Malpractice Insurance Rates Lower; Likely to Remain So

After a run-up in rates in the first half of the 2000s that left many physicians wondering how they would stay in business, the cost of medical professional liability coverage in Arkansas appears to be in a period of prolonged stability.

Rates in Arkansas are down a combined 1.3 percent since 2006 among the companies that have made filings for increases or decreases, according to Bill Lacey, property and casualty division manager with the Arkansas Insurance Department. Of the 31 filings the department has received from providers during that time period, five have been requests for decreases, 12 for increases, and 14 for no change.

The state experienced a big run-up in rates in the first part of the 2000s in which the department allowed companies to have double-digit increases for several straight years rather than the huge increases some wanted. Some initially requested 100 percent increases.

“Now they’re probably adequate,” he said. “They’re probably exactly where they ought to be. Each company might tweak a little up or a little down, but those are usually marketing type things, and we don’t see any overall increases or decreases of any particular significance or magnitude over the past couple of years.”

As stock market analysts often say, past performance is not a predictor of future results, but the experts and industry members interviewed for this article don’t foresee the climate changing markedly in the near future.

“Every new piece of information we get about claims and loss experience has been less than what we’ve seen before, said Lars Powell, PhD, Whitbeck-Beyer chair of insurance and financial services at the University of Arkansas at Little Rock College of Business. “So it’s possible the rates could go back up. But you would expect to see that precipitated by large losses or an increased frequency of claims, and to my knowledge, we haven’t seen either one in Arkansas yet.”

Rates, which peaked nationwide in 2007-08, are down because claims are down. Larry Smarr, president of the Physician Insurers Association of America, said that claims frequency has dropped 25-30 percent from four or five years ago.

And claims are down because the volume of lawsuits is down, a primary reason being that plaintiffs’ attorneys are unwilling in this economy to foot the high costs of filing suit unless they believe they have a nearly airtight case. PIAA data shows only 30 percent of all claims filed against doctors end up in a payment to the plaintiffs. Only five percent of all cases go to trial, and the plaintiff wins only 20 percent of the time when it does.

“Bringing a medical malpractice lawsuit is expensive, and the plaintiffs’ bar doesn’t have the money to bring lawsuits any more than the other side has the money to defend them right now,” said UALR’s Powell.

Smarr said insurance companies are currently very profitable and have built up reserves because in the past they overestimated losses, enabling them now to be competitive on rates while paying generous dividends. He said that even when market conditions change, it takes years for it to show up in rate decreases because insurance companies must keep sufficient resources in the bank until the statute of limitations has ended on potential cases.

“It’s like turning a battleship around. It takes 4.5 years from the time a medical incident happens until that claim is closed, and so you don’t see the good news in your financial results for a while,” he said. “And so rates stayed relatively high at a time when the number of claims were dropping off.”

Competition is a key factor in keeping down the costs of coverage. After St. Paul Fire and Marine Insurance Company, which dominated the market, abruptly stopped offering malpractice insurance in 2004, Arkansas for a time was left with nobody providing coverage until a couple of companies, including State Volunteer Mutual Insurance Company, a physician-owned company based in Tennessee, stepped into the void. But the more favorable economic conditions have led more companies to enter the market. Currently there are 21 companies in Arkansas renewing business or seeking new policyholders.

That’s good for physicians, according to Andrew Meadors, a partner with Meadors, Adams and Lee, which offers insurance through both MAG Mutual and ProAssurance. Meadors said that while property and casualty insurance providers have faced challenges during the last year or so, the medical professional liability sector is profitable, so companies are battling for market share with lower prices.

“The insurance companies have really paid out a lot in dividends,” he said. “Their profits are very, very strong, and it’s a healthy situation for all, and I do not see medical professional rates going up any time soon.”

UALR’s Powell said another dynamic is at play: Some companies have tried to increase their volume in order to become acquisition targets, so they focused on Arkansas because there was so little competition here a few years ago. A good example, he said, was First Professionals Insurance Company, which was bought by The Doctors Company on May 24.

“That’s a pattern that fits; that if you want to be bought by another company, then you want to make your books look good,” he said. “So why did they do it in Arkansas instead of somewhere else? Well, there was opportunity here.”

Size of payouts is another factor that affects insurance rates, and Arkansas has not had any huge verdicts in recent years. According to UALR’s Powell, a rural state like Arkansas tends to be less litigious than a metropolitan area.

Other reasons that clams are down include the rise of physician-owned insurers that can provide lower rates because they don’t have to pay profits to shareholders, forcing other providers to lower their rates in response. Also, sources contacted for this story said physicians are doing a better job of applying risk management practices and standards of care, reducing the possibility of a malpractice situation. Many insurance companies give extra credit to doctors who complete online risk management courses. Cecil Suitt, a senior field representative covering Arkansas for policyholder-owned LAMMICO, said more physicians are taking advantage of such offerings. “I think that over the years, physician groups and practice managers have seen the benefits – loss avoidance and (fewer) claims, and I do think that it’s probably increased in the last 5 to 10 years,” he said.

Arkansas passed a strict tort reform law in 2003 that may have had some effect on rates. However, subsequent court decisions have whittled away its most important cost-reducing elements – the splitting of a case’s trial and punitive damage phases in order to reduce the passion involved in jury awards, and the requirement that an expert witness be of the same specialty as the doctor being sued.

“Everybody wants to say that tort reform is working really well in Arkansas,” UALR’s Powell said. “I don’t know what’s left of the tort reform. Everything that was passed that has been shown to have an effect on the claims and prices has since been struck down by our Supreme Court.”

Nationwide, according to Smarr, the data doesn’t show that the number of large verdicts has decreased. Still, he said that famous seemingly over-the-top lawsuit awards like the $2 million McDonald’s coffee spill case appear to have had an effect on the general public’s opinion on big verdicts. “We know anecdotally that that type of litigation activity has really sensitized juries to the jackpot issue, but I don’t necessarily see that in our data,” he said.

So what could happen that would reverse this trend toward reduced premiums? Smarr said an increase in the number of reported claims would be a primary cause. Another potential factor: Insurers rely on investment income to offset their need for premiums, so a significant change, such as a rise in interest rates that would make their current indebted bonds worth less, could force them to make up the difference by charging higher rates to physicians.

One factor that doesn’t appear destined to affect rates: healthcare reform. The Patient Protection and Affordable Care Act didn’t contain much related to medical malpractice reform. The PIAA’s Smarr said about a dozen sections could be construed to produce additional liabilities and that his organization is working with Congress to protect the industry. UALR’s Powell said that grants to help states study ways to reduce medical liability haven’t materialized, at least not in Arkansas. “There’s really nothing in the bill that’s been implemented that would affect medical malpractice,” he said. “They’ve paid lip service to it, but when the bill was written and voted on, there was nothing in it.”

Ultimately, medical malpractice rates are cyclical, pointed out Tom Robinson, MD, director of physician relations for Arkansas Mutual, a physician-owned company. And currently, physicians happen to be in the best part of the cycle.

“The market will harden and rates will go up, and then it will soften and rates will go down, but we’re at just about the lowest that we’ve been in almost forever,” he said. “The rates have really been coming down.”

Tags:

Bookmark:

Facebook

Technorati

Newsvine

Google

Related: