1. Estimating the Effect of Tort Reform on Medical Malpractice Costs CAS Spring Meeting May 16, 2005 Robert J. Walling, FCAS, MAAA

2. A Brief Recap

3. 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

4. Widespread, but not Uniform

5. A Call for Greater Efficiency The current system is woefully inefficient

6. 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

7. 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

8. 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

9. 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

10. “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)

11. Sliding Scale Attorney Fees CA’s MICRA: – 40% first $50,000, – 33% next $50,000, – 25% on next $500,000, and – 15% > $600,000

12. Impact of Attorney Fee Caps $500K Non-Econ Damage Cap reduces costs 15% ($88M)

13. Impact of Attorney Fee Caps Caps on Fees restore 75% of Net Damages ($66M)

14. 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?

15. 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

16. Impact of Prelitigation Panels

18. 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?

19. 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)

20. 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

21. NICA Impacts

23. 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