Mo. 2003 Malpractice Claims Hit Record Lows

Missouri medical malpractice claims filed and paid fell to all-time lows in 2003 while insurers enjoyed a cash-flow windfall, Department of Insurance Director Scott Lakin reported.

“If Missouri’s malpractice insurers suffered a crisis, it was a one-year phenomenon that began and ended in 2002,” Lakin said. “The Missouri malpractice insurance environment is sound. The insurers’ problems clearly have passed, but policyholders, especially physicians, are left with high rates – perhaps much too high – and too few options for coverage.

“Our major problem is convincing companies to enter and compete in the Missouri market after so many insurers folded or withdrew nationally. Policyholders desperately need price competition again, but insurers across the U.S. have been unwilling to devote more capital to this line of business so far.”

Based on company and self-insured filings:

New claims filed against health-care providers and physicians – an important indicator of future malpractice settlements — plunged to all-time lows (under laws passed in 1986).

Claims filed against physicians last year fell 13.8 percent to 664, compared to a previous low of 704 in 2001. Claims against all providers fell 16.4 percent to 1,369 last year, compared to the previous mark of 1,554 in 2001.

Claims closed with payments set a record low overall in 2003 and almost did so for physicians. Medical malpractice settlements or, in rare cases, jury verdicts were awarded in 448 cases, or 21.3 percent below the previous year and four fewer than the all-time low in 2000. For physicians, claims paid fell 25.8 percent from 229 to 170, almost matching the record low of 158 in 1998.

The percentage of premiums paid out to victims fell to the lowest levels seen since the late 1980s, when the last medical malpractice “crisis” was resolving itself.

Lakin said such low payouts commonly occur when the “insurance cycle” – a recurring boom-and-bust pattern – is moving into a highly profitable phase; rates continue to rise even after they are sufficient to cover liabilities and normal profits.

Licensed medical malpractice insurers for physicians paid out only 38 cents of every dollar in premium collected, compared to 63 cents in 2002 and a 10-year average of 62 cents. For the top five insurers that write the bulk of physician policies in Missouri, the results were even brighter: only 24 cents paid on the dollar. For all health-care providers, malpractice insurers spent 45 cents.

The same pattern of low payment ratios extended to the unregulated “surplus lines” malpractice market. Those insurers only paid out 29 cents on the dollar.

Actual dollars paid in benefits to malpractice victims fell dramatically – by $26 million (24 percent) for the licensed market overall, $27.7 million (35 percent) for licensed physician business and $18 million (70 percent) for unregulated surplus lines carriers.

Average payments per claim fell slightly overall to $207,068. Average payments in cases involving physicians rose 9.1 percent, almost all to cover increased economic damages for lost wages and future medical care of victims. The median – or more typical – total settlement in Missouri was $111,250.

Missouri data again showed no evidence to support the national rhetoric about “skyrocketing judgments” and “out-of-control juries.” The number of payments that reached Missouri’s then-maximum of $557,000 on non-economic or “pain and suffering” damages fell from 13 in 2002 to six last year, or the average number in recent years. The number of payments that exceeded $1 million – mostly economic damages for lost wages and medical costs – fell from 16 to 13; only three cases of 448 exceeded $2 million.

Despite the focus on non-economic damages, they dropped to an all-time low as a percentage of total payments in Missouri. In 2003, non-economic damages accounted for only 41.1 percent of awards, compared to a previous low of 45.2 percent in 1992.

The legislative proposals to further reduce Missouri’s cap on non-economic damages would have produced few savings – or premium reductions – in 2003. The House has approved lowering the cap from its current $565,000 to $350,000, permanently, without adjustment for inflation. In 2003, that would have affected only 23 cases in Missouri, but reduced payments to those victims by $4.4 million, or about $191,000 each for patients who are usually the most severely injured. That would have translated into only a 2.2 percent reduction in the average medical malpractice premium. The Senate has voted for a $450,000 cap with an annual inflation factor that would have had less impact on costs and premiums.

The severity of injuries in closed claims subsided slightly in 2003 after a surge the previous year. In particular, the number of deaths involved dropped from 205 to 135, or about the norm. Overall, deaths and permanent disabilities accounted for 65 percent of all claims paid, or the usual ratio.

On a scale of 1 (temporary emotional damage) to 9 (death), the average claim closed in 2003 dropped from 6.1 to 5.9, although both scores indicate permanent, significant injury. The severity of claims filed in 2003, however, rose slightly, almost tying the all-time record set in 2001.

While losses paid, claims paid and claims filed dropped sharply in 2003, medical malpractice insurers increased spending by 43.6 percent for legal expenses to fight those cases. Medical Assurance Co. – now the largest insurer of physicians in Missouri – spends more than 60 percent of its earned premium dollars on legal costs, or more than twice what it paid to victims last year. On average, medical malpractice insurers spent more than one-third of their premiums to contest patients’ claims.

The top three insurers for physicians – Medical Assurance Co., Medical Protective Co. and Intermed – all posted profits last year, totaling $60 million, compared to after-tax losses of $21.2 million in 2002.

Lakin said encouraging trends in the data have not yet affected pricing of the state’s medical malpractice insurers for physicians. The top three insurers raised their rates 19, 26 and 82 percent last year. (MDI does not approve rates under state law.) He said MDI had determined competition no longer helps keep check on Missouri malpractice rates – in sharp contrast to the late 1990s when some companies simply copied and filed leading competitors’ rates as their own. Malpractice insurers in Missouri largely have eliminated competitors’ prices as a factor in rate-setting, based on company rate filings.

Since mid-2001, eight national companies that had at least 70 percent of the Missouri malpractice market have withdrawn from the business or become insolvent; none of those decisions resulted from Missouri conditions.

That competitive void, however, left Missouri health-care providers searching for coverage when other insurers are not expanding this line of business. Although eight new physicians’ insurers have entered the Missouri market in the past year, only one – Missouri Physicians Mutual, which wrote almost $19 million in coverage – did appreciable business last year.

Lakin noted that in 2003 malpractice companies in Missouri did not drop reserving for future losses even though the number of filed claims declined sharply and the severity of injuries fell slightly. Licensed insurers only reduced their estimates of losses on 2003 claims by 2.6 percent from the year before.

Physicians’ insurers indicated they expect eventually to pay out 90 percent of the premium for claims filed last year (incurred loss ratio), down from 117 percent in 2002. Of the top five insurers for physicians, three posted incurred loss ratios below 60 percent on their Missouri business, which would be highly profitable for most property and casualty lines. The five had a combined loss ratio of 72 percent.

However, almost one-fifth of all physicians’ incurred losses were reported by Chicago Insurance Co., which entered the Missouri market in 1999 and then began withdrawing in early 2002. The company, which competitors have cited for substantially underpricing its policies, wrote only $3.8 million of coverage here in 2003, but reported $13.4 million in actual payouts and $19.8 million in anticipated settlements, much of which represented higher payments and revised estimates for claims filed in earlier years.

The surplus lines market also had upbeat financial filings, based on projected losses for 2003 business. These insurers reported they eventually expect to pay only 69 cents on the premium dollar for 2003 claims.

National malpractice spending up 21.6%, compared to 12.9 in Missouri

Overall, health-care providers paid a total of $198 million for commercial medical malpractice coverage last year, up 12.9 percent from 2002, from both licensed and surplus lines insurers. Nationally, malpractice insurance spending rose 21.6 percent. Missouri physicians’ premiums rose 18 percent with licensed firms; surplus lines breakdowns are not available.

Unlike in most “hard” markets, the Missouri data reportedly shows little evidence that physicians and other providers have been forced to seek coverage through surplus lines and other unregulated carriers, which typically are much more expensive.

While total spending on surplus lines coverage rose from $26 million in 2002 to $28.9 million, that market continued to account for only 13 percent of malpractice premiums. The share of Missouri malpractice business in 2003 was actually greater than two years ago, when unregulated insurers accounted for more than 18 percent of premiums.

A new trend may have begun emerging in 2003 – an expansion of economic damages from medical costs and lost income to include other out-of-pocket expenses, such as home renovations to accommodate disabled victims.

In 2003, the average award for economic damages was 79 percent more than the insurers’ evaluations of actual wage losses and medical costs, which historically have accounted for almost all economic damages. Similar trends have been noted in California, which also limits non-economic but not economic damages.

Medical malpractice, unlike other lines of insurance, is dominated by litigation rather than simple claims filing. As a result, in 2003, victims of malpractice had to wait 47 months – almost four years – to receive any assistance with their medical bills or to replace their lost income. The wait has lengthened by three to four months in the past two years.