Court ruling drives malpractice rates up

A 2002 Missouri court ruling has put medical malpractice insurers and physicians in a tight spot. Under the January 2002 ruling in Scott et al. v. SSM Healthcare St. Louis, juries can award multiple caps in each medical malpractice case for noneconomic damages. That ruling has caused medical malpractice insurers to raise their rates, leaving physicians with record high premiums.

Cliff Stepp, COO at Intermed Insurance Company, said the ruling puts both parties in a bad position.

"It's a tough market right now. And it's tough for the physicians out there. Their incomes have been capped because of managed care, yet their cost to do business keeps going up. It's just a tough situation," Stepp said.

Dr. Alan Clark, president of the Greene County Medical Society, said the cost of medical malpractice insurance has risen about 65 percent this year and is expected to rise another 65 percent next year.

"You have to look at physicians as small-business men," Clark said. "It's been a real burden on the private practicing physicians because now they are potentially unable to meet their overhead."

Intermed, Missouri's largest medical malpractice insurer, has roughly 2,700 policyholders in Kansas and Missouri, with the majority being in Missouri, Stepp said. Despite an increase in rates, Intermed's number of policyholders has risen over the past few years, he said, adding that the company's written premium was up about 45 percent last year.

Intermed raised its rates by 27 percent in July 2002. Rates also increased by 18 percent in November 2001 and by 9 percent in November 2000. Intermed has filed for an additional rate increase that is currently being reviewed by the Missouri Department of Insurance.

If approved, the request would raise Intermed's rates by 82 percent on policies effective Aug. 1, according to Randy McConnell, director of communications with MDI. The increase would equal a 201.7 percent increase in Intermed's rates since 1999, McConnell said.

MDI is currently conducting an exam of companies within the medical malpractice industry, McConnell said.

"That includes how they make rates, whether the current rates are fair or excessive and a number of other related issues. Under current law we're not allowed to tamper with rates unless the market is not competitive," he said.

Ruling's impact

Recent rate hikes have been a direct result of the Scott v. SSM Healthcare ruling, Stepp said.

"Prior to that, we had some degree of predictability in terms of what our exposure would be in a given lawsuit. We knew we could rely on a certain number of caps for any one case. Now that's an open-ended question," he said.

As a result, as cases are reported to Intermed, the company has to reserve more conservatively, Stepp said.

"To be prudent, we have to set aside more money for those cases than we would have before the Scott decision was handed down," he said.

The impact of high insurance premiums in the long term could be serious, Clark said. Many physicians may decide to retire early, move out of state to avoid the high cost of insurance, or quit their practices all together. It will be difficult to replace those doctors because other doctors won't have an incentive to practice in Missouri.

"If doctors are leaving because insurance is so high they can't afford to have an office, why would anyone else want to come in and open up shop?" Clark said.

One of the two major cost drivers of medical malpractice insurance is the amount of jury awards for economic and noneconomic damages, Stepp said. Advanced medical technology is a factor because severe injuries are more often treatable, he said. But while treatment is possible, it isn't always successful.

"When something does go wrong, the economic damages can be high," Stepp said.

The process of defending cases is the second major cost driver, Stepp said, because it is becoming more expensive regardless of the outcome.

"Over 70 percent of the cases that are reported to us we still close with no payment. That means no indemnity payment, but we still have to pay legal fees to resolve those cases, and those fees are going up. Achieving any profit in the last two to three years has been difficult, if not impossible," Stepp said. He added that profit margins are based on expectations.

"When we develop our rates, we load in 5 percent profit which we think is a reasonable expectation and not one that puts an undue burden on our insured."

Clark said the vast majority of malpractice suits involve treating extremely ill patients.

"The problem is not bad doctors," he said. "It is not a matter of doing anything bad, it's just that some people have bad outcomes because they have bad diseases. Society now expects, in some courts, that anytime someone has a bad outcome it should be paid for, whether it was anyone's fault or not. That is partially what has caused the outrageous increase in insurance premiums."