Health Care and the 2004 Elections: Medical Liability Reform
Medical Liability Reform
Sharp increases in medical liability insurance premiums in recent years, and the withdrawal of some insurers from this market have focused the attention of health care providers, patients, and policymakers on reform of the medical liability system. Of additional concern is that the fear of liability causes physicians to practice medicine in ways that raise costs. The key issues being debated this election season are how to assure the availability of affordable liability coverage in the future while maintaining access to care, and the impact medical liability has on rising health care costs. There are varying opinions of how medical liability reform should be addressed, including whether it should remain a state issue or be addressed at the federal level, and, if so, how.
According to a recent study on medical liability by the Congressional Budget Office (CBO), medical liability insurance premiums for all physicians nationwide increased an average of 15 percent between 2000 and 2002. Those for some specialties rose even faster, with premiums for obstetrician-gynecologists increasing an average of 22 percent and those for internists and general surgeons growing an average of 33 percent during the same period. The same study indicated that malpractice costs account for less than 2 percent of health spending and that significant reductions in these costs would only modestly affect overall health spending growth. Concern has also been raised over spending related to the practice of defensive medicine. However, based on existing research and its own analysis, the CBO found that savings from reducing this practice would be “very small.” 1
Premium hikes have also varied substantially from one area to another. In a 2003 survey of seven states, the General Accounting Office (GAO) found that “premium levels varied greatly not only from state to state, but…even among areas within states.” 2 For example, it found that the largest professional liability insurer in Florida raised annual premiums for general surgeons in Dade County by 75 percent between 1999 and 2002 (to $174,300), while the largest such insurer in Minnesota hiked premiums for the same specialty during the same period by 2 percent (to $10,140). Outside Dade County, the Florida insurer’s annual premium rate for general surgeons for 2002 was $89,000.
This surge in premiums is only the latest episode in an insurance cycle that produced similar increases in the second half of the 1970s and again in the mid-1980s. These upswings in premiums are thought by most experts to be caused by higher-than-expected financial outflows from insurers, lower-than-expected financial inflows to them, or a combination of the two.
A number of factors may increase liability insurers’ spending, including growth in the size of pay-outs to patients, an increase in the number of lawsuits, the rising cost of health care for injured parties, and increased premiums for reinsurance (insurance that they purchase from other companies to protect themselves against extremely costly cases).3 While evidence on the role played by most of these factors is mixed, the available data suggests that the costs of malpractice lawsuits have risen significantly over time. For example, CBO has determined that average pay-outs to patients and average legal defense costs per case have both risen at annual rate of 8 percent between 1986 and 2002.4
Aside from premiums, the main factor affecting the financial inflows or revenues of liability insurers is income from the investment of their reserves. While agreeing that other factors play a role in determining liability premiums, the GAO has found that lower-than-expected investment income for 15 large insurers between 2000 and 2002 probably played an important role in their rate-setting.5 Likewise, an analysis by the American Academy of Actuaries also found that liability insurers’ investment income decreased as a percentage of premiums between 1995 and 2001, and it suggested that each one percent decrease in interest rates would require insurers to increase premiums 3 to 4 percent to offset the reduced investment income.6
Another factor contributing to the current round of premium hikes is that a number of insurers have withdrawn from the market, thereby limiting competition on premiums as well as the number choices for coverage available to physicians. In 2001, the St. Paul Company, which provided about 10 percent of all medical malpractice insurance nationally, withdrew from the market altogether. Some physician-owned insurance companies have also exited the market or restricted where they offer coverage.7
In response to current and past surges in premiums, many states have refashioned their laws governing medical liability lawsuits, which have traditionally been a state issue. As of October 2002, 28 states had adopted limits on the amount of non-economic damages (pain and suffering) that can be awarded to an injured party.8 California led the way with the adoption of the Medical Injury Compensation Reform Act of 1975, (MICRA) which, among other things, capped such damages at $250,000. Similar legislation is pending in most of the states that have not yet acted. California also has approved a referendum rolling back premiums on many types of insurance (including medical liability insurance) and instituted state regulatory review of proposed premium increases.
Federal limits on liability lawsuits. Although there are a number of policy prescriptions for remedying the problem of rising medical liability insurance premiums, most of the attention in Congress has focused on legislation that would limit medical malpractice lawsuits and awards. Preferred by most Republicans, such legislation has been passed twice by the House of Representatives in the past two years. While Republicans in the Senate have tried to bring similar legislation up for consideration, most Democrats (joined by two Republicans) have blocked these attempts.
The House-passed legislation, which would not limit damages for any economic losses (such as medical costs and lost wages) sustained by a patient, would:
- cap non-economic damages (pain and suffering) at $250,000;
- limit punitive damages to cases involving malicious intent to injure or deliberate failure to avoid unnecessary injury;