Damage Caps Don't Prevent Malpractice Premium Increases, Study Finds

June 6, 2003
Caps on non-economic damages have failed to prevent sharp increases in insurance premiums, even though insurers enjoyed a slowdown in their payouts, according to a Weiss Ratings white paper.

"Tort reform has failed to address the problem of surging medical malpractice premiums, despite the fact that insurers have benefited from a slowdown in the growth of claims," said Martin D. Weiss, chairman of Weiss Ratings, Inc.

"The escalating crisis will not be resolved until the industry and regulators address the other, apparently more powerful, factors driving premiums higher."

In reviewing the impact that tort reform has had on both medical malpractice premiums paid by doctors in three high-risk specialties and insurers' claim payout levels between 1991 and 2002, Weiss noted the following trends:

Physicians continued to suffer a rapid increase in premiums despite caps: In 19 states that implemented caps during the 12-year period, physicians suffered a 48.2 percent jump in median premiums, from $20,414 in 1991 to $30,246 in 2002. However, surprisingly, in 32 states without caps, the pace of increase was actually somewhat slower, as premiums rose by only 35.9 percent, from $22,118 to $30,056.

At the same time, among the 19 states with caps, only two of the states, or 10.5 percent, experienced flat or declining medical malpractice premiums. In contrast, states without caps were actually better able to contain premium rate increases, with six, or 18.7 percent, experiencing stable or declining trends.

Meanwhile, the insurers enjoyed slowed increases in claims payout levels: The median payout in states without caps surged 71.3 percent, from $87,553 in 1991 to $150,000 in 2002. In contrast, the median payout grew by only 37.8 percent in states with caps, from $79,798 to $110,000. Likewise, in states without caps, the median payout for the entire 12-year period was $116,297, ranging from $75,000 to $220,000, while the median payout for states with caps was 15.7 percent lower, or $98,079, ranging from $50,000 to $190,000.

Other Factors

Weiss identified six factors driving the increase in rates, each of which may be exerting a greater impact on premiums than the presence or absence of caps:

1. The medical inflation rate: Medical costs have risen 75% since 1991.
2. The insurance business cycle: The property and casualty industry suffered a 12-year "soft" period through 1999, during which marketing goals often superceded prudent underwriting practices and decision-makers typically relied too heavily on high investment income to make up for losing operations. In an attempt to catch up, insurers have tightened underwriting standards and raised premiums.
3. The need to shore up reserves for policies in force: medical malpractice insurers have been consistently under-reserving since 1997-to the tune of $4.6 billion through December 31, 2001. The only way to shore up reserves is to increase premiums.
4. A decline in investment income: Investment income declined by 23 percent in 2001 and then another 2.5 percent in 2002, which is particularly critical for lines of business like medical malpractice since the duration of claims payouts typically spans several years.
5. Financial safety: Based on the Weiss Safety Ratings, 34.4 percent of the nation's medical malpractice insurers are vulnerable to financial difficulties, compared to 23.9 percent of the property and casualty insurance industry as a whole. To restore their financial health, many medical malpractice insurers will remain under pressure to increase rates despite new laws to cap payouts.
6. Supply and demand for coverage: The number of medical malpractice carriers increased through 1997 to 274, but has since fallen to 247 in 2002.

Weiss Recommendations

Although the implementation of non-economic caps has resulted in a slowdown in payout increases for insurers, most insurers have not passed those savings on to physicians, continuing to jack up premiums due to other powerful pressures. Thus, caps have been ineffective in reducing premiums for medical professionals.

To adequately address this national crisis, Weiss suggests several comprehensive steps, including:

• Legislators should put all proposals for punitive damage caps on hold until convincing evidence can be produced to demonstrate a true benefit to doctors in the form of reduced medical malpractice costs;
• insurance companies must never again allow marketing to divert or pervert prudent actuarial analysis and planning; and
• the medical profession must assume more responsibility for policing itself.

Weiss Ratings issues safety ratings on more than 15,000 financial institutions, including HMOs, life and health insurers, Blue Cross Blue Shield plans, property and casualty insurers, banks, and brokers. Weiss also rates the risk-adjusted performance of more than 12,000 mutual funds and more than 7,000 stocks.

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