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    Behind the med-mal crisis
    Beyond stopgap: Insurance reforms

    There are things the industry—and regulators—can do to make rates less volatile.

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    Proposals to improve malpractice insurance range from rate tinkering to more systemic changes, including the no-fault option currently in use in the workers' compensation system and among some automotive insurers. Here are the key ones.

    Improve rate setting. Fundamentally, experts say, companies must do a better job of rate setting during good markets in order to minimize steep rate hikes during bad ones.

    Clearly, some companies did the opposite during the 1990s. They underpriced, relied on investment gains to offset underwriting losses, and, worst of all, let marketing strategies trump sound business decisions. A gung-ho strategy to win new business shouldn't substitute for "prudent actuarial analysis and good planning," concludes a recent report by Florida-based Weiss Ratings, an insurance and financial rating agency.

    The report not only calls on the industry to clean up its act voluntarily; it also calls on regulators to do a better job of monitoring the premiums charged policyholders. In monitoring companies' financial health, the report says, state officials should focus on underwriting profits and losses, independent of the company's investment income. Had this been done during the period when investments gains were offsetting underwriting losses, Weiss argues, state regulators could have authorized gradual rate increases in place of the sudden ones that blindsided doctors.

    Develop stricter standards for estimating incurred loss. In a related area, former Missouri insurance commissioner Jay Angoff would like to see standards adopted, either voluntary or state-imposed, for how companies estimate their expected or incurred losses, a key factor in rate setting. As it stands, says Angoff, high estimates and corresponding bumps in reserve levels don't raise many eyebrows, because solvency-conscious regulators know there's money set aside to pay future claims. But higher estimates also make it possible for companies to ask for higher rates, as they did at the end of the '90s, when some insurers may have overcorrected for past miscalculations.

    Angoff would develop a standard that says to companies, "In determining your incurred loss estimates for any one year, you must take into account your actual paid claims over the immediate prior years. If you paid out only slightly increasing amounts for each of the past three years, say, you can't double your rates this year." Companies that consistently over- or underestimated their losses (underestimates and correspondingly lower reserves can make the bottom line look better) would be penalized.

    Whatever standard is finally adopted, says Angoff, there's got to be some rhyme or reason to the way companies go about estimating their incurred losses, and thus the rate hikes they think they deserve.

    Move to "experience rating." Some have called for insurers to change the way they rate individual policyholders, from a focus on specialty, risk, and location to a focus on actual claims history. As it is, doctors with stellar claims histories often end up subsidizing the small number of doctors in the same field with less-than-stellar ones. The switch to experience rating would alter this, proponents say, making it less likely that all doctors in one field would be tarred by the same brush.

    But there are problems with this approach. First, as critics point out, doctors who treat very high-risk patients are likely to be at a disadvantage, whatever their skill level. Second, doctors might have an added incentive to underreport errors, given how much rides on having a clean history. And third, if good individual information can't be accurately compiled, experience rating would be impractical to implement.

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    Wayne J. Guglielmo
    For 12 years, Wayne has written on health policy and related issues for Medical Economics. He also writes the magazine's ...

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