DO CAPS ON NON-ECONOMIC DAMAGES DECREASE MEDICAL MALPRACTICE INSURANCE PREMIUMS?
by
Matthew Mortensen
A Senior Honors Thesis Submitted to the Faculty of The University of Utah
In Partial Fulfillment of the Requirements for the Honors Degree in Bachelor of Arts
In
Political Science
Approved:
______________________________ Daniel Levin, PhD
Thesis Faculty Supervisor
_____________________________ Mark Button, PhD
Chair, Department of Political Science
_______________________________ Matthew Burbank, PhD
Honors Faculty Advisor
_____________________________ Sylvia D. Torti, PhD
Dean, Honors College
April 2015 Copyright © 2015 All Rights Reserved
ii ABSTRACT
This paper examines whether tort reform, like caps on non-economic damages for medical malpractice claims, actually lower insurance premiums for physicians.
Proponents of tort reform argue that large jury awards against physicians have driven up physician insurance premiums, and as a result, overall health care costs. Tort reform is backed by conservative pro-business groups like the Chamber of Commerce, while the opposition consists of Democrats and the American Trial Lawyers Association. This paper endeavors to show that medical malpractice insurance premiums rise in response to other factors, independent of litigation, contrary to the arguments made by conservative politicians and associations. Premiums change in response to determinants such as under reserved insurance companies or, most importantly, in response to losses incurred in the investment market by insurance companies. Under reserved insurance companies and losses incurred in the investment market affect medical malpractice premiums because premiums rise in response to changes in capital reserve requirements and declines in investment income. This paper shows that litigation is not the cause of increasing medical malpractice insurance rates, but instead increases in medical malpractice
insurance rates respond to changes in the insurance underwriting cycle due to fluctuations in the investment market. Conservative backed tort reform is a misguided attempt to control medical malpractice insurance premiums and overall health care spending.
iii
TABLE OF CONTENTS
ABSTRACT ii
INTRODUCTION 1
THE POLITICS OF NON-ECONOMIC DAMAGES 3
TOO MUCH LITIGATION OR TOO MUCH MALPRACTICE? 11
DETERMINANTS OF INSURANCE PREMIUMS 13
CALIFORNIA AND TEXAS: CASE STUDIES 21
CONSTITUTIONAL QUESTIONS AND EQUITY ISSUES 24
CONCLUSION 26
WORKS CITED 28
APPENDIX 1 30
INTRODUCTION
Health care expenditures in the United States accounted for 17.9 percent of the total gross domestic product in 2012 ("Health expenditure, total (% of GDP)", 2014). In 2013 there was a 3.9 percent increase in health care spending per insured ("Health Care Cost and Utilization Report 2013", 2014). Rising health care costs are not a phenomenon exclusive to the 2000s. Health care costs have been rising for decades, and the medical malpractice tort system has been blamed, by conservatives, for contributing to rising costs. Tort reform followed the waves of “medical malpractice insurance crisis” that occurred on a decennial basis from the 1970s through the 2000s. The first state to cap non-economic damages was California in 1975. In the 1990s many states adopted a popular type of tort reform that caps the awards plaintiffs can receive for non-economic damages. Throughout the 1990s and early 2000s tort reform, and specifically caps on non-economic damages, was backed by Republicans and groups like the American Tort Reform Association (ATRA), Chamber of Commerce, and other pro-business
organizations. President George W. Bush was the most vocal proponent on the national stage, and spoke about tort reform often on the campaign trail. Due to popular rhetoric, and support from the ATRA and other organizations, more than thirty states have enacted some form of a cap on non-economic damages since the 1970s. One of the most recent states to cap non-economic damages was Texas in 2003, and the effects have been studied extensively.
Proponents of capping non-economic damages argue that frivolous litigation and large jury awards have driven up health care costs through increased medical malpractice insurance premiums for physicians, especially specialists. Caps on non-economic
2
damages are a common way to try and control health care spending through insurance premiums. This theory supported by tort reformers and their corporate allies suggests that increases in medical malpractice insurance premiums and health care spending are tort driven. Their solution to decrease insurance premiums is to cap the amount that plaintiffs can obtain in economic damages. The theory behind caps on non-economic damages is simplistic, and does not account for a more holistic view of the issue. “Tort-based explanations of a premium spike include a sudden increase (or expected increase) in either the number of claims, the dollars per claim necessary to resolve the dispute, a rise in the cost of defending such claims, or some combination of all of these factors” (Hyman, 2009, p. 262). Tort reform rhetoricians have painted a scene where frivolous lawsuits and multi-million dollar jury awards are the norm, and have in turn driven up the costs for a physician to purchase liability insurance.
The competing theory is that increases in medical malpractice insurance premiums are driven by the insurance market itself. “Insurance-based explanations include a decline in projected investment income, the need to strengthen reserves, an increase in the cost of reinsurance, and the like” (Hyman, 2009, p. 262). This insurance market driven view of the medical malpractice insurance underwriting environment is more accurate, and there is greater empirical data to support the argument that caps on non-economic damages do not lower medical malpractice insurance premiums. Tort reform, specifically caps on non-economic damages, is flawed.
This research paper will show that caps on non-economic damages are not a statistically significant determinant of medical malpractice insurance premiums. The first section of this paper looks at the different viewpoints and interests of the players involved
3
with tort reform and caps on non-economic damages: government, insurance companies, doctors and consumers, and how increased medical costs affect them. The second section explores the trends in tort litigation and medical malpractice, and whether medical
malpractice crisis are caused by frivolous litigation or increasing medical malpractice mistakes. The third section considers the empirical data associated with medical
malpractice insurance premiums and caps on non-economic damages as well as the other determining factors of insurance premiums. The fourth section uses California and Texas as case studies to determine whether caps on non-economic damages meet their
objectives, or whether other reforms are more effective. The fifth section discusses the constitutional challenges and issues that deal with caps on non-economic damages.
THE POLITICS OF NON-ECONOMIC DAMAGES
Non-economic damages in medical malpractice lawsuits are awarded when it has been proven in a court of law that the actions of a physician have caused pain and
suffering, emotional distress, loss of consortium or companionship, or any other
intangible injuries ("Noneconomic Damages Reform", 2011). Proponents of tort reform argue that the damages awarded by a jury excessed what is really due to the plaintiff, and that these large awards have a negative impact on the medical malpractice insurance market. It seems to follows logically that if insurance companies are paying out more money in claims (due to large non-economic damage awards) then they will have to increase the price of their premiums which doctors pay. If doctors have to pay more in insurance premiums, then they will charge more to the client or move to a different state with caps on non-economic damage caps. As logically appealing as this scenario is, it does not hold true. The greatest assumption in this scenario is that claims are the main
4
determinant of insurance premium price. There are many different factors that determine the price at which the insurance premium is set. Proponents of capping non-economic damages see large jury awards as increasing the friction in the insurance market, and driving up costs.
Health care costs have grown at an astounding rate for many decades. In 1960 the total National Health Expenditure was $27.4 billion, and in 2012 it topped $2,793.4 billion ("National Health Expenditures", 2012). The percentage change from 1960 to 2012 in National Health Expenditure is 10,094.89%, while during the same period the population only grew by 68.28% ("National Health Expenditures", 2012). Health care costs are rising much faster than population rates, which means that every person is now responsible for more of the increase in medical costs. President Bush in 2005 blamed the increases in the cost of health care on frivolous litigation and large jury awards for those who have been injured by medical malpractice ("Bush Urges Caps on Legal Awards for Malpractice", 2005). The Congressional Budget Office disagreed with President Bush that costs associated with medical malpractice litigation were the driving force behind increased medical costs. “Costs related to litigation are a miniscule portion of health care spending; according to the United States Congressional Budget Office (CBO), these malpractice costs are less than two percent of total spending” (Boehm, 2005, p. 362). The CBO also estimated that a cap on non-economic damages, as well as a cap on punitive damages, would only have an effect of about 0.4 to 0.5 percent on total health care spending, and the effects on insurance premiums would be similarly minimal (Boehm, 2005). The CBO found no statistical difference in per capita health care spending in states with caps and states without caps (Salvi, 2006). A 50% drop in
5
premiums would yield less than a 1% change in health care spending (Paik, Black,
Hyman, & Silver, 2012). Clearly, costs associated with medical malpractice litigation are not significant factors in total health care spending or very closely related with the rising prices of medical malpractice insurance. The effect of non-economic damage caps on insurance premiums and the rest of the health care market is passionately debated by the ATRA with their corporate associations on one side, and the American Trial Lawyers Association with Democratic backers on the other side. The corporate backers and insurance companies view tort reform as a way to protect businesses from frivolous lawsuits resulting in losses. The opposition to tort reform, and their liberal backers, view tort reform as an ineffective way to control premiums, and see insurance companies as trying to circumvent justice to protect profits.
Government Interests
The government has an interest in keeping medical malpractice insurance premiums down, because the costs of higher premiums are often passed on to the consumer who has little power. The rising price of medical malpractice insurance has been cited by proponents of caps on non-economic damages as causing doctors to move from “crisis states” to states with caps on damages. Congressman Ted Strickland (Ohio) testified before the Subcommittee on Health that:
As a Representative of a rural area, I am particularly concerned about this issue. My District already suffers from chronic access problems and I am very worried that a malpractice crisis in which doctors simply cannot buy insurance would exacerbate this problem to the point of emergency. (Matsa, 2007, p. 146)
6
Access to physicians in rural areas is particularly difficult, but as Representative
Strickland and others have pointed out, if there are push factors for doctors to leave their states, then the demand for medical care will far outrun the supply. Politicians are able to use popular rhetoric about tort reform to ensure their reelection, although the data shows that there is no statistically significant relationship between capping non-economic damages and medical malpractice insurance premiums. In Wisconsin, a cap on non-economic damages was struck down by the state supreme court because the government failed to rationally relate caps to their objective of lowering medical malpractice
insurance premiums (Avraham, 2007). If there is no relationship between caps on damages and insurance premiums, then there is no reason to expect that doctor mobility will increase from one state to another based on price of medical malpractice insurance. Congressman Strickland has little reason to worry that physicians will flee his rural state because of increasing medical malpractice premiums.
The government and politicians have an interest in keeping down medical costs, but they also should have an interest in upholding the Constitution of the United States and its amendments. Caps on non-economic damages are in direct conflict with the Seventh Amendment which protect the right to trial by jury: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.” The fact finding duty of a jury is impaired when it is no longer able to make a factual determination about the proper award for non-economic damages. The legislature imposes themselves upon the judiciary when they impose caps on non-economic damages. The constitutional
7
implications of caps on non-economic damages should be more important to our government and politicians than the savings on medical malpractice insurance, which have not been proven to follow caps on non-economic damages. The issue of
constitutionality will be discussed in greater detail in the fifth section.
To date there has been no federal action taken to limit the ability of juries to award non-economic damages. The Bush administration in 2005 brought to the Senate the Health Act of 2005 (S. 354). The bill never made it out of committee and, since then, no federal action has been taken on medical malpractice tort reform. However, there has been much activity on the state level. Over 30 states have implemented some form of non-economic damage cap in the past 50 years. Proponents of capping non-economic damages claim that doctor mobility costs are low enough that, if presented with the opportunity, they will choose to move to a state with caps that protect doctors.
Increasingly, Americans are at risk of not being able to find a doctor when they most need one. Doctors have given up their practices, limited their practices to patients who do not have health conditions that are more likely to lead to lawsuits, or have moved to states with a fairer legal system where insurance can be
obtained at a lower price. (Matsa, 2007, p. 143)
However, the mobility costs associated with a doctor moving his practice (state licensing requirements and an established customer base) have been shown to be greater than the opportunity cost of moving to a state with less liability (Matsa, 2007). The relationship between caps on non-economic damages and doctors continuing to practice in a state has yet to be proven.
8
Insurance Industry Interests
Insurance companies support caps on non-economic damages because they see it as a way to decrease their loss ratio. “The main barometer of insurance market
performance in the literature is the loss ratio, which serves as an inverse measure of profitability” (Viscusi & Born, 2005, p. 26). The loss ratio equals losses over premiums. Non-economic damage reforms have increased insurer profitability by lowering the loss ratio 10 to 13 percent (Viscusi & Born, 2005). It is clear why insurance companies support tort reform. They are firms whose sole purpose is to maximize profit, and if they are publicly traded companies they have a legal duty to the shareholder to maximize profits. When insurance companies are experiencing profitable years, however,
insurance premiums do not decline. They may experience slower growth rates, but they do not go down. Rates increase in bad times due to pessimism in the market, and increase less drastically in good times- no real savings are passed on to the physicians. They do not lower their premiums to benefit the doctors, but instead choose to continue to raise premiums, albeit at a lower level, to ensure maximum profits. Insurance
companies, the ATRA and other pro-business organizations lobby state legislatures to pass tort reform measures to control the amount of losses they can incur.
Health Care Provider Interests
Physicians’ interests do not always align with those of their insurers. Insurance companies hold a disproportionate amount of power in the relationship, and have the power to dictate rising prices even when a competitive market model indicates prices should fall. “The reduction of losses due to tort liability reform in turn should lead to a
9
lower level of premiums if firms operate in a competitive market” (Viscusi & Born, 2005, p. 36). Doctors and insurance companies do not exist within a perfectly competitive market because of the amount of control that insurance companies have to set prices. Physicians’ most important concern is to keep their insurance premiums to no more than what they are able to pass on to the consumer (Matsa, 2007).
Consumer Interests
Consumers of physician services have the least amount of power in the struggle between doctors and insurance companies over medical malpractice insurance premiums, but bear the brunt of the consequences of tort reform. David Matsa claims that one of the most important factors for doctor in deciding whether to stay in a certain area is whether they can pass on the increases in medical malpractice insurance to their customers (Matsa, 2007). Consumers in rural areas are especially affected by the increases in medical malpractice insurance because they have fewer, equally capable substitutes. Malpractice caps do not increase physician supply for most Americans, but may have a possible positive impact of 3-5 percent for customers in rural areas (Matsa, 2007). Rural consumers would have 3-5 percent greater supply of physicians to choose from, which should theoretically lower the cost of physician services. Consumers are the negatively affected by higher medical malpractice insurance premiums, because the costs are passed on to them, and they might not even receive the benefit of a greater supply of physicians if caps are implemented. Consumers of medical services have very little bargaining power with doctors or insurance companies, but have the most to lose- their health. Consumers pay a higher health care insurance premium because doctors pass on the price
10
of their higher premiums, which are ultimately a result of insurance companies having an unfair advantage in price setting to lower their loss ratio.
Consumers have lost the ability to regulate the medical profession through the courts because insurance companies and doctors are insulated from losses by non-economic damage caps. “Right now, consumers are being asked to sacrifice not only large damage claims, but also critical leverage to help regulate the medical profession- all with the stated goal that it will end the med mal crisis for doctors” (Tumulty, 2006, p. 817). Patients who are injured by doctors are not able to receive proper remedies because legislation has prohibited them from receiving their full jury awards. The ability for ordinary citizens to hold large corporations accountable is the fulcrum of our democracy, and tort reform inhibits that process (Boehm, 2005). Caps on non-economic damages do not affect those who have been mildly injured by a physician. Only the most seriously injured receive judgments greater than a damage cap can allow, and therefore are the only ones who are subjected to a cap on non-economic damages. The most injured are being stripped of the ability to hold their physicians accountable by a system that does not allow them the right to receive proper compensation for their injuries.
Research compiled over the past 50 years shows that patients receive less than they need to cover their expenses, and caps exacerbate this problem even further (Baker, 2005). Although non-economic damages are difficult to award, they are essential
because they give patients the means to pay lawyer’s fees, and still have enough funds to set their lives in order (Baker, 2005). When caps on non-economic damages reduce the amount awarded to a plaintiff, the plaintiff often has to turn to government assistance. The plaintiff, and the taxpayer, both are negatively affected by this type of tort reform.
11
TOO MUCH LITIGATION OR TOO MUCH MALPRACTICE?
Proponents of tort reform argue that explosive growth in malpractice litigation is to blame for the increases in medical malpractice insurance premiums. However, the number of torts filed has actually decreased over the past 25 years, and is now less than one-half the level it was at in 1992 (Hyman & Silver, 2013). The number of medical malpractice claims filed before the 1999-2000 insurance underwriting crisis were steadily decreasing, contradicting the theory that crisis are fueled by an explosion in litigation and expensive non-economic damage awards (Hyman & Silver, 2013). The number of medical malpractice claims have even dropped in states labeled as “crisis states” by the American Medical Association based off their perception of the litigation climate in that state (Boehm, 2005). Two of the most visible states that have implemented caps on non-economic damages, Florida and Texas, both experienced no changes in medical
malpractice claims filed in the ten years preceding their tort reform measures (Kysar, McGarity, & Sokol, 2006).
Torts account for about 10% of total civil filings made, and according to the Department of Justice Bureau of Statistics, have remained relatively stable since 1986 (Kysar, McGarity, & Sokol, 2006). Medical malpractice filings, however, are only 4.9% of tort filings (Kysar, McGarity, & Sokol, 2006). Despite the rhetoric of pro-business organizations like the ATRA and the Chamber of Commerce, medical malpractice cases are infrequent and are a small percentage of all civil cases filed. Only 1.53% of patients injured by physicians file a claim against the physician (Tumulty, 2006). When medical
12
malpractice cases are filed, it is extremely unlikely that the jury will return with a favorable verdict for the plaintiff. “Specifically, only 1.2% to 1.9% of plaintiffs in medical malpractice cases obtain a favorable verdict on their claim” (Tumulty, 2006, p. 822). Since only 1.2% to 1.9% of plaintiffs in medical malpractice cases receive a favorable verdict, proponents of tort reform will argue that this statistic shows that the majority of cases are frivolous. However, in suits where the physician is a plaintiff, they only prevail in about 14% in their cases against hospitals and other organizations
(Boehm, 2005). What these numbers really mean is that medical cases are extremely difficult to try, and there is a heavy burden of proof on the plaintiff. The cost of trying a frivolous case is very high, especially because contingency fees only take effect if the plaintiff actually prevails. When a cap on non-economic damages is enacted, the number of meritorious claims fall because the likelihood of receiving enough compensation to make the case worth an attorney’s time and investment in expert witnesses and other costs is lowered.
Caps on non-economic damages have an obvious effect on payout rates in
medical malpractice cases. When a plaintiff is able to obtain a favorable verdict, caps cut down the amount the plaintiff is entitled to if it falls above the cap amount. Caps on non-economic damages decrease awards by 23% to 48% (Matsa, 2007). These caps affect those who are most seriously injured at the hands of a physician.
Medical malpractice claims rarely result in favorable verdicts for the plaintiff, and when they do, they are oftentimes limited by caps on non-economic damages. Only 1.53% of those injured by physician negligence file a claim (Tumulty, 2006). In 2005 the number of avoidable deaths in hospitals reached an astounding 195,000 (Boehm, 2005).
13
If only 1.53% of those injured are filing claims, and only 1.2% to 1.9% of those receive favorable verdicts, then the medical industry is not being regulated efficiently by the judicial system. “Nearly 100,000 people die in the United States die in the United States each year from medical mistakes- more than die from automobile and workplace
accidents combined” (Baker, 2005, p. 5). As Tom Baker points out, there is too much medical malpractice, not too much litigation. According to Baker, there is far more medical malpractice than there is medical malpractice litigation (Baker, 2005).
In fact, the research shows that the total price of medical malpractice insurance and related forms of protection are much less than the cost of medical
malpractice. If anything, the price is much too low, either to satisfy health-care providers’ moral obligation to take responsibility for consequences of their mistakes or to provide an adequate incentive to avoid mistakes. (Baker, 2005, p. 63)
Medical malpractice insurance premiums may be rising, but according to Baker, the price of insurance is still too low to deter medical malpractice. Medical malpractice litigation is not the problem, medical malpractice is the problem. The medical malpractice
insurance underwriting cycle is not driven by torts, but is instead driven by other factors in the insurance market.
DETERMINANTS OF INSURANCE PREMIUMS
The American Tort Reform Association claims that, “The broad and basically unguided discretion given juries in awarding damages for noneconomic loss is the single greatest contributor to the inequities and inefficiencies of the tort liability system” ("Noneconomic Damages Reform", 2011). They, as well as the American Medical
14
Association, argue that these “inequities” and “inefficiencies” are the main determinant of the price of medical malpractice insurance. It seems logical that larger claims result in more losses for the insurer, incentivizing them to raise the price of their premiums to maintain an equal profit margin and loss ratio. However, claims are not the only determinant of insurance premium price. The underwriting cycle and health of the investment market show a greater relationship to medical malpractice insurance premiums than do caps on non-economic damages.
Since there has been no federal legislation addressing the issue of capping non-economic damages in medical malpractice lawsuits there has only been statewide data collected to show the effects of tort reform. Gius (1998) used panel data from a pooled set of state-level data to estimate the determinants of medical malpractice insurance premiums. The study found that “none of the tort reforms were significant determinants of premiums” (Gius, 1998, p. 39). Gius concluded that other factors affect the insurance market, one of them being the role of state insurance commissioners. Gius showed that the insurance commissioner in many states is responsible for approving rate increases. Gius stated that “legislated power of the insurance commissioner may have an effect on the malpractice insurance premiums levied in any given state” (1998, p. 37). Gius’ study was conducted in 1996 and is the only major study done on determinants of medical malpractice insurance premiums that mentions state insurance commissioners as significant determinants of rates. His findings have not been cited widely, suggesting that his conclusions are different than the mainstream school of thought on how medical malpractice premiums are determined. His conclusions are important to mention, because they may be a hidden factor in many of the insurance markets, but they do not
15
seem to coincide with the greater consensus. Gius’ study found, “If a tort reform
measure has been enacted into law in a given state, it is expected that medical malpractice insurance premiums will decrease, holding all other factors constant” (Italics added; Gius, 1998, p. 38). The insurance market does not exist in a condition of ceterus paribus. There are factors which are constantly changing, which will be examined in greater detail later in this section.
From 1991 to 2002 in the 19 states with caps, the median annual premium increased by 48.2% (Weiss, Gannon, & Eakins, 2003). In the remaining states without caps the annual premium increased at a slower pace of 35.9% (Weiss, Gannon, & Eakins, 2003). See Appendix 1 and Appendix 2 for statewide data on medical malpractice insurance premiums from 1991-2002. “Thus, on average, doctors in states with caps actually suffered a significantly larger increase than doctors in states without caps” (Weiss, Gannon, & Eakins, 2003, p. 8). The argument that large jury awards for medical malpractice cases are the determining factor for medical malpractice premiums falls apart because states with caps have higher premiums. The Supreme Court of Wisconsin ruled that caps on non-economic damages fail to pass the rational basis test because caps cannot be shown to be rationally related to the objective of lowering insurance premiums and overall health care spending (Avraham, 2007). The gap in rationality between caps on non-economic damages and lowered insurance premiums is so great because states with caps tend to have higher medical malpractice insurance premiums. A greater
percentage of states without caps experienced flat or declining premiums during the same time period (1991 to 2002), 18.7% of states without caps versus 10.5% of states with caps. If caps were supposed to lower the medical malpractice insurance premiums, they
16
should do it for more than just two out of the 19 states with caps. This data clearly demonstrates that there is no real relationship between caps on non-economic damages and medical malpractice insurance premiums. “Seventeen out of the nineteen states with damage caps have raised their malpractice premium rates, and in half of the states where caps have increased insurance rates, such increases have been above the national
average” (Chiu, 2005, pp. 100-101).
Medical malpractice premiums increased in states with caps faster than the national average, which takes into account all states regardless of caps. Clearly, caps on non-economic damages do not have the intended effect of lowering medical malpractice insurance premiums. Therefore, there must be other factors determining the increases in premiums. Since 2002 the number of states with caps on non-economic damages has increased from 19 to over 30, and medical malpractice insurance premiums have continued to rise. Proponents of tort reform and caps on non-economic damages claim that increasing jury awards are the main determinant of medical malpractice insurance premiums, but when losses are capped, insurance premiums continue to rise, at a higher rate than in states without caps on non-economic damages.
Possibly the greatest determinant of medical malpractice insurance premiums is the performance of the investment market. Insurance companies are institutional investors in the securities market and are highly exposed to any changes in the market. “Insurance companies take in money in the form of premiums paid and then hold it for some length of time until they need to make a payout to, or on behalf of, a policyholder” (Boehm, 2005, p. 364). Insurance companies invest the funds that they receive from premiums in the market because they know that only a small percent of people will make
17
claims that will require a payment. The money that insurance companies hold for investment purposes, not in reserve to be used in case of a payout, is called a “float.” When the market is bullish or interest rates are high, the float brings investment returns back to the insurance company (Boehm, 2005). The argument that litigation is the cause of increases in medical malpractice insurance premiums is faulty for the reasons shown above (i.e. the declining number of claims over the past 25 years), but also because there is a much greater relationship to the investment market than litigation. “In fact, recent studies have shown that the timing and severity of malpractice ‘crises’ are strongly correlated with fluctuations in the market, rather than with changes in litigation patterns or verdict amounts” (Salvi, 2006, p. 560).
The medical malpractice crisis that have occurred at a decennial basis are strongly correlated with bear markets. In these cases, insurance companies are increasing their insurance premiums to hedge against more losses in the investment market. The periods in which medical malpractice insurance premiums are not increasing as quickly are strongly correlated with bull markets. The medical malpractice crisis that have plagued the United States usually subside once the investment market improves. In a bull market, an insurer is capable of generating more money independent of the income from the collection of premiums. “Contrary to popular perceptions, it is the return from these investments, rather than present or past premium receipts that generates the bulk of insurance-company profits” (Kysar, McGarity, & Sokol, 2006, p. 798). In fact, when the entire stock market averaged gains greater than 13%, less than one additional state per year enacted caps on non-economic damages (Celis, Smith, & Bird, n.d.). Insurance companies do not always post profits from investment income, and when they lose
18
money they increase the price for insurance premiums to make up their losses. Returns on investments are the greatest determinant of medical malpractice insurance premiums, despite the rhetoric from conservative organizations that increases in litigation are to blame.
If an insurance company is making consistent profit by investing the float, they may loosen their underwriting policies to extend coverage to those who would otherwise not qualify (Weiss, Gannon, & Eakins 2003). They also underprice their premiums to attract more customers, and increase their float when times are good (Boehm, 2005). When insurance premiums are underpriced and the underwriting policies are loosened because of a good investment market, it is called a “soft market”. Soft markets strictly follow the trend of the bull market, and were prominent in the 12 year boom ending in 1999 (Boehm, 2005). When investment income falls, insurance companies raise their rates or cut back coverage, this is called a “hard market” (Boehm, 2005). Medical malpractice insurance rates skyrocket for doctors during hard markets (Boehm, 2005). Hard markets are extreme because herd behavior is prevalent in insurance underwriting. Hard markets are the result of a collective response to a decrease in investment income (Baker, 2005). Insurance companies collectively change their policies based on whether they predict a hard or soft market. Proponents of tort reform mistakenly identify
litigation costs as driving up premiums, but instead insurance companies are responding to the broader economic cycle. Claims and payouts stayed flat or even declined during these periods of hard markets, yet caps on non-economic damages were seen as the answer to fix rising premiums. Since payouts stay flat, or decline during hard markets, and insurance companies make money during soft markets on investments, they are
19
poised to rake in profits during boom or bust. “From 2002 to 2003, profits rose 997% and they continue to soar- reportedly doubling between the first quarters of 2003 and 2004” (Boehm, 2005, p. 365). Insurance companies are insulated from losses because they can raise their premiums during hard markets, even though claims do not change, and reap the benefits of bull markets during soft markets. The progression between hard and soft markets is a part of the greater underwriting cycle.
Tom Baker describes the fundamentals of insurance pricing (the underwriting cycle) as: underwriting and loss expenses, uncertainty about those expenses, length of the tail on the claims, returns on investment, and the cost of holding capital (Baker, 2005). These fundamentals are key to understanding the underwriting cycle and how hard and soft markets are formed. Underwriting and loss expenses are the costs associated with settling claims (the loss ratio). The length of the tail on claims deals with the fact that medical malpractice claims usually take about ten years to settle completely because the complications that car arise in medicine can be long running (Baker, 2005). Uncertainty due to the long tail of medical malpractice claims contributes to a volatile underwriting cycle. If claims can be drawn out for ten years, then each additional potential claim could result in greater losses. That coupled with the cyclical nature of the investment market create very little stability for medical malpractice insurance premiums. Short term fluctuations in the amount of litigation would not have any real effect on premiums because they are based on long term projections.
Insurance companies act more like financial intermediaries than suppliers of an insurance instrument, they keep large capital reserves in case of large claims or having to make up for losses in the investment market. However, it is extremely difficult to know
20
the exposure created by their policies because of the ten year tail inherent in medical malpractice claims. In those ten years the investment market could decline which reduces revenue, or medical inflation could outpace normal inflation and causing each claim to increase in value. If medical inflation outpaces normal inflation, insurance companies cannot ask for physicians who have already paid their premiums to pay more money to make up for changes in inflation. They have to rely on their reserves to hold them over, and then they increase premiums the next year to counteract the rising inflation. When projections look optimistic in the investment market, insurance companies reduce their reserves to minimum levels and invest more aggressively. The opposite is true when projections are pessimistic. Data reported to the National
Association of Insurance Commissioners (NAIC) show that insurers have consistently been under-reserving since 1997. In 2001 they were under-reserved by $4.6 billion (Weiss, Gannon, & Eakins, 2003). Insurers need reserves to make payouts, as well as to cover losses they may incur in the investment market, and their financial integrity can begin to deteriorate. A 2003 study done by Weiss Ratings, Inc. showed that in within the group of insurers that derive at least 50% of their premiums from the medical malpractice sector, 34.4% of them are vulnerable (meaning they received a weak or very weak rating) (Weiss, Gannon, & Eakins, 2003).
Proponents of tort reform blame increases in medical malpractice insurance rates on increased litigation. However, the number of claims has been falling for years. The real determinant of medical malpractice insurance premiums is return on investments. The investment market affects the underwriting cycle for insurance companies, and whether insurance companies need to increase their reserves to comply with
21
requirements. Health of the investment market is the biggest determinant of medical malpractice insurance premiums. No statistically significant relationship has been shown to exist between capping non-economic damages and reduced medical malpractice insurance premiums (Viscusi & Born, 2005, p. 38).
CALIFORNIA AND TEXAS: CASE STUDIES
California was the first state to enact a cap on non-economic damages in 1975. Over thirty states have enacted caps on non-economic damages (with several states having repealed them) since the 1970s, but their experiences have almost always been the same. Despite popular rhetoric, litigation is not increasing and caps on non-economic damages do not lower medical malpractice insurance premiums. California provides an accurate case study into what types of reforms are necessary to control rising medical malpractice insurance premiums. Texas enacted a cap on non-economic damages in 2003, and the results have not been what the Republican led legislature hoped. A group of law school professors from the University of Texas- Austin have studied whether caps in Texas have achieved their stated goals. Both California and Texas are interesting case studies into the effects of caps on non-economic damages on the state level.
In 1975 California enacted the Medical Injury Compensation Reform Act (MICRA) which capped non-economic damages at $250,000. In the twelve years following MICRA, medical malpractice insurance premiums rose 450% in California (Tumulty, 2006). Insurers reported that their losses declined in the years following MICRA, mostly due to a decrease in the number of claims filed. Insurance companies posted profits in the years following MICRA because claims decreased and premiums increased. This data shows that losses are not a determinant of medical malpractice
22
insurance premiums. If claims and losses were the major determinant of medical
malpractice insurance premiums, insurance premiums should have decreased while losses decreased. The effect that caps on non-economic damages really have is restricting the number of claims filed and the amount of compensation that the most injured patients have been awarded by a jury.
To correct their increasing medical malpractice insurance premiums, the voters of California voted to pass Proposition 103, which was an insurance reform instead of a tort reform (Tumulty, 2006). “The most significant portions of Proposition 103 mandated a twenty percent reduction in medical malpractice insurers' premiums and froze premium rates for one year” (Tumulty, 2006, p. 824). After Proposition 103, medical malpractice insurance rates stabilized in California. “Following the insurance reform, premium rates dropped 31% in just three years, after adjusting for inflation, and since then rates have risen only in proportion to inflation” (Salvi, 2006, p. 559 ). Insurance reform was a more effective solution to controlling medical malpractice insurance premiums than tort
reform.
In 2003, Governor Perry of Texas signed a measure which capped non-economic damages at $250,000. Governor Perry touted this legislation as a way to control medical malpractice insurance premiums, attract physicians to Texas, and decrease overall health care expenditures. After the imposition of the cap, some insurers requested 35% rate hikes for physicians, and up to 60% rate hikes for hospitals (Tumulty, 2006). However, there was a 60% drop in claims, and a 70% total drop in payouts (Paik, Black, Hyman, & Silver, 2012). If proponents of tort reform are correct, then a decrease in claims should result in lower premiums, but that has not occurred in Texas. Insurance companies are
23
reaping the benefits of large loss savings, while less meritorious claims are being brought because of the decreased likelihood of a payout. There are less claims being filed, yet premiums are still increasing.
Tort reformers also argue that limited liability for physicians will attract more physicians to Texas. The data shows that the rate of increase in physicians per capita was lower after the imposition of the cap on non-economic damages than in the years before the 2003 tort reforms (Hyman, Silver, Black, & Paik, 2014). “Physician supply is driven primarily by other factors such as economic growth and the size of Texas’ population of insured patients” (Hyman, Silver, Black, & Paik, 2014, p. 3). Physician supply growth was not stunted in the period preceding the 2003 cap on non-economic damages (Hyman, Silver, Black, & Paik, 2014). The argument that litigation was driving doctors from the state is not true. Texas is a great case study to show that limited liability is not a
significant factor for physicians in deciding in which area to practice.
Proponents of tort reforms argue that surges in litigation have caused insurance premiums to rise, which contributes to the growth of overall health care expenditures. However, in Texas post-2003 tort reforms, Medicare spending has outpaced the national average (Lincoln, 2011). Tort reform in Texas has failed to achieve its three stated objectives of lowering insurance premiums, attracting physicians to Texas, and decreasing overall health care expenditures.
California and Texas are useful case studies to demonstrate the ineffectiveness of caps on non-economic damages because medical malpractice insurance premiums
increased in both states following the implementation of caps on non-economic damages. California realized the ineffectiveness of cap on non-economic damages in 1988 and
24
decided to implement insurance reforms which lowered insurance premiums. Texas has yet to repeal their cap on non-economic damages, despite significant evidence that their experiment in tort reform has failed.
CONSTITUTIONAL QUESTIONS AND EQUITY ISSUES Aside from the lack of empirical evidence in support of caps on non-economic damages, there is a completely separate issue involved in the debate over tort reform- constitutionality. Caps on non-economic damages interfere with the ability for a jury to exercise its duty to be a fact finding body. “The argument is that damages in a medical malpractice action are a factual determination to be made by the jury. Therefore, it violates an individual’s right to trial by jury when a legislature takes that determination away from the jury through the use of a cap on damages” (Gfell, 2004, p. 784). By 2004, 28 states had ruled on caps, and had split over their constitutionality (Gfell, 2004). When the legislature hinders the ability of a jury to make a factual determination, the plaintiff and defendant are both denied their constitutional right to trial by jury because the judicial process has been compromised. In 1993 the Oregon Supreme Court found in Lakin v. Senco Products, Inc. that, “the assessment of damages was a factual
determination and a function of a common law jury” (Gfell, 2004, p. 784).
The constitutionality of caps are also disputed because of equal protection guarantees. Because the caps on non-economic damages apply solely to medical malpractice cases, there is unequal treatment of plaintiffs in medical malpractice cases versus plaintiffs in other personal injury or tort cases (Gfell, 2004). Also, by setting a cap on damages it creates unequal treatment between those who were only injured slightly and those who are most seriously injured.
25
These tort reform measures have four things in common: insurance companies save money; incompetent doctors avoid blame and any meaningful form of
discipline; patients and their families, who have been destroyed in the process, are prevented from obtaining financial compensation, the only kind of justice
available to them; and, the general public is left unprotected from doctors who may maim and kill their patients. (Gfell, 2004, p. 779)
Only those who are most seriously injured have to deal with caps. “Those who suffer the most severe injuries will go without full compensation for their non-economic damages, while those who suffer relatively minor injuries with few non-economic damages will be fully compensated under the law” (Gfell, 2004, pp. 790-791).
Caps on non-economic damages also violate state separation of powers
provisions. The Illinois Supreme Court in 1997 struck down its cap on non-economic damages based on state separation of powers provisions because it found that caps set by legislatures invade into the judiciary’s power of remittitur (Gfell, 2004). In Best v. Taylor Machine Works, the Illinois Supreme Court ruled along with precedent of the United States Supreme Court that designates remittitur as a “question of law for the court” (Gfell, 2004, p. 789).
Caps on non-economic damages have been upheld in some states, but the constitutional right to trial by jury, equal protection guarantees and state separation of powers provisions listed above highlight some of the issues with caps. State courts have to decide whether or not caps on non-economic damages are constitutional, and whether or not there is a sufficient societal quid pro quo through lower insurance premiums and medical costs (Gfell, 2004). In Ferdon v. Wisconsin Patients Comp. Fund the Supreme
26
Court of Wisconsin struck down a cap on non-economic damages because this societal quid pro quo had not been met (Avraham, 2007).
Applying the rational basis test, the court held that the statute was not rationally related to the legislative objective of lowering malpractice insurance premiums and reducing overall health care costs only after examining various empirical studies on the impact of tort reform. (Avraham, 2007, p. 185)
Showing a direct relationship between caps and lower insurance premiums will be difficult because caps have not been shown to be a significant determinant of insurance premiums or medical costs.
CONCLUSION
Health care costs in the United States are increasing every year. Conservative groups and politicians, with corporate backers like the ATRA and Chamber of
Commerce, claim that the price of health care is being pushed further upward by growing medical malpractice insurance premiums for physicians. Their answer to control medical malpractice insurance premiums has been to cap non-economic damages awarded by juries to control the losses that insurance companies can take. By doing this they expect insurance premiums to fall, but this has not been the case. There are more direct
determinants of medical malpractice insurance premiums than the claims that insurance companies pay out. A fall in investment income has a greater correlation with increased medical malpractice premiums. Caps on non-economic damages face serious problems in the courts because they deprive patient plaintiffs of their constitutional right to a jury trial. Caps on non-economic damages have not had a significant effect on medical
27
malpractice premiums and only affect those who have been most injured by medical malpractice.
28 WORKS CITED:
Avraham, R. (2007). An empirical study of the impact of tort reforms on medical malpractice settlement payments. The Journal of Legal Studies, 36(2), 183-229.
Baker, T. (2005). The medical malpractice myth. Chicago, Illinois: University of Chicago Press.
Baker, T. (2005). Medical malpractice and the insurance underwriting cycle. DePaul Law Review, 54, 393-438.
Boehm, G. (2005). Debunking medical malpractice myths: unraveling the false premises behind "tort reform" Yale Journal of Health Policy, Law, and Ethics, 1, 357-369.
Bush Urges Caps on Legal Awards for Malpractice. (2005, January 5). Nbcnews.com. Retrieved from http://www.nbcnews.com/id/6789233/ns/politics/t/bush-urges-caps-legal-awardsfor-malpractice/#.VSM3Q_nF-AW
Celis, T., Smith, W., & Bird, B. (n.d.). Determinants of medical malpractice insurance premiums. Unpublished article, University of West Georgia.
Chiu, S. (2005). A critical look at the non-economic damage cap of the HEALTH act of 2005 and its impact on consumers. Loyola Consumer Law Review, 18(1), 85-113. Gfell, K. (2004). The constitutional and economic implications of a national cap on non-economic damages in medical malpractice actions. Indiana Law Review, 3, 775-814. Gius, M. (1998). Using panel data to estimate the determinants of medical malpractice insurance premiums. Applied Economics Letters, 5, 37-39.
Health Care Cost and Utilization Report 2013. (2014, October). Retrieved from http://www.healthcostinstitute.org/files/2013%20HCCUR%2010-28-14.pdf Health expenditure, total (% of GDP). (2014). Retrieved from
http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS
Hyman, D. (2009). What lessons should we learn from the first malpractice crisis of the twenty-first century? Drexel Law Review, 1, 261-272.
Hyman, D., & Silver, C. (2013). Five myths of medical malpractice. Chest Journal, 143(1) 222-227.
Hyman, D., Silver, C., Black, B., & Paik, M. (2014). Does tort reform affect physician supply? Evidence from Texas. Northwestern Law & Econ Research Paper 12-11; Illinois
29
Program in Law, Behavior and Social Science Paper No. LBSS12-12; U of Texas Law, Law and Econ Research Paper No. 225. Retrieved from
http://ssrn.com/abstract=2047433
Kysar, D., McGarity, T., & Sokol, K. (2006). Medical malpractice myths and realities: why an insurance crisis is not a lawsuit crisis. Loyola of Los Angeles Law Review, 39(2), 785-817.
Lincoln, T. (2011). A failed experiment: health care in Texas has worsened in key respects since state instituted liability caps in 2003. Public Citizen's Congress Watch Report.
Matsa, D. (2007). Does malpractice liability keep the doctor away? Evidence from tort reform damage caps. The Journal of Legal Studies, 36(2), 143-182.
National Health Expenditures. (2012). Retrieved from http://www.cms.gov/Research-
Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/tables.pdf
Noneconomic Damages Reform. (2011, January 1). Retrieved from http://www.atra.org/issues/noneconomic-damages-reform
Paik, M., Black, B., Hyman, D., & Silver, C. (2012). Will tort reform bend the cost curve? Evidence from Texas. Journal of Empirical Legal Studies, 9(2), 173-216. Salvi, P. (2006). Why medical malpractice caps are wrong. Northern Illinois University Law Review, 26, 553-562.
Tumulty, C. (2006). Capping non-economic damages: is it really what the doctor ordered? Predicting the effect of federal tort reform by examining the impact of tort reform at the state level. Suffolk University Law Review, 39, 817-836.
Viscusi, W., & Born, P. (2005). Damage caps, insurability, and the performance of medical malpractice insurance. The Journal of Risk and Insurance, 72(1), 23-43. Weiss, M., Gannon, M., & Eakins, S. (2003, June 2). Medical malpractice caps: the impact of non-economic damage caps on physician premiums, claims payout levels, and availability of coverage, Weiss Ratings Inc.
30 Appendix 1
States with Caps; Median Medical Malpractice Premiums 1991-2002 State Year Imposed Amount of Cap ($000) 1991 Median Premium ($) 2002 Median Premium ($) % Change 1991 to 2002
Alaska 1997 500 N/A 27,940 N/A California 1975 250 20,354 30,430 49.5
Colorado 1998 250 22,678 33,651 48.4
Hawaii 1976 375 23,334 25,756 10.4
Idaho 1990 682 N/A 14,199 N/A
Indiana 1990 1,000 N/A 22,886 N/A
Kansas 1994 250 14,669 23,335 59.1
Louisiana 1975 500 20,291 37,280 83.7 Maryland 1986 605 24,193 34,711 43.7
Massachusetts 1997 500 N/A 30,246 N/A
Michigan 1993 624 65,946 68,225 3.5 Missouri 1988 547 25,999 38,759 49.1 Montana 1997 250 18,697 27,011 44.5
New Mexico 1996 600 N/A 67,161 N/A
North Dakota 1996 500 N/A 16,238 N/A
Utah 1996 250 20,474 37,290 82.1
Virginia 1992 1,000 16,497 21,343 29.4
West Virginia 1986 1,000 N/A 56,989 N/A
Wisconsin 1995 350 18,111 17,213 -5.0
Total 20,414 30,246 48.2
Source: Compiled and analyzed by Weiss Ratings, Inc. from data supplied by Medical Liability Monitor and the National Practitioners Data Bank.
31 Appendix 2
States without Caps: Median Medical Malpractice Premiums 1991-2002
State 1991 Median Premium ($) 2002 Median Premium ($) % Change 1991 to 2002 Alabama 25,629 23,490 -8.3 Arizona 37,601 38,571 2.6 Arkansas 10,422 16,384 57.2 Connecticut 29,298 40,146 37.5
Delaware N/A 24,731 N/A
District of Columbia 28,085 40,871 45.5 Florida 43,600 95,474 119.0 Georgia 27,998 30,093 7.5 Illinois 39,260 49,948 27.2 Iowa 21,140 18,607 -12.0 Kentucky 23,666 44,834 89.4 Maine 22,118 18,583 -16.0 Minnesota 8,117 10,142 25.0 Mississippi 19,726 30,871 56.5
Nebraska N/A 14,710 N/A Nevada 24,988 59,776 139.2
New Hampshire N/A 27,157 N/A
New Jersey 20,162 38,307 90.0 New York 48,026 50,970 6.1 North Carolina 11,294 31,687 180.6 Ohio 31,450 52,764 67.8 Oklahoma 9,137 12,766 39.7 Oregon 17,268 26,711 54.7 Pennsylvania 11,433 71,260 523.3
Rhode Island N/A 27,922 N/A
South Carolina 12,984 21,337 64.3
South Dakota 9,618 13,853 44.0
Tennessee 15,601 30,018 92.4
Texas 27,945 55,951 100.2 Vermont N/A 15,690 N/A
Washington 18,158 23,100 27.2
Wyoming 22,758 39,828 75.0
Total 22,118 30,056 35.9 Source: Compiled and analyzed by Weiss Ratings, Inc. from data supplied by Medical
32
Name of Candidate: Matthew Mortensen
Birth date: June 15, 1991
Birth place: Las Vegas, Nevada
Address: 344 East 1300 South