Medical Malpractice Reform: Truth in Advertising Needed (Part Three of Three)
by Mike Halasy
Healthcare concultant and researcher, PA
UPDATE: Part 1 here; Part 2 here. (h/t rjs in comments for the suggestion.)
Update 2: Post fixed…Dan
Medical Malpractice Reform: Truth in Advertising Needed (Part Three of Three)
So in the first two articles we have addressed the historic effects of tort reform using Texas as an example, and subsequently we reviewed the effects of tort reform on so called “defensive medicine” practices, looking at both the effect of reform measures on physician/provider ordering patterns, as well as the possible effects on patient outcomes or mortality.
Today, we are going to examine the last party in this carousel. The insurance agencies themselves. For starters, I wanted to examine if there was any sort of a relationship between malpractice premiums, and healthcare spending. So, using historic healthcare expenditure rates from the NHE database (CMS), I calculated the rate of healthcare growth, percentage wise, per year from 1995-2008. I then used an ISO database set to examine the growth in insurance premiums per year.
As we can plainly see, there is no correlation, but out of sense of thoroughness, I even ran a simple regression.
But with an R-Squared of 0.021, there is simply little correlation there.
So what causes these random spikes in medical malpractice premiums? Well, according to the AIR (Americans for Insurance Reform) these are due to the economic cycles of insurers and to drops in investment income.
Lastly, I visited this article, http://www.centerjd.org/air/TrueRiskF.pdf, which found:
1. Inflation-adjusted payouts per doctor not only failed to increase between 2001 and 2004, a time when doctors’ premiums skyrocketed, but they have been stable or falling throughout this entire decade.
2. Medical malpractice insurance premiums rose much faster in the early years of this decade than was justified by insurance payouts.
3. At no time were recent increases in premiums connected to actual payouts. Rather, they reflected the well-known cyclical phenomenon called a “hard” market. Property/casualty insurance industry “hard” markets have occurred three times in the past 30 years.
4. During this same period, medical malpractice insurers vastly (and unnecessarily) increased reserves (used for future claims) despite no increase in payouts or any trend suggesting large future payouts. The reserve increases in the years 2001 to 2004 could have accounted for 60
percent of the price increases witnessed by doctors during the period.
But the real devil, the real devil is in the loss ratios…I’m assuming that we are all familiar with the MLR discussions that raged over the past two years discussing what should be an allowable loss ratio for health insurance. Malpractice also has it’s loss ratios, and oh boy, are they favorable to the insurance industry. 61.1% is the average, in 2007, for the average loss ratios for malpractice insurance companies. To put this another way as per the article: In 2007, medical malpractice insurer profit based just on insurance transactions, that is,just on the premiums they took in, was 24.6%. This was more than double the amount on insurance transactions for the entire industry (11.0%).
If I were a physician who paid my own malpractice, I would be livid over these figures. It is not as though there is a huge advertising market for medical malpractice insurance. 38.9 cents on every dollar are kept as almost pure profit. Surely, administrative costs cannot account for this. Add to this, this last nugget: Inflation-adjusted payouts per doctor not only failed to increase between 2001 and 2004, a time when doctors’ premiums skyrocketed, but they have been stable or falling throughout this entire decade.
It seems, that right now would be a great time to own a malpractice insurance firm. Too bad, that it isn’t so great for everyone else in healthcare.
Could you not seperate MM premiums for Texas? What about the trend in MM premiums from 2004 until today?
links to part 1 & part 2 would be useful…for those who missed them, click the “tort reform” label at the top of the post…
rjs – Done. Thank you. (That the article still appears to end in the middle of sentence I can’t fix. DanC??)
Little John,
I could certainly post the data from Texas, but as premiums have dropped significantly nationally, I do not think that it would provide much yield. The point is, that premiums have dropped, but these savings..
A. Do not reflect the actual drop in malpractice filings or money payed out by the Insurers.
B. There was no reflection of this in national healthcare expenditure data which continues to rise at rather constant rate. The same was true in Texas, which suggests that these savings are either miniscule, or are not being passed on to the healthcare consumer.
FWIW, Sen John Kyl proposed that Texas saw a reduction in malpractice premiums of 27% since 2003, but payments by malpractice insurers actually were reduced by 67% over the same time period.
This would suggest again, that the primary beneficiaries have been the insurance companies themselves.
Michael,
This would suggest again, that the primary beneficiaries have been the insurance companies themselves.
I would suggest you keep investigating.
As companies are profit maximizing, the incentives for price cutting and new entrants are too strong to allow excessive profits to persist, particularly in a commodity-type product such as insurance (“15 minutes could save you 15%”). So you need to find evidence of illegal collusion, barriers to entry, or some other market failure for your conclusion to be plausible.
Sammy,
While I also would like more from Michael, I think you also need to establish that ‘the market’ would not allow excessive profits to persist as true needs as much evidence to establish as true that you ask of Michael. Your assumption for price cutting and entry also are not established.
hi Rdan,
you also need to establish that ‘the market’ would not allow excessive profits to persist as true needs as much evidence to establish as true that you ask of Michael.
No. The laws of Supply and Demand are well established and documented. When the cost of producing a good decrease, the price decreases due to competition. I don’t see why MM is any different, so Michael needs to explain why it is a “special case.”
61.1% was the LR in 2007. Hmmm. What costs are included in that number? Is the agent commission included? Are admin expenses? I don’t think they are. I’ll bet you after all is said and done these numbers are closer to the industry average (11%) than we might think.
Laws of supply and demand do not mean that every market has perfection. It is hard enough to establish what the markets are in many states, but the claims for tort reform savings are huge in the MSM and political battles. Given the claims in the press it is worth looking at.
Lets find a discrepancey first as a first step. Disagree with Michael’s conclusions but not with a law of supply and demand.
Laws of supply and demand do not mean that every market has perfection. It is hard enough to establish what the markets are in many states, but the claims for tort reform savings are huge in the MSM and political battles. Given the claims in the press it is worth looking at.
Lets find a discrepancey first as a first step. Disagree with Michael’s conclusions but not with a law of supply and demand as a first order response.
Michael probably will respond after work little john.
No problem.
Yep, sorry for the delay.
Well, this data is of course variable. And one concern in comparing LR in insurance is what is being underwritten, malpractice being the underwriting of a providers practice or work, and commodity insurances like auto insurance, insuring autos…
But, let’s take a look for comparison’s sake:
GEICO had a LR in 2009 of 77.2% with an expense ratio of 18.3% for a combined pre-tax ratio of 95.5%
Progressive had a LR in 2009 of 70.5% with an expense ratio of 21.1%, for a combined ratio of 91.6%
Malpractice insurance does not have the same advertising burdens, but the main component, otherwise is DCC, or Defense Cost and Containment, basically examining and establishing the validity of a claim. Which comprises by far the largest portion of non direct loss costs.
http://www.floir.com/pdf/MedicaMalReport10012009.pdf
This report from the Florida Office of Insurance has a direct, state by state comparison. If you look at Appendix B, it will compare the profitability of different state markets. The average Total LR (direct losses plus DCC) is 54% nationally in 2008, down from the data in the OP above. This is much higher than other insured commodities on average, although the companies will also claim that due to the high costs associated with each claim, and the long “tail coverage” that they need to have more money on hand. I will let you determine what is appropriate from that perspective. There will be certainly other expenses in addition to DCC such as taxes/fees and commissions and brokerage fees, but these only added up to 11.5% for Florida.
In short, I don’t see anything to counter the notion that these companies in MOST states are making serious money. In some states, insurers are not doing as well.
I hope that this helps.
Well I am not an actuary, and I agree that in some states these insurance companies are making good money, but the “tail” can be pretty long and with these claims. Nonetheless interesting post and comments.