Op-Ed: To Solve the Malpractice Insurance Crisis, Roll Back Rates, Not Rights

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Tom Paine

California has already reckoned with the “malpractice insurance crisis” now raging across the nation. Thirty years of experience in the Golden State shows that stringent regulation of insurance companies, not restrictions on the right to sue negligent doctors and hospitals, is the only way to control the price medical providers pay for liability coverage.

California has tried it both ways. In the mid-1970s, skyrocketing premiums galvanized doctors to join the insurance industry in campaigning for “tort reform.” Meeting in emergency session, lawmakers passed the 1975 Medical Injury Compensation Reform Act, known as MICRA. It caps patients’ damages for pain and suffering at $250,000, limits attorneys fees and shifts the cost of caring for victims of medical negligence to taxpayers. MICRA enriched the insurance industry by reducing what it had to pay out to victims of medical mistakes. But contrary to the insurers’ promises to the doctors, premiums continued to rise.

Ten years later, another insurance crisis hit the nation. California experienced massive increases in auto, business as well as malpractice insurance premiums. Once again, insurers blamed a “litigation explosion” for what they described as enormous claims losses. More “tort reform” was passed, but premiums continued to soar. In 1988, angry voters took matters into their own hands, passing a ballot measure that imposed the toughest regulation of insurance rates and practices in the nation. Under Proposition 103, premiums were frozen for nearly four years. Insurance companies were forced to refund over $1.2 billion to Californians, including over $75 million to physicians. Proposition 103 requires insurers to open their books and justify future increases, while limiting the expenses, projected claims and profits that insurers can pass on to consumers. It stripped the industry of its exemption from the antitrust laws. And it gave voters the right to elect the state insurance commissioner.

Only after Proposition 103 passed did medical malpractice insurance premiums go down and stabilize, according to the insurance industry’s own data.

The periodic insurance upheavals that afflict the nation have nothing to do with lawsuits or the size of damage awards, both of which, in the case of medical malpractice, have not increased significantly. Rather, insurance companies manufacture these “crises” when they decide to boost premiums in order to offset investment losses. In the 1970s and 1980s, falling interest rates reduced their investment income. The current crisis stems from insurers’ attempts to cash in on the stock market boom of the 1990s by abandoning conservative investment practices. The bear market cost the liability insurance companies $10.8 billion during the first half of 2002, according to conservative estimate by Weiss Ratings, an industry monitor. And they lost hundreds of millions in the stocks of crooked companies such as Enron and WorldCom. Insurers weren’t the only ones to get hurt in the market. But unlike the rest of us, insurers can dig into consumers’ pockets, raising premiums to cover their losses. That’s why industry profits soared by $11.9 billion in the first three quarters of 2002.

What about the huge losses that insurers insist are forcing them rate increases? They’re as phony as Enron‘s bookkeeping. Industry accounting practices permit insurers to write-off their claims payments — including projections of future claims — as losses for tax and regulatory purposes. Insurers therefore routinely inflate their projections of claims payments to make it look as if losses have soared. In previous crises, a huge portion of these phantom losses never materialized. Insurers then quietly book the “losses” as profits. Examination of their financial statements reveals the extent of the scam: from 1996 through 2001, insurers nationwide paid out an average of only sixty-nine cents in claims for every malpractice premium dollar they took in.

Lost in the debate over malpractice premiums is the true crisis: the epidemic of medical malpractice that kills over 160,000 American each year, according to the author of a landmark study by the Harvard School of Public Health. MICRA has made it impossible for many malpractice victims in California to hire a lawyer. Its cap — now worth $68,000 in 1975 dollars — has left many of the injured and next of kin without adequate resources. Finally, MICRA has undermined the powerful incentive for quality care provided by the threat of a lawsuit, protection that patients need in the era of profit-driven HMO care. That’s why California consumers are calling for MICRA‘s repeal, even as President Bush has joined striking doctors and the insurance industry in support of a federal MICRA law.


Bio: Harvey Rosenfield is the President of the California-based Foundation for Taxpayer and Consumer Rights and the author of Proposition 103. Web: http://www.consumerwatchdog.org

Consumer Watchdog
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