The healthcare industry (along with nearly every other field) has entered a new era in which global risks such as information protection and cyber liability are a serious concern. New regulations are continually elevating the standard of care and changing how medical providers manage their staff, which is causing financial strain at a time when it’s difficult to increase revenue streams to offset compliance costs. Luckily, new industries are emerging and others are evolving to assist with risk management, information technology, operational and compliance burdens that are often more efficiently addressed in an outsourced manner.
Our research regarding medical professional liability exposures has a key purpose: to predict how past and present trends might affect future costs and exposures related to malpractice claims on both a regional and national scale. This data can help us learn from the past, as well as from other parts of the country that experience severe malpractice trends. We’d like to share some of our key data points and highlight notable trends in the medical malpractice field.
Insurance Costs – What’s Trending?
While the majority of the healthcare industry’s operational costs are rising, medical malpractice insurance rates are estimated to be at 15-year lows (depending on which inflation figures you adjust for). You might be wondering how rates for this insurance product have gone down for more than a decade when virtually all other costs have increased. One of the greatest advantages that medical professional liability has over others areas of errors and omissions insurance (especially cyber) is that we have decades of data and a true “first dollar” perspective on what drives trends over time. More importantly, each crisis that has occurred due to either deteriorating trends or financially poor results has allowed the remaining carriers and new entrants to learn from the unanticipated outcomes of the past. Additionally, healthcare professionals have studied data and adopted more proactive practices that are focused on reducing patient injury and facilitating better communication. All of the new trends and emerging technology over the last 10 years have raised concerns about the potential impact on claims litigation and how to properly document issues. While most trends lag ultimate malpractice insurance outcomes, studying the past can help us plan for the future.
Frequency of Medical Malpractice Claims – What’s Trending?
The following chart illustrates the frequency of medical malpractice claim trends on a national scale over a 10-year period from 2005 to 2015.
According to the data, medical malpractice insurance carriers are spending less on claims. In fact, this sector of the insurance industry has shrunk from $6.74 billion in total annual premium in 2005 to around $4.74 billion today. Insurance carriers are facing stiffer competition because more providers are electing to self-insure. Also, the number of private practices has decreased and overall risk-taking ability has increased, creating a buyer’s market within this insurance space. Even if pricing was below the true cost of risk, it is estimated that favorable reserve development alone could support another full calendar year of positive financial results.1 Furthermore, insurance carriers must hold surplus, which for many is in excess of statutory levels even after the current interest rate environment and lack of significant investment returns.
We have also compiled trends on a regional scale that represent the footprint of our Midwest clients. As you review the data below (specifically in Nebraska), it’s important to note the relatively low frequency after 2006. This is attributed to the Hepatitis C outbreak that occurred in the early 2000s, which worked its way out of the data reported.
Because Nebraska is home to SilverStone Group’s corporate headquarters, we have been closely tracking the results of medical malpractice cases filed against physicians, clinics and hospitals in this state for the past several years. (It’s important to note that this data does not include suits filed against dental, podiatry, chiropractic, physical therapy and other health-related practitioners.) We found that during 2015, 104 medical malpractice suits were filed in Nebraska, and that number grew to 145 during 2016. When you compare the number of suits filed in Nebraska to the total number of claims paid in the chart above, you can see that very few medical malpractice suits end up being successful when you track a claim from start to finish.
While you have to be careful about reading into isolated data such as this, it is notable that the number of medical malpractice suits has increased recently. There are also arguments that some of the traditional sources of trend data are not properly representing the true exposures as litigation strategies evolve. For example, when looking at trends on a national scale against physicians, the National Practitioner Data Bank (NPDB) is under scrutiny because its data does not account for the “corporate shield” loophole in which a physician provider is dismissed so that a corporate entity can be the sole defendant. In cases such as these, the settlements do not become part of the NPDB record.
A study conducted by the Suffolk University School of Law in 2011 also indicated that more than half of all malpractice claims filed are neither won, lost nor settled, but actually abandoned by the plaintiff. Most agree this is due to the costly nature of taking a suit to trial. The plaintiff’s firm typically finances the legal proceedings and they are usually very selective about which cases they pursue. On average, medical malpractice carriers are settling 84% of all claims for zero payment, which speaks to the low success rate for those filing malpractice suits.
Independent studies of NPDB data recently revealed that less than 2% of doctors contributed to half of all medical malpractice payouts. Other studies have further noted that only 3% of claims were litigated to verdicts for the plaintiffs, and that physicians who have had two paid claims have almost twice the risk of incurring another. The medical malpractice insurance industry is closely watching these correlations, and carriers are either pricing for them or charging physician groups more when a “frequent flyer” is part of the team.
A somewhat unique challenge for Nebraska physicians who are “frequent flyers” is that premiums relative to other states are so low that they typically can’t be charged enough (based on state-filed rates) to price accordingly for exposures outside of normal underwriting ranges. Therefore, unless physicians can gain synergy by grouping with other physicians or joining larger hospital programs, they can have a difficult time getting stable coverage. This is because the average defense costs, even when no settlement occurs, can erode the amount set aside by insurers to pay for costs each year. This could be the reason that carriers adjust rates in the Midwest, and why leveraging a long-term relationship with an insurance carrier and monitoring their overall financial results seems to be the best strategy for stable insurance pricing over time. Most medical malpractice insurers also offer cyber insurance as a pass-through to their insureds, but it is unknown how this area of coverage will evolve and affect medical liability carriers down the road.
Severity of Medical Malpractice Claims – What’s Trending?
The severity of paid claims has recently started to edge upward. The chart below illustrates this increase on a national scale.
The sum total of severity claims can be troublesome for states that don’t have caps on damages. The following chart takes a closer look at these numbers for several states in the Midwest. While Nebraska currently benefits from a total cap on damages of $2,250,000 per claimant, most of its surrounding states can only benefit from the fact that larger jury awards are rare. Again, as you review the data below, it is important to note the relatively low totals following the Hepatitis C outbreak.
It should be noted that the Nebraska Liability Fund (which coordinates all Nebraska medical malpractice claims in excess of $500,000) keeps their per claim data and total severity trends confidential, so only annual summaries of data provided by the Nebraska Liability Fund are available as part of their financial and solvency reporting. In other words, the severity trends in Nebraska are not available for public analysis, only the totals above as reported by insurance carriers to NPDB.
It is important to understand the frequency and severity trends of medical malpractice claims on both a national and state level, and how those trends affect insurance pricing. In the Midwest, many states enjoy lower rates simply due to the fact that total payouts are lower (even when accounting for population differences) and legal protections (tort reform) have been in place for long periods of time. States with large urban centers typically have more people in the business of suing healthcare providers. This is most evident when seeing the differences by physician specialty for medical professional liability limits and the corresponding premiums for each state. Nebraska, South Dakota, Iowa and Minnesota typically range in the top 25% for best rates by physician specialty, with Nebraska and Iowa often being in the top five.
While current trends are still favorable, if history repeats itself (and it usually does), a negative cycle is likely in the future. This would be characterized by sharp increases in the severity and frequency of claims, and ultimately higher pricing for medical professional liability insurance for fully insured providers. Much like the economy, there are many factors and behaviors that make it difficult to predict these trends with certainty. Stay tuned to future SilverLink articles for more on this topic as we cover emerging risks and trends that could lead to the next medical malpractice insurance crisis.
1 Mike Matray, Medical Liability Monitor, April 2016
Note: Several data points used to compile this article were provided by Mike Matray, Medical Liability Monitor
This article originally appeared in the 2017 | ISSUE TWO of the SilverLink magazine, under the title “Look Back to Plan Ahead | Medical Malpractice Trends.” To receive a complimentary subscription to the SilverLink magazine, sign up here.