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Contributing Factors to Increased Medical Malpractice Premium Rates

Since 1999, medical malpractice premium rates for physicians in some states have increased dramatically. Among the seven states that we analyzed, we found that both the extent of the increases and the premium levels varied greatly not only from state to state but across medical specialties and even among areas within states. For example, the largest writer of medical malpractice insurance in Florida increased premium rates for general surgeons in Dade County by approximately 75 percent from 1999 to 2002, while the largest insurer in Minnesota increased premium rates for the same specialty by about 2 percent over the same period. The resulting 2002 premium rate quoted by the insurer in Florida was $174,300 a year, more than 17 times the $10,140 premium rate quoted by the insurer in Minnesota. In addition, the Florida insurer quoted a rate for general surgeons outside Dade County of $89,000 a year for the same coverage, approximately 51 percent of the rate it quoted inside Dade County.

Multiple factors have contributed to the recent increases in medical malpractice premium rates in the seven states we analyzed. First, since 1998 insurers� losses on medical malpractice claims have increased rapidly in some states. For example, in Mississippi the amount insurers paid annually on medical malpractice claims, or paid losses,8 increased by approximately 142 percent from 1998 to 2001 after adjusting for inflation.9 We found that the increased losses appeared to be the greatest contributor to increased premium rates, but a lack of comprehensive data at the national and state levels on insurers� medical malpractice claims and the associated losses prevented us from fully analyzing the composition and causes of those losses. For example, data that would have allowed us to analyze claim severity at the insurer level on a state-by-state basis or determine how losses were broken down between economic and noneconomic damages were unavailable. Second, from 1998 through 2001 medical malpractice insurers experienced decreases in their investment income as interest rates fell on the bonds that generally make up around 80 percent of these insurers� investment portfolios. While almost no medical malpractice insurers experienced net losses on their investment portfolios over this period, a decrease in investment income meant that income from insurance premiums had to cover a larger share of insurers� costs. Third, during the 1990s insurers competed vigorously for medical malpractice business, and several factors, including high investment returns, permitted them to offer prices that in hindsight, for some insurers, did not completely cover their ultimate losses on that business. As a result of this, some companies became insolvent or voluntarily left the market, reducing the downward competitive pressure on premium rates that had existed through the 1990s. Fourth, beginning in 2001 reinsurance rates for medical malpractice insurers also increased more rapidly than they had in the past, raising insurers� overall costs. In combination, all of these factors contribute to the movement of the medical malpractice insurance market through cycles of hard and soft markets--similar to those experienced by the property-casualty insurance market as a whole--during which premium rates fluctuate. Cycles in the medical malpractice market tend to be more extreme than in other insurance markets because of the longer period of time required to resolve medical malpractice claims, and factors such as changes in investment income and reduced competition can exacerbate the fluctuations.

While the medical malpractice insurance market as a whole had experienced periods of rapidly increasing premium rates during previous hard markets in the mid-1970s and mid-1980s, the market has changed considerably since then. These changes are largely the result of actions insurers, health care providers, and states have taken to address increasing premium rates. Beginning in the 1970s and 1980s, insurers began selling �claims-made� rather than �occurrence-based� policies, enabling insurers to better predict losses for a particular year.

Also in the 1970s, physicians, facing increasing premium rates and the departure of some insurers, began to form mutual nonprofit insurance companies. Such companies, which may have some cost and other advantages over commercial insurers, now comprise a significant portion of the medical malpractice insurance market. More recently, an increasing number of large hospitals and groups of hospitals or physicians have left the traditional commercial insurance market and begun to insure themselves in a variety of ways�for example, by self-insuring.

While such arrangements can save money on administrative costs, hospitals and physicians insured through these arrangements assume greater financial responsibility for malpractice claims than they would under traditional insurance arrangements and thus may face a greater risk of insolvency. Finally, since periods of increasing premium rates during the mid-1970s and mid-1980s, all states passed at least some laws designed to reduce medical malpractice premium rates. Some of these laws are designed to decrease insurers� losses on medical malpractice claims, while others are designed to more tightly control the premium rates insurers can charge. These changes make it difficult to predict how medical malpractice premiums might behave during future hard and soft markets.

Source: http://www.gao.gov/

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