Insurance Mess: Is The Worst Over?
IT DOESN'T FEEL THAT WAY TO OPHTHALMOLOGISTS CRUNCHED
BY HIGH PREMIUMS, BUT
SOME SIGNS POINT TO RELIEF.
BY JERRY HELZNER, SENIOR ASSOCIATE EDITOR
Weinstock, M.D., a Canton, Ohio, ophthalmologist, went into practice in 1964, his first year's premium for malpractice insurance was all of $41. In 2003, the average medical liability insurance premium for an ophthalmologist in the United States was about $15,000, with rates varying widely from state to state.
And while ophthalmologists still pay relatively low malpractice insurance premiums compared with specialists such as orthopedists, neurosurgeons and obstetrician/gynecologists, rate increases ranging from 15 to 50% per year over the past 3 years have left ophthalmologists in some areas of the country feeling threatened and concerned about the future of their practices. In a survey taken by Ophthalmology Management for this article, many ophthalmologists say rising malpractice insurance premiums have caused them to develop more defensive risk management strategies. Others say continued increases may force them to cut costs and spend less time with patients in order to keep their practices profitable.
For this article, Ophthalmology Management talked to physicians, attorneys, insurance industry representatives and industry analysts to determine how widespread the malpractice insurance crisis is, what problems it's causing for ophthalmologists, and what actions are being taken around the country to resolve the situation.
|Foes Agree on Some Aspects of the
While plaintiffs' attorneys and insurance industry representatives are at odds on how to equitably resolve the malpractice insurance crisis, they do agree -- at least to some extent -- on the following aspects of the situation:
Insurance companies helped precipitate the crisis.
In the early 1990s, several major insurers, including The St. Paul Companies, CNA and
PHICO, became aggressive in writing medical malpractice insurance. Some insurers engaged in a price war, offering physicians unrealistically low premiums in order to gain market share. When these companies began to see big losses on their medical malpractice business, they either exited the marketplace, as St. Paul and CNA did, or went bankrupt, as PHICO did. With diminished competition and rising claims, the few companies that continued to write medical malpractice insurance then began to raise rates sharply.
Insurance companies' recent investment returns have been poor, exacerbating the problem. Plaintiffs' attorneys and some academics have cited the slump in the financial markets and ensuing economic downturn that began in 2000 as a key contributing factor in causing insurers to raise rates to make up for shortfalls in investment returns. Insurance company representatives and independent analysts agree that this is a valid point, but note that insurance company investments are regulated and exposure to the stock market is limited by law.
"Though insurance carriers have a relatively small percentage of their assets invested in equity markets, several were significantly impacted when the stock market fell so dramatically," says Robert J.
Widi, manager of member services and sales for the Ophthalmic Mutual Insurance Company
(OMIC). "But a much bigger factor in rising premiums for malpractice insurance has been a spike in the frequency and severity of claims that the industry has experienced in recent years."
Malpractice insurance rates should soon stabilize, or even decrease. Here's the good news that plaintiffs' attorneys, insurers and independent analysts all agree on. With malpractice premiums at historically high levels, financial markets recovering, and individual states beginning to take steps to address the crisis, writing medical liability insurance will once again become an attractive business for insurance companies.
"I do think we're past the absolute worst of it. Nationally, I expect to see relief in the form of lower or leveling rates in the relative near term," says Mark N. Rose, M.D., J.D., vice president legal affairs, Aultman Health Foundation, Canton, Ohio. "At recent premium levels, new companies will enter the market."
Adds plaintiffs' attorney Neal A. Roth, a partner in Grossman and Roth, PA., and past president of the Academy of Florida Trial Lawyers: "The insurance cycle is turning now. You'll see new companies come in and rates ease off."
Premiums Vary Widely
Clearly, your perception of this "crisis" will vary depending on where your practice is located and whether caps on non-economic damages are in place in your state. Ophthalmologists in California, the Dakotas, Arkansas and many rural areas can rightfully ask: "What crisis?" But those eye M.D.s practicing in Pennsylvania, Ohio, New York, New Jersey, south Florida and a number of other states are now feeling threatened by the continued rise in their medical liability premiums. For them, the crisis is very real.
To illustrate how the malpractice insurance issue differs for individual ophthalmologists in various states, following are some responses we received to our survey:
Jarstad, M.D., who practices in Washington state, is paying $39,000 this year for medical liability insurance after absorbing a $3,500 rate increase in 2003.
"I may have to reduce my LASIK cases or stop doing the procedure," says Dr.
Jarstad. "There's a big difference in my premium for doing more than 20 cases a month."
Dr. Jarstad says his high insurance premium "forces me to be more efficient than ever and sometimes spend less time with patients than I would like to, making practice more stressful."
► In Miami, one eye surgeon reports that his practice has experienced a 400% rise in premiums over the past 3 years, to a current annual rate of $60,000. This surgeon says he's limiting his surgical procedures and has stopped seeing patients in hospital emergency rooms. He's now looking into the legal ramifications of "going bare" (practicing without insurance coverage).
He's particularly incensed when physicians from outside the community are brought in by attorneys to testify on behalf of plaintiffs.
"I believe that a doctor who says I did something wrong should be from my community and be accountable for his or her statements," he says.
► And in Kentucky, a surgeon whose high-volume practice has been sued several times is now paying $172,000 to insure two M.D.s and two
"We have a great risk management program," he says. "I have a scribe who follows me and writes down everything I tell a patient. We show patients tapes of our procedures and point out possible complications. What bothers me is when you have an unrelated event, such as a patient having a retinal detachment 2 months after cataract surgery, and they claim it was your fault."
► Yet David Chang, M.D., who practices in California, where a $250,000 cap on non-economic damages and limits on attorneys' contingency fees have long been in place, has no problems with his premiums. He paid only $6,300 last year for his malpractice coverage.
"We have reasonable rates in California because of state laws that limit 'pain and suffering' awards," says Dr. Chang. "Ophthalmologists need to support organized medicine's efforts to limit non-economic awards through the legislative process."
► But a Minnesota eye surgeon saw his medical liability premium increase 50% in 2003 to about $15,000, though his practice has a risk management program in place. He says his premium would have to rise another 50 to 100% for him to make changes in the way he conducts his practice.
What does this respected ophthalmologist see as a solution to ever-rising malpractice premiums?
"We need caps on pain and suffering, and payment of both sides' legal costs by the losing side."
Korenfeld, M.D., practices in a suburban area of Missouri and has seen his insurance premiums increase from $6,500 a year a decade ago to about $9,500 today. Dr. Korenfeld has been active in trying to help pass tort reform in Missouri.
"I'm rated to do the most risky procedures in ophthalmology," he says. "I don't have a specific risk management program, but I take the informed consent process very seriously. I have made my own videotapes for all the surgeries that I do in which I talk directly to patients about virtually all problems that can arise from the procedure, how likely they are to occur, and how you fix them. We encourage family members to watch the tapes with the patients, and we document who also saw the tape. Patients are also given a transcript of the video, and I will encourage patients to obtain a second opinion if they have any concerns about having a specific procedure done."
► And remember Dr. Frank
Weinstock, who had that $41 annual insurance premium back in 1964? He paid $4,000 in 2003 without doing surgery. His partners paid about $12,000 each.
Dr. Frank Weinstock's annual premium was $41 in 1964.
Some Are Taking Action
Though efforts have been made to pass federal tort reform legislation, the issue still remains in the hands of the individual states, and can be heavily influenced by the political power of plaintiffs' attorneys in each state.
With numerous physicians in states where the medical liability crisis is most acute either retiring, leaving or reducing the range of procedures they perform, insurance reform activists in specific states have come up with a variety of ways to stem the exodus of doctors.
► In Texas, the state legislature recently took the extreme step of putting through an amendment to the state constitution mandating caps on non-economic damages. By changing the constitution, Texas can now prevent the state judiciary from ruling that the caps are unconstitutional.
► In Ohio, where the state supreme court has three times ruled caps unconstitutional, the legislature has again passed a law calling for caps, this time counting on a more friendly court to uphold the law.
► In Pennsylvania, where physicians are moving out or closing up at an alarming rate, Democrat Gov. Edward Rendell recently pushed through a 25-cents-per-pack increase in the cigarette tax to provide doctors relief from paying heavy assessments into the state-operated catastrophic malpractice insurance Mcare fund for 2 years. In return for this relief, doctors must agree to continue to practice in Pennsylvania for 3 years. Physicians in the state are still absorbing major increases in the primary coverage they must also buy from private insurance companies.
► In Florida, the Florida Medical Association has conducted seminars instructing doctors how to prevent litigation by requiring all patients to agree (prior to being treated) to submit any disputes that might arise to binding arbitration. Many ophthalmologists say they find such an agreement distasteful in that it has the potential to sour the doctor/patient relationship.
► In New Jersey, a form of insurance carrier called a "reciprocal exchange" has recently begun to operate. The carrier, called New Jersey Physicians United Reciprocal Exchange (NJ PURE), is a not-for-profit organization that pays a 12.5% management fee to a professional administrator. NJ PURE says it offers reasonably priced "occurrence-type" policies to physicians who pass its rigorous screening procedures. An occurrence-type policy covers a physician for any event that occurs during the time he's insured by the carrier, regardless of when the claim is made. This type of policy relieves the physician of having to purchase a "tail" that assures coverage if the physician ever leaves the carrier.
NJ PURE requires each physician it accepts to pay an additional percentage of the first-year premium to help the carrier meet requirements for its financial reserve. Physicians can't be assessed for any money exceeding the yearly premium and the initial payment, but they can receive refunds if NJ PURE has a "profitable" year. They can also obtain 10 to 15% rate discounts by participating in the insurer's risk management program.
"We began using the reciprocal exchange structure in 1989, first with workers' compensation and then with auto insurance," says Eric Poe, vice president of marketing and business development for NJ PURE. "It's legal in most states, but it takes a crisis to get a reciprocal exchange started because you, as a physician, must make an investment in addition to your premium. You can get your investment back when you retire or leave NJ PURE."
Poe says the NJ PURE management team would like to expand into other states, but he cautions that successfully operating a reciprocal exchange requires extensive experience and insurance industry knowledge.
"We're reinsured for 75% of the coverage we write," he notes. "We also insure all of our physicians for $1 million per claim and $3 million overall coverage per year. We don't like to write higher coverage because you'll be more of a litigation target if you have deep pockets. We don't have wide variations in the premiums we charge, and we don't think one claim makes a physician a bad risk, though we do have a limit on the number of physicians we'll insure in certain high-risk specialties."
Viewing the Bigger Picture
While examining the malpractice insurance situation on a state-by-state basis is instructive, it's also important to understand the elements that have made medical liability a problem on a national level. In addition to misguided insurance company attempts in the mid-1990s to gain market share by underpricing malpractice coverage and poor insurance company investment returns in recent years (See "Foes Agree on Some Aspects of the Crisis." on page 42.) the following three factors have been cited as also contributing to the steep rise in many physicians' premiums:
Rising claims frequency and severity.
Americans have become increasingly litigious in recent years, particularly in urban areas where HMOs and other managed care organizations have made the patient/physician relationship increasingly impersonal.
"We've created a culture that says: "If you don't get what you want, go ahead and sue," says David Golden, director of commercial lines for the National Association of Independent Insurers
(NAII), the insurance industry's largest trade association. "We've lost the distinction between what constitutes malpractice and what's just an adverse outcome in a case in which no one did anything wrong."
Golden says the NAII's most recent statistics for medical liability, which cover 2001, show insurance companies laying out $1.55 in claims paid and operating costs for every dollar they took in through premiums.
"This measure, which is called the combined ratio, has been getting worse each year," says Golden.
Golden also notes that insurance companies spend an average of $67,000 just to defend the average medical malpractice case, though no payment is made to the plaintiff in 70% of the cases.
"Insurance companies settle 23% of the cases and only 7% go to trial," says Golden. "Sometimes it's easier just to settle a case for $20,000 than to defend it, although physicians hate to settle a case when they feel they did nothing wrong."
Increasing costs for reinsurance. Almost all insurance companies that write medical liability coverage purchase reinsurance from entities such as Lloyd's of London. Reinsurance is a way of spreading the risk so that one or two huge settlements won't cause an insurer to become insolvent.
The cost for buying reinsurance has increased sharply in recent years due to the worsening claims experience and the weaker financial condition of some carriers. In addition, some industry analysts say reinsurers are passing along some of the costs they've had to absorb from payouts related to terrorist events.
Higher operating expenses. The basic costs of running an insurance company have continued to rise for many carriers. Like any business, insurance companies have to pay staff, purchase computers, rent office space and market their products. With more cases being handled, some carriers have had difficulty reining in expenses. This has caused additional upward pressure on rates.
What's the Answer?
Despite the numerous factors that have contributed to higher overall medical malpractice premiums in recent years, some states have been successful in avoiding -- or at least minimizing -- the impact of the problem. The "gold standard" in this regard is California, where the Medical Injury Compensation Reform Act
(MICRA) has been in effect since 1975. The American Medical Association, the insurance industry, many physicians and most industry analysts would like to see the MICRA model adopted nationwide.
Plaintiffs' attorneys oppose
MICRA-type legislation because it imposes a cap on non-economic ("pain and suffering") damages and also strengthens defendants' rights in several other areas.
Briefly, MICRA contains the following provisions:
► A $250,000 cap on non-economic damages, but no cap on damages that would affect a plaintiff's future earnings and medical expenses.
► A sliding scale that gives plaintiffs' attorneys a lower percentage of larger awards. Attorneys can only receive 15% of awards above $600,000.
► A "collateral sources" provision that prevents plaintiffs from being paid from two sources for the same injury. For example, a plaintiff isn't permitted to collect workers' compensation if the settlement of the case includes payment for lost wages.
► A provision allowing larger settlements to be paid in periodic installments rather than in one lump sum. This enables insurance carriers to have a more predictable revenue stream and in some cases permits an insurance company to purchase a lower-cost annuity to pay off the settlement over a period of years.
"MICRA has proven that it works as a long-term solution," says David Golden of the
Though some states have adopted MICRA-type legislation, the plaintiffs' bar has had the political clout to defeat such legislation in many states.
Plaintiffs' attorney Neal A. Roth, a partner in Grossman and Roth, PA, and past president of the Academy of Florida Trial Lawyers, opposes caps. But he offers a different solution that has been received with some interest.
"I'd like to see each state create its own professionally administered, non-profit insurance carrier with the risks spread over a large pool of physicians," says Roth. "I've done the math and we could insure the lowest-risk doctors for about $10,000 a year, medium-risk physicians for about $15,000 a year, and those in high-risk specialties for about $20,000. Because 6 to 8% of physicians account for 60 to 70% of the claims paid, we would weed out repeat offenders and get them out of practice. Individual physicians and legislators like this plan. But organized medicine looks at plaintiffs' attorneys as their arch enemy and they won't even recognize that this is a good idea."
Interestingly, Roth's plan is strikingly similar to the previously mentioned NJ PURE "reciprocal exchange" model, though it would be state-run instead of privately operated. The NJ PURE experience demonstrates that many physicians find this type of model appealing.
With financial markets improving and malpractice premiums now high enough to encourage new insurance carriers to enter the market, the basic insurance underwriting cycle finally appears to be on the verge of turning positive. If more states adopt
MICRA-type legislation and others opt for concepts modeled after NJ PURE, the prospect for reducing malpractice premiums for most physicians over the next few years should be a lot brighter.
Ophthalmologists Turn to
Interestingly, the Ophthalmic Mutual Insurance Company
(OMIC), which provides medical liability insurance solely to ophthalmologists under the sponsorship of the American Academy of Ophthalmology
(AAO), was formed in 1987 in response to a previous malpractice insurance crisis.
"We were actually one of the country's first 'risk retention' groups," says Robert J.
Widi, manager of member services and sales for OMIC. "We were formed under the Federal Liability Risk Retention Act of 1986, which allows an identifiable profession of similar liability risks to offer insurance to its members while removing some of the administrative hurdles of a traditional insurance company. OMIC has actually served as a model for other recently formed risk-retention groups."
Today, OMIC insures about 30% of the ophthalmologists in the United States and is a market leader in terms of insuring ophthalmologists in private practice. Only AAO members are eligible to have OMIC as their insurer.
"We've experienced dramatic growth in recent years as some big carriers, such as St. Paul and
PHICO, have dropped out of the medical liability market," says
Widi. "Though ophthalmology hasn't been hit nearly as hard as some other specialties, OMIC rates are up a total of 38.3% over the last 3 years. That's still a lot better than many of our competitors."
PREMIUMS VARY WIDELY
For 2004, OMIC's average annual premium for the most common liability limits chosen ($1 million per claim and $3 million in the aggregate) is $14,831 for a full-time physician rated in full surgery. The highest-rated territory includes Nassau and Suffolk counties in New York state, where the rate is $49,632, and the lowest-rated territory is the state of Arkansas, where the same level of coverage costs $5,825. As a rule, OMIC doesn't tag on a surcharge for ophthalmologists who perform refractive surgery, though other carriers do.
OMIC is able to keep its rates relatively low because all applicants for insurance are rigorously screened by a panel of board-certified ophthalmologists before being approved for coverage. Recently, OMIC has been getting more applications from ophthalmologists who've been dropped by other companies for one reason or another.
"In 2002, about 57% of the applicants who didn't bind coverage with OMIC were rejected by our underwriting team, which is historically high for us," says
Widi. "But 87% of the applicants who were issued a quotation from us chose to go with
OMIC. Those numbers suggest that our products are competitively priced and that we remain an insurance carrier of choice for the nation's ophthalmologists.
OMIC doesn't normally raise rates for ophthalmologists who have a claim against them.
"We believe that our screening process enables us to choose good physicians, so we don't necessarily hold it against them if we have to pay a claim," notes
Widi. "However, if our evaluation finds there was a breach in the standard of care in addition to claims frequency or severity, we may non-renew or cancel coverage for a physician we determine to be an increased risk. Fortunately, this doesn't occur too often."
In 2003, the average indemnity paid by OMIC to settle a claim was approximately $131,000, which was close to the 10-year average settlement. However, the frequency of claims has spiked in recent years.
RISK MANAGEMENT IS ENCOURAGED
OMIC encourages its insured physicians to participate in its extensive risk management program, and it offers a 5% discount at renewal for those ophthalmologists who take advantage of the program.
"We make it easy for the doctors to participate in risk management, offering live seminars at national meetings, online courses and national audio conferences," says
Widi. "For larger group practices of 25 or more, we may hold an on-site seminar or conduct a risk management audit."
OMIC supports tort reform and cites studies that show cap limits have helped control malpractice insurance premiums in the states that have them.
"Our national average premium is $14,831, yet in Los Angeles, where you would expect premiums to exceed the national average, our premium is $12,700," notes
Widi. "Cap limits are one answer."
Widi thinks it will be another year or two before stability returns to the medical malpractice insurance market.
"Pricing hasn't yet caught up to the frequency and severity of claims because of delays in reporting the outcome of cases," says
Widi. "It's not possible for me to forecast what we'll do in 2005 as it will depend on our claims experience and overall ratios. However, if increases are necessary, we're hoping they'll be relatively modest."
One Physician's Insurance
About a year ago, William L.
Hoppes, M.D., F.A.C.P., an Ohio infectious disease specialist who had enjoyed a long and distinguished medical career, was driving home with his wife after a day of golf when his wife suddenly burst into tears.
"She had opened a letter telling me that Medical Protective, my malpractice insurance carrier for the past 37 years, was dropping me despite the fact that I had no claims and the company had never paid out a penny in all the time they covered me," says Dr.
Hoppes. "She was crying because the news was so crushing and unexpected. The insurance company was basically telling me to retire."
Hoppes, a professor of medicine at Northeastern Ohio Universities College of Medicine
(NEUCOM) in Canton, Ohio, since 1978, was a vigorous 64-year-old with no plans to retire.
"Heck, I expected to practice well into my 70s," says Dr.
Hoppes. "I contacted other insurance companies to see whether they would cover me. The best deal I could get was a premium of $50,000 a year, plus I would have to pay an additional $20,000 for every time I was named in a legal action. Essentially, I would have been working just to pay my insurance premium."
LITIGATION RISK IS HIGH
Dr. Hoppes explains that infectious disease specialists are often named in malpractice lawsuits because of the nature of their work.
"In virulent forms of meningitis, a person can feel well one day and be dead the next day," he notes. "People can't believe that a disease can progress so quickly without someone having done something wrong, especially when it involves the death of a child. Infectious disease specialists often get named in these legal actions, but that doesn't mean they did anything wrong."
Hoppes' case, Medical Protective told him that he had been named a few times in cases and though no money had been paid out, it had been enough for the insurance company to drop him.
"It's kind of ironic," says Dr.
Hoppes. "I had given depositions at the request of the company to help them successfully defend two other physician specialists who had been named in lawsuits. So I had actually helped the insurance company save money -- rather than me costing them money. But I guess that didn't matter to them."
Not wanting to lose Dr.
Hoppes' valuable services, the Canton Medical Education Foundation, a joint venture of the city's Aultman and Mercy Hospitals, hired him last year as an employee of the joint venture, with his insurance premium paid by the Foundation.
Today, Dr. Hoppes heads the infection control committees in both hospitals and teaches infectious diseases to medical students and residents.
"I'm happy with this arrangement and I believe it will continue unless they recruit someone new to come here," concludes Dr.
Hoppes. "But given the medical liability insurance situation in this state right now, no one in my field will even come to Ohio."
Ophthamology Management, Issue: February 2004