By Christopher Guadagnino, Ph.D.
These developments would seem to be substantial evidence that the state’s malpractice environment is improving in a dramatic way, and analysts believe that payout and premium rates will continue to decline as malpractice trial juries continue to become more conservative in their awards, and as the effects of existing tort reforms continue to mature. There is little hard evidence, however, that the current payout and premium rate declines are direct results of tort reforms, and some analysts believe that they may instead have resulted from more mundane causes, such as the shrinking coverage layer and payout responsibility of the MCARE Fund over the past several years, the ability of commercial insurers to shore up their reserves with several years of steep premium increases, and the cyclical and psychological nature of the insurance industry.
MCARE Fund Experience
According to state Insurance Department figures, the MCARE Fund will pay out $233 million in claims for 2005, down more than 27 percent from last year’s $320 million, and a continued decrease from $379 million in 2003.
The number of lawsuits filed with the MCARE Fund is declining: 373 cases in 2005, 476 cases in 2004, 543 in 2003, and an average of about 550 annual cases in 2001, 2000 and 1999. The average number of defendants per case – health care providers on whom payment was made within a case – has remained stable at roughly 1.3 claims per case over the last four years.
The amount that physicians pay into MCARE will also drop by one-quarter in 2006, to 29 percent of the JUA annual occurrence premium for the physician’s specialty and territory, down from a 39 percent assessment in 2005 – while the Rendell Administration said it supports extending MCARE Fund abatement for physicians for another two years.
“We don’t know that this is a trend, but the numbers are in the right direction. Something stopped the cycle” of the MCARE Fund payout and assessment increase, says Sarah H. Lawhorne, deputy insurance commissioner for the Office of Policy, Planning and Administration, and former deputy of the MCARE Fund.
While Governor Rendell’s push in 2003 for MCARE to resolve all pending cases may have contributed to a higher number of cases that year, Lawhorne believes that Pa.’s existing tort reforms are having a material impact on the number and value of cases filed. Although she says it takes an average of four to five years for the MCARE Fund to close a case from the time it is filed, Lawhorne notes that two reforms could have had an immediate effect on reducing claims frequency: venue reform and certificate of merit. The Pa. Legislature in 2003 required malpractice lawsuits to be filed in the county in which the alleged incident occurred, preventing “venue shopping” to counties with historically higher jury awards – especially Philadelphia, while the Pa. Supreme Court in 2003 adopted a rule intended to weed out meritless cases early on by requiring a certificate of merit to be filed with a lawsuit, in which an expert certifies that negligence occurred.
Other reforms in Act 13 of 2002 directly target the damages portion of malpractice lawsuits, but their impact is still filtering through the lag-time of case resolution, while venue reform and certificate of merit have already begun to lower claim frequency by affecting overall expectations within the tort system, maintains Lawhorne. As MCARE disposes of more cases, she adds, more will be known about payout severity impacts of Act 13 reforms – such as modification of the collateral source rule, periodic payment of future medical bills with reduction to present worth, a seven-year filing limit, and stricter expert witness qualifications.
In addition to those mandated reforms, years of public focus on Pa.’s malpractice environment and lawsuit “abuse” has brought more rationality to case valuation by juries, Lawhorne believes, as stories circulate about friends losing physicians, problems of access to some specialists, and abatement of MCARE fees to preserve access to physicians.
Anecdotal accounts also suggest that plaintiffs and defendants are using mediation more frequently to reach satisfactory resolution of cases, adds Lawhorne. Although hard data is not yet available, MCARE hopes to find that mediation is having a positive effect on plaintiffs’ demands and payout severity.
Commercial Carrier Experience
Lawhorne believes that Pa.’s commercial medical liability insurance market is in a recovery phase, with several years of premium hikes probably bringing enduring stability to the loss ratios of Pa.’s commercial carriers and strengthening their ability to handle risks, believes Lawhorne, who was PMSLIC’s president and chief operating officer from 1990 to 2001. Alternative market entities, such as Pa.-grown upstarts and risk retention groups, should also be able to prevail if they remain true to their commitment to effective risk management, she adds.
PMSLIC concluded, after actuarial analysis of claims experience, that it did not have to take a base premium rate increase in 2006, following several years of increases – 10.8 percent (2005), 15.1 percent (2004), 54 percent (2003), 40 percent (2002), 10 percent (2001), and 15 percent (2000), according to Anna Lavertue, PMSLIC’s director of marketing and communications. The company is also opening its books to new physician policies, after three years of restricting new policies to physicians joining groups already insured by PMSLIC.
PMSLIC was able to keep rates flat and eliminate restrictions on new business because of improved financial results stemming from several actions, says Lavertue, including: levying past rate increases, replacing occurrence policies (which includes coverage for claims that might be filed in the future) with claims-made policies (restricting coverage to claims filed only during the year for which the premium is paid, thereby allowing accurate determination of losses for the given year) in 2003, and refocusing business on individual physicians rather than hospitals and large groups in 2001/2002.
PMSLIC is reviewing new applications from individual physicians in all specialties and territories, and Lavertue says its underwriting guidelines have not changed.
No Act 13 tort reforms have yet impacted cases handled by PMSLIC, as it can take up to two years from an alleged malpractice event for a plaintiff to file a lawsuit, and it takes an average of three years to resolve a lawsuit once it is filed, says Lavertue. Cases that have been settled and tried by PMSLIC were filed before Act 13 became effective (March 2002), she adds.
PMSLIC has seen positive results from venue and certificate of merit reform, in the form of a decrease in the number of cases filed, but severity (cost of payouts) and expenses to manage cases continue to be problematic, says Lavertue. Declining to speculate whether PMSLIC’s recent actions represent the beginning of a trend, Lavertue notes that PMSLIC’s premium rate-setting in the future will depend on annual actuarial analyses of claims experience.
After four years of double-digit premium increases, Medical Protective – Pa.’s second-largest commercial carrier of malpractice insurance for physicians – is also expecting its average base premium rate to be flat, or increase at most by single digits, for July 2006, according to Mark Wittel, Medical Protective’s national sales leader. The company has seen a flattening of loss payout increases, and a decrease in frequency of claims over the past 18 months, which Wittel says seems to be a trend, although there is no guarantee that it will continue. The company sets its rates based on payout experience over a ten-year cycle, including savings from any decline in payouts.
While he says it is difficult to attribute causes of decline in loss experience, Wittel believes that venue reform has been a factor, and also touts the effectiveness of his company’s defense results – winning trials 90 percent of the time and maintaining a no-payout ratio on claims of 75 to 80 percent. He also says physicians may be doing better risk management in their practices.
Medical Protective continues to write occurrence policies for all specialties and territories, an ability that Wittel attributes to accumulating data from a long history of doing in business in Pa., continuing to use “cautious, conservative underwriting discipline” and pricing its product right.
In the past few years, physicians in certain specialty classes have had difficulty getting new policy applications approved by commercial malpractice insurers, but within the last six months are finding that companies are more willing to “write the physician, rather than the number of claims,” i.e., looking more closely at prior claims details rather than automatically rejecting an applicant with a certain number of claims, according to a malpractice insurance broker in Pennsylvania.
While the market’s underwriting seems to have become more flexible, large outside companies – like a Princeton or a MIIX – have yet to come back into Pa., the broker notes.
Professional Casualty Association – one of the larger upstart reciprocal malpractice insurance companies in Pa., with 1,500 physician members – has held premiums flat for four years and anticipates asking for a decrease in its premiums and assessment fees (a one-time capitalization levy on an insured’s first year premium) next year if loss costs remain stabilized, according to Barton Post, Esq., the company’s president. While Professional Casualty has settled a handful of cases, the company has not yet had a case go to trial, says Post.
Professional Casualty’s actuaries report that frequency and severity of claims are down, and Post believes “there is absolutely no question that the new venue rule is ten times more important than any other reform” in producing these results. “We also know juries are more temperate. Even in Philadelphia, they’re a little more reluctant to award high numbers,” says Post, a trial lawyer whose son also represents many physicians and hospitals in malpractice cases. Post believes that the positive juror attitude shift will continue if the media continues to inform the public about the problem that runaway jury awards pose to Pa.’s health care system.
Recent positive developments may have a downside, argues Post, because physician advocacy groups are not as active as they have been in the past in pushing important changes. Needed changes that remain undone, says Post, include:
· Allowing physicians to file countersuits against frivolous malpractice claims immediately, rather than having to wait as long as five years for the initial claim to be adjudicated before bringing a countersuit.
· Campaign reform to have Court of Common Plea judges appointed, rather than elected – and thereby beholden to trial bar campaign contributions which dwarf those by the medical community.
· Reducing unnecessary lawsuits by attaching trial costs to losing parties, which Post says currently applies to defendants, but not to plaintiffs.
Turned a Corner?
“Pa. may not have turned a corner on the malpractice crisis, but the recent news is encouraging. We’re peeking around the corner,” says Mark A. Piasio, M.D., president of the Pennsylvania Medical Society (PMS) and a practicing orthopedic surgeon in DuBois. His practice of 3.5 FTE orthopods is employed by DuBois Regional Medical Center and needs two or three more surgeons, but has been recruiting without success for several years. “We will use the good news of recent developments in our recruiting efforts,” he says.
Piasio believes that PMSLIC’s rate flattening and MCARE’s payout decline may have occurred independent of any tort reform effects, as commercial carriers had to raise their rates over the last several years to manage the unpredictability of future liability by assuming a greater coverage layer – going from $200,000 to $500,000 as the MCARE Fund’s layer decreased by that amount. Actuarial underwriting is easier now that coverage is stable at the $500,000 level, and claims-made policies – which PMSLIC switched to in 2003 – are reaching maturity. Even if payouts by commercial carriers haven’t changed much, he adds, premium rates are now covering costs, while the new venue rule is also contributing to stable books of business.
The PMS hopes that premium and payout declines will continue, but the greatest stability will not be achieved without caps on noneconomic damage awards, says Piasio. Affordability and availability of malpractice insurance has changed only minimally, as premium rates are still high and the solvency of start-up companies – measured by their ability to pay claims – is still untested, as their members’ policies and claims experience with the new companies are just beginning to reach maturity, he adds.
Legislative priorities on the PMS agenda include obtaining caps on noneconomic damage awards and restricting joint and several liability – which was recently struck down by the Commonwealth Court based on procedural issues related to the bill used for its original 2002 passage. The society also plans to throw more support behind tort-alternative demonstration projects around the state, such as administrative courts and mediation, says Piasio. He believes that favorable results from PMSLIC and MCARE will be a political impediment to obtaining caps, but should not slow efforts to ease conflicts between physicians and patients through tort-alternative projects around the state.
MCARE fee abatement has also brought stability to the market, says Piasio, and the PMS is in full support of HB 2041, which would extend abatement for two years.
MCARE abatement, venue reform, PMSLIC’s rate flattening and MCARE’s payout and assessment decline have diluted physician energy to push for further reforms, and have rendered the Politically Active Physicians Association dormant for the time being, according to Anthony V. Coletta, M.D., formerly the association’s statewide coordinator. “MCARE relief and venue reform had a big impact on physicians’ perception of the malpractice crisis, and the need for an organization like PAPA has decreased,” he says, noting that there are no immediate plans to resurrect the grassroots energy of two to three years ago.
The political arena has also changed, as legislators are less inclined to help physicians further, Coletta adds.
Malpractice insurance availability and affordability are improving, venue reform has significantly reduced the number and size of payouts – especially in southeastern Pa. – and jury mentality has softened out of concern for bankrupting Pa.’s health care system, Coletta believes. Another significant positive signal, says Coletta, is that large law firms – such as Philadelphia’s Kline & Specter, P.C. and The Beasley Firm – have shifted their advertising and marketing away from medical malpractice and are now emphasizing other forms of plaintiff litigation, such as manufacturing and corporate liability. In the wake of venue reform, “Medical malpractice is not as lucrative for them now,” Coletta believes.
Coletta believes it is an overstatement, however, to say that Pa. has turned a corner on the malpractice crisis because additional large insurers have yet to enter Pa. and a serious long-term problem still remains: the MCARE Fund continues to have serious financial problems in the form of a $1.3 billion unfunded liability. “As a pay-as-you-go entity, MCARE has no ability to pay for all the litigation out there, and no one has an answer to solve the problem,” Coletta says. “I don’t know that MCARE relief will be forever. We may be back to where we started, even if payouts are lower – and without long-term solutions in place, the unfunded liability can come back to haunt us,” he adds.
The Rendell Administration still considers it important to remove MCARE’s unfunded liability from the back of Pa.’s young physicians, but politicians do not appear to have the appetite to tackle that problem and there are no concrete proposals to do so, according to Lawhorne.
To address Pa.’s long-term problem, Coletta says that noneconomic damage caps should still be pursued, although it will be a challenge to overcome the complacency and short-term mentality that has settled in among physicians and legislators.
“We’re not out of the woods yet, but things are brighter than what they used to be,” says Jim Redmond, senior vice president, legislative services, of the Hospital & Healthsystem Association of Pennsylvania (HAP). Redmond believes that MCARE’s payout declines are strictly a result of the Fund’s coverage limits decreasing from $1 million in 1996 to half of that amount today. None of the Fund’s claims have yet been impacted by Act 13, although those reforms will eventually kick in, he says.
Tort reform impacts on claims frequency have been overstated, says Redmond, because of a statistical anomaly in the Pa. Supreme Court’s reporting of the data. The Court released a report showing that in 2004, 34 percent fewer malpractice claims were filed in Pa. – and nearly 54 percent fewer in Philadelphia – compared to the average annual number of claims from 2000 to 2002. Redmond says the percentages are skewed by the “tremendous uptick” in claims filed to beat the effective dates of Act 13 in 2002 and venue reform in 2003.
Redmond’s points are supported by a PricewaterhouseCoopers LLP study commissioned by the Pa. Insurance Department to evaluate the impact of Act 13 on medical professional liability loss costs. Released in June 2005, the report said that, “Since cases take years to move from their initial filing to their ultimate resolution, many cases impacted by Act 13 are only beginning to be resolved.” The report found that “post-Act claim experience is too immature to reach definitive conclusions regarding claims severity.”
With respect to venue and certificate of merit reform, the report acknowledges that there was a spike in the number of cases filed in 2002 – and an artificially lower number of cases filed in 2003 and 2004 – because of a push to file cases before the effective date of Act 13.
Based on reports by malpractice insurers and other data, the report nevertheless concludes that recent reforms have had a significant initial impact on the number of cases filed, but cautions that it is too early to project a savings on total loss costs to the industry for several reasons, including:
· The reduced number of cases may be a reduction in less meritorious cases.
· Certain counties or areas may have a tendency for higher awards of settlements because those areas see the most complicated cases.
· As claims have moved to other counties, the process of disposing of those claims may have slowed, potentially offsetting, at least partially, any resulting savings by the inflationary impact of delaying the resolution of these claims.
The report did project a savings on primary carriers’ defense costs – estimated at four to six percent of total loss costs – as a result of fewer claims filed.
Redmond notes that the exit from hospital business by traditional commercial malpractice insurers has produced one of the hospital community’s most dramatic changes over the past three years: nine out of ten Pa. hospitals now use risk retention groups or are self-insured, while one out of ten did so a few years ago. Self-insurance and smaller risk retention group pools lose the advantage of spreading insurance risk among many insureds, and hospitals end up essentially paying actual losses, says Redmond. Nearly one out of six hospitals are not able to secure excess coverage, he adds.
Pa. hospitals cover an average of 22 percent of their active medical staffs for medical liability insurance, and to the extent that commercial coverage availability increases for physicians – e.g., with PMSLIC again opening its books to new physicians – hospitals’ pressure to insure physicians will be eased, says Redmond.
HAP is pushing for the passage of MCARE abatement extension (HB 2041 and SB 972), new joint and several liability reform (HB 138 and SB 435), limits on noneconomic damages (SB 50 and HB 423), and alternative dispute resolution systems, says Redmond.
Pa.’s malpractice crisis is easing or ending, says William M. Sage, M.D., J.D., Columbia Law School professor and principal investigator on the Project on Medical Liability in Pennsylvania. “If one defines ‘malpractice crisis’ as unexpected cost increases and coverage declines, yes – this crisis is easing and will end,” he declares.
An important caveat is the unknown future capacity of the reinsurance market, particularly its ability to assimilate and survive the impacts of terrorism, hurricanes and possible flu pandemics, says Sage. “Every insurer reinsures part of their business by going to global markets for excess insurance, which could be difficult if global markets are strained. That was one of the factors that tipped the malpractice crisis five years ago,” he adds.
Sage expects Pa.’s malpractice insurance environment to ease because of the nature of insurance cycles, which he says are influenced by human factors of business decision-making. Because of the time-lag in case resolution, says Sage, “Insurance companies over-react both ways: by lowering premiums and aggressively expanding business while relying on investment income during good times, and cutting back to their core business with stricter underwriting during financially harder times.”
According to Sage, it will still take a few years to assess whether any reduction in claims frequency or severity represents a long-term trend in Pa. “You can fool yourself into thinking the crisis is solved because fewer cases are being filed and payouts are down – while those may really be related to a politically-driven cycle,” he cautions. Whenever a malpractice crisis leads to the passage of tort reform legislation, he says, lawyers rush to file as many lawsuits as possible before the laws take effect. When those claims are filed, the crisis is intense and public opinion turns against lawyers because of health care access concerns and effective lobbying by physicians. The plaintiffs get concerned about juries not being as sympathetic, and new claims fall under new tort reform laws – creating a cycle of its own, whereby fewer claims are filed. “You see a significant slowing of cases because attorneys see juries as against them,” says Sage.
The MCARE Fund’s payout decline may or may not be an indication of an improved malpractice environment, but it is impossible to determine without knowing when the cases were filed, says Sage. As a pay-as-you-go system, the MCARE Fund does not respond to insurance cycles, he notes.
According to Sage, researchers for the Project on Medical Liability in Pennsylvania have concluded, among other things, that liability insurance rating practices are outdated, and predispose the health care system to malpractice crises. The Insurance Department should give greater scrutiny to insurers’ over-reliance on physician specialty and location, which Sage says results in small risk pool pricing, burdens physicians in a few specialties and compromises the health care system. “The malpractice insurance structure is incredibly siloed,” Sage adds, and “the real issue has to do with getting physicians into insurance arrangements that are stable, going forward.”
Other Pa. reforms that are endorsed by Sage and the Project’s researchers include the following:
· With federal support, fund hospital demonstrations of “no-trial” systems to compensate avoidable injury.
· Establish a state center that coordinates information about patient safety, liability insurance and litigation.
· Use the MCARE phase-out to review and improve actuarial practices for malpractice insurance.
· Broaden legal protection for health care providers who apologize to patients.
· Keep reform moving ahead even if the “crisis” ends.