So in the first two articles we have addressed the historic effects of tort reform using Texas as an example, and subsequently we reviewed the effects of tort reform on so called “defensive medicine” practices, looking at both the effect of reform measures on physician/provider ordering patterns, as well as the possible effects on patient outcomes or mortality.
Today, we are going to examine the last party in this carousel. The insurance agencies themselves. For starters, I wanted to examine if there was any sort of a relationship between malpractice premiums, and healthcare spending. So, using historic healthcare expenditure rates from the NHE database (CMS), I calculated the rate of healthcare growth, percentage wise, per year from 1995-2008. I then used an ISO database set to examine the growth in insurance premiums per year.
As we can plainly see, there is no correlation, but out of sense of thoroughness, I even ran a simple regression.
But with an R-Squared of 0.021, there is simply little correlation there.
So what causes these random spikes in medical malpractice premiums? Well, according to the AIR (Americans for Insurance Reform) these are due to the economic cycles of insurers and to drops in investment income.
Lastly, I visited THIS article, which found:
1. Inflation-adjusted payouts per doctor not only failed to increase between 2001 and 2004, a time when doctors’ premiums skyrocketed, but they have been stable or falling throughout this entire decade.
2. Medical malpractice insurance premiums rose much faster in the early years of this decade than was justified by insurance payouts.
3. At no time were recent increases in premiums connected to actual payouts. Rather, they reflected the well-known cyclical phenomenon called a “hard” market. Property/casualty insurance industry “hard” markets have occurred three times in the past 30 years.
4. During this same period, medical malpractice insurers vastly (and unnecessarily) increased reserves (used for future claims) despite no increase in payouts or any trend suggesting large future payouts. The reserve increases in the years 2001 to 2004 could have accounted for 60
percent of the price increases witnessed by doctors during the period.
But the real devil, the real devil is in the loss ratios…I’m assuming that we are all familiar with the MLR discussions that raged over the past two years discussing what should be an allowable loss ratio for health insurance. Malpractice also has it’s loss ratios, and oh boy, are they favorable to the insurance industry. 61.1% is the average, in 2007, for the average loss ratios for malpractice insurance companies. To put this another way as per the article: In 2007, medical malpractice insurer profit based just on insurance transactions, that is,just on the premiums they took in, was 24.6%. This was more than double the amount on insurance transactions for the entire industry (11.0%).
If I were a physician who paid my own malpractice, I would be livid over these figures. It is not as though there is a huge advertising market for medical malpractice insurance. 38.9 cents on every dollar are kept as almost pure profit. Surely, administrative costs cannot account for this. Add to this, this last nugget: Inflation-adjusted payouts per doctor not only failed to increase between 2001 and 2004, a time when doctors’ premiums skyrocketed, but they have been stable or falling throughout this entire decade.
It seems, that right now would be a great time to own a malpractice insurance firm. Too bad, that it isn’t so great for everyone else in healthcare.
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