Costs of insuring doctors on rise
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Medical malpractice insurance premiums are increasing at the highest rate since the mid-1980s, adding to rising health care costs.
Insurers say the increases, typically in the double digits, result mainly from a rise in jury awards, now averaging $3.49-million.
Some of the biggest insurers are raising rates in many states by more than 30 percent. Even insurers owned by doctors and hospitals, which work to keep rates low, are increasing prices 10 percent to 18 percent.
Insurers began raising rates last year, after several years of price-cutting competition that left premiums behind inflation. A 4 percent rise in premiums last year was the biggest since 1994, and insurers say the increases are greatly accelerating this year.
Malpractice coverage is one of the most expensive kinds of insurance. The latest increases put further pressure on doctors' and hospitals' earnings, which have been shrinking under managed care.
While doctors and hospitals say they must absorb much of the added cost, analysts say they are able to pass some of it along to HMOs, other health care companies and patients who have traditional medical insurance or pay directly.
Health care costs are expected to increase about 10 percent this year. Rising malpractice premiums account for about one-tenth of the increase, according to Dr. William Jessee, chief executive of the Medical Group Management Association, which represents 188,000 doctors, or nearly half of those who buy the coverage.
Kenneth Abramowitz, a managing director at the Carlyle group, a New York investment company, who specializes in the health care industry, said that insurance is now the most rapidly increasing expense for doctors. "The rising cost of malpractice coverage is becoming one of the most important factors driving inflation for physicians' services, particularly for high-priced specialists in surgery and obstetrics," he said.
The price increases are highest for obstetricians, gynecologists and surgeons, the kinds of doctors who are sued the most frequently. In New York and Florida, these doctors pay more than $100,000 a year for $1-million in coverage.
The Clarendon Insurance Group, one of the market leaders in Florida, has raised its prices for obstetricians and gynecologists in the southeastern part of the state to more than $200,000, up from about $158,000 last year, according to Carol Brierly Golin, editor of the Medical Liability Monitor, an industry newsletter.
For many hospitals, insurers are not only increasing premiums but are also sharply reducing the amounts of coverage and raising deductibles. One hospital in Chicago, for example, paid the St. Paul Cos., the nation's second-largest malpractice insurer, $1-million for $40-million in coverage last year with a deductible of $15-million. This year, the insurer raised the premium for the hospital, which it would not identify, to $1.8-million, but cut the coverage to $10-million and more than doubled the deductible.
Health care experts say that rising medical malpractice premiums and judgments are adding to medical costs in another way. Doctors, worried about being sued and facing even higher malpractice premiums, are practicing more defensively, ordering extra tests that may not be clinically necessary and choosing procedures that limit their risks. Dr. Nigel Spier, an obstetrician-gynecologist in Hollywood, Fla., said doctors were performing even more Caesarean sections, for example, which are more costly than vaginal deliveries.
Insurers put most of the blame for the increases on a jump in big awards by juries and settlements with patients and their families. While the number of malpractice suits has been holding steady, the average jury award for cases that have gotten to court rose to $3.49-million in 1999, up 79 percent from $1.95-million in 1993, according to the latest compilation by Jury Verdict Research of Horsham, Pa.
But industry experts point to a secondary reason for the price shock: a grave miscalculation by insurers. For several years, they kept prices artificially low while competing fiercely for market share and new revenue to invest in a booming stock market.
As the bull market surged, stock investments by these historically conservative insurers rose to 10.6 percent in 1999, up from a more typical 3 percent in 1992, said Geri Riley, an analyst at Conning & Co., an insurance research company. That was five times as high as the percentage increase in stock market investments by the entire property and casualty insurance industry over that period.
With the market now in a slump, the insurers can no longer use stock market gains to subsidize low rates. The industry reported realized capital gains of $381-million last year, down 30 percent from the high point in 1998, according to A.M. Best Co., one of the most comprehensive sources of insurance industry data. A decline in investment earnings has also helped drive up the prices of automobile and homeowners insurance.
About 60 percent of the malpractice insurance is provided by mutual companies, owned by doctors and hospitals that are inclined to err on the side of keeping rates low. Commercial insurers, battling for market share, also restrained their prices.
But now, industry experts say, the insurers must sharply increase their premiums to avoid collapse, which would leave doctors and hospitals searching for coverage among the surviving companies. One of the largest companies, PHICO, which sells insurance nationally but concentrates on New Jersey and Pennsylvania, was taken over in August by regulators in Pennsylvania, where it is based, as claims threatened to outrun the company's ability to pay.
Brierly Golin, the newsletter editor, blames a lack of foresight for the plight of the industry. "The insurance companies wouldn't be in this position if they hadn't been been so hungry for investment profits and had priced their product appropriately," she said.
Insurers more generally now acknowledge their miscalculations. "We should have raised prices sooner," said Mike Miller, the senior executive in charge of malpractice coverage at the St. Paul Cos.
But no one wanted to go first, said Larry Smarr, the president of the Physician Insurers Association of America, which represents many of the companies doctors own.
"It became like the game the airlines play," he said. "If you're the first guy to raise your rates, you'll lose market share. So they all played a game of chicken for a long time."
Because dozens of companies are raising rates state by state, there is no centralized tally of the changes. Companies say their rates vary by state, city, doctor and medical specialty, depending on the cost of malpractice claims, with the largest increases where the gap between premiums and cost is greatest.
St. Paul has raised rates for doctors an average of 24 percent this year in 25 states. SCPIE Cos. is raising rates an average of 30 percent to 50 percent in a dozen states, including Florida and Texas. Some of the insurers owned by doctors and hospitals are raising rates more than 60 percent.
Many insurers say the higher jury awards are partly a backlash against managed care. "You have a jury pool today made up of people who are not happy with their doctor and their managed care provider," said Miller of the St. Paul Cos. "When they're told about this poor person that was killed or injured, they're in a position to relate. And the plaintiffs' bar is better than ever at capturing that audience."
The physician insurers association in Washington has been lobbying Congress to include in the patients' bill of rights a limit of $250,000 on jury awards for pain and suffering in medical malpractice suits.
In about a dozen states, there have been no rate increases so far. But experts say the increases will probably keep spreading. Now that the leading malpractice insurers have raised their rates, competitors, no longer fearing a loss of market share, are expected to match or only slightly undercut them.
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