Inside the Current Med Mal Market: Understanding Chaos
By David Ruvalcaba, Sr. Market Researcher/Analyst

Rate hikes and business closures. No, I'm not referring to California's energy crisis or the recent Enron debacle. I'm talking about our nation's medical professional liability insurance-or Med Mal-industry. Physicians across the country are experiencing huge rate increases, lack of available coverage or worse, denial of coverage because many large insurers have gone out of business or have stopped writing Med Mal coverage altogether. Add to this a physician's constant battle with HMOs, increased government oversight and the growing practice of "defensive medicine" and it comes as no surprise that many physicians are questioning if practicing medicine is a worthwhile endeavor after all.

For the physician community, the current predicament in the Med Mal industry probably came as a shock. In an attempt to rationalize the situation, many have blamed recent developments on the tragedy of September 11. Others see this as part of an inevitable cycle in the Med Mal industry (remember the California crisis of '75?). While both of these explanations have some validity, the current situation is most likely the product of questionable business practices that were rampant within in the industry during the '90s. Not all insurers adopted unsustainable operating philosophies; the larger, more aggressive companies were at the forefront of such practices, and the net result is that they have changed the face of the Med Mal marketplace for us all.

Putting Your Rates in Perspective
If you're a doctor practicing in California you may actually be better off than you think. In 2002, overall rate increases filed with the California Department of Insurance ranged from 2 percent to 8 percent. Compare that with the 20 percent to 50 percent increases that physicians are seeing in other states and you'll begin to understand why Med Mal rates are becoming a major issue throughout the country. Nevada, Pennsylvania and West Virginia, for example, are truly in a state of crisis. The December 12, 2001 announcement by St. Paul Companies (the nation's second largest Med Mal insurer) that it would no longer write Med Mal insurance and the February 2, 2002 announcement of PHICO's (once Pennsylvania's largest Med Mal insurer) liquidation put physicians in these three states in a precarious situation, to say the least.

Oregon and Washington have also suffered the effects of a lack of tort reform. In 2001, some insurers priced themselves out of the Oregon market with midyear increases ranging from 50 percent to 125 percent. And in December of that year, Washington Casualty Company ceased operations-leaving 1,200 doctors without insurance. These actions were in some part attributable to increased severity of jury awards and a lack of initiative on the part of state legislatures to curb what has been referred to as the "lottery" mentality that has permeated the litigation process.

What Keeps California Premiums Under Control?
In a word, the answer is MICRA (Medical Injury Compensation Reform Act). It's hard to believe that this one piece of legislation has been protecting California physicians since 1975, but the facts speak for themselves. Physicians in California experience the same pressures as their counterparts in other states, but MICRA is the one factor that has made all the difference. MICRA, which has been challenged by "patients' advocates" for years and defended tooth and nail by local medical societies and physician-owned mutual insurance companies, has helped to keep economic damage awards at levels that other states without tort reform could only dream of. Granted, the Med Mal insurance industry as a whole, even in California, is experiencing an increase in jury awards, as well as a recent increase in the frequency of suits, but if it weren't for MICRA, awards would be astronomically higher than they are. Take for instance a Pennsylvania jury award in 2000, in which a defendant was awarded $100 million. Without tort reform, a situation like this in California would force insurers to pass these losses on to their policyholders in the form of double- to triple-digit rate increases. Luckily, as long as medical societies, mutually operated insurers and the physician community continue to lobby the legislature, MICRA will continue to offer protection from such catastrophic awards.

You Can't Blame it All on the Litigation Environment
Jury verdicts aren't the only thing eating away at insurers' balance sheets. For some, especially large commercial insurers, poor business practices are also to blame. During the Med Mal "market share wars," the commercial companies' weapon of choice-price slashing-was supported by their huge capital reserves. As long as the stock market kept rising and increasing the value of their corporate coffers, commercials could use this income to offset the low rates they offered physicians and hospitals. If all this brings to mind the proverb, "stealing from Peter to pay Paul," then you're beginning to see where these practices led.

As monoline mutuals and risk retention groups began to see their policyholders defect to commercial insurers, they were faced with some very tough decisions. Should they 1) try to compete with the commercials in the price war game; 2) essentially join the commercials by transforming themselves into publicly traded stock companies; or 3) remain steadfast in following the operating philosophies of their founders? Interestingly, each of these strategies was followed by different organizations. Northwest Physicians Mutual, a company based in Oregon, decided to compete in the price war game in order to increase its small book of business. SCPIE, the Southern California market share leader, chose to abandon the mutual model and become a publicly traded company in the hope that this would allow it to raise enough capital to fight the commercials head-on, and maybe give it the ability to grow geographically and into other lines of business. A.M Best's February 22, 2002 announcement that it was downgrading SCPIE from an "A" to a "B++" financial rating suggests that this was not a decision without adverse consequences. Then there are companies like NORCAL that continued on the same path, with the same conservative operating philosophy, that allowed it to become one of the strongest, most financially stable companies in California. While this meant losing some policyholders to the enticements of slashed commercial rates, and even taking the occasional rate increase (which came nowhere near the 80-plus percent rate increases later taken by some commercials), it would prove to be a winning strategy.

The Value of Partnership
With the collapse of the stock market, an industry-wide increase in losses due to the tragedy of September 11 and the surfacing of increased risk due to poor underwriting and substandard risk management (direct results of aggressively chasing market share without adequate pricing of risk and failing to meet the basic needs of the niche market policyholder), commercial carriers ever-focused on the bottom line have priced themselves out of the market or have ceased writing Med Mal altogether. Combined with the other factors mentioned here, this begins to explain why the Med Mal industry is in such a state of chaos throughout the nation. Yet those insurers, like NORCAL, that continue to put into practice the strategies that allowed them to quell the storm of '75 will more than likely navigate these troubled waters, as well.

Along with NORCAL and other local California medical societies, the San Bernardino County Medical Society is also doing its part at the local, state and national levels to improve the medical malpractice liability environment. Together, San Bernardino County Medical Society and NORCAL work continuously to uphold MICRA and other legislative reforms and are committed to providing you with programs and initiatives that have a positive impact on your practice, such as collaborative claims review through the Medical Review and Advisory Committee and timely risk management programs. And rest assured, this partnership that spans three decades will continue to provide stability and peace of mind for local physicians well beyond the immediate crisis.