 3                                                                      GAO-04-128T
contract, the insurer agrees to investigate claims, to provide legal
representation for the health care provider, and to accept financial
responsibility for payment of any claims up to a specified monetary level
during an established time period. The insurer provides this coverage in
return for a fee—the medical malpractice premium. The most common
physician policies provide coverage limits of $1 million per incident and $3
million per year.

Since 1999, medical malpractice premium rates for physicians in some
states have increased dramatically. Among the states that we analyzed,
however, we found that both the extent of the increases and the premium
levels varied greatly not only from state to state but across medical
specialties and even among areas within states. For example, the largest
writer of medical malpractice insurance in Florida increased premium
rates for general surgeons in Dade County by approximately 75 percent
from 1999 to 2002, while the largest insurer in Minnesota increased
premium rates for the same specialty by about 2 percent over the same
period. The resulting 2002 premium rate quoted by the insurer in Florida
was $174,300 a year, more than 17 times the $10,140 premium rate quoted
by the insurer in Minnesota. In addition, the Florida insurer quoted a rate
of $89,000 a year for the same coverage for general surgeons outside Dade
County, or about half the rate it quoted inside Dade County.

In order to improve the affordability and availability of malpractice
insurance and to reduce pressure on providers who could be faced with
heavy liabilities, all states have adopted varying types of tort reform
legislation. Tort reforms are generally intended to limit the number of
malpractice claims or the size of payments in an effort to reduce
malpractice costs and insurance premiums. Among the various types of
tort reform measures adopted by states during the past three decades,
caps on noneconomic damage awards have been the focus of particular
interest. They have also been an issue of some debate.8 Noneconomic


8
 Other tort reform measures adopted by states include placing caps on economic and
punitive damages; abolishing the “collateral source rule” that prevents a defendant from
introducing evidence that the plaintiff’s losses and expenses have been paid in part by
other parties such as health insurers or prevents damage awards from being reduced by the
amount of any compensation plaintiffs receive from third parties; abolishing “joint and
several liability” to ensure that damages are recovered from defendants in proportion to
each defendant’s degree of responsibility, not each defendant’s ability to pay; placing limits
on fees charged by plaintiffs’ lawyers; imposing stricter statutes of limitations that shorten
the time injured parties have to file a claim in court; and establishing pretrial screening
panels to evaluate the merits of claims before proceeding to trial.



Page 4                                                                         GAO-04-128T
                           damages are awarded to plaintiffs in a medical malpractice suit to
                           compensate for harm that is not easily quantifiable, such as pain and
                           suffering. Proponents of caps believe that such limits can help reduce the
                           rate of growth in malpractice insurance premiums by, among other things,
                           helping to prevent excessive awards and overcompensation and by
                           ensuring more consistency in jury verdicts. In contrast, opponents of these
                           caps believe that factors other than award amounts affect malpractice
                           insurance premiums and that caps can result in undercompensation for
                           severely injured persons. Congress is currently considering federal tort
                           reform legislation that includes several of the measures states have
                           adopted, including placing caps on noneconomic and punitive damages.


                           Among the factors that have contributed to increases in medical
Multiple Factors Have      malpractice premium rates are insurers’ losses, declines in investment
Contributed to the         income, a less competitive climate, and climbing reinsurance rates. We
                           found that increased losses appeared to be the greatest contributor to
Increases in Medical       premium rate increases, but a lack of comprehensive data at the national
Malpractice Premium        and state levels on claims and associated losses prevented us from fully
                           analyzing the composition and causes of those losses at the insurer level.
Rates

Rising Paid Losses         In the long term the price insurers need to charge for their premiums is the
Increase Insurers’         sum of actual paid losses and expenses, plus a reasonable return in a
Expectations of Required   competitive market.9 Paid losses, one of the two ways that insurers define
                           losses, are the cash payments insurers make in a given year, irrespective of
Premiums                   the year in which the claim giving rise to the payments occurred or were
                           reported. Most payments made in any given year are for claims that were
                           reported in previous years. Medical malpractice insurers saw these losses
                           begin to rise rapidly in 1998.

                           Short-term changes in rates—from year-to-year—are affected by incurred
                           losses, which, in contrast to paid losses, reflect an insurer’s expectations
                           of the amounts it will have to pay on claims reported in that year and any
                           adjustments, whether up or down, to the amounts the company expects to




                           9
                            We identified several factors suggesting that this market was not anticompetitive. That is,
                           these factors suggested that insurers in this market were not charging premium rates that
                           were inconsistent with expected losses.



                           Page 5                                                                       GAO-04-128T
pay out on claims from previous years that are still pending.10 Incurred
losses are the largest component of medical malpractice insurers’ costs.
For the 15 largest medical malpractice insurers in 2001—whose combined
market share nationally was approximately 64.3 percent—incurred losses
(including both payments to plaintiffs to resolve claims and the costs
associated with defending claims) accounted for around 78 percent, on
average, of the insurers’ total expenses.

Figure 1 helps illustrate the relationship between incurred and paid losses
and between short-term and long-term determinants of changes in
premium rates. The figure shows paid and incurred losses for the national
medical malpractice market from 1975 to 2001, adjusted for inflation. After
adjusting for inflation, we found that the average annual increase in paid
losses from 1988 to 1997 was approximately 3.0 percent but that this rate
rose to 8.2 percent from 1998 through 2001. Inflation-adjusted incurred
losses decreased by an average annual rate of 3.7 percent from 1988 to
1997 but increased by 18.7 percent from 1998 to 2001.




10
  That is, as more information becomes available on a particular claim, the insurer may
find that the original estimate was too high or too low and must make an adjustment. If the
original estimate was too high, the adjustment will decrease incurred losses, but if the
original estimate was too low, the adjustment will increase them.



Page 6                                                                       GAO-04-128T
Figure 1. Inflation-Adjusted Paid and Incurred Losses for the National Medical Malpractice Insurance Market, 1975–2001
(Using the CPI, in 2001 dollars)




                                         The recent increases in both paid and incurred losses among our seven
                                         sample states11 varied considerably, with some states experiencing
                                         significantly higher increases than others. From 1998 to 2001, for example,
                                         paid losses in Pennsylvania and Mississippi increased by approximately
                                         70.9 and 142.1 percent, respectively, while paid losses in Minnesota and
                                         California increased by approximately 8.7 percent and 38.7 percent,
                                         respectively.

                                         According to actuaries and insurers contacted with, increased losses affect
                                         premium rates in several ways. First, increasing levels of paid losses on
                                         claims reported in current or previous years can increase insurers’


                                         11
                                           For analysis of the medical malpractice insurance market, we visited seven states—
                                         California, Florida, Minnesota, Mississippi, Nevada, Pennsylvania, and Texas. We selected
                                         these states because they contained a mix of characteristics, including the extent of any
                                         recently reported increases in premium rates, status as a “crisis” state according to the
                                         American Medical Association, presence of caps on noneconomic damages, state
                                         population, and aggregate loss ratios for medical malpractice insurers within the state.



                                         Page 7                                                                      GAO-04-128T
                       estimates of what they expect to pay out on future claims. Insurers then
                       raise premium rates to match their expectations. In addition, large losses
                       on even one or a few individual claims can make it harder for insurers to
                       predict the amount they might have to pay on future claims. Some insurers
                       and actuaries we spoke with told us that when losses on claims are hard to
                       predict, insurers will generally adopt more conservative expectations
                       regarding losses—that is, they will assume losses will be toward the higher
                       end of a predicted range of losses. Further, large losses on individual
                       claims can raise plaintiffs’ expectations for damages on similar claims,
                       ultimately resulting in higher paid losses for both claims that are settled
                       and those that go to trial. As described above, this tendency in turn can
                       lead to higher expectations of future losses and thus to higher premium
                       rates. Finally, an increase in the percentage of claims on which insurers
                       must make payments can also increase the amount that insurers expect to
                       pay on each policy, resulting in higher premium rates. That is, insurers
                       expecting to pay out money on a high percentage of claims may charge
                       more for all policies in order to cover the expected increases.


Declining Investment   State laws restrict medical malpractice insurers to conservative
Income Has Affected    investments, primarily bonds. In 2001, the 15 largest writers of medical
Premiums               malpractice insurance in the United States12 invested, on average, around
                       79 percent of their investment assets in bonds, usually some combination
                       of U.S. Treasury, municipal, and corporate bonds. While the performance
                       of some bonds has surpassed that of the stock market as a whole since
                       2000, annual yields on selected bonds have decreased steadily since 2000.
                       We analyzed the average investment returns of the 15 largest medical
                       malpractice insurers in 2001 and found that the average return fell from
                       about 5.6 percent in 2000 to an estimated 4.0 percent in 2002. However,
                       none of the companies experienced a net loss on investments at least
                       through 2001, the most recent year for which such data were available.
                       Additionally, almost no medical malpractice insurers overall experienced
                       net investment losses from 1997 to 2001. We roughly estimated that, all
                       else held constant, the 1.6 percent decrease in average investment return
                       from 2000 to 2002 would have resulted in an increase in premium rates of
                       approximately 7.2 percent over the same period.



                       12
                         As reported by A.M. Best. These insurers included a combination of commercial
                       companies and non-profit physician-owned insurers. Some of these insurers sold more than
                       one line of insurance, and changes in returns on investments might not be reflected equally
                       in the premium rates of each of those lines.



                       Page 8                                                                      GAO-04-128T
                             Medical malpractice insurers are required by state insurance regulations to
                             reflect expected investment income in their premium rates. That is,
                             insurers are required to reduce their premium rates to consider the income
                             they expect to earn on their investments. As a result, when insurers expect
                             their returns on investments to be high, as returns were during most of the
                             1990s, premium rates can remain relatively low because investment
                             income will cover a larger share of losses on claims. Conversely, when
                             insurers expect their returns on investments to be lower—as returns have
                             been since around 2000—premium rates rise in order to cover a larger
                             share of losses on claims. During periods of relatively high investment
                             income, insurers can lose money on the underwriting portion of their
                             business but still make a profit. Although losses from medical malpractice
                             claims and the associated expenses may exceed premium income, income
                             from investments can still allow the insurer to operate profitably. Insurers
                             are not allowed to increase premium rates to compensate for lower-than-
                             expected returns on past investments but must consider only prospective
                             income from investments.


Downward Pressure on         Since 1999, the profitability of the medical malpractice insurance market
Premium Rates Has            as a whole has declined—even with increasing premium rates—causing
Decreased as Profitability   some large insurers to pull out of the market in some states or even
                             nationwide. With fewer insurers offering this insurance, there is less price
Has Declined                 competition and thus less downward pressure on premium rates.
                             According to some industry and regulatory officials in our seven sample
                             states, premium rates were kept from rising between 1992 and 1998, in
                             part, by price competition, even though losses generally did rise. In some
                             cases, premium rates actually fell. For example, during this period
                             premium rates for obstetricians and gynecologists covered by the largest
                             insurer in Florida—a state where these physicians are currently seeing
                             rapid premium rate increases—actually decreased by approximately 3.1
                             percent. Some industry participants we spoke with told us that, in
                             hindsight, premium rates charged by some insurers during this period
                             might have been lower than they should have been. As a result, the
                             premium increases that began in 1998 were actually bringing premiums
                             more in line with insurers’ losses on claims. Some industry participants
                             also pointed out that the pricing inadequacies of the 1990s were to some
                             extent masked by insurers’ adjustments to expected losses on claims
                             reported during the late 1980s and by their high investment income.

                             According to industry participants and observers, as the competitive
                             pressures on premium rates decreased, insurers apparently were able to
                             raise premium rates to a level more in line with their expected losses

                             Page 9                                                           GAO-04-128T
                          relatively quickly and easily. That is, absent the competitive pressure that
                          may have caused insurers to keep premium rates lower, insurers were able
                          to raise premium rates to match their loss expectations.


Reinsurance Premium       The rising cost of reinsurance was an additional reason for the recent
Rates Have Increased 	    increases in medical malpractice premium rates in our seven sample
                          states. Insurers in general purchase reinsurance to protect themselves
                          against large unpredictable losses. Medical malpractice insurers,
                          particularly smaller insurers, depend heavily on reinsurance because of
                          the potentially high payouts on medical malpractice claims.


The Medical Malpractice   The medical malpractice insurance market appears to roughly follow the
Market Moves through      same “hard” and “soft” cycles as the overall property-casualty insurance
Hard and Soft Insurance   market. However, the cycles tend to be more volatile—that is, the swings
                          are more extreme—because of the length of time involved in resolving
Cycles                    medical malpractice claims and the volatility of the claims themselves.
                          Hard markets are generally characterized by rapidly rising premium rates,
                          tightened underwriting standards, narrowed coverage, and often by the
                          departure of some insurers from the market. In the medical malpractice
                          market, some market observers have characterized the period from
                          approximately 1998 to the present as a hard market. (Previous hard
                          markets occurred during the mid-1970s and mid-1980s.) Soft markets are
                          characterized by slowly rising premium rates, less stringent underwriting
                          standards, expanded coverage, and strong competition among insurers.
                          The medical malpractice market from 1990 to 1998 has been characterized
                          as a soft market.




                          Page 10                                                         GAO-04-128T
                       In order to constrain the rate of growth in malpractice insurance
States with Tort       premiums, states have adopted various tort reform measures, some of
Reforms that Include   which include placing caps on monetary awards for noneconomic
                       damages. Premium rates reported for the physician specialties of general
Certain Noneconomic    surgery, internal medicine, and obstetrics and gynecology—the only
Damage Caps Had        specialties for which data were available—were relatively stable on
                       average in most states from the mid- to late 1990s and then began to rise,
Lower Recent Growth    but more slowly among states with certain noneconomic damage caps.13
in Malpractice         From 1996 to 2000, average premium rates for all states changed little, as
Insurance Premium      did average premium rates for states with certain caps on noneconomic
                       damages and states with limited reforms, increasing or decreasing
Rates                  annually by no more than about 5 percentage points on average.14 After
                       2000, premium rates began to rise across most states on average, but more
                       slowly among states with certain noneconomic damage caps. In particular,
                       from 2001 to 2002, the average rates of increase in the states with
                       noneconomic damage caps of $250,000 and $500,000 or less were 10 and 9
                       percent, respectively, compared with 29 percent in the states with limited
                       reforms (see fig. 2).15




                       13
                         Premium rate data are reported by the Medical Liability Monitor (MLM). MLM is a private
                       research organization that annually surveys professional liability insurance carriers in 50
                       states and the District of Columbia to obtain their base premium rates for the specialties of
                       internal medicine, general surgery, and OB/GYN.
                       14
                        We focused our analysis on those states with noneconomic damage caps as a key tort
                       reform because such caps are included in proposed federal tort reform legislation and
                       because published research generally finds these caps to have a greater impact on medical
                       malpractice premium rates and claims payments than some other tort reform measures.
                       15
                         Because research suggests that any impact of tort reforms on premiums can be expected
                       to follow the implementation of the reforms by at least 1 year, we grouped states into their
                       respective categories based on reforms in place as of 1995 and reviewed premium rate data
                       for the period 1996 through 2002. Four states had noneconomic damage caps of $250,000
                       (California, Colorado, Montana, Utah), 8 states had noneconomic damage caps of $500,000
                       or less (Hawaii, Louisiana, Massachusetts, Michigan, Missouri, North Dakota, South
                       Dakota, and Wisconsin), and 11 states had limited reforms, defined as no damage caps of
                       any type or collateral source reforms (Arkansas, District of Columbia, Kentucky,
                       Mississippi, Nevada, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and
                       Wyoming). We categorized the remaining 28 states as “other reforms” for analysis
                       purposes, indicating they had a noneconomic or total damage cap greater than $500,000,
                       any punitive damage cap, or any collateral source rule reform.



                       Page 11                                                                       GAO-04-128T
Figure 2: Premium Rates for Three Physician Specialties Rose After 2000, but to a
Lesser Extent in States with Noneconomic Damage Caps




Notes: GAO analysis of MLM base premium rates, excluding discounts, rebates, and surcharges,
reported for the specialties of general surgery, internal medicine, and OB/GYN.
Premiums are adjusted for inflation to 2002 dollars.
a
This category excludes states with caps of $250,000.


The recent increases in premium rates were also lower for each reported
physician specialty in the states with these noneconomic damage caps.
From 2001 to 2002, the average rates of premium growth for each specialty
in the states with these noneconomic damage caps were consistently
lower than the growth rates in the limited reform states (see fig. 3).




Page 12                                                                          GAO-04-128T
Figure 3: Recent Premium Growth Was Lower for Three Physician Specialties in
States with Noneconomic Damage Caps




Note: GAO analysis of MLM base premium rates, excluding discounts, rebates, and surcharges,
reported for the specialties of general surgery, internal medicine, and OB/GYN.
Premiums are adjusted for inflation to 2002 dollars.
a
This category excludes states with caps of $250,000.
Other studies have found a relationship between direct tort reforms that
include noneconomic damage caps and lower rates of growth in
premiums.16 For example, in a recent analysis of malpractice premiums in
states with and without certain medical malpractice tort limitations, the
Congressional Budget Office (CBO) estimated that certain caps on damage
awards in combination with other elements of proposed federal tort
reform legislation would effectively reduce malpractice premiums on
average by 25 to 30 percent over the 10-year period from 2004 through


16
  Direct reforms are limits on amounts that can be recovered in a malpractice action
including caps on noneconomic or total damages, abolition of punitive damages, collateral
source rule reforms, and abolition of mandatory prejudgment interest.



Page 13                                                                          GAO-04-128T
2013.17 A 1997 study that assessed physician-reported malpractice
premiums from 1984 through 1993 found that direct reforms, including
caps on damage awards, lowered the growth in malpractice premiums
within 3 years of their enactment by approximately 8 percent.18

Differences in malpractice premiums across states are influenced by
several factors other than noneconomic damage caps. First, the manner in
which damage caps are administered can influence the ability of the cap to
restrain claims and thus premium costs. Some states permit injured parties
to collect damages only up to the specified level of the cap regardless of
the number of defendants, while other states permit injured parties to
collect the full cap amount from each defendant named in a suit.
Malpractice insurers informed us that imposing a separate cap on amounts
recovered from each of several defendants increases total claims payouts,
which can hinder the effectiveness of the cap in constraining premium
growth. Second, tort reforms unrelated to caps can also affect premium
and claims costs. For example, California tort reform measures include
not only a $250,000 cap but also allow other collateral sources to be
considered when determining how much an insurer must pay in damages
and allow periodic payment of damages rather than requiring payment in a
lump sum, among other measures. Malpractice insurers told us that these
provisions, in addition to the cap, have helped to constrain premium
growth in that state. In contrast, while Minnesota has no caps on damages,
it has experienced relatively low growth in premium rates. Trial attorneys
say this development is the result of mandatory prescreening requirements
that have reduced claim costs, and thus premiums, by preventing some
meritless claims from going to trial. Third, state laws and regulations
unrelated to tort reform, such as premium rate regulations, vary widely
and can influence premium rates. Finally, insurers’ premium pricing
decisions are affected by their losses on medical malpractice claims and
income from investments, and other market conditions as we previously
discussed. Because of these various factors, we could not determine the
extent to which differences in premium rates across states were
attributable solely to damage caps or also to these additional factors.




17
 U.S. Congress, Congressional Budget Office, Cost Estimate: H.R. 5 – Help Efficient,
Accessible, Low-cost, Timely Healthcare (HEALTH) Act of 2003 (March 2003).
18
 Daniel P. Kessler and Mark B. McClellan, “The Effects of Malpractice Pressure and
Liability Reforms on Physicians’ Perceptions of Medical Care,” Law and Contemporary
Problems, vol. 670, no. 1 (1997): 81-106.



Page 14                                                                    GAO-04-128T
                     A lack of comprehensive data at the national and state levels on medical
Comprehensive Data   malpractice claims filed against various insurers and the losses associated
on the Composition   with these claims prevented us from answering important questions about
                     the market for medical malpractice insurance, including exactly why
and Causes of        losses are rising over time and, as just noted, the extent to which tort
Increased Losses     reforms may have affected premium rates. For example, comprehensive
                     data that would have allowed us to fully analyze the frequency and
Were Lacking         severity of medical malpractice claims at the insurer level on a state-by-
                     state basis did not exist. As a result, we could not determine the extent to
                     which increased losses were the result of an increased number of claims,
                     larger claims, or some combination of both. In addition, data that would
                     have allowed us to analyze how losses were divided between settlements
                     and trial verdicts or between economic and noneconomic damages were
                     not available. Insurers do not submit information to the National
                     Association of Insurance Commissioners on the portion of losses paid as
                     part of a settlement and the portion paid as the result of a trial verdict, and
                     no other comprehensive source of such information exists. As a result, we
                     could not analyze the effect of certain tort reforms on noneconomic
                     losses, and thus on premium rates.

                     While more complete data on the insurance industry would help provide
                     better answers to questions about how the medical malpractice insurance
                     market is working, other data are equally important to analyzing the
                     underlying causes of rising malpractice losses and associated costs. These
                     data relate to factors outside the insurance industry, such as policies,
                     practices, and outcomes in both the medical and legal arenas. However,
                     collecting and analyzing such data were beyond the scope of our reviews.


                     As we have discussed, multiple factors, including falling investment
Conclusions          income and rising reinsurance costs, have contributed to recent increases
                     in premium rates in our sample states. However, we found that losses on
                     medical malpractice claims—which make up the largest part of insurers’
                     costs—appear to be the primary driver of rate increases in the long run.
                     And while losses for the entire industry have shown a persistent upward
                     trend, insurers’ loss experiences have varied dramatically across our
                     sample states, resulting in wide variations in premium rates. In addition,
                     factors other than losses can affect premium rates in the short run,
                     exacerbating cycles within the medical malpractice market.

                     We have also seen that the severe premium rate increases of the last few
                     years followed a period of relatively stable premium rates in the early
                     1990s, when insurers had excess reserves and sufficient investment

                     Page 15                                                           GAO-04-128T
income to keep rates low. But by the mid- to-late 1990s, as insurers
exhausted their excess reserves and investment income fell below
expectations, the profitability of malpractice insurance had declined.
Regulators found that some insurers were insolvent, and in 2002 one of the
two largest medical malpractice insurers, which had been selling
insurance in almost every state, stopped selling medical malpractice
insurance altogether. Other companies reduced the amount of insurance
they sold and consolidated their markets, resulting in large rate increases
in many states. It remains to be seen whether these increases will be found
to have exceeded those necessary to pay for future claims losses, as they
did in the 1980s.

Tort reforms, particularly those that limit noneconomic damages, have
frequently been proposed as a means of controlling increases in medical
malpractice insurance premium rates. While the limited available data
indicate that premium rates have grown more slowly in states with tort
reform laws that include certain caps on noneconomic damages, a lack of
comprehensive data prevented us from determining the exact effects of
these laws on premium rates. Tort reforms and other actions that reduce
insurer losses below what they otherwise would have been should
ultimately slow the increase in premium rates, if all else holds constant.
But several years may have to pass before insurers can quantify and
evaluate the effect of the laws on losses from malpractice claims and
before an effect on premium rates is seen.

More time is also needed before we can determine whether the medical
malpractice insurance market will continue its cycle from the current hard
to a soft phase and thus are better able to understand the part the cycle
itself has played in the rise in premium rates. However, any evaluation of
the effect of tort reforms and cyclical behavior on premium rates requires
sufficient data. In order for Congress and others to better understand
conditions in the medical malpractice market and the effects of the actions
that have already been or will be taken, better data need to be collected,
including more comprehensive data on insurers’ losses, jury verdicts in
malpractice cases, and conditions in the medical industry that might affect
the incidence and severity of medical malpractice suits. Without question,
the absence of such data complicates the ability of insurers, regulators,
and the Congress to understand current market conditions and to
formulate effective, sustainable solutions.




Page 16                                                        GAO-04-128T
                   Mr. Chairman, this concludes our prepared statement. We would be
                   pleased to answer any questions you or other members of the
                   subcommittee may have at this time.


                   For further information regarding this testimony, please contact Richard J.
Contacts and       Hillman at (202) 512-8678 or Kathryn G. Allen at (202) 512-7059.
Acknowledgements   Individuals from our Financial Markets and Community Investment team
                   making key contributions to this testimony include Lawrence Cluff,
                   Patrick Ward, Melvin Thomas, and Andrew Nelson. Individuals from our
                   Health Care team making key contributions to this testimony include
                   Randy DiRosa and Corey Houchins-Witt.




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                   Page 17                                                        GAO-04-128T
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