THE NEW JERSEY MEDICAL MALPRACTICE LIABILITY INSURANCE CRISIS OF 2002
Independent Study by Steven Nehmer
Sponsor Professor Howard A. Latin
July 14, 2005
In 2002 the medical community in New Jersey experienced a medical malpractice crisis, in which premiums climbed rapidly at the same time that many physicians faced the prospect of losing their coverage completely as their carrier stopped writing medical liability policies. This paper represents an effort to understand the events that occurred, their causes, and to look at possible changes that would limit future repetition of this crisis.
The historical development of medical malpractice litigation, and the subsequent spread of liability insurance to protect physicians, will be described. Recurring “crises” in the system have been the norm. Basic concepts of the industry, including hard and soft markets, the annual premium v. insurer’s surplus ratio, relative effects of premiums and investment income, will be defined.
The “perfect storm” of 2002, representing the fallout from years of under-pricing medical malpractice insurance by the carriers in order to widen market share, followed by a drop in investment yield, increasing reinsurance costs, and, finally, the exit of several carriers from the market place, will be discussed. Reactions to the crisis by organized medicine, attorneys, insurers, government and the public are looked at.
Several national studies of the parallel medical malpractice crisis, including those of the General Accounting Office, Public Citizen, the Rand Institute, and the Project on Medical Liability in Pennsylvania, are used to delve into the causes of the crisis and to offer alternative thoughts on possible system changes that need to be implemented.
This paper concludes with the author’s thoughts on the subject, summarizing the history of the medical malpractice industry, its goals, and what I believe needs to be done to improve the system.
The concept of medical malpractice is first found in the writings of Sir William Blackstone, who explicitly extended the concept to physicians in 1768. He used the term “mala praxis” from which the word malpractice derives.1 It was in the nineteenth century that the legal concept took hold in the United States. The establishment by the American Medical Association in 1849 of a board to determine standards for medical practice was key, since having standards for the profession allowed the existence of a deviation from these standards.2
The first “malpractice crisis” to occur in the United States took place from 1840 to 1860, during which time the state appellate courts saw a 950% rise in the number of medical malpractice cases heard. This was in contrast to a population rise of 85%.3 One prominent litigator in this arena on both the plaintiff and defense sides was Abraham Lincoln.4 Initially the targets of most suits were the more respected and educated physicians, as they had the funds to make them attractive defendants. The charlatans of the age were judgment proof. It was with the rise of medical liability insurance at the end of the nineteenth century that all physicians became prospective targets.5
The second medical malpractice crisis occurred around 1970, when claims began to grow suddenly, causing the insurance carriers to dramatically raise their premiums to cover their expenses. At that time most of the carriers were multi-line commercial insurers, and many of them decided to drop out of the market when profitability declined. This caused a crisis in availability, causing the medical community to respond with the creation of physician-owned medical malpractice companies.6
In contrast to the issue of availability, the next crisis to hit was one of affordability. In the 1980’s there was a spike in both the number of claims and the amount of damages awarded, and the insurance carriers responded with increasing premiums.7 This was followed by another decrease in the late 1980’s in incidence of claims and amounts of awards.8
The 1990’s was a period of prosperity for the medical liability insurance industry. The New Jersey legislature, in 1995, did pass a tort reform package with several features. These included a cap on punitive damages at 5 times compensatory damages or $350,000, whichever is greater; a modification of the doctrine of joint and several liabilities, which allowed a defendant to be held 100% liable for damages only if they are 60% or more at fault; exemption of health care providers from certain product liability claims; and the requirement for a certificate of merit signed by an expert declaring a deviation from the standard of care.9
The attorney fee schedule for contingency awards, effective September 1, 1996, limits fees to “33.3% of the first $500,000, 30% of the second $500,000, 25% of the third $500,000, 20% of the fourth $500,000, and a reasonable amount approved by the court for an excess of more than $2 million.10 Contrast this to Newt Gingrich’s statement that “[p]ersonal injury lawyers are earning up to 60% of jury medical-malpractice awards that regularly top $1 million.”11
At the present time, most physicians nationally purchase medical liability coverage in the amount of $1 million per event and $3 million per year aggregate. Sixty percent of the coverage is obtained from physician-owned or operated companies.12
The functioning of medical malpractice liability insurance is very similar to other types of insurance. The physician pays a premium in return for the insurance company’s promise to defend claims and to be financially responsible for any damages incurred up to the limits of the policy. The most common type of policy sold is the claims made, which limits the insurer’s liability to those claims made within the time frame of the policy. This is not as open ended as the older occurrence type policy, in which the insurer was responsible for any events occurring within the time frame of the policy, even if the claim was made years later. The claims made policy allows the insurer to better plan for the future and more accurately determine the premiums that it needs to collect.
The ratio of total annual premiums to insurer’s surplus is an important one, and is used by state insurance departments to measure the financial soundness of insurers. The annual premiums is the sum total of monies collected within the year, and the surplus is the insurer’s assets in excess of the liabilities, both current and future estimated. Generally, the surplus should at least equal the annual premium. It is more difficult for the medical malpractice insurance industry, than the property/casualty insurance industry in general, to accurately predict losses on claims for three reasons: (1) claims take on average more than five years to resolve, (2) the range of cost of claims is very wide, and (3) past data is limited due to the small size of the pool of insured.13
Another key factor for the insurance company is the return it realizes on the funds during the time between its collection of premiums, and the paying of expenses. In 2001 the largest United States insurers had on average 79 percent of their assets invested in bonds.14 Returns of 6% or more were common in the mid-1990’s, but the rate had fallen to 4% by 2002.15 An insurance company’s income is primarily made up of premium collection and yield from investments. In 2001, the average insurance carrier had assets that were approximately 4.5 times as large as their annual premium income. Therefore a 1% drop in investment income would necessitate a 4.5% rise in insurance premiums to keep income stable.16
The medical malpractice insurance industry, like most financial sectors, has repetitive cycles, alternating between ‘hard’ and ‘soft’ markets. Hard markets are characterized by increasing premiums and decreasing availability of coverage. Hard markets generally occur in parallel with downturns in the overall economy, when insurers are obtaining lower yields from their investment portfolios. Soft markets, by contrast, typically have stable or even decreasing premium rates as the supply of insurers increase and there is competition for writing policies. Often the investment returns are sufficient to allow a cut in premiums while still maintaining profitability.
The period from the late 1980’s until 1998 was a classic soft market for medical malpractice insurance. From 1998 on, profitability decreased and premiums began to increase, heralding the switch to a hard market.
NEW JERSEY 2002
In 2002 New Jersey physicians saw a rapid rise in their medical malpractice premiums, with some doctors even having difficulty in obtaining coverage. An article in The Star Ledger of Newark dated February 18, 2002 was entitled “Jersey physicians run for coverage- Malpractice insurers vanishing.”17 Three carriers in New Jersey had stopped writing policies for medical liability: Phico declared bankruptcy, St. Paul Fire and Marine terminated its medical liability line of business, and Zurich ended its New Jersey business.18 In May of 2002 the largest single insurer of New Jersey physicians, Medical Inter-Insurance Exchange (MIIX), went into “voluntary solvent runoff.”19
The response to this crisis was varied, with physicians, attorneys, and carriers all blaming each other for responsibility. Abbott Brown, a certified civil trial attorney and adjunct professor at Seton Hall University School of Law, wrote an editorial in which he blamed the carriers, specifically Princeton and MIIX for using the absence of competition to drive up their prices and compensate for losses in other arenas.20 He called for governmental regulation of the medical malpractice insurance industry, and for a reduction in the incidence of medical malpractice by the medical community.21
The chairman of the medical liability task force for the Medical Society of New Jersey, Bernard Saccaro, blamed the system and the trial attorneys, declaring that the result of the “out of control” costs would be a shortage of physicians.22 His recommendations included expert panels to review claims prior to trial, caps on awards, plaintiff attorney compensation limits, legislation to provide relief to physicians in those specialties hardest hit by the increases, and a more stringent statute of limitations.23
Angelo S. Agro, M.D., the president of the Medical Society of New Jersey, stated that “[t]here has been no increase in true malpractice. Moreover, the number of jury awards, which in itself is a poor indicator of malpractice, has not gone up; the amount of those awards has exploded.”24
The insurance carriers responded with statements that their increasing premiums were a reflection of increasing expenses defending medical malpractice claims. Patricia Costante, president and CEO of MIIX, called it “the business of economics. We look at someone and decide, based on their losses, whether we are able to insure them.”25 Bob Schultz, a Princeton Insurance executive, blamed the exit of other carriers on their selling policies with “irresponsibly low” premiums.26
The New Jersey Hospital Association (NJHA) became a strong supporter of legislation that would place a cap on non-economic damages. Gary Carter, president and CEO of the NJHA, stated in January 2003 “any solution that doesn’t include a $250,000 cap on pain and suffering settlements would fall short and lead to diminished access of care.”27
A public poll was conducted by the New Jersey Chapter of the American College of Cardiology, asking the following question-
Because of rising malpractice insurance, many New Jersey doctors are not performing certain procedures, or leaving practice altogether. Ultimately, this means that in New Jersey, we could start to see a shortage of certain types of doctors. Who do you feel is the most responsible for this situation?
Insurance companies got the most votes with 33%, lawyers and juries 30%, everyone involved 11%, the state of New Jersey 9%, doctors 6%, and others 2%.28
Analysts had other theories for the crisis. Janet Spicer discussed “legal developments” including lengthening of the statute of limitations in some states, broadening of the legal grounds for bringing suits in other states, “more liberal court decisions, the tendency for juries to return larger rewards, and the rapid rise of higher out-of-court settlements.”29 She then mentions the declining personal nature of the physician-patient relationship and the “reluctance of some state medical boards to discipline their own members.”30
Statistics appeared to offer conflicting views of the severity of the crisis, and whether in fact there even was one. Depending upon the time frame referenced, and the measure used to determine events, different conclusions could be drawn. “The St. Paul Companies reported that medical malpractice claims of $1 million or more doubled in 2001, climbing from 27 in 1999 to 54 in 2000.”31
“Jury Verdict Research reports that the median malpractice award rose in four consecutive years from $455,000 in 1996 to $800,000 in 1999.” This represents an increase of 76%.32 Another source also quoting Jury Verdict Research reported “that the median malpractice award from 1992-1996 was $350,000. The figure from 1997 to the present [2/02] jumped to $518,000.”33
It has been reported that “claims have ballooned from $2.6 billion in 1997 to $4.1 billion in 2000, an increase of 58%.”34 However the National Association for Insurance Commissioners (NAIC) released data showing the payments made by insurers in New Jersey were $231 million in 1992 and $235 million in 2001, a modest increase for that time period.35 The NAIC is a voluntary association of state insurance department heads which exists to serve state insurance regulators.36
“The number of malpractice suits in New Jersey has declined from 2200 in 1994 to 1613 in 2001, a decrease of more than 25 percent.”37 Princeton Insurance Co., New Jersey’s largest malpractice carrier, reported 366 cases tried to a conclusion in 1998, 347 in 1999, and 274 in 2000.38 In 2002, there were 205 medical malpractice jury trials and 2 bench trials that went to verdict.39
The actual dollars paid out by insurers on behalf of the physicians of New Jersey were reported by The Star Ledger on June 9, 2004 as a high in 2001 of $214 million, declining to $199 million in 2002 and $162.5 million in 2003.40
The Star Ledger, in a January 8, 2003 editorial entitled “The malpractice muddle,” emphasizes the lack of knowledge as to whether pain-and-suffering awards are inflating the cost of malpractice claims. Four months later it was reported that the New Jersey Assembly was being asked to seek data from insurance companies by the use of subpoena power.41 Assemblyman Neil Cohen, chairman of the insurance committee, stated that attempts to get information from the insurance carriers voluntarily were unsuccessful.42 This quest for subpoena power proved unsuccessful as well, as demonstrated by testimony given before a committee of the New Jersey Assembly in which the vice president and general counsel of Princeton Insurance Company stated “It’s not the kind of data that is needed by the company or its actuaries, and we just never captured it.”43 He was referring to the amount paid out be Princeton Insurance Company for non-economic, pain and suffering damages.
The crisis of 2002 is the most recent of a series of crises, and it would be easy to assume that it is only the most recent “upswing of the same pendulum,” in which “malpractice premiums rise, doctors accuse lawyers, lawyers point back at doctors, and legislatures debate tort reform in arcane and repetitive terms.”44 But many analysts see this hard market as different. William Sage cites four areas in which changes in the health care system have had a significant effect upon the medical malpractice system: (1) patient safety, (2) cost containment, (3) medical progress, and (4) industrialization.45
In previous episodes of medical malpractice premium rises, physicians would blame the legal system, and argue that instances of malpractice were few. However, in the Institute of Medicine’s (IOM) 1999 report To Err is Human, the conclusion is reached that “modern medicine has outgrown its traditional methods of quality control.” Estimates of error are large, for example between 44,000 and 98,000 Americans dying each year secondary to medical errors.46 The report argues for system changes to improve outcomes and to decrease “malpractice.”47
Cost containment has been a constant and ubiquitous process in health care over the past two decades, and this has strained the system. In the past, insurers paid the fees charged without much questioning, and physicians were able to pass along increases in their malpractice premiums by increasing their fees. The increase in malpractice premiums represented primarily an insult to their pride. But with the vast majority of fees paid today fixed by health care insurers, that option no longer exists. Substantial increases in premiums have a direct and significant effect on physician incomes.48
The increase in the size of medical malpractice awards is largely linked to medical progress. In fact, “[m]ore than any single factor, malpractice expense tracks overall health care spending as technology improves, expectations rise, sources of avoidable error proliferate, and the costs of caring for those who suffer harm grow.”49 The failure to promptly diagnose a disease is of much more significance as the ability to treat that disease, when diagnosed early, improves. As our ability to work longer into our lives increases, the economic damages from malpractice-generated disability grows. The costs involved in the treatment of conditions caused by malpractice have a direct bearing upon the awards at time of trial.50
Industrialization has resulted in a dimunition of the patient-physician relationship, especially in urban areas. It has also resulted in a loss of control by the physician, who is often held responsible when the actions taken were dictated by health care insurances.51
While no comprehensive, rational investigation of the medical malpractice crisis has occurred in New Jersey to date, there has been a federal study. The United States General Accounting Office (GAO), responding to Congressional Requesters, in June of 2003 issued a report seeking to determine the causes of the recent surge in medical malpractice premiums.52 This study should serve as a template for New Jersey government officials seeking to understand and quantify the problem in New Jersey.
The report studied a sample mix of seven states, gathering information from the state insurance regulator, state medical association, state hospital association, state association of trial attorneys, the largest one or two active insurance companies, data from NAIC, and from A.M. Best.53 The states were chosen on the basis of obtaining a mix of status as a crisis state as defined by the American Medical Association (AMA), population, presence of damage caps, and extent of recent increases in malpractice insurance rates. Those chosen were Florida, California, Pennsylvania, Texas, Mississippi, Nevada and Minnesota.54
The medical malpractice insurance companies reported raising their rates beginning in 1999, after a period of relative price stability. There was a great deal of variability in the raises, depending upon the medical specialty and geography, even within states. For example, physicians in Philadelphia paid 83% more than those outside of the city.55 It was the opinion of the GAO that the cause of these raises was multi-factorial, but that the largest factor was an increase in losses on claims. Other important factors cited were the decrease in investment income experienced nationally, the loss of price competition among insurance carriers when some left the market place, and the increase in reinsurance rates generally subsequent to the events of September 11, 2001.56 Insurers reported that 78 percent of their expenses consisted of the costs of defending and paying claims. Increasing losses cause premiums to rise in several ways: direct immediate increased expenditures, higher anticipated losses, and an effect upon the plaintiff’s expectations of awards. This change in plaintiff attitude can result in more frequent claims as well as higher settlement amounts in those cases that do not go to trial.57
It was noted that “settlement amounts are not formally divided between these two types of damages [economic and non-economic] and that consistent, comprehensive information on trial judgments is not collected.”58
In sum, the GAO study concludes without recommending any specific remedial action by the Congress for the current situation. They believe that it is difficult to predict how the medical malpractice insurance arena would respond to any change in legislation. The current market is different from previous ones due to the presence of physician owned carriers instead of commercial entities; due to many states having passed laws to influence the industry; and due to a lack of meaningful data. The GAO does recommend that Congress encourage the NAIC and state insurance regulators to collect more information in the future.59
At the same time the GAO was publishing a report on the causes of the rise in medical malpractice premiums, they also issued a statement on “Implications of Rising Premiums on Access to Health Care.”60 They sought to determine whether the rising premiums had resulted in physicians retiring or relocating, a reduction in high-risk services, or the practice of ‘defensive’ medicine. Nine states were studied, five of which were considered as experiencing malpractice insurance problems and four of which were not.61
The study did find examples of decreased local access to health care services in the five states that were experiencing liability insurance increases, and did not in the other four states. Two examples of diminished availability of services were: (1) a loss of orthopedic on call services at a rural hospital in Pennsylvania when three of the five orthopedists left in 2002 due to increasing malpractice rates, and (2) family practitioners in rural Mississippi stopped delivering babies in order to control their rising premiums, which necessitated the local women to travel 65 miles to obtain obstetric care. It was noted that the majority of cases of decreased health care access were in rural locations where there had been a chronic problem with maintaining adequate medical coverage. The report also did note that there were anecdotal reports of physicians retiring or leaving an area which upon investigation were not verified. The study also looked at Medicare claims to determine if certain high risk procedures were performed, such as mammograms, spine surgery, and total joint revisions. There was no evidence of decreased delivery of these services.62
The organization Public Citizen published in August 2004 an analysis entitled “Medical Malpractice Briefing Book: Challenging the Misleading Claims of the Doctors’ Lobby.”63 This paper concludes that lawsuits are not the primary cause of rising medical malpractice premiums, but that the insurance cycle is. They believe that inadequate patient safety is the real medical malpractice crisis, that patient access to care is not in danger, and that caps are unjust and would not offer relief from rising premiums.64
The first claim, that the medical malpractice premium rise is not primarily due to increasing lawsuits, is based upon statistics from the National Practitioner Data Bank stating that the number of payouts in 1994 was 15,166 and in 2003 was 15,295, an increase of only 0.85%.65 When the number of physicians is factored in, the number of payouts per 100 physicians went down 11% in the same time period. Using the United States population, malpractice filings per 100,000 people decreased 1% from 1992-2001.66 The actual cost of payouts has increased from $184,787 in 1994 to $291,378 in 2003; when adjusted for medical services inflation, which is the basis for much of the economic damages awarded, the rise is 1.1% per year.67 When compared to the inflation of medical services, which was 125% from 1987 to 2001, malpractice premiums increased 76%.68
Public Citizen blames the 2001 hardening of the medical malpractice insurance market for the increasing premiums.69 They quote the director of insurance for the Consumer Federation of America, J. Robert Hunter, as stating that “premiums charged do not track losses paid, but instead rise and fall in concert with the state of the economy.”70 The Congressional Budget Office also related the increase in premiums to the drop in investment returns.71
The problem of individuals with multiple claims is brought to light in the Public Citizen publication as well. Prorating statistics drawn from To Err is Human, they attribute to New Jersey 1316-2930 deaths per year and $508-$867 million in annual costs that result due to preventable medical errors. This is compared to $415.8 million in New Jersey health care provider medical malpractice premiums in 2002.72 Using National Practitioner Data Bank data, 1990 to 2003, 56.2% of all payouts was made on behalf of 5.4% of doctors, and 31.1% on behalf of 2% of doctors.73 Public Citizen goes on to criticize state medical boards for not taking disciplinary action against these physicians,74 but no mention is made of the difficulties that would be involved in this process, including assessment of practice patterns- certainly some procedures on certain in some geographic locations involve higher risk (e.g. obstetrics for high risk pregnancies in an urban setting), and society does need someone function in that role.
The Public Citizen report relied upon the GAO report (see above) for evidence that access to healthcare was not impaired as a result of medical malpractice rates. It found no correlation between the presence of caps and the per capita number of physicians in individual states.75
William Sage listed six problems that need to be addressed by those that would seek to correct the chronic recurrent issues that plague the medical malpractice insurance industry: (1) high costs as well as the volatility of premiums, (2) the potential for decreased access to care, (3) compensation for the injured, which he feels is presently inadequate, (4) decreasing the incidence of errors, (5) speeding up the entire process which takes years under the present tort system, and (6) improving the climate for health care and the incentive to innovate.76