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    Behind the med-mal crisis
    Seeds of the crisis

    Multiple factors—history shows—have contributed to the current situation.



    AMA: Crisis everywhere
    We've had three malpractice insurance crises to date—one in the 1970s, another in the mid-'80s, and today's. Experts looking at the latest crisis see links with the past—like higher insurance company loss levels and sudden readjustments—as well as several new forces at work, including the impact of 9/11 on both the investment and reinsurance markets. We took a look at what's driving today's problems—as well as at the earlier stopgap reforms that were supposed to have prevented them.

    Increased losses. During most of the 1990s, medical liability was one of the most profitable lines of insurance in the casualty industry. This so-called soft market was characterized by lower-than-expected claims losses, a reduction in the funds set aside to cover future liabilities (known as loss reserves), low overall inflation, equally low inflation in medical costs, and solid returns on insurance company investments during the stock market boom.

    Malpractice insurers responded to this happy set of circumstances in several ways. Some made only the most modest premium increases. Others not only held rates stable, but offered policyholders dividends or premium discounts. And still others—notably smaller companies new to the medical liability line of business—sold policies at bargain-basement prices in a competitive bid for market share. Reinsurers (companies that assume liability for other insurers, especially for higher-risk policies) also got into the act, competing for new business by scaling back their rates.

    But in 1998 dark clouds appeared on the horizon.


    States capping noneconomic damages
    In that year, paid losses—the money insurers must pay out for claims in a given year, regardless of when those claims originated or were reported—began to rise rapidly. (Most payouts in a given year are for claims arising and reported five to 10 years earlier.) From 1998 to 2001, the average annual increase in paid losses, adjusted for inflation, climbed to 8.2 percent, from about 3 percent from 1988 to 1997, according to the GAO's analysis of industry data. The decade's end also saw the proportion of big payouts ($1 million and above) increase, as data from the Physicians Insurers Association of America suggest.

    What accounted for these upticks? The short answer is, no one knows for sure.

    But plausible arguments can be made for a number of contributing factors, writes Harvard associate professor of law and public health David M. Studdert and his co-authors in an article published last January in the New England Journal of Medicine. These include greater public awareness of medical errors (something the media's coverage of the Institute of Medicine's 2000 report on the subject clearly contributed to); less trust in the system because of patients' bad experiences in managed care; rising expectations of medical care; and a greater reluctance among plaintiffs' attorneys to settle and close cases.

    Whatever the reasons, the rise in paid losses and larger awards made the once-giddy med-mal insurers gloomy—perhaps too gloomy, some would argue. Beginning in 1998, they began to raise their "incurred losses"—that is, their estimates of what they expected to pay at some point in the future for claims reported in the current year, as well as what they expected to pay for claims still open from previous years. The closer companies looked at their present situation, the more it darkened their view of the future.


    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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