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By Jennifer Gardner, NAIC Research & Actuarial Manager Beginning in 1997, the loss and direct defense cost contain-ment ra o for medical professional liability insurance began its ascent, reaching a peak in 2001 of 126.83% (Figure 1). The line sustained five straight years of loss ra os above 100% (1999–2003) and the NAIC, and several industry groups, began researching reasons and possible solu ons for the crisis. In 2004, the NAIC published the Medical Mal-prac ce Insurance Report: A Study of Market Condi ons and Poten al Solu ons to the Current Crisis (Malprac ce Re-port). The Malprac ce Report was conducted with the ob-jec ve of reviewing regulatory and legisla ve solu ons con-sidered in response to a market crisis in availability and affordability of medical liability insurance.1 The Malprac ce Report cited the following possible reasons for the spike in medical professional liability insurance: compe ve pricing; increasing claims experience, including increasing health care costs, jury awards, and defense and inves ga on costs; declining investment yields; loss reserve deficiencies; inadequate underwri ng and loss control pro-cedures; increasing reinsurance costs; and pressure to con-solidate. It was also thought the U.S. economy had an ad-verse effect on the medical professional liability market, including interest rates, the reinsurance market and invest-ment earnings. Research indicated that, while net investment income had declined, it was primarily, though not exclusively, under-wri ng losses that were the driving factor in rate increases experienced by physicians and other health care providers. As a result, the study focused on incurred losses. During 2003, the legislatures of at least 30 states consid-ered bills intended to stabilize or reduce the cost of medical professional liability insurance. Over the subsequent years, various reforms were put into place on a state-by-state ba-sis to thwart the rising cost of medical professional liability losses. A common goal among the states was reduc on in the cost to health care providers and their insurers of awards and se lements. Several solu ons were iden fied: placing caps on noneconomic damages; changing rules of evidence to provide for considera on of collateral sources for payment of benefits; allowing claimants and insurers to agree to periodic payments of future benefits; and limi ng con ngency fees paid to a orneys. California Proposi on 46 was defeated in November 2014, which would have in-creased the limits for non-economic damages.

These legisla ves trends and a variety of addi onal factors were credited for the decline in the loss ra o, which reached a trough in 2010 at 51.02%. Reasons cited for the increased profitability include: tort reform; doctor shortag-es; be er risk management; and aggressive claims defense. In recent years, loss ra os have remained rela vely stable. Direct premiums wri en and earned have been on a steady decline since 2006. Losses incurred enjoyed a corresponding decline from 2006 to 2014. Direct defense and cost contain-ment declined from 2006 to 2013, but jumped 8% from 2013 to 2014. The expanding use of electronic medical rec-ord reten on, a growing shortage of primary care providers and the enactment of the federal Pa ent Protec on and Affordable Care Act (PPACA), also known as the Affordable Care Act (ACA), were thought to be drivers of imminent change to the medical professional liability line of business. However, Figure 2 on the following page shows otherwise. Very li le has changed within the medical professional lia-bility line of business in recent years. In this instance, maybe no news is good news. According to the Medical Liability Monitor, rates for medi-cal professional liability coverage increased nearly 20% in 2003 and 2004, less than 10% in 2005 and less than 2% in

(Continued on page 20)

1 This study published by the NAIC in September 2004 can be found at www.naic.org/documents/topics_Med_Mal_Rpt_Final.pdf.

*Incurred loss and direct defense cost containment expenses as a percent of earned income. Source: NAIC.

F 1: C L D C C R *

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2006 and 2007. Rates fell 1.5% in 2014, represen ng the seventh-straight year of decline and a prolonged so market cycle. One measure of compe on within a market is the num-ber of insurance groups par cipa ng. An increasing num-ber of insurers typically demonstrate a strong market where insurers see opportunity for increased profit. Con-versely, a decreasing number of insurers signify a so market where profits are falling or are expected to de-crease. Figure 3 shows the number of insurance groups that sold medical professional liability coverage de-creased from 104 in 2012 to 101 in 2013 and remained the same in 2014. The Herfindahl-Hirschman Index (HHI) is another common measure of compe on in a market. The HHI is the sum of the squares of the market shares of all groups in the mar-ket. Although there is no precise point at which the HHI indicates an overly concentrated or restric ve market, the U.S. Department of Jus ce developed guidelines for corpo-rate mergers, indica ng an HHI of less than 1,000 is con-sidered not concentrated. An increasing HHI means more concentra on in the industry. Figure 3 also shows that, although s ll well below 1,000, the HHI for the medical

professional liability market increased from 195 in 2001 to 322 in 2011. The HHI fell to 309 in 2013 and rose again to 313 in 2014. This shows fewer insurers are wri ng more of the total premiums, resul ng in increased market share for the top writers. More informa on on market compe on can be found in the NAIC Compe on Database Report.

(Continued on page 21)

F 2: C S M P L I C Y 2003—2014

Calendar Year Direct Premium

Wri en Direct Premium

Earned Direct Losses

Incurred

Direct Defense and Cost Containment Expense Incurred

Loss and DCC ra o*

2000 6,428,278,303 6,373,039,337 5,098,753,650 1,657,371,460 106.01% 2001 7,604,104,289 7,054,509,032 6,972,294,879 1,974,903,227 126.83% 2002 8,912,533,968 9,631,548,967 8,200,307,513 2,412,849,663 110.19% 2003 10,646,907,290 11,277,448,229 8,459,389,539 2,847,849,045 100.26% 2004 11,986,813,417 11,538,819,200 7,224,164,963 2,514,795,515 84.40% 2005 12,145,623,736 11,874,907,423 6,151,942,930 2,713,740,255 74.66% 2006 12,332,430,917 12,167,900,762 5,285,472,723 2,651,577,175 65.23% 2007 11,680,519,170 11,744,160,781 4,787,669,711 2,301,741,443 60.37% 2008 11,210,406,745 11,353,905,915 4,092,787,274 2,108,507,419 54.62% 2009 10,816,183,520 10,835,284,565 4,012,060,052 2,018,784,762 55.66% 2010 10,600,322,059 10,557,651,729 3,524,306,622 1,862,710,616 51.02% 2011 10,287,069,135 10,296,112,512 3,655,161,296 1,973,170,359 54.66% 2012 10,019,229,369 10,099,576,764 4,167,260,437 1,931,017,905 60.38% 2013 9,792,290,581 9,842,519,528 3,965,980,623 1,877,391,889 59.37% 2014 9,673,154,625 9,693,851,922 3,976,257,675 2,030,545,129 61.97%

Mean 10,363,297,296 10,203,294,969 5,317,900,229 2,189,930,875 76.11%

Median 10,601,317,985 10,558,261,973 4,788,663,246 2,030,545,129 61.97% * Loss Ra o = (Direct Losses + Direct Defense and Cost Containment Expenses Incurred) / Direct Premiums Earned.

Source: NAIC.

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2 www.naic.org/commi ees_c_aca_med_pro_liability.htm. 3 www.naic.org/cipr_home.htm.

There are many specula ve reasons insurers may reduce their exposure in the medical professional liability market. The most noteworthy is the passage of the ACA. The ACA, which sought to expand access to health insurance and care, as well as restrict medical costs, included several pro-visions many speculated would cause a change in liability insurance. Such provisions include: shared responsibility individual mandates; subsidies for small business and indi-vidual coverage; Medicaid eligibility expansion; provisions leading to Medicare’s crea on of the Hospital Value-Based Purchasing (VBP) Program, as well as revisions to the pay-ment policies and annual payment rates for the Medicare prospec ve payment system (PPS); funding authoriza on for the Pa ent-Centered Outcomes Research Ins tute; incen ves for providers to implement electronic medical records (EMRs) and computerized physician order entry (CPOE); and funding for pilot programs to implement and evaluate malprac ce tort reforms. The NAIC created a forum for discussion and research of poten al effects of the ACA on medical professional liability insurance. The Affordable Care Act Medical Professional Liability (C) Working Group was created in December 2012 to study feasible outcomes of the law. The Working Group has heard from many interested par es regarding the im-pacts the ACA may have on the availability and affordability of medical professional liability insurance, although the actual outcomes are s ll unknown. One of the topics dis-cussed was the increasing reliance on physician assistants and nurse prac oners to provide care while physicians are coordina ng and managing the process. In many states, physician assistants and nurse prac oners are allowed to prac ce independent of physicians. The Working Group has also discussed the movement to-ward EMRs, which may create privacy issues, as well as in-creased upfront costs for infrastructure implementa on and training. Some industry groups have forecast higher frequency and severity of losses due to an increase in medi-cal personnel exposed to loss, as well as more consumers with access to healthcare coverage. So far, the data show premiums and losses have changed minimally in recent

years, and the results of the ACA may be unknown for years to come. Informa on regarding this Working Group can be found on the NAIC website.2 The NAIC publishes market share reports by line of business for property and casualty insurance. The 2014 Medical Pro-fessional Liability, Other Liability, and Products Liability Mar-ket Share Report for Property and Casualty Groups and Com-panies contains direct wri en premium, direct earned pre-mium, direct loss to earned premium ra o, direct loss and direct cost containment to earned premium ra o and mar-ket share informa on for the top 125 companies country-wide, as well as 99% of the marketplace in each jurisdic on. Note the 2014 Medical Professional Liability, Other Liability, and Products Liability Market Share Report for Property and Casualty Groups and Companies direct wri en premium is slightly lower than contained in the informa on on the CIPR website3, as the report includes nega ve premium from companies that have withdrawn from the medical profes-sional liability line of business.

A A

Jennifer Gardner is a manager in the NAIC Research and Actuarial Department. Jen-nifer joined the organiza on in 2011. She conducts economic and sta s cal research for the NAIC and its members. She is re-sponsible for publishing various sta s cal reports including the Report on Profitabil-

ity By Line By State and the Compe on Database Report. She provides support for numerous NAIC working groups and assists the state insurance departments in data collec on related to catastrophe. Jennifer earned a bachelor’s degree in business administra on with an emphasis in finance from the University of Missouri-Kansas City. Prior to joining the NAIC Research and Actuarial Department, Jennifer worked on the State Based Sys-tems (SBS) products and services within the NAIC.

30 August 2015 | CIPR Newsle er

© 2015 Na onal Associa on of Insurance Commissioners, all rights reserved. The Na onal Associa on of Insurance Commissioners (NAIC) is the U.S. standard-se ng and regulatory support organiza on created and gov-erned by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best prac ces, conduct peer review, and coordinate their regulatory oversight. NAIC staff supports these efforts and represents the collec ve views of state regulators domes cally and interna onally. NAIC members, together with the central re-sources of the NAIC, form the na onal system of state-based insurance regula on in the U.S. For more informa on, visit www.naic.org. The views expressed in this publica on do not necessarily represent the views of NAIC, its officers or members. All informa on contained in this document is obtained from sources believed by the NAIC to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such informa on is provided “as is” without warranty of any kind. NO WARRANTY IS MADE, EXPRESS OR IM-PLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OPINION OR INFORMATION GIVEN OR MADE IN THIS PUBLICATION. This publica on is provided solely to subscribers and then solely in connec on with and in furtherance of the regulatory purposes and objec ves of the NAIC and state insurance regula on. Data or informa on discussed or shown may be confiden al and or proprietary. Further distribu on of this publica on by the recipient to anyone is strictly prohibited. Anyone desiring to become a subscriber should contact the Center for Insur-ance Policy and Research Department directly.

NAIC Central Office Center for Insurance Policy and Research 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197 Phone: 816-842-3600 Fax: 816-783-8175

http://www.naic.org http://cipr.naic.org To subscribe to the CIPR mailing list, please email CIPRNEWS@NAIC.org or SHALL@NAIC.ORG

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