Malpractice insurance rates lower, but why?

After a run-up in rates in the first half of the 2000s that left many physicians wondering how they would stay in business, the cost of medical professional liability coverage in Tennessee has been falling thanks to tort reform laws and economic conditions that discourage plaintiffs’ attorneys from filing lawsuits.

Rates in Tennessee are trending downward “in round numbers, probably 30 percent,” according to John Duncan, manager of property and casualty filings with the Tennessee Department of Commerce and Insurance. Duncan said rates rose rapidly for several years until 2001-03 and then increased by single digits in 2004-05.

Tennessee’s market is dominated by State Volunteer Mutual Insurance Company, a physician-owned company based in Tennessee that controls 81.4 percent of the market. About 20 companies split the rest of the market, with the next largest, Medical Protective, having less than 5 percent.

At State Volunteer, rates have fallen 34 percent since 2006, including a 23.1 percent drop in 2010 and an 8.4 percent reduction in 2011. Meanwhile, State Volunteer dividends have averaged nearly 11-12 percent of premiums during 2010-11.

Those reductions followed a period of rapidly escalating rates during the early 2000s, including increases of 17.3 percent in 2001, 15.1 percent in 2002, and 16.3 percent in 2003. Rates stabilized in 2006 and remained unchanged or saw a slight drop through 2009.

Part of the credit goes to tort reform laws passed in Tennessee in 2008. Those reforms require plaintiffs’ attorneys, within 90 days of filing a case, to certify through a medical expert who is competent to testify in Tennessee that a defendant physician is guilty of some form of negligence.

According to Yarnell Beatty, general counsel for the Tennessee Medical Association, those laws are ensuring attorneys focus their attention only on medical providers who truly are at fault, rather than filing “shotgun lawsuits where someone has a bad outcome, and then the plaintiff’s attorney will sue everybody whose name is in the medical record, and then they sort it out later.”

F. Michael Minch, MD, president of the Tennessee Medical Association, said physicians began seeing a difference in their general medical liability insurance rates in 2009, the year after the law was passed.  “In the past, many times people would get sued just because their name was on the chart,” he said. “Any particular chart might have 15 doctors taking care of them.”

It is difficult to assess precisely how much the 2008 law has reduced lawsuits because malpractice claims can be made years after the event, but the number of cases does appear to be lessening. From a high of 4,187 cases pending in 2004, the number of claims has been steadily reducing to 2,146 in 2010. Each claim represents a provider being sued – further indicating that the number of “shotgun lawsuits” is diminishing.

Steve Williams, president and CEO of State Volunteer Mutual Insurance Company, credited the tort reform laws for reducing lawsuits. In an email, he said, “We believe that the October 2008 change in Tennessee law has been responsible for much of the decline in the frequency of new malpractice suits, although our claim frequency was going down somewhat before the law took effect.”

Williams pointed out that other states that had no reforms or even had court reversals of previous reforms also saw claim reductions. He said he had no explanation for that trend, joking that, “We may be better accountants than sociologists.”

According to Larry Smarr, president of the Physician Insurers Association of America (PIAA), claims frequency nationally has dropped 25-30 percent from four or five years ago, at about the same time that rates peaked in 2007-08. Those claims are leading to lower rates nationwide.

The nation’s struggling economy is a major cause of that reduction, Smarr said, explaining that plaintiffs’ attorneys are unwilling to foot the high costs of filing suit unless they believe they have a nearly airtight case. PIAA data shows only 30 percent of claims filed against doctors result in a payment to the plaintiffs. Only five percent of all cases go to trial, and the plaintiff wins only 20 percent of the time when they do.

Smarr said insurance companies are currently very profitable because in the past they overestimated losses, enabling them to now offer competitive rates while paying generous dividends. He said that even when market conditions change, it takes years to show up as rate decreases because insurance companies must keep sufficient resources in the bank until the statute of limitations has ended on potential cases.

“It’s like turning a battleship around. It takes 4.5 years from the time a medical incident happens until that claim is closed, and so you don’t see the good news in your financial results for a while,” he said. “And so rates stayed relatively high at a time when the number of claims was dropping off.”

One factor that doesn’t appear to be affecting rates: health care reform. The Patient Protection and Affordable Care Act didn’t contain much related to medical malpractice insurance, though Smarr said about a dozen sections could produce additional liabilities. 

Nationwide, according to Smarr, the data doesn’t show that the number of large verdicts has decreased. Still, he said that famous seemingly over-the-top lawsuit awards like the McDonald’s coffee spill case appear to have had an effect on the general public’s appetite for big awards. “We know anecdotally that that type of litigation activity has really sensitized juries to the jackpot issue, but I don’t necessarily see that in our data,” he said.

The Tennessee Civil Justice Act of 2011 passed by lawmakers earlier this year limited non-economic damages to $750,000, or to $1 million in certain cases, such as spinal cord injuries that result in the loss of the use of limbs. TMA’s Beatty said he expects that law to further reduce rates, though the effect won’t be known until long after it goes into effect October 1.

“I think it’s going to be another factor out there that would reduce the number of lawsuits filed, but more importantly, it creates predictability for medical malpractice carriers to know what their overall risk is going to be,” he said. “When you have a possibility of open-ended jury verdicts or awards, it could be in the tens of millions of exposure for a certain physician, and we’ve seen that in a few cases in Tennessee in the last few years.”

Minch said that he expects rates to further lower because of the impact of the 2011 law and then rise with inflation. He said the TMA doesn’t have any further reforms on its agenda because it wants to see the effect of the 2011 law.

So what could happen that would reverse this trend toward reduced premiums? PIAA’s Smarr said an increase in the number of reported claims would be the first cause. Another factor: Insurers rely on investment income to offset their need for premiums, and a significant change, such as a rise in interest rates that would make their current indebted bonds worth less, could force them to make up the difference by charging higher rates to physicians.

Regardless, he said, “I’m not saying insurance is cheap. It isn’t. But it’s not as expensive as it used to be, for sure.”

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