Estimating the Effect of Tort Reform on Medical Malpractice Costs

CAS Spring Meeting

May 16, 2005

Robert J. Walling, FCAS, MAAA

A Brief Recap

A Historical Recounting

Favorable operating results and investment returns Rating agency pressure on domestics Aggressive expansion, competition and depressed rates Strained insurer balance sheets Unanticipated increase in large claim frequencies and

severities Decreased investment returns post-9/11 Reduced coverage availability Reduced coverage affordability Reduced access to healthcare

Widespread, but not Uniform

A Call for Greater Efficiency

Thecurrent

system iswoefully

inefficient

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Maine Med Mal MedicalMalpractice

Group A & H PrivatePassenger Auto

Liability

WorkersCompensation

Line of Business

Penn

ies

per D

olla

r of P

rem

ium

Losses ( Claimants' Share) Losses ( Attorneys' Share) ALAE ULAE Commissions Taxes, Licenses & Fees Other Acquisition Expense General Expenses

Tort Reforms Impact on Efficiency

Damage caps by themselves do not improve system efficiency

Several other elements of MICRA should help Some newer reforms may help too

Attorney fee caps Birth Related Neurological Injury Funds (NICA) Prelitigation screening “I’m Sorry’ laws

I’m Sorry Laws

Physicians want more communication Patients feel physicians are “hiding something” In most states, expressions of regret or empathy are

admissible as evidence Lexington, KY VA Hospital “I’m Sorry” laws,

– Enacted in CA, CO, FL, MA, OR, TN, TX, WA– AZ, ME and others are considering– Providers/staff can say “I’m sorry this happened to you”– CO only, “I’m sorry I did this”

without admissibility

I’m Sorry Laws Insurers are:

– Training providers on how to apologize (mandatory)– Coordinating with claims

Initial results are significant– Reduced severities– Reduced loss adjustment expense– Reduced attorney involvement

(CO: 2 lawsuits in 433 claims)– Improved patient satisfaction– In many cases, much improved efficiency

Impact of “I’m Sorry” Laws Focus on claims <$35,000 Company’s can match apology with aggressive

claims settlement strategy (e.g. COPIC) Increase efficiency at all costs (including higher

pure loss severity) Reduces ALAE on small claims 35-65%

(3.5%-6.0% cost reduction overall) Actually increases small claimant net damages

“I’m Sorry” Impact Complexities

Data– What claim types are best suited for improvements

due to apologies?– Differing results by company and state

Other– Court interpretations– Lack of historical data in any state– Can actually run contrary to other reforms

(e.g. prelit panels)

Sliding Scale Attorney Fees

CA’s MICRA:– 40% first $50,000, – 33% next $50,000, – 25% on next $500,000, and – 15% > $600,000

Impact of Attorney Fee Caps

-

20

40

60

80

100

120

140

160

180

200

0-25 25-50 50-100

100-150

150-200

200-250

250-350

350-500

500-1000

1m-2m

2m+

Size of Loss

Incu

rred

Los

ses

($M

)

Uncapped LossesCapped Losses

$500K Non-EconDamage Cap reducescosts 15%($88M)

(80)

(60)

(40)

(20)

-

20

40

60

0-25 25-50 50-100

100-150

150-200

200-250

250-350

350-500

500-1000

1m-2m

2m+

Mill

ions

Size of Loss

Cha

nges

in N

et D

amag

es ($

M)

Change in FeesChange in Losses

Impact of Attorney Fee Caps

Caps on Fees restore 75% of Net Damages ($66M)

Attorney Fee Cap - Impact Complexities

Data– Many states do not have detailed claim histories– Most states do not have economic vs. non-econ detail

Look to available data– Nobody has data on current average fees (Rand-33%)

Other– Judicial challenges can reduce impact– Many final laws allow “exceptions”– Are there other “soft” impacts?

Prelitigation Screening Panels

Benefits of Prelitigation Screening Panel or Medical Review Board– Can eliminate frivolous claims– Can reduce ALAE on claims with payment and w/o– Decision of panel can cut off further actions– Create opportunity for counseling

Impact of Prelitigation Panels

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0 1-25 25-50 50-100 100-150

150-200

200-250

250-350

350-500

500-1000

1m-2m

Size of Loss (No LAE)

Cla

im S

ever

ity ($

K)

Prelit state Non-Prelit

Impact of Prelitigation Panels

-

10

20

30

40

50

60

70

0 1-25 25-50

Size of Loss (No LAE)

Cla

im S

ever

ity ($

K)

Prelit state Non-Prelit

Prelitigation Panel - Impact Complexities

Data– At least two states of data needed

Other– Rare to have only a single statutory difference– Implementation of panels can be very different– Judicial challenges can reduce impact– Courts can reduce panel protections– Are there other “soft” impacts?

Birth Related Neurological Injury Funds

Government insurance mechanism No Fault system (reduces attorney involvement) Broader benefits Broader funding base Low frequencies, high severities Florida (NICA) and Virginia (BRNICP)

Typical NICA Legislative Costings

Changes in eligibility – Birth weight– Physical “and” mental injuries versus “or”– Survival requirements– Mandatory coverage

Changes in benefits– Housing allowances– Specialized equipment

NICA Impacts

2006 Average Claim Costs by Category

65%6%

4%

6%4%

6% 2% 3% 2%1%1% 0%

Nursing Hospital/Physician Incidental HousingVans Lost Wages Physical Therapy Medical EquipmentPrescription Drugs Legal Insurance Medical Review/Intake

NICA Impacts

1. Estimated Annual Claim Frequency 10

2. Estimated % Claims Below 2,000 grams 25%

3. Estimated Number of Claims Eliminated 2.5

4. Estimated Claim Severity 1,948,479

5. Estimated Annual Loss Reduction 4,871,198 due to introduction of 2,000 birth weight limit

NICA - Impact Complexities

Data– Very limited claims history (NICU admissions help)– Very inflation sensitive– Very mortality sensitive– What mortality table is comparable?

Other– Eligibility issue can be politically sensitive