Malpractice rates: Still trending down

For most physicians, liability insurance rates are holding steady or dropping. Is this cause for celebration? Yes and No, say the experts.

By: Gail Garfinkel Weiss
Medical Economics

Is the era of big malpractice insurance rate increases over? That depends on where you live, and on your definition of “big.”

At first glance, the numbers look good: In its 2006 survey, Medical Liability Monitor, a monthly publication that covers the malpractice insurance industry, reported on rate changes for three specialties—internal medicine, general surgery, and ob/gyn. Of the 837 rates that were quoted in states that don’t have patient compensation funds—that is, where year-to-year comparisons can be made:

* Rates held steady in 390 instances (47 percent).
* Rates dropped in 192 instances (23 percent).
* Rates rose in 255 instances (30 percent).

Looked at another way, responding companies reported either no rate change or a decrease in rates 70 percent of the time—a significant improvement from 34.5 percent in 2005. Also, among the 2006 rate changes, 15 percent were for decreases of up to 9.9 percent; in 2005 only 8 percent of respondents reported that much of a decrease.

In many states, however, even in some where rates have dropped slightly or leveled off, premiums are still high. Indeed, the five states where the highest rates for internists were reported in 2005—Florida, Illinois, Michigan, Ohio, and Pennsylvania—maintained that dubious distinction in 2006 (see the chart). The only change in the “highest rates” list was for ob/gyns: Maryland and New Jersey made the 2006 list, pushing out Connecticut and Pennsylvania.

As in 2005, the lowest 2006 rates were reported in Idaho, Minnesota, Nebraska, South Dakota, and Wisconsin. And although rates began edging upward in Nebraska in 2005 when the state’s patient compensation fund raised the level where it takes over from private insurers from $200,000/$600,000 to $500,000/$1 million, Nebraska physicians still shell out considerably less for malpractice insurance than their counterparts on much of the East Coast.

Indeed, for physicians who continue to pay large malpractice premiums, slightly lower or stagnant rates are certainly better than higher rates, but not a reason to rejoice. ” ‘Less pain’ might be one way to characterize this development,” says Lawrence E. Smarr, president of the Physician Insurers Association of America, a trade association that represents more than 50 physician-owned medical liability carriers. Smarr attributes the moderation of medical liability rates to the fine-tuning of insurance companies’ rate plans after the industry lost money from 1998 to 2003, to increased competition, and to the enactment of tort reform in several states. Recent rate cuts in Texas and Mississippi, he says, stem from tort reform.

Medical Liability Monitor editor Michael Matray agrees that tort reform is an effective means of bringing liability rates down. But he notes that the effects take awhile to kick in because measures to limit liability and put caps on awards given in civil tort cases must first withstand court tests.

What has to happen for rates to drop steadily and appreciably? Tort reform certainly helps, says Frank O’Neil, a senior vice president with malpractice carrier ProAssurance in Birmingham, AL. But other factors are important, too. “Responsible companies derive their rates off actual loss experience, and we’re seeing a dramatic increase in the number of $20 million, $50 million, and even $200 million verdicts,” he notes. “Even though frequency may be down—there are fewer suits in which every physician who had contact with the patient is named—that doesn’t necessarily translate into diminished losses. A $100 million verdict is still a $100 million verdict, whether 10 physicians or three physicians are named.”

If there’s a sustained decrease in frequency and severity, commensurate rate reductions will follow, O’Neil continues. “Companies, in determining rates, don’t just crunch the numbers on Jan. 1; they look at trends throughout the year,” he says. “The wide variance in rate actions in 2006 is a great example: Rates dropped in parts of Florida and Illinois, remained flat in Michigan, and rose in New Jersey. People naturally want to find a national trend, but you have to look at rates state to state and even county to county to get the true picture. In Ohio, for example, most companies have four or five territories because the liability climate in the Cleveland area differs dramatically from the climate in and around Cincinnati. Similarly, rates in the Florida panhandle are vastly lower than the rates in Miami-Dade County.”

O’Neil also points out that rate changes are averages, and within a territory that has seen a sharp increase or decrease there can be considerable variability that’s based on practice characteristics and loss history. “Just as auto insurers penalize for a high number of accidents, or reward clients for years of accident-free driving, malpractice insurers are permitted to debit or credit—within limits—to reflect physicians’ loss history and nuances of how, where, and what they practice,” he says.

With so much rate variation in certain areas, should you shop around for the lowest rate? Within limits, says Mike Matray. As tempting as it might be to pay less for malpractice insurance, he notes, physicians should think twice before signing up with a company that sharply undercuts its competitors. Insurance pricing involves a complex formula where surplus is weighed against projected losses and projected litigation. Companies that try to attain market share by slashing prices don’t have much staying power.

The PIAA’s Larry Smarr maintains that rates will continue to wax and wane until more states put caps on malpractice awards, particularly for noneconomic damages. “It was inevitable that rates would level off or even drop somewhat after rising for so many years,” he maintains. “I think we’re in for a period of quietude, but I fully expect that in the not-too-distant future rates will edge up again in states that haven’t enacted tort reform.” ?
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