Calculating Malpractice Claims
Thursday, December 29, 2005
The insurance industry has long argued that huge losses from malpractice suits -- now running more than $7 billion a year -- have forced it to hike malpractice premiums, which more than doubled last year in some cities and for some specialties.
But a new study by a consumer group shows that losses reported to state regulators -- the figures often cited by the industry -- were much larger than losses actually paid during a nine-year period.
The study, by the Foundation for Taxpayer and Consumer Rights, a Santa Monica, Calif., advocacy group, found that from 1986 to 1994 the industry reported to regulators losses of $39.6 billion but actually paid only $26.7 billion, 31 percent less. The losses were overstated in each of the nine years.
The study examined a period that ended a decade ago to compare losses insurers reported to regulators as "incurred" with the amount actually paid after malpractice claims had made their way through the court system -- a process that can take nine or 10 years. By that measure, 1994 is the most recent year for which industry-wide data were available.
What insurers initially report to regulators as "losses" actually are only estimates of what claims will cost once they are settled. Insurers don't pay every claim or loss they report, since some turn out to have no merit and others are more or less expensive than first believed. That is particularly true for claims involving litigation, which can take a long time and be hard to predict. But insurers use those estimates to help set premiums for the coming year. So prices can go up, even if the losses eventually turn out to be smaller.
The study's authors say it demonstrates that losses used to justify big premium hikes have been overstated. The Foundation for Taxpayer and Consumer Rights is funded in part by tort lawyers who sue doctors and hospitals in malpractice cases, as well as sue corporations in product liability cases.
"We're not saying they shouldn't use estimates, but it's how far off they are," said Harvey Rosenfield, a lawyer for the foundation. "It's out of the ballpark, not even close."
Insurance industry representatives dismiss the study's methodology, saying it selectively uses years when the industry overestimated its losses and ignores more recent years when the industry wound up paying more than it reported initially to regulators. Lately, they add, insurers' losses have outstripped estimates from only a few years ago.
"They cherry-picked the years," said Lawrence E. Smarr, president of the Physician Insurers Association of America.
Insurance representatives also say insurers rebated or lowered premiums during the years that losses were overstated. They note that at least half of the medical malpractice insurance market is written by doctor-owned mutual companies, which, they say, have no incentive to overcharge.
The study arises out of a long-running and polarized debate about malpractice losses and how to insure against them. On one side, insurers and doctors argue that the legal system is out of control and tighter restrictions are needed on how much plaintiffs can recover. On the other side, consumer groups and trial lawyers argue that the insurance industry manipulates prices and the medical profession doesn't do enough to control medical injuries and that those industries need closer supervision.
About 190 companies offer medical malpractice insurance, writing about $9.4 billion in policies a year. Traditional insurance accounts for only about a third of the market, according to some estimates, because many large providers rely on self-insurance and other arrangements. The United States spends about $1.7 trillion on health care annually.