Medical Malpractice: A State of Crisis

By: Abhas Gupta

U.S. health care is likely entering its next medical malpractice crisis. After stabilizing for most of the '90s, malpractice insurance rates are once again growing at alarming rates (see chart below of Ob/Gyn malpractice premiums⁴). This article explores some of the factors responsible for these high rates. The next post, 'Medical Malpractice and Tort Reform: A Brief Overview and Case Study', outlines strategies to control these costs.


Besides carving into hospital and physician profits, high malpractice insurance rates may also eventually threaten patient care by driving physicians out of high premium areas. Some have reported that the impact on patients' access to care is modest¹ and others have reported an increase in physician influx to states following the introduction of malpractice caps. Irrespective of this debate, the impact on physician profits and morale is substantial.

The General Accounting Office (GAO) undertook a study² in 2003 to investigate why malpractice rates were increasing so rapidly. They cited a number of reasons, some of which are not immediately obvious:

• Previously underpriced premiums - In the '90s, underwriters/insurers initially kept malpractice premiums high in anticipation of another malpractice crisis. However, the reality was less bleak: the number of claims stabilized and the financial markets were performing well. The result was an opportunity for other insurers to step in and undercut competitors. This practice became so intense that many insurers eventually underpriced their premiums to increase their subscriber base. All this was feasible, however, until the number of claims started increasing and the market trajectory changed course


• Downturn in the economy – as the economy slowed, insurers' investment returns suffered and the difference (between projections and actual growth) had to be bridged by increasing premiums


• Increases in claims and payouts - beginning in 1999, the median size of payouts increased precipitously (see the figure³ on the right). The GAO offers up a number of factors that may have contributed to this increase, including greater public awareness of medical errors (To Err Is Human was published around this time), lower levels of confidence and trust in the health care system (possibly due to managed care), improvements in diagnostic technology that in turn increased the intensity of care, rising public expectations about medical care, and an increasing reluctance of plaintiffs to accept settlements.

The urgency of today's malpractice crisis is decidedly more pressing than previous ones. For one, widespread managed care has forced providers to operate under tight profit margins and strict contractual agreements. Thus, providers who could previously pass on the increased cost of malpractice premiums to payers can no longer easily do so. Also, this crisis is taking place in the backdrop of the patient-safety movement, which may engender a distrust of physicians more broadly and thereby escalate the number of claims and claim payouts. Finally, the albeit small fraction of physicians who have chosen to relocate or retire in the face of increasing premiums highlights the suspicion that we are approaching a breaking point in provider profitability.

References:
1. Changes in Physician Supply and Scope of Practice During a Malpractice Crisis: Evidence from Pennsylvania. M Mello et al. Health Affairs, 2007
2. GAO-03-702 Medical Malpractice Insurance: Multiple Factors Have Contributed to Increased Premium Rates. General Accounting Office, June 2003
3. Current Award Trends in Personal Injury. 43rd ed. Jury Verdict Research. Horsham, PA.