Information Sheet
Assessing the Malpractice Insurance Environment in Virginia

Thomas P. Cox, ARM
Vice President
PhillipsCox Insurance Services
Available As an MS Word Document

EXECUTIVE SUMMARY: Medical malpractice insurance premiums nationally are increasing and Virginia is no exception. In some areas of the country this is having a negative impact on the delivery of health care. Some experts believe Virginia is on the edge of such a situation. Yet, there is a demonstrated need for these rate increases, as shown in a General Accounting Office study, if the insurance companies are to remain solvent. Certain steps can be taken in Virginia to decrease the impact of the current hard market. Any tort reform should be aimed at restoring insurance to its original purpose, which is to make an injured person whole again, not reward them (and the plaintiff's attorney) for being injured. It will also be beneficial to decrease the number of claims filed that are, arguably, lacking in merit.

Malpractice insurance premiums in Virginia have increased dramatically in recent years. While some carriers began increasing rates as far back as 1997, in response to loss trends, since 2000 premiums have more than doubled. Yet, rates in Virginia are extremely competitive compared to the nation.

According to an ongoing premium study by the Physicians Insurance Association of America, the highest rates in 2003 were found in Dade County, FL. Internists in Dade County paid as much as $65,697, general surgeons $226,542, and OB/GYN's $249,196. The lowest 2003 rates in the country for these three sample specialties were: Internists, $2,786 (Nebraska); general surgeons, $8,717 (Minnesota); and, OB/GYN's, $14,662 (South Dakota).

By contrast, in Virginia the lowest internal medicine rate in 2003 was $7,101, which applied to the central Virginia area. For general surgeons the best rate appeared to be $26,973, while the best OB/GYN rate was $32,493, both for central Virginia. The highest rates remained in northern Virginia, where the least expensive internist rate was $9,447, for general surgeons $34,198, and for OB/GYN's $52,400. Note that these rates are for 2003 and several companies have already taken rate increases effective 01/01/04.

A more interesting comparison may be California rates against Virginia rates, since California's MICRA legislation from 1976 was the model considered by Congress for national tort reform. Internal medicine rates ranged from $6,488 in northern California to $25,178 in Orange County and the Los Angeles area ($7,101 to $14,019 in Virginia); general surgery rates ranged from $23,348 in northern California to $58, 830 in the Los Angeles area ($26,793 to $47,830 in Virginia); and, for OB/GYN's $36,066 in northern California to $77,814 in the Los Angeles area ($32,493 to $83,971 in Virginia).

Finally, Colorado has in place a $1 million cap on all damages (compared to Virginia's $1.7 million cap) and a $250,000 cap on non-economic damages. In Colorado rates for internal medicine ranged from $11,180 to $11,819 in 2003; for general surgeons the range was $39,036 to $44,927; and, for OB/GYN's the range was $34,868 to $74,948.

Keeping in mind Mark Twain's quote concerning lies ("There are lies, damn lies, and statistics."), it appears as if Virginia's current rates for medical professional liability insurance ("MPLI"), while increasing dramatically in recent years, remain among the more moderate rates in the country. In fact, most carriers claim that rates today have simply returned to where they were in the late 1980's, at the end of the last hard market. It is also often noted that the MPLI marketplace would not be as hard today if rates had remained at those levels, which leads to a discussion of how we got here.

After the last hard market in the mid to late 1980's, rates declined slowly with the lowest rates appearing in the mid 1990's. This was due to companies having built large surpluses due to reserve redundancies, as well as usually moderate and predictable jury verdicts, competition, and a stable or growing economy. It should be noted, however, that some of the competition was in the form of growth strategies that were less than financially sound. As the 1990's began drawing to a close, however, multiple storm clouds were gathering over the property & casualty industry as a whole, of which MPLI is a part. Challenges were beginning to grow in liability lines of coverage, with the MPLI industry having specific problems.

In the late 1990's the property & casualty reinsurance industry began running loss ratios over 112%, according to A.M. Best (companies purchase insurance to protect themselves from large losses, which is called reinsurance). This increase was primarily due to large property losses from natural disasters, such as the wind storms that struck Europe in December 1999, but was also due to increasing MPLI losses. Industry journals began to warn of an impending hard market due solely to increased reinsurance costs. Coincidental with growing loss ratios in the reinsurance industry, medical malpractice jury verdicts began to increase dramatically in the late 1990's, with Jury Verdict Research showing an increase in verdicts from an average of $500,000 in 1997 to over $1 million by 2002. Increasing loss severity as the leading cause of the increase in MPLI premiums was supported by a General Accounting Office report prepared earlier this year for congress.

The increase in loss severity was, at first, difficult to get a handle on as payments in general appeared to be increasing slowly. However, the most significant increase was in the number of "breathtaking" awards, jury verdicts that seemed wildly disproportionate to reality. Therefore, while loss frequency has remained mostly static during the last 15 years, loss severity has increased in a "sneaky" way, with a dramatic impact on the bottom line of both the insurance companies and the reinsurance companies.

As an example, a Georgia jury heard evidence at trial, from both the plaintiff and the defense, which was amazingly consistent. Both sides agreed that the doctor in the case decided that a birth was not progressing and that the fetus was being placed in jeopardy, and wisely ordered an emergency Caesarian-section. The patient refused! The patient insisted that she was going to deliver the baby vaginally and continued to refuse for over 20 minutes. Finally she was persuaded to have the emergency procedure, but the 20 minute delay resulted in an infant with neurologic deficits. The jury awarded the woman $12 million.

This combination of increasing loss severity in MPLI , when combined with increasing loss ratios in the reinsurance markets, created the need for rate increases for reinsurance. Most MPLI companies purchase reinsurance at a level of $500,000, meaning the reinsurance company is responsible for any loss above $500,000. Stronger companies may retain as much as $750,000 or even $1 million of any loss, while weaker companies may only retain $250,000 (Note: Doctor's Insurance Reciprocal, a Virginia risk retention group now in receivership, retained only $10,000 of any loss). When companies purchase reinsurance they are paying to cover losses above an agreed upon limit; the higher the limits offered to insureds, the more expensive the cost of reinsurance. Therefore, it costs more money to purchase reinsurance for physicians carrying limits of $2 million than it does for physician carrying limits of $1 million. This increased cost is passed along to the insured physician.

Consequently, as the severity of malpractice awards increased it had a double impact on Virginia physicians. First, the cost of reinsurance purchased by the carriers increased, and this increase was passed along to the physicians. During the last two years as much as 18% of some rate increases in Virginia was due to the increased cost of reinsurance. The second impact, however, relates to the existence of the malpractice cap.

As indicated, the malpractice insurance companies purchase coverage for, typically, any losses above $500,000. As noted, this means that it costs the MPLI companies more money to offer higher limits. Therefore, while Virginia physicians have the benefit of the protection of the malpractice cap, they also must pay a higher premium for these higher limits. In a stable reinsurance market this might not be the issue it is today, where many reinsurance companies are still struggling to return to profitability.

Further impacting the bottom line of both insurance and reinsurance companies was the economy. On average MPLI companies only have 32% of their investment income in the stock market, according to A.M. Best. Most MPLI companies have the majority of their investments in government-backed bonds or other conservative investments. From the perspective of an insurance company in a volatile line of business such as MPLI, knowing it will get a return of 6% every year is preferable to returns of 15% for some years and an investment loss in other years.

However, as the Federal Reserve has repeatedly cut interest rates it has depressed the bond market, so that companies formerly getting a 6% return are seeing a 2% return on investment. Depending on other variables, a 1% decrease in investment income can result in as much as a 25% rate increase.

So, there were multiple factors leading to an increase in MPLI premiums (loss severity, reinsurance costs, investment income) prior to the terrorist attacks of September 11, 2001. The impact of those attacks on the insurance industry was reported in our e-newsletter of October 10, 2001. The impact was summarized as follows:

Therefore, the result of 09/11/01 was to take an insurance market that was hardening and make it much harder, much quicker, and for a longer period of time, and this is what we are dealing with today. All of the events noted above have also created an extremely hard underwriting market for two reasons. First, as MPLI companies attempt to stem losses and generate an underwriting profit they are trying to limit themselves to "good risks." Unfortunately trying to determine ahead of time whether a doctor will get sued is an extremely inexact science.

The second reason for the tighter underwriting, however, stems from the dictates of the reinsurance companies. As the increasing loss severity has reached up into the reinsurance layer, the reinsurance companies have dictated to their customers to clean up their books, get rid of doctors with claims, and to not provide new coverage for doctors with claims. Each primary MPLI company, therefore, has extremely stringent underwriting guidelines making it difficult for a doctor to find coverage if he/she has had any claims. Also, certain specialties are trending badly on a national basis, to the point that some companies will not extend coverage to a physician, even if he/she is claim free, if he/she works in one of these specialties. These "problem" specialties include radiology, emergency medicine, oncology/hematology, bariatrics, gastroenterology, pathology and neurology, among others.

All of these events taken together generated a storm of massive proportions for the property casualty industry in general, for liability insurance in particular, and for MPLI specifically. However, what makes the storm a "perfect storm" for physicians is that all of the increased costs noted above are handed down to the physician in the form of higher premiums, but the physicians cannot pass the costs along to their customers, their patients. This is due to the managed care impact so prevalent in health care today, as well as to health insurance companies tying their reimbursement to Medicare.

When Medicare became law in 1965 the average age of death in this country was 67 years of age. As most people retired at age 65 it was easy to design a health insurance program that normally lasted only two years. In addition, doctors were able to offset low Medicare (and Medicaid) reimbursement because the balance of their practice was fee-for-service (the fee the doctor billed was what the doctor was paid).

Today people are living longer and the challenges of Medicare are well documented. More importantly, as health insurance companies tie reimbursement to Medicare reimbursement, each cut in Medicare reimbursement has resulted in a similar cut by the private health insurance companies. As noted previously, most companies have related that MPLI premiums today are back up to where they were in the late 1980's; unfortunately, physician reimbursement today is estimated to be about 35% of what it was at that same time.