Malpractice Reforms Fail To Cure Some States’ Premium Woes

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National Underwriter

Last week we reported on states where malpractice reforms succeeded in controlling costs. This week we review several states where reforms have not delivered all of their anticipated benefits.

Pain-and-suffering damage caps tied to an inflation index, constitutional challenges in court, interest-bearing periodic award payments, and growing medical expenses (which are not subject to any cap) have stymied malpractice reforms in some states, according to several prominent insurance executives, defense attorneys and tort reform supporters.

Although tort reform supporters often point to California’s Medical Injury Compensation Reform Act as the greatest success story for malpractice reform, other states that have tried to follow California’s lead have come up short of promised benefits, experts say.

Utah is one of approximately 20 states that emulated California’s MICRA, including its cap on non-economic (pain and suffering) damages. In addition, Utah limits attorney fees to one-third of the award, has a periodic payment option for damages over $100,000, and a collateral source rule to prevent multiple recovery of the same damages, according to Elliott Williams, a partner

in the Salt Lake City-based law firm Williams & Hunt LLC.

“Reform has been effective, but not as beneficial as expected,” said Martin Oslowski, president and CEO of the Utah Medical Insurance Association, a doctor-owned malpractice insurer in Salt Lake City. “Plaintiffs’ attorneys contend that the reforms are unconstitutional and have challenged them in court,” Mr. Oslowski pointed out. Several years ago, the statute of limitations as it applies to minors was struck down. Now there is a pending case challenging the non-economic damages cap as applied to minors, and a decision is expected in 12 to 18 months, according to Mr. Oslowski.

There have been other problems with Utah’s cap on non-economic damages. The cap was recently raised from $250,000 to $400,000 and tied to the Consumer Price Index after patients’ rights advocates argued that the cap had become too low due to inflation.

Another issue in Utah is the increase in cases with large awards for economic damages (mainly medical expenses and lost wages), which are not limited by the cap. “For example, a severely injured baby can result in $5 million or more in economic damages, and tort reform doesn’t affect that kind of award,” Mr. Oslowski explained.

Malpractice premiums in Utah have risen about 150 percent since 1995, noted Mr. Oslowski.

Missouri is another state that tied its non-economic damages cap, which was just increased to $567,000, to the CPI. However, this does not account for the state’s current malpractice woes, according to a February 2003 report by the Missouri Department of Insurance.

The report found that only 1.4 percent of claims reached the cap. Medical costs and lost earnings accounted for the majority of damages, the report concluded. The report also noted that the four largest malpractice insurers in the state raised rates by 28-to-97 percent during the past three years.

An inflator also caused Idaho’s non-economic damages cap to escalate, from the original $250,000 to a hefty $682,000, said Ken McClure, coordinator for the Idaho Liability Reform Coalition in Boise. The Idaho House recently passed, and forwarded to the Senate, a bill to cut the cap back to its original $250,000 and start the inflator meter running again. The bill also caps punitive damages at the greater of three times compensatory or $250,000.

“In the last three or four years before this one, malpractice rates increased about 5-to -5 percent a year. This year, it was 30-to-50 percent,” Mr. McClure noted. “It’s not a crisis yet. No doctors are striking or leaving the state. But the system isn’t as stable as it should be and something has to be done.”

In some states, reforms never got a chance to succeed, as they were struck down by the courts. Oregon is an example of a state where reforms were not given an opportunity to work, according to Frank O’Neil, senior vice president of ProAssurance, a medical malpractice insurer in Birmingham, Ala.

“Oregon passed tort reform and the savings started to be reflected in lower losses and rates,” Mr. O’Neil said. “Then the state supreme court held the reforms unconstitutional.”

Jim Dorigan, chief executive officer of Oregon’s doctor-owned insurer, Salem-based Northwest Physicians Mutual Insurance Company (NPMIC), confirms that his state was hit hard by the court’s ruling. The damage cap was held to conflict with the right to a jury trial and to have a jury determine damages, Mr. Dorigan explained.

“While the $250,000 cap was in force between 1988 and 1998, malpractice rates declined 50 percent. Since then, they are up 200 percent,” Mr. Dorigan said. “In 1998, malpractice insurers in Oregon paid $15 million in damages. In 2001, they paid $60 million.”

A report by the Governor’s Medical Professional Liability Task Force noted that NPMIC raised overall rates by 18.7 percent in January 2003. Oregon’s other major malpractice insurer, the Oregon Medical Association Risk Purchasing Group, increased rates by 59 percent.

Similar scenarios played out in other states as well, noted ProAssurance’s Mr. O’Neil. “Ohio had great tort reform, but the courts struck it down. A similar thing happened in Florida. In those states, rates were not reduced because the reforms were not in effect long enough.”

Montana is another state where malpractice reforms have been disappointing, according to Larry Smarr, president of Rockville, Md.-based Physician Insurers Association of America. Although Montana has a $250,000 cap on non-economic damages, increases in other types of damages are driving costs up. “Since 2000, Montana rates have increased 125 percent,” said Mr. Oslowski of Utah Medical, whose company writes malpractice coverage in Montana.

Even California has not been immune from malpractice cost increases.

MICRA is effective in keeping damage awards and premiums at reasonable levels, but does not guarantee that rates will never go up, said Donald J. Zuk, president and CEO of Los Angeles, Calif.-based SCPIE Companies, one of California’s largest medical malpractice insurers.

SCPIE recently requested from the state Department of Insurance a 15.6 percent overall premium increase for approximately 10,000 California doctors. Mr. Zuk pointed out that this increase is small compared to the 50 percent or greater premium increases insurers are requesting or getting in other states.

MICRA helped keep costs down, but no reform ever keeps rates from going up,” Mr. Zuk pointed out. “The $250,000 cap keeps increases in line, but it only applies to non-economic damages. It does not prevent economic damages from rising.”

Mr. Zuk added that malpractice is like any other line of insurance, where rates go up as costs increase. “The increase has nothing to do with insurer stock market losses, as some so-called consumer groups have alleged,” Mr. Zuk stressed.

One of the most vocal malpractice reform opponents is the Santa Monica, Calif.-based Foundation for Taxpayer and Consumer Rights, headed by consumer advocate Harvey Rosenfeld.

FTCR released a report which credits the rate and regulation changes mandated by the 1988 passage of Proposition 103 (of which Mr. Rosenfeld was the author and principal backer)–and not MICRA–as the catalyst for California’s favorable malpractice premiums. MICRA damage caps discourage attorneys from taking legitimate malpractice cases, according to Mr. Rosenfeld.

Mr. Zuk noted that California has steadfastly stuck by its $250,000 cap, which has worked well because it is not indexed to the CPI. Trial attorneys have attempted to convince the state legislature to increase the cap to $750,000 or more, but those attempts have failed, said Mr. Zuk.

Consumer Watchdog
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