Doctors' orders: physicians have wielded their clout to bring about medical-liability reform, but what lies beyond caps on damages?

I'm early 2002, the medical-legal framework in Texas was strained to the limit. On one side were personal injury lawyers advertising heavily and juries returning awards in medical-malpractice lawsuits that ranged into the millions of dollars. On the other were trauma centers closing their doors, medical-liability insurers rapidly exiting the market and doctors retiring early or moving their practices elsewhere.

Across the state, there were murmurings of a doctors' strike.

"We had reached a breaking point," recalls Corpus Christi radiologist Burk Strong. "But we decided we needed to do something else."

So instead of striking, the doctors ordered up a cure.

Armed with bumper stickers and buttons, pamphlets to distribute in their waiting rooms and yard signs to post on the lawns of their homes, medical professionals affiliated with the 50,000-member Texas Medical Association joined others in a rally for change. In Strong's region, 200 doctors, with busloads of supporters and friendly legislators in tow, held an awareness day at the Nueces County Courthouse. At the Texas Capitol, 180 miles away in Austin, doctors began showing up on the first Tuesday of each month, donning white coats and meeting with policymakers to state their cause.

The efforts "paid off big time," said Strong, who was president of the Nueces County Medical Society at the time. On June 11, 2003, Gov. Rick Perry signed into law House Bill 4, which contained sweeping tort reforms, including a $250,000 limit on noneconomic, or "pain and suffering" damages and a $750,000 overall limit per case. The public backed up the bill by approving Proposition 12, which allowed liability insurance premiums to immediately decrease by circumventing a possible 10-year wait for the state Supreme Court to determine whether caps were permitted under the Texas Constitution. Washed out with the turning of the tide were huge jury awards, including one that topped out at $10.5 million in 2000.

So far, the doctors' activities helped to drive an initial 12% cut in medical-liability premiums by the Texas Medical Liability Trust and a subsequent 5% reduction. In addition, 11 new insurers have entered the Texas medical-liability market.

What happened in Texas is just one example of how, in recent years, doctors across the country have set the stage for legislative reform, particularly in the area of capping noneconomic damages. Since 2002 alone, those efforts, coupled with advocacy by the insurance industry and other groups, have led to reforms in a number of states, including Alaska, Arkansas, Connecticut, Florida, Georgia, Idaho, Illinois, Missouri, Nevada, Ohio, Oklahoma, South Carolina and West Virginia.

The lobbying skills used to get there, however, weren't something doctors picked up in medical school.

"A lot of doctors had always hated bringing politics into the office. The doctor and patient relationship is very important," Strong said. "But most of them realized the importance of doing that. So doctors began talking to patients."

National Efforts

Christian Shalgain, manager of legislative affairs for the American College of Surgeons, said those efforts have been felt at home as well as on Capitol Hill, where federal medical-liability reforms are currently on the burner.

"We have seen doctors become much more active in the political process and getting medical-liability reform," Shalgain said. "They've come to testify, bringing their patients with them and meeting representatives. The combination of the doctors' stories and the patients' stories (in terms of scarcity of access) have gone to show legislators what the true need for medical-liability reform is."

And while the need for reform has been subject to great debate, with some blaming the current medical-liability crisis on exorbitant jury awards and others alleging profiteering by liability insurance companies, one thing most agree upon is that doctors are facing a problem, Shalgain said.

According to the American Hospital Association, 45% of hospitals reported that the professional-liability crisis has resulted in the loss of physicians or reduced coverage in emergency departments. Moreover, a Harris Poll found that more than 75% of doctors believe medical-liability litigation has negatively affected their ability to provide quality care in recent years.

In response to the argument that medical-malpractice insurers are swimming in reserves, Connecticut Insurance Commissioner Susan Cogswell wonders why the number of such insurers doing business in her state dropped in the past decade from 19 to the current three. "Many insurers are leaving the market either because they can't provide at profitable rates or because they are going insolvent," she said.

According to A.M. Best Co.'s 2004 Best's Aggregates & Averages, over the past decade the profitability of medical-liability insurers has been on the decline and was lower than that of other property/casualty insurers. Between 1996 and 2003, the combined ratio of medical-liability insurers increased from 106.6 to 136.9, meaning that for every $1 insurers received in premiums in 2003, they paid out about $1.37 in claims and expenses. In contrast, the 2003 combined ratio of all property/casualty insurers was 100.1.

Caps or No Caps

However, as doctors go about trying to solve the issue of soaring medical-liability premiums, those in line for harm are the innocent victims of medical malpractice, represented by lawyers, said Carlton Carl, spokesman for the Association of Trial Lawyers of America.

"Who does tort reform hurt? It hurts people injured by, not the fault of their own, but by the neglect or greed of others. The proposal to cap damages applies to every case, no matter how severe the injury, no matter how outrageous the neglect of the doctor or hospital or nursing home or drug company," Carl said. "It would, in fact, apply to the mother whose child is killed as a result of malpractice and the children whose parent is killed in a nursing home.

"Caps on damages don't improve the quality of health care, they don't minimize instances of mistakes, they don't increase the availability of health care and they don't reduce premiums. The only thing they do is to put more money back in the pockets of the insurance companies," he said.

Robert Detlefsen, public policy director for the National Association of Mutual Insurance Companies, said the bulk of insurers' expenses originate not so much from hefty jury awards--the average of which, according to the American Medical Association, has doubled in recent years--but from legal expenses and settlements that are made under the threat of such awards.

"The slogan about the insurance industry deciding on the value of a person's life is really sort of a canard," Detlefsen said. "You're leaving it up to a jury to decide what noneconomic damages to a plaintiff" have occurred based on the evidence presented. But the question becomes, should juries have unlimited power to award intangible things such as pain and suffering? The fact is, as long as there's a potential for these very large jury awards, the existence of that phenomenon influences the entire settlement process."

"If you just focus on the parade of horribles, you find yourself on a slippery slope that leads to the situation that we're in today, where doctors are subject to potential ruinous litigation expenses and damage awards to the point where it becomes next to impossible for them to obtain affordable malpractice insurance, and they have to shut down their practices," Detlefsen said.

As doctors continue their quest, the legal landscape will likely change as well, said John Salvucci, an insurance lawyer for the Philadelphia-based law firm Cozen O'Connor. No longer will a $250-an-hour defense lawyer be up against a $2,500-an-hour plaintiff's lawyer who collects medical-malpractice cases as an investor does stocks and bonds, knowing that the risk is bound to pay off in at least a few cases, Salvucci said.

"If you put caps in place on medical-malpractice cases, that ends. The plaintiff's attorney who is used to making multimillions of dollars, they're going to switch and do something else," Salvucci said. "Lawyers are fighting these measures through political action committees, but states are passing laws anyway. There has been a change in the philosophy of the consuming public, led by the disenfranchisement of physicians."

And while caps may accomplish a certain result for insureds as well as insurers, and physicians are likely to remain vocal on the topic, in the end, alternate reforms may be necessary to usher in a lasting cure.

One option, Detlefsen said, may be the adoption of "loser pays" rules, which exist in Europe and Japan and require a losing party in a lawsuit whether it be the defendant or plaintiff, to pay the legal expenses incurred by the other side. Another answer may come though creating medical-malpractice courts, which so far have seen consideration in Pennsylvania, Illinois, Maryland and Massachusetts.

"Logic will tell if (placement of caps for noneconomic damages) is an effective remedy. But experience doesn't always follow logic. We haven't accumulated enough experience yet to know just how effective caps are going to be," Detlefsen said.

Key Points

* States have responded to demands| for medical-liability reform by enacting laws that legislators hope will lower premiums and increase patients' access to care.

* As the legal landscape changes and doctors stay in the fight, states are beginning to look beyond caps for a lasting cure.

* In the past three years, the number of medical-malpractice captives formed in Vermont has doubled.

* Physicians' increased use of defensive medicine is taking a toll on costs.

RELATED ARTICLE: Cost and effect.

Insurers are feeling the effects of rising medical-malpractice costs, but many believe it's the severity, not the frequency, of claims that has the greatest impact on the industry. And even when plaintiffs lose a case, insurers are still on the hook for defense costs.

Medical-malpractice payments increased 40% to 50% over the past 12 years, said Amitabh Chandra, an economist at Dartmouth College. The increase, he said, is consistent with the growth in overall health-care expenditures.

Some doctors contend that large jury awards are driving the rise in payments, but a recent study published online by Health Affairs begs to differ. According to the study, the average malpractice claim, assessed from an analysis by the National Practitioner Databank, increased by about 4% each year from 1991 to 2003. The increase slowed, however, to less than 2% a year from 2000 to 2003, and the average court judgment in 2003 was $461,000, despite doctors' complaints about multimillion-dollar jury awards.

The Physician Insurers Association of America, which represents more than 60% of physicians in need of medical-malpractice coverage, believes payouts are continuing to rise, with many non-meritorious claims contributing significantly to medical-malpractice premiums. "Today, about 70% of all claims brought against doctors go nowhere, with cases being dropped, dismissed or won in court, and there's no payment to the claimant," said Larry Smarr, president of the PIAA. "When cases go all the way to verdict, physicians win 80% of the time, and the average cost of trials is approximately $100,000:' Unlike auto claims that often are paid within days or weeks of a claim, medical-malpractice claims are paid, on average, four-and-one-half years "after an incident occurs, he said, and 50% of money available to pay claims goes to attorneys.

The Center for Justice and Democracy, a consumer-advocacy group, also argues there's been a recent flattening in claims payouts, but physicians' premiums still are rising. In its study, based on insurers' filings with state regulators, net claims for medical malpractice paid by 15 leading malpractice insurers have remained stable over the past five years, while net premiums have increased 120%. According to the study, leading malpractice insurers' annual statements show they have been raising premiums even though both their actual claims payments and their projected future claims payments have been falling, showing malpractice claims cost isn't the cause of high premiums.

But Smarr disagrees, saying the results of the study are "inappropriate" because it compares value of claims in a calendar year to the value of premiums collected in that year, and includes only amounts paid in indemnity to injured plaintiffs. "There's a lot of junk science and fuzzy math out there on this issue," he said. "Just look at the work of the GAO, CBO and the NAIC to verify what credible institutions are saying about the costs of claims. They all agree that the rising cost of indemnity payments to plaintiffs is driving up premiums."

Defensive Medicine

Physicians' increased use of defensive medicine also is helping to drive costs. Defensive medicine, which is defined as the use of medical treatments of uncertain therapeutic value to reduce the risk of litigation, accounts for between 5% and 9%, of health-care spending, according to a benchmark study released in 1996 by Daniel Kessler and Dr. Mark McClellan, the current administrator of the Centers for Medicare & Medicaid Services. Chandra said that today, the percentage of that spending remains about the same.

"Physicians are terrified of growth in payments and the risk of being sued, so in order to avoid that, they are increasingly recommending the use of imaging and diagnostic testing," said Chandra, author of the Health Affairs study.

In 2004, President Bush said skyrocketing malpractice premiums have forced physicians to practice defensive medicine, driving up federal costs by $28 billion a year. A recent article in the Journal of the American Medical Association reported that 90% of Pennsylvania physicians in high-risk specialties admitted to the practice, and in California, the practice is common despite the state's law that caps noneconomic damage awards in medical-malpractice cases at $250,000.

--Lori Chordas

Medical-Malpractice Claim
Payment Values--2003

(As of May 2004)

Mean Indemnity Payment   $328,757
Mean Expense Payment      $29,683

Source: Reprinted with permission of the Physician
Insurers Association of America

RELATED ARTICLE: Doctors say 'I'm sorry'.

Doctors spend years studying the complex workings of the human body. Now, they're turning their attention to the complex workings of the legal system and stepping up risk-management techniques to avoid medical-malpractice claims.

In addition to investigating incidents and making sure doctors have proper credentials, a major component of risk management for doctors is addressing potential medical-malpractice claims early on. Instead of treating would-be plaintiffs as adversaries, the doctors are striving to have an open and honest discussion with them--including even apologizing, when appropriate.

"Most malpractice claims come out of anger and a feeling of not being told the truth to, as opposed to specifically bad outcomes," said Dr. Robert Margolis, chief executive officer of HealthCare Partners Medical Group, a Torrance, Calif.-based doctors' group. "Bad outcomes happen in health care. It's unfortunate, but unavoidable to stamp out all bad outcomes."

HealthCare Partners, one of the largest doctor groups in California, has a risk manager who's both a lawyer and a registered nurse. The risk manager looks at and works with all potential complainants and works to establish good communication with families to assure that the family is fully informed.

This is a growing trend across the country, said Brian Engel, a senior vice president of Benfield Group, an insurance broker. "If there's negligence or something has gone wrong, instead of the traditional way of thinking 'we are going to hurt ourselves if we say anything,' the growing view is maybe an apology should be given, and hopefully we won't have as much of an antagonistic relationship with the patient" Engel said.

Of course, "bad outcomes" happen even without mistakes or negligence. That's one reason communication is so important.

"It's anger management of the plaintiff," said Steve Harri, managing director of insurance broker and consultant Beecher Carlson's national health-care practice. "When a mistake does happen, not necessarily a negligent mistake, doctors are having an early intervention with the family to explain to them what happened. If the event is deserving of compensation, that is brought up quickly, and resolved. A dialogue occurs as opposed to having an adversarial situation, and that can go a long way to mitigating severity."

Most medical-malpractice claims do not involve "bad" doctors, experts said.

"I don't think someone goes to medical school for 10 years to hurt people. They want to do good," said Michael Suter, vice president of Aon Risk Services. "There's a lot of risk management built into being doctors. People hear these anecdotal horror stories about the wrong leg getting cut off, but that's not the norm at all. The problem is people are bad patients. They want to do whatever they want, eat whatever they want, and if it's not fixed, they're going to sue the doctor. You have to be accountable for your own health care. You have to meet the doctor half way."

--Meg Green

Medical-Malpractice Market Dominated by Companies
Owned or Funded by Doctors or Hospitals

Among the leading U.S. medical-malpractice writers listed below,
those with # are owned or founded by physicians or hospitals.

                              % Market       % of Company
                             Share--2004    Premiums--2004

       Amer Intl Group Inc       8.1              3.2
              MLMIC Group#       8.0             96.5
       GE Global Ins Group       7.1             37.1
       ProAssurance Group#       4.9             70.5
     Doctors Co Ins Group#       4.4             99.7
               CNA Ins Cos       4.0              4.2
       ISMIE Mutual Group#       3.8            100.0
Health Care Indemnity Inc#       3.3            100.0
         Mag Mutual Group#       3.1             97.7
             Norcal Group#       2.6            100.0

Note: Rank is based on 2004 direct premiums written.

Source: A.M. Best Co.

60% Percentage of total medical-malpractice market held by members
of the Physician Insurers Association of America. All member
companies are either owned or operated by doctors.

Source: Physician Insurers Association of America

RELATED ARTICLE: Doctors continue to form risk-retention groups.

Stick out your tongue and say, "improved combined ratio?" Faced with rising medical-malpractice insurance costs, hospitals and doctors are continuing to get into the insurance business to gain more control over claims and premiums.

"A lot of physicians and medical specialists feel that they are being underwritten by a big, large pool, and they are taking on the responsibility of forming their own risk-retention groups to take control," said Carol Frey, vice president of Ace Captive Strategies.

In the past three years, the number of medical-malpractice captives--including risk-retention groups--formed in Vermont, the top U.S. captive domicile, has doubled, said Derick White, director of captive insurance For Vermont.

Growth slowed somewhat in 2004, but it still was the fifth-busiest year in 24 years, he said. "With the market softening a bit, and more carriers coming in, we haven't seen the dire crunch that we saw in 2002 and 2003," White said.

The combined ratio, or measure of profitability, for medical malpractice is improving, said Steve Harri, managing director of Beecher Carlson's national health-care practice. This has helped the commercial market recover in terms of adequacy of rates, he said.

Still, "the allure of the alternative market is that participants believe they are a better risk than the rest of the world, and that they will recognize savings quicker than they would in a commercial program," he said.

HealthCare Partners Medical Group is one such participant. It recently joined with three other California-based doctor groups to form an RRG.

"All four groups were picked carefully based on historical claims experience and their internal risk-management capabilities--which were not appreciated by large, national or regional medical-malpractice companies," said Dr. Robert Margolis, Chief executive officer of HealthCare Partners. "In California, we've seen rate requests of well over 100% a year. It's not tied at all to claims history."

The Torrance, Calif.-based medical group paid $2.6 million in premiums in 2004 and expects to reduce its insurance costs by 50% with the new RRG.

The RRG will encourage risk management by not offering first-dollar coverage. All members will take a minimum $50,000 sell-insured retention, said Michael Suter, vice president of Aon Risk Services, which helped HealthCare Partners to create the RRG.

Doctor-run captives can outperform traditional insurers, Suter said. They "have access to winning disciplines of the past 40 years and do not have the financial baggage of the past. Doctor-run companies, where owners are the insureds, do not have to add a profit component to their rate making, giving them a pricing advantage," Suter said.

Also, RRGs and captives tend to be niche insurers. "If they can manage it well, underwrite it better, price it appropriately and are capitalized to survive severity hits, they can outcompete traditional insurers," said Richard Poling, senior vice president at Beecher Carlson, an insurance broker and consultant. "But they have to do everything right."

In addition to forming new captives, a number of hospitals reactivated existing captives in recent years, said Brian Engel, senior vice president of reinsurance broker Benfield. Also, he noted some have formed other forms of insurance companies, including reciprocals, mutuals and even stock companies.

"There's no particular trend on what form will dominate," he said.

--Meg Green

Alternative Market Growth

Medical-malpractice captives,
including risk-retention groups,
have doubled their numbers in
Vermont in the past three years.

          Total
         Captives

1980s      12
1990s      34
2000       35
2001       38
2002       51
2003       72
2004       78

Note: Table made from bar graph.

Source: Vermont Department of Banking, Insurance,
Securities & Health Care Administration.