Coping with Medical Malpractice Insurance Rates
April 2003
By Bonnie Darves
Editor’s Note: “The current professional liability crisis is costly, unfair to patients, and limits access to care. Malpractice insurance premiums have risen sharply, only one in eight negligently injured patients receives appropriate compensation, and some physicians have had to either limit their clinical services or move to a more equitable practice environment. While there is no geographical cure for the problem, some states have enacted tort reform legislation to help deal with these issues. Physicians need to be aware of the cyclical nature of the professional liability crisis and knowledgeable about the differences between claims made and occurrence policies, as well as novel ways to reduce premium expenses. We also must be well versed and take a leadership role in patient safety initiatives.”
— John A. Fromson, M.D., Chairman of the Department of Psychiatry at MetroWest Medical Center
The malpractice climate needn’t be a deciding factor in where physicians choose to practice, but awareness of the issues — and contractual and coverage considerations — are key.
Physicians who have been reading alarming headlines recently about the current malpractice crisis might be understandably concerned that the steeply rising premiums in some areas is reason to avoid considering practice opportunities in affected states. The substantial premium hikes — ranging from 25 percent to more than 80 percent in some specialties — and coverage availability problems in states such as Mississippi, Nevada, Pennsylvania, Texas, and West Virginia are cause for concern. Despite these issues, it’s important to keep in mind that national and state-level tort reform efforts may soon improve the situation and that malpractice premium pricing is cyclic in any event. In almost every decade since the 1960s, a difficult malpractice environment has occurred at some point.
“Physicians should understand that the problem is everywhere, not just in a handful of states. And even in the hardest hit places, the medical community and legislators are working on the issue,” says Mark Smith, executive vice president of Merritt Hawkins & Associates, a national search firm based in Dallas, Texas. “Every state in the country has tort reform on the [legislative] docket in some manner — so that’s the good news.”
For this reason, physicians shouldn’t necessarily cross a state off the list just because it’s a current “hot spot.” They should also understand that premiums sometimes vary significantly from one part of a state to another, Smith notes.
On the national level, the American Medical Association (AMA) has made liability-system reform a top priority. AMA President-elect Donald Palmisano, M.D., J.D., notes that growing public awareness of the issue has brought it to the forefront on Capitol Hill. “The vast majority of Americans support liability reform. A new Gallup poll shows that 72 percent of Americans support limiting the amount patients can be awarded for ‘pain and suffering,’ ” Dr. Palmisano says. The limits are being sought because of disturbing industry statistics — the median jury award for medical malpractice increased from $700,000 in 1999 to nearly $1 million in 2000, according to the most recent report from Jury Verdict Research in Horsham, Pennsylvania.
Efforts under way to remedy the situation
Charles A. Welch, M.D., former president of the Massachusetts Medical Society, says that while young physicians are well advised to focus first and foremost on delivering patients care, they should also be aware of the issues driving the current debate about the medical malpractice tort system. For one, Dr. Welch says, the system as it’s currently structured does not necessarily provide appropriate remedy for injured patients, since only one in eight injured patients actually receives monetary compensation. In addition, some physicians practicing in states with high premiums or an unfavorable malpractice climate have moved elsewhere — a situation that is beginning to affect patient access to care.
“The medical liability system as we know it is highly flawed. It poorly compensates those injured, drives up the cost of health care by forcing physicians to practice defensive medicine for fear of being sued, and is driving good doctors out of practice,” Dr. Welch says, adding that the defensive climate also impedes improvements in patient safety that both physicians and patients desire.
Despite the current problems, Dr. Welch notes that efforts are being undertaken to stabilize the situation in the short term. He cautions, however, that longer-term remedies are needed, along the lines of the arbitration-based systems that have been implemented in countries such as Sweden and New Zealand. “Those systems are structured to provide fair compensation to all injured parties, and they have been very successful,” he says.
Recent developments in the national movement to place “caps” on damages are promising and may soon stabilize the malpractice environment in states that don’t have tort reform, since lawmakers now know that high premiums and dearth of coverage in some states are affecting patients’ access to care. Still, physicians eyeing practice opportunities should be well aware of the professional liability situation as it might affect them personally, in any geographic areas they are considering. Even though prospective employers pay the tab for malpractice coverage, the premium environment in the region or state can affect not only physician compensation but also scope of practice and the hiring organization’s future financial viability. For example, a practice that must absorb a 40 percent premium increase might have to change its salary or bonus structure the following year, or might find itself on shaky ground financially if it doesn’t have the resources to weather the storm.
“It’s very important that physicians be aware of the [malpractice] situation and ask the right questions when they are considering a position,” says Patrice Burgess, M.D., chair of the AMA’s Young Physician Section and assistant director of the Family Practice Residency of Idaho in Boise. She advises residents to inquire about malpractice rates and premium patterns in regions they’re considering. They should also ensure that the prospective hiring organization will provide adequate “tail” coverage — back-end coverage for malpractice lawsuits that may arise after the physician leaves the practice. “Physicians should ensure the contract addresses that tail coverage before they agree to take the position [offered],] Dr. Burgess advises. Even if coverage is adequate, physicians will also want to ensure their personal assets are protected from future malpractice claims by working with an experienced attorney.
Ripple effects of high malpractice premiums
The malpractice environment also affects other important issues. In states where premiums are steep because of losses or rising claims costs, insurers may be unwilling to add new physicians to a practice’s policy or may limit a physician’s scope of practice by excluding certain procedures. “These exclusions are becoming a big issue, and not just in the high-risk specialties such as neurosurgery, anesthesiology and OB,” Dr. Burgess notes. Even in family practice, insurers in some areas may exclude certain common in-office procedures such as ingrown toenail removal, for example. So it’s important that the physician and prospective employer evaluate coverage availability and potential exclusions or limitations before proceeding to a final employment contract. The bottom line, Dr. Burgess and Smith say, is that young physicians eyeing a particular opportunity should not just assume that the coverage provided to the medical group’s current physicians will automatically extend to doctors who join the organization.
“The analogy I use is that you wouldn’t go out and buy an expensive sports car without first checking with your insurance agent about coverage,” Smith says. Physicians should ask questions about the practice’s current coverage rates, rate-change patterns in recent years, and what the practice expects to see in rate changes in the year ahead. “If the physicians or practice administrators appear unconcerned about the issue, or are unwilling to discuss malpractice coverage, be cautious,” he adds. In any event, physicians should conduct their own research on the malpractice environment in the region, Smith adds, by using the wealth of resources available on the Internet and through many medical-professional organizations such as the AMA.
In addition, Smith notes that a favorable malpractice-premium environment one year may be followed by an unfavorable one the following year — and he reminds physicians that professional liability coverage is affected by some of the same factors that influence all insurance coverage. For example, the current high premiums in malpractice, property and casualty, and other types of insurance are also the result of economic factors, too. Low returns in the stock market force insurers to raise rates to compensate for the losses on their investments, which tend to offset lower premiums during more favorable stock market conditions.
The cyclic nature of insurance pricing is a factor as well. When many companies are offering insurance, the competition for customers causes a “soft” market, characterized by lower premiums. When insurers leave the market because of tough conditions or steep losses, the market hardens and premiums increase. In professional liability coverage, the permanent market departure in late 2001 of the largest U.S. medical malpractice insurer, The St. Paul Companies, has had a severe effect on both coverage availability and pricing.
Of course, malpractice coverage is only one of many important considerations in choosing a practice opportunity. Smith urges physicians to first focus on where they want to practice and the type of practice environment they desire, before addressing such issues as compensation and insurance coverage. For example, a state with currently high malpractice premiums might also be a more affordable place to live — or may offer better reimbursement climate. Conversely, states that have implemented tort reform and have a stable malpractice environment may be less appealing to some physicians for other reasons. In the end, physicians should try to carefully and objectively balance all of the advantages and disadvantages of any position they are considering, Dr. Burgess advises, and should pay close attention to all contract elements before making a decision.
The Malpractice Coverage Climate: How Does — or Should —
It Affect Job Search, Policy Choice?
The malpractice crisis — characterized by high or steeply rising premiums and scarcity of coverage — is a national problem, but several states have been especially hard hit in recent years. They include Florida, Georgia, Mississippi, Nevada, New Jersey, New York, Pennsylvania, Oregon, Texas, Washington, and West Virginia. In those states, physicians in high-risk specialties such as obstetrics, neurosurgery and anesthesiology, among others, have seen their premiums increase by 35 percent or more in a single year.
That’s the bad news, but there is hope on the horizon. Tort reform efforts are occurring in most states, and the national push to alleviate malpractice coverage problems is gaining momentum. For this reason, physicians shouldn’t rule out a particular state or geographic region solely on the basis of malpractice premiums. At the same time, physicians should be aware of the malpractice environment in areas they’re considering. They should also ensure that adequate coverage is available for the scope of practice they plan to pursue and that the prospective employing entity is financially prepared to cope with sudden or unexpected premium increases. Finally, it’s imperative that the terms, conditions, and limitations of “tail” coverage be clearly spelled out in the employment contract.
As a word of caution, physicians new to practice should beware of premium-reducing strategies that could prove costly down the line. For example, in attempts to reduce their outlay for malpractice coverage during the years they’re paying off school debt, some physicians are opting for “claims-made” rather than “occurrence” policies. While the former are less expensive, they only cover claims that occur while the policy is in force. This means that if the physician moves to another practice or state and changes policies, separate “tail” coverage would be needed to cover future liability claims. When purchased as stand-alone coverage, “tail” policies could cost more than twice the amount of the annual premium paid for the claims-made policy. Occurrence policies, on the other hand, have tail coverage built in.
One premium cost-cutting strategy that might be suitable for young physicians is to obtain “credit” for reduced hours spent in direct patient care. Physicians who can show that they spend only 20 hours each week in direct care, for example, might receive a commensurate premium reduction. This strategy is most applicable for physicians whose work predominantly involves teaching, research, or administrative duties — and for those who don’t perform invasive procedures. It is clearly unsuitable for young physicians who are trying to build up their patient-care hours.
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NOTE: The author, Bonnie Darves, is an independent health care writer based in Lake Oswego, Oregon.
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