Effectiveness of Malpractice Tort Effectiveness of Malpractice Tort Reforms: The Relation Between Loss and Reforms: The Relation Between Loss and
PremiumPremium
Arthur Gurevitch, PhDArthur Gurevitch, PhD
Milliman USA
Manifestations of the Manifestations of the Current Malpractice CrisisCurrent Malpractice Crisis
Withdrawal of St. Pauls’ in December Withdrawal of St. Pauls’ in December 2001 followed by PHICO, Reliance, 2001 followed by PHICO, Reliance, Frontier, Miix, and Farmer’s.Frontier, Miix, and Farmer’s.
Reports in the popular press of Reports in the popular press of dramatic increases in premium and dramatic increases in premium and decrease in availability of coverage.decrease in availability of coverage.
““Strikes” and other political activity by Strikes” and other political activity by physicians.physicians.
Proposals/ legislation at national and Proposals/ legislation at national and state level for “tort reform”.state level for “tort reform”.
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A June 2002 Wall Street Journal Article A June 2002 Wall Street Journal Article SetSet the Stage for the Current Debate the Stage for the Current Debate
“while malpractice litigation has a big effect on premiums, insurers’ pricing and accounting practices have played an equally important role. Following a cycle that recurs in many parts of the business…(insurers) sell malpractice coverage … at rates that proved inadequate to cover claims”
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Plaintiffs’ Attorneys and “Consumer Advocates” Plaintiffs’ Attorneys and “Consumer Advocates” Have Extended These Arguments in their Fight Have Extended These Arguments in their Fight
Against Tort ReformsAgainst Tort Reforms
Premium increases have not been “unusual”Premium increases have not been “unusual”– ““malpractice insurance costs have risen at half the rate malpractice insurance costs have risen at half the rate
of medical inflation”of medical inflation”
Claims are not increasingClaims are not increasing– ““the spike in medical liability premium was caused by the spike in medical liability premium was caused by
the insurance cycle, not by new claims or skyrocketing the insurance cycle, not by new claims or skyrocketing jury verdicts”jury verdicts”
Tort reforms will reduce neither claims nor premiumTort reforms will reduce neither claims nor premium– ““nothing about California’s experience suggests that nothing about California’s experience suggests that
limiting jury awards will reduce malpractice premiums”limiting jury awards will reduce malpractice premiums”
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Research OverviewResearch Overview How have losses and premium grown over How have losses and premium grown over
the past few years?the past few years?
Do states with strong tort-reforms have lower Do states with strong tort-reforms have lower losses? Lower premiums?losses? Lower premiums?
What is the “insurance cycle” impact on the What is the “insurance cycle” impact on the cost of malpractice coverage?cost of malpractice coverage?
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To Evaluate the Current Malpractice Crisis, We To Evaluate the Current Malpractice Crisis, We Examined Annual Statement Premium and Examined Annual Statement Premium and
National Practitioner Data Base LossesNational Practitioner Data Base Losses
– – Premium –Premium –Annual StatementsAnnual Statements
Written Premium, for Written Premium, for Medical Mal.Medical Mal.
Includes Hospitals & Includes Hospitals & PhysiciansPhysicians
Aggregate for State by Aggregate for State by Policy YearPolicy Year
No Self Insurance or No Self Insurance or State Fund DataState Fund Data
– – Loss –Loss –
National Practitioner National Practitioner Data BankData Bank
Physician OnlyPhysician Only Closed with LossClosed with Loss No LAENo LAE By Year ClosedBy Year Closed Not Designed as an Not Designed as an
Analytical DatabaseAnalytical Database
Milliman USA
Written Premium Increased Written Premium Increased Dramatically in 2001Dramatically in 2001
0.80
1.00
1.20
1.40
1.60
1997 1998 1999 2000 2001 2002
Year
Per
Cap
ita W
ritte
n P
rem
ium
(199
7 =
1.0)
Milliman USA
Losses began a rapid Losses began a rapid increase in 2000increase in 2000
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1997 1998 1999 2000 2001 2002 2003
Year Closed
Loss
Per
Phy
sici
an(1
997
= 1.
0)
Prorated June Data
Milliman USA
Severity Rose Dramatically During Severity Rose Dramatically During This Period. Frequency Has Been This Period. Frequency Has Been
Unchanged.Unchanged.
0.75
1.00
1.25
1.50
1997 1998 1999 2000 2001 2002 2003
Year Closed
Rel
ativ
e F
requ
ency
or
Sev
erity
(1
997=
1.0)
Frequency Severity
Prorated June Data
Milliman USA
There Was a Clear and Dramatic There Was a Clear and Dramatic Change Between 1999 & 2001Change Between 1999 & 2001
0.80
1.00
1.20
1.40
1.60
1997 1998 1999 2000 2001 2002 2003
Year
Per
Cap
ital L
oss
or P
rem
ium
(199
7 =
1.0)
Premium Losses
Prorated June Data
Milliman USA
Losses Are Dramatically Lower Losses Are Dramatically Lower in States With Award Capsin States With Award Caps
0
2,500
5,000
7,500
10,000
1997 1998 1999 2000 2001 2002 2003
Year Closed
Lo
ss P
er P
hys
icia
n (
Pu
re P
rem
ium
)
States with Caps States without Caps
Milliman USA
This is Due to Lower Severity …This is Due to Lower Severity …
0
100,000
200,000
300,000
400,000
1997 1998 1999 2000 2001 2002 2003
Year Closed
Sev
erity
(
$ Lo
ss p
er C
laim
)
States with Caps States without Caps
Milliman USA
And Also Lower FrequencyAnd Also Lower Frequency
1.00
1.50
2.00
2.50
3.00
1997 1998 1999 2000 2001 2002 2003
Year Closed
Freq
uenc
y (C
laim
s pe
r 100
Phy
sici
ans)
States with Caps States without Caps
Milliman USA
But Premium is Also Lower in But Premium is Also Lower in States With Caps on AwardsStates With Caps on Awards
5,000
7,500
10,000
12,500
15,000
17,500
1997 1998 1999 2000 2001 2002
Year
Prem
ium
($) p
er P
hysi
cian
States with Caps States without Caps
Milliman USA
We Found a Correlation Between Premium We Found a Correlation Between Premium and Loss Over Time and Between Statesand Loss Over Time and Between States
y = 0.6769x + 6582.9R2 = 0.2715
0
5,000
10,000
15,000
20,000
25,000
30,000
0 5,000 10,000 15,000 20,000
Loss ($) per Physician
Prem
ium
($) p
er P
hysi
cian
Milliman USA
The Simple Model Had More Predicative The Simple Model Had More Predicative Power for States With Over 400 NPDB Power for States With Over 400 NPDB
Cases Per YearCases Per Year
-100%
-75%
-50%
-25%
0%
25%
50%
75%
100%
0 500 1,000 1,500 2,000 2,500
NPDB Cases per Year
Acc
urac
y of
For
ecas
t -
Rel
ativ
e R
esid
ual
Milliman USA
These 9 States Account for Over These 9 States Account for Over 60% of National Malpractice60% of National Malpractice
California*California* FloridaFlorida IllinoisIllinois Michigan*Michigan* New JerseyNew Jersey
New YorkNew York OhioOhio PennsylvaniaPennsylvania TexasTexas
* States With Caps
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Additional Analysis of Premium and Additional Analysis of Premium and Loss for the 9 States Yielded a Loss for the 9 States Yielded a
Powerful Regression ModelPowerful Regression Model
Regression StatisticsMultiple R 0.882 R Square 0.779 Adjusted R Square 0.761 Standard Error 1,617.97 Observations 54
Coefficients P-valueIntercept (5,833.59) 0.0170 Nat Loss -1 1.81 0.0000 Loss -1 0.25 0.1028 Loss -2 0.75 0.0001 % State Fund (11,700.57) 0.0000
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Over 75% of the Variability in Over 75% of the Variability in Premium Can Be Explained With a Premium Can Be Explained With a
Simple, Loss Based ModelSimple, Loss Based Model
5,000
10,000
15,000
20,000
25,000
5,000 10,000 15,000 20,000
Forecast Premium
Act
ual P
rem
ium
States With Caps States Without Caps
Milliman USA
Equally Important Are the Equally Important Are the Metrics That Had No Significant Metrics That Had No Significant
Effect on PremiumEffect on PremiumCurrent LossCurrent LossLosses Older Than 3 yearsLosses Older Than 3 years Interest Rate (5 year Treasury)Interest Rate (5 year Treasury)Average Case AgeAverage Case AgeDiscount Rate (Interest & Age)Discount Rate (Interest & Age)% PIAA (Mutual) Market Share% PIAA (Mutual) Market ShareCompetitive IndicesCompetitive Indices
Milliman USA
The Model Predicts The Model Predicts Stable Rates for 2003Stable Rates for 2003
Top 9 States
5,000
10,000
15,000
20,000
1997 1998 1999 2000 2001 2002 2003
Policy Year
Pre
miu
m p
er P
hysi
cian
Forecast Actual
Milliman USA
SummarySummary
Despite Claims to the ContraryDespite Claims to the Contrary
Premium increases have not been “unusual”Premium increases have not been “unusual”
Claims are not increasingClaims are not increasing
Reforms will reduce neither claims nor premiumReforms will reduce neither claims nor premium
Between 1997 & 2003 overall per capita Between 1997 & 2003 overall per capita premium has increased 50%premium has increased 50%
Between 1997 & 2003 per capita losses Between 1997 & 2003 per capita losses have increased 35%have increased 35%
The evidence supports the effect of reforms The evidence supports the effect of reforms in reducing claims & premiumin reducing claims & premium