IV. DO SOME STATES HAVE A PREMIUM CRISIS?
Some states have enacted legislation capping the amount of damage awards. Consequently, premiums in these states might be lower than those without caps. Thus despite offering compelling evidence against claims of a premium crisis on a national and regional basis, the AMA surveys may not be able to reveal a crisis for particular states if these crises occur in states without caps on awards. Several states place caps on the total award; however, most states that do cap awards typically limit payment for pain and suffering or punitive damages, rather than for loss of income or out-of-pocket expenses. As of October 2005, eleven states had laws capping damage awards for non-economic damages at $250,000; ten states had legislation that capped awards at between $250,001 and $499,999; thirteen states had legislation limiting non-economic damages at $500,000 or higher; and eighteen jurisdictions did not have any limits on damage awards. (122)
Some studies suggest, however, that the difference in premiums between states with award caps and those without them is slight. In 2003, the Government Accountability Office reviewed studies on the effect of statutory caps on premiums. The GAO concluded that there is disagreement as to whether caps on damages lead to lower premiums and that "a lack of comprehensive data on losses at the insurance company level makes measuring the precise impact of [state caps] impossible." (123)
In 2004, Kenneth Thorpe studied how award caps affect premiums. He estimated that in the twenty-five states with caps on damage awards, "premium[s] per physician ... were associated with a 12 percent reduction in premiums" compared to non-cap states. (124) In other words, averaging premiums in states with caps and premiums in states without caps for yielded a 12 percent difference in premiums among the two groups of states. Even if we accept Thorpe's conclusion and assume that premiums are 6 percent higher in states with caps than the AMA data indicate (because it averages between states with and without caps), premiums in these states would still be a very small percentage of total practice expenses. They simply would not be large enough to substantially affect net practice income. Using Thorpe's 12 percent finding, for example, premiums still constituted only 2 percent of total practice expenses in 2000. If the reported mean dollar values for premiums for physicians nationally are increased by 6 percent with other expenses and revenue remaining constant, premiums would be 8 percent of total expenses, net income reduced by $1,252.
The Thorpe study, however, averaged premiums across twenty-five states with caps on awards. This may hide premium differences among the individual states averaged, still allowing for the possibility of state-specific crises.
A recent study led by David Hyman on the effect of caps on non-economic damages in Texas found that the effect of caps is less than supposed because damage awards often are reduced to the lower limits of individual liability insurance coverage. (125) Expressed in 1988 dollars, the cap in Texas reduced the mean payout in cases with jury verdicts by $184,000, from $696,000 to $512,000. (126) Predicted payouts in settled cases declined by $56,000, from $313,000 to $257,000. (127)
Nonetheless, the only way to be certain that no state specific premium crises exist is to obtain reliable data from every state. Although no such data exists, there is a worthy alternative: Reliable data from a state that by all accounts should have a premium crisis if such a crisis exists.
Massachusetts as a Test Case
Based on all available information, if there are states with a premium crisis, Massachusetts should be among them. The AMA itself declared Massachusetts a "crisis state." (128) Why? Because Massachusetts has a soft $500,000 settlement cap that allows broad exceptions and that is "woefully inadequate," according to the Massachusetts Medical Society, another organization claiming a national premium crisis. (129)
"The AMA is disheartened that the medical liability environment in Massachusetts has deteriorated to the point where physicians are restricting services, and patients are losing access to care," said the AMA's Palmisano in 2004. (130) The situation outside of Boston is particularly worrisome." (131) Added Alan Woodward, then president of the Massachusetts Medical Society: "Our patients have world-class physicians and health care institutions, but this crisis has been steadily eroding the quality of our health care system for many years." (132)
Stoking the panic are data from the National Practitioner Data Bank (NPDB). These data indicate that, from 2000 to 2005, Massachusetts should have had higher premiums than most states because of its high malpractice settlement payments. Malpractice premiums reflect the size of malpractice awards and their frequency. The Massachusetts median settlement payment of $187,000 ranked fourth, and its mean settlement payment of $329,000 ranked sixth for all jurisdictions nationally. (133) At 4.34 payments per 100,000 people, the state is ranked 24th in the frequency of awards nationally, but had less than one fewer payment per 100,000 than the ninth highest state. (134)
Only Washington D.C. and Connecticut had both higher mean payment sizes and frequency. Since Massachusetts malpractice payments were among the highest nationally, its premiums should also be high compared to other states. Not the case. In Massachusetts, mean premiums were lower in 2005 than in 1990 for nearly all physicians.
The Massachusetts Study Data
Our study of Massachusetts premiums (the Massachusetts Study) used data from the state regulated mutual insurer, the Medical Professional Mutual Insurance Company, known as ProMutual Group (PMG), which since 1975, has been the state's main medical malpractice insurer. (135) Its insurance rates reflect prices available to most physicians.
In 1975, as a result of the exit of commercial malpractice insurers from Massachusetts, the legislature created the Massachusetts Medical Malpractice Joint Underwriting Association (MMJUA). The legislature converted it into the Massachusetts Medical Professional Insurance Association in 1993 and then in 1995 to ProMutual. Around the time of the formation of the MMJUA, Harvard affiliated hospitals created the Controlled Risk Insurance Company (CRICO) for its affiliated physicians.
Since their creation in the late 1970s, the MMJUA/ProMutual and CRICO controlled about 90 percent of the physicians' liability insurance market, each covering about half that market. (136) In 2005, A.M. Best (a U.S.-based rating agency focused on the insurance industry) reported that the ProMutual Group covered 77 percent of regulated professional liability insurance, which includes other medical professionals and health care institutions. Those physicians that did not purchase insurance from the ProMutual Group or CRICO purchased insurance from other state regulated insurers or from unregulated risk-retention groups and offshore insurers.
How Insurers Set Premiums
To understand changes in the cost of professional liability insurance, it helps to consider the various kinds of liability insurance available. Insurers sell several types of policies, each priced differently. Policies vary based on the time period covered and the dollar amount of liability coverage. Insurers set premiums based on three key variables: (1) risk of loss (which can vary with practice specialty and other factors), (2) the dollar amount of protection, and (3) the time period covered. (137)
Insurers calculate each practice specialty's risk of loss and assign it to a premium rate group. (138) Once insurers assign each practice specialty to a rate group, they can refine their risk assessment based on many other factors including the physician's claims history, length of time in medical practice, their work setting, and organizational affiliation. (139)
Policies specify a maximum amount that can be reimbursed both per claim and yearly for all claims. Massachusetts initially required that physicians purchase at least $100,000 of loss coverage per claim with coverage capped at a $300,000 yearly loss. (140) Starting in 1987, the Massachusetts Board of Registration required physicians to purchase up to $100,000 coverage per claim, capped at a $300,000 yearly loss. (141) In 2006, $l/$3 million coverage was the most frequently purchased amount of liability protection, and $2/$6 million coverage was the second most frequent level of protection purchased. (142)
Patients often do not file claims in the same year that the incident occurred, though statutes of limitation restrict the time that patients have to file. Professional liability insurance policies cover either periods when alleged negligence occurs, regardless of when claims are filed (occurrence policies), or periods during which patients file negligence claims (claims-made policies).
Physicians renewing a claims-made policy are covered from the first year that they owned the policy. Premiums are higher for claims-made policies in the second, third, and fourth years because the policies cover a longer time. Insurers also sell mature claims-made policies that cover five or more years of past practice.
Occurrence policies are more expensive than first through fourth year claims-made policies and less than mature claims-made policies. The cost of insurance through claims-made and occurrence policies generally converge over time because physicians who do not renew a claims-made policy need to purchase "tail insurance" for claims filed later.
Grouping Physicians into Five Practice Tiers
The Massachusetts study focused on $1/$3 million and $2/$6 million occurrence policies because together, these two types accounted for 81.2 percent of the policies in 2005. Occurrence policies are the second most expensive type of policy. Mature claims-made policies, which are slightly...