New York Times

SEP 10, 2001


Malpractice Rates Are Rising Sharply; Health Costs Follow


By JOSEPH B. TREASTER


Medical malpractice insurance premiums are soaring at the highest rate since

the mid-1980's, 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 more than 30

percent. Even insurers owned by doctors and hospitals, which strive 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 trailing inflation. A 4 percent rise

in premiums last year was the largest since 1994, and insurers say the

increases are accelerating greatly this year.


In New York, where rates are already among the highest, and in New Jersey,

insurers say they do not expect any big jumps this year. But some of

Connecticut's largest malpractice insurers are raising prices sharply, and

New York insurers say they are nervous about increasing costs. One New York

insurer, its finances deteriorating, was taken over by state regulators last

month.


Malpractice coverage is already 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 health care insurers and

patients who have traditional medical insurance or pay directly.


Health care costs are expected to increase about 10 percent this year. And

rising malpractice premiums account for about one-tenth of the increase, Dr.

William F. Jessee, chief executive of the Medical Group Management

Association, estimated. His group represents 188,000 doctors, or nearly half

of those who buy the coverage.


Kenneth S. Abramowitz, a managing director at the Carlyle Group, a New York

investment firm, who specializes in the health care industry, said: "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."


Dr. Yank D. Coble Jr., the president-elect of the American Medical

Association, said the insurance jolt was one of his members' greatest

worries. "This is creating a great deal of alarm and concern," he said.


The price increases are highest for obstetricians, gynecologists and

surgeons, the 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, said 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 amounts of coverage and raising deductibles. One hospital

in Chicago, for example, paid the St. Paul Companies (news/quote) $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.


Rising medical malpractice premiums are also adding to medical costs in

another way: Doctors are practicing more defensively, ordering extra tests

and choosing procedures that limit their risks. Dr. Nigel Spier, an

obstetrician-gynecologist in Hollywood, Fla., said doctors were performing

more Caesarean deliveries, 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 large settlements. While the number of malpractice suits has been

holding steady, the average jury award 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 another reason for the price shock: a grave

miscalculation by insurers. For several years, they kept prices artificially

low while competing 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 & Company, an

insurance research firm. That was nearly four times 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 the A. M. Best Company, 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. 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, when

claims threatened to outrun the company's ability to pay.


Later in the month, another big company, the Frontier Insurance Group, based

in Rock Hills, N.Y., was taken over by New York regulators.


Ms. Brierly Golin, the newsletter editor, blames a lack of foresight for the

plight of Frontier and others in 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 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 Companies.


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. "If you're the first guy to raise your rates, you'll

lose market share," he said. "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 speciality, with the largest increases where the

gap between premiums and costs is greatest.


St. Paul, the second-largest malpractice insurer, has raised rates for

doctors an average of 24 percent this year in 25 states, with rates jumping

65 percent in Ohio and Mississippi. Scpie Companies is raising rates an

average of 30 percent to 50 percent in a dozen states, including Florida and

Texas. A few of the insurers owned by doctors and hospitals are raising

rates more than 55 percent.


In New York, one of the most litigious states, where neurosurgeons on Long

Island pay $155,000 a year for $1 million in coverage, insurance executives

say they are seeing rising costs that could soon result in still higher

premiums. Donald J. Fager, who is in charge of daily operations for the

Mlmic Group, the state's largest malpractice insurer, said that by midyear,

claims costs were running $21 million, or 12 percent, ahead of last year.

"I'm nervous about what's going to happen," he said.


In New Jersey, insurers do not expect the market leaders to make sharp

increases this year. In Connecticut, one of the leading companies, the

Connecticut Medical Insurance Company, has raised its rates 16 percent this

year. State regulators said the company also cut dividends to doctors, who

are both customers and owners, effectively raising its rates another 33

percent. Scpie, one of the smaller companies in the state, has raised its

rates 35 percent.


Many insurers say the higher jury awards are at least 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 Mr.

Miller of the St. Paul Companies. "When they're told about this poor person

that was killed or injured, they're in a position to relate."


The physician insurers association, based 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. But even in

California, where this limit applies, juries keep awarding more for other

damages, like medical expenses and lost wages.


Last year, in California, juries awarded more than $1 million in 39

malpractice lawsuits, up from 28 seven years earlier, according to Medical

Underwriters of California. The average award rose to $2.9 million from $2

million.


In about a dozen states, there have been no rate increases so far this year.

But experts say they will probably spread. Now that the leading malpractice

insurers have raised rates, their competitors are expected to match or

nearly match them.


"There's no end in sight to this," said Mr. Smarr, of the physician insurers

group. "The companies will have to take some very large rate increases to

sustain their viability."