Effectiveness of Malpractice Tort Reforms: The Relation Between Loss and Premium Arthur Gurevitch, PhD

Milliman USA Manifestations of the Current Malpractice Crisis Withdrawal of St. Pauls’ in December 2001 followed by PHICO, Reliance, Frontier, Miix, and Farmer’s. Withdrawal of St. Pauls’ in December 2001 followed by PHICO, Reliance, Frontier, Miix, and Farmer’s. Reports in the popular press of dramatic increases in premium and decrease in availability of coverage. Reports in the popular press of dramatic increases in premium and decrease in availability of coverage. “Strikes” and other political activity by physicians. “Strikes” and other political activity by physicians. Proposals/ legislation at national and state level for “tort reform”. Proposals/ legislation at national and state level for “tort reform”.

Milliman USA A June 2002 Wall Street Journal Article Set the Stage for the Current Debate “while malpractice litigation has a big effect on premiums, insurers’ pricing and accounting practices have played an equally important role. Following a cycle that recurs in many parts of the business…(insurers) sell malpractice coverage … at rates that proved inadequate to cover claims”

Milliman USA Plaintiffs’ Attorneys and “Consumer Advocates” Have Extended These Arguments in their Fight Against Tort Reforms Premium increases have not been “unusual” Premium increases have not been “unusual” – “malpractice insurance costs have risen at half the rate of medical inflation” Claims are not increasing Claims are not increasing – “the spike in medical liability premium was caused by the insurance cycle, not by new claims or skyrocketing jury verdicts” Tort reforms will reduce neither claims nor premium Tort reforms will reduce neither claims nor premium – “nothing about California’s experience suggests that limiting jury awards will reduce malpractice premiums”

Milliman USA Research Overview How have losses and premium grown over the past few years? How have losses and premium grown over the past few years? Do states with strong tort-reforms have lower losses? Lower premiums? Do states with strong tort-reforms have lower losses? Lower premiums? What is the “insurance cycle” impact on the cost of malpractice coverage? What is the “insurance cycle” impact on the cost of malpractice coverage?

Milliman USA To Evaluate the Current Malpractice Crisis, We Examined Annual Statement Premium and National Practitioner Data Base Losses – Premium – Annual Statements Written Premium, for Medical Mal. Written Premium, for Medical Mal. Includes Hospitals & Physicians Includes Hospitals & Physicians Aggregate for State by Policy Year Aggregate for State by Policy Year No Self Insurance or State Fund Data No Self Insurance or State Fund Data – Loss – National Practitioner Data Bank Physician Only Closed with Loss No LAE By Year Closed Not Designed as an Analytical Database

Milliman USA Written Premium Increased Dramatically in 2001

Milliman USA Losses began a rapid increase in 2000

Milliman USA Severity Rose Dramatically During This Period. Frequency Has Been Unchanged.

Milliman USA There Was a Clear and Dramatic Change Between 1999 & 2001

Milliman USA Losses Are Dramatically Lower in States With Award Caps

Milliman USA This is Due to Lower Severity …

Milliman USA And Also Lower Frequency

Milliman USA But Premium is Also Lower in States With Caps on Awards

Milliman USA We Found a Correlation Between Premium and Loss Over Time and Between States

Milliman USA The Simple Model Had More Predicative Power for States With Over 400 NPDB Cases Per Year

Milliman USA These 9 States Account for Over 60% of National Malpractice California* California* Florida Florida Illinois Illinois Michigan* Michigan* New Jersey New Jersey New York Ohio Pennsylvania Texas * States With Caps

Milliman USA Additional Analysis of Premium and Loss for the 9 States Yielded a Powerful Regression Model

Milliman USA Over 75% of the Variability in Premium Can Be Explained With a Simple, Loss Based Model

Milliman USA Equally Important Are the Metrics That Had No Significant Effect on Premium Current Loss Current Loss Losses Older Than 3 years Losses Older Than 3 years Interest Rate (5 year Treasury) Interest Rate (5 year Treasury) Average Case Age Average Case Age Discount Rate (Interest & Age) Discount Rate (Interest & Age) % PIAA (Mutual) Market Share % PIAA (Mutual) Market Share Competitive Indices Competitive Indices

Milliman USA The Model Predicts Stable Rates for 2003

Milliman USA Summary Despite Claims to the Contrary Premium increases have not been “unusual” Premium increases have not been “unusual” Claims are not increasing Claims are not increasing Reforms will reduce neither claims nor premium Reforms will reduce neither claims nor premium Between 1997 & 2003 overall per capita premium has increased 50% Between 1997 & 2003 overall per capita premium has increased 50% Between 1997 & 2003 per capita losses have increased 35% The evidence supports the effect of reforms in reducing claims & premium