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6 Obstetrical Malpractice Insurance Although the committee was not able to analyze insurance issues in depth it did believe that it was important to examine certain basic questions related to the role that medical malpractice insurance plays in the obstetrical professional lia- bility crisis. Is medical malpractice insurance generally available to obstetrical providers? Who provides this insurance? Is it affordable? Has its affordability changed over time? What are the trends in severity and frequency of medical malpractice claims and how do they affect the market in medical malpractice insurance? Have insurers changed their underwriting practices? Have risk management activities and quality assurance programs succeeded in reducing claims? How profitable is medical malpractice insurance? The committee examined major studies available as of August 1988. It is aware that other major studies were in progress at that time. The data that were available to the committee related to medical malpractice insurance generally; from them the committee drew inferences about obstetrics. It is possible that the data for obstetrics would vary from the general experience. The committee also reviewed major available studies of the profitability of medical malpractice insurance. In addi- tion it commissioned a survey of risk management activities sponsored by medical malpractice insurers. Recognizing that the committee did not examine the insurance problem in depth this chapter reports only the committee s findings on insurance issues; it does not include recom- mendations. Although the committee generally approves efforts by in 92
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OBSTETRICAL M~PRACTICE INSU~CE 93 surers to assist providers in evaluating and limiting the risks of obstetri- cal care, there are not enough data available to enable the committee to evaluate responsibly the efficacy ofthese efforts. Moreover, insurance is regulated by insurance departments in each of the 50 states, Puerto Rico, and the District of Columbia. The regulatory climate, the market structure, and the health care delivery issues vary tremendously in each of these areas. The committee did not believe that, under these circumstances, it was feasible to make specific recommendations re- garding insurer business practices. THE STRUCTURE OF THE MARKET Nearly all health care providers purchase professional liability insur- ance to protect themselves financially from malpractice claims. Under the terms of a typical malpractice insurance contract, the insurance company agrees to accept financial responsibility for payment of any claims up to a specific level of coverage during a fixed period, in return for a fee. It is the insurer's responsibility to investigate and defend any claims made against the providers under the terms of the contract. Most physicians in private practice purchase their own medical mal- practice insurance, although physicians employed by staff-mode! health maintenance organizations (HMOs) are frequently covered by the HMO. Physicians who are salaried staff of hospitals are likely to have their insurance purchased by the hospital. In some instances physicians may be self-insured or purchase malpractice insurance through a trust. Hospitals, like physicians, have traditionally purchased medical mal- practice insurance from commercial insurers; however, since the late 1970s large hospitals have increasingly elected to self-insure rather than buy insurance. By self-insuring, they can avoid premium taxes and other state regulations, as well as take direct responsibility for manag- ing smaller and more predictable claims. A survey of bank trust depart- ments in 1980 estimated that between 750 and 1,OOO hospitals were self- insured at that time (Needleman and Hackbarth, 19881. Prior to the insurance "crisis" of the mid-1970s, the majority of medi- cat malpractice insurance was provided by commercial insurers. The withdrawal of some commercial insurers from the market and dramatic premium increases imposed by the remaining insurers prompted many state medical societies and hospital associations to establish their own programs, usually as mutual insurance companies or insurance ex- changes. The largest medical society-created insurance company, the Medical Liability Mutual Insurance Company of New York, has approx- imately 5.8 percent of the national market and 38.3 percent of the New York State market, according to the annual compilation by A. M. Best
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94 MEDICAL PROFESSIONAL LIABILITY: VOLUME I
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OBSTETRICS PRACTICE INSU~CE 95 licensed in the state. State insurance departments are concerned about the financial ability of these companies, which are not subject to state form- or rate-filing rules or to capitalization standards, to meet their commitments to their clients over the long run. It is difficult to assess accurately the size of the medical malpractice insurance market because data on it are incomplete. According to data reported by A. M. Best Co., the leading insurance rating service in the United States, direct premiums written for medical malpractice insur- ance in 1984 totaled $2.3 billion (freedman, 1985) and rose to $4.7 billion in 1987 (Stern, 19881. These figures understate the total cash flow because they do not include all JUAs, patient compensation funds, a number of provider-owned companies (captives), or money paid through deductibles and self-insurance arrangements by hospitals. T=nnits of Coverage Medical malpractice insurance policies generally have a dollar limit on the amount that the insurer will pay on each claim (per occurrence) and a dollar limit for all claims (in aggregate) for the policy period, which is usually one year (GAO, 19861. A $200,000/$600,000 policy, therefore, provides coverage for up to $200,000 per claim and $600,000 per year. The amounts purchased by physicians and hospitals often differ. Hospitals frequently seek annual limits of $5 million to $30 million. Individual physicians seldom purchase annual limits as high as $5 million; most have $1 million per claim or less. Some states require certain minimum coverage amounts. In states where there is a patient compensation fund, the limits are tied to the coverage provided by the fund. Premiums for physician malpractice insurance are typically based on the claims rate for other physicians in the same geographic area, some- times modified by the claims experience of the individual physician. In some instances premium rates are uniform throughout a state; in others rates differ among territories within a state. Premiums also vary widely by specialty (Needleman and Hackbarth, 19881. Insurers typically di- vide physicians into risk classes based on the claims experience of a particular specialty. Most insurers set a base rate for each class, which may be adjusted for a number of factors, including the physician's individual claims experience and the number of high-risk procedures performed (for example, surgery or invasive diagnostic procedures). Some insurers have multiple rates for family and general practitioners, depending on the number and type of obstetrical services they provide. Premiums for nurse-midwives are, by contrast, currently based on national ratings. Certified nurse-midwives in Arkansas and New York
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96 MEDiC~ PROFESSIONAL CITY: VOICE ~ pay the same premium rate, even though the claims experience of each area may be very different (NeedIeman and Hackbarth, 19881. There are two common types of medical malpractice insurance- occurrence-based and cIaims-made policies. Under an occurrence-based policy, the insurance company is liable for all incidents occurring during the period the policy was in effect, regardless of when the claim is actually filed. A cIaims-made policy, on the other hand, covers the insured for malpractice incidents for which claims are filed while the policy is in force. Because a cIaims-made policy allows insurers to more closely approximate the current environment and eliminates the need for actuaries to project claims experience far into the future, premiums for claims-made policies are usually initially lower for the insured. They generally increase each year during the initial five years of the policy until the policy "matures" (GAO, 19861. Claims filed after a cIaims- made policy has expired are typically covered by a tail policy, a special policy to cover residual claims. As of 1985, approximately one-half of medical malpractice policies written are for cIaims-made policies (Pierce, 1985), but the share has probably increased in recent years. Availability of Medical Malpractice Insurance Physicians In the mid-1970s the availability of medical malpractice insurance was a major issue for physicians in many states. It is the consensus of scholars that a number of factors converged to produce a short-term crisis in some states and the contraction of markets in others (Danzon, 19851. Among the factors generally believed to account for this situation were the increase in the frequency and severity of claims, which in- creased the risk to underwriters at a time when the costs of capital were rising, and greater regulation in many states, including denial of rate increases perceived as necessary by actuaries and prohibitions against conversions to cIaims-made policies (Danzon, 19851. It has also been alleged in the press that the withdrawal of commercial insurers from offering malpractice coverage in many states during this period was orchestrated in part by the major reinsurance companies, which were frustrated in their attempts to impose claims-made policies and rate increases. A similar allegation claiming that such a conspiracy among insurers affected liability insurance for governmental entities is cur- rently the subject of an antitrust suit brought by the attorneys general of several states fIn Re Insurance Antitrust Litigation, C-88-1688-WVVS (N.D. Calif.)].
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OBSTETRICS MALPRACTICE INSU~CE 97 In the late 1970s, in response to the withdrawal of commercial car- riers from the medical malpractice market in many states, medical societies established their own insurance companies, in the form of mutuals or reciprocals. Similarly, many hospitals opted to self-insure through the establishment of trust funds or the formation of captive insurers domiciled offshore, thereby avoiding state regulation (Danzon, 19851. Because they are small and not diversified, these provider-owned insurance schemes are inferior bearers of risk. However, they do offer the potential advantage of reinforcing the incentives for risk reduction. According to Danzon, the key advantage of provider mutuals most likely derives from the fact that policyholders, who are also the residual claimants to profit and the residual bearers of loss, have superior incen- tives (as well as knowledge) to utilize claims information to monitor maloccurrence and manage risk (Danzon, 19851. Two other structural changes occurred in the mid-1970s. Joint under- writing associations became more important, and insurers were suc- cessfu] in pressing their demands for acceptance of cIaims-made policies. There is a consensus that the crisis of availability of professional liability insurance for physicians in the 1970s was largely addressed by the appearance of physician-owned companies, JUAs, and the conver- sion to claims-made policies. The situation for nurse-midwives con- tinues to be a problem. Moreover, there has been and continues to be concern in most quarters about the affordability of medical malpractice premiums. According to AMA data, medical malpractice premiums for all physicians have increased unevenly since 1978. As Figure 6.1 illus- trates, in the early 1980s the rates of increase for average physician malpractice premiums trailed the rates for other factors of medical care inflation, whereas the increases for obstetrics-gynecology malpractice premiums exceeded the medical and consumer price indices. After 1982 the rate of increase for malpractice insurance appears to have acceler- ated greatly for physicians in general and obstetrician-gynecologists in particular. Average national increases can mask substantial variations among geographical regions and specialties. As Figure 6.2, based on the under- writing practices of the St. Paul Companies, suggests, rates tend to be highest in California and Illinois. It should be noted that there are other "problem" territories; St. Paul does not offer coverage in Florida, Michi- gan, and New York, and rates are generally higher in urban areas than in rural areas. Between 1982 and 1986, mean professional liability premiums of self- employed obstetrician-gynecologists increased by 171 percent, while the Consumer Price Index and the medical care component of the Consumer
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98 MEDICAL PROFESSIONAL [iABlLiTY: VOLUME 300 270 240 - o - 210 a) in a) - > ._ - 180 150 120 90 60 30 Hosoital Room Prices Medical Care Price Index Consumer Price Index Average Physician Maloractice Premium _ Average Obstetrics-Gynecology ~ / Average Loss per Claim / ,/ / / - - o 1976 1977 1978 1979 1980 1981 Year 1982 1983 1984 1985 1986 FIGURE 6.1 Comparative trends in malpractice health care costs. SOURCE: Needleman, J., and M. Hackbarth. 1988. The malpractice insurance system and obstetrical care: Recent experience and options for change. Paper prepared for the Institute of Medicine. Washington D.C. Price Index increased by only 14 percent and 32 percent, respectively (see Table 6.11. Although the national average premium for obstetri- cians was approximately $30,000 in 1986, in several metropolitan areas obstetricians are paying annual premiums in excess of $100,000 per year for $1 million/$3 million coverage. During this period, premiums of self-employed physicians in other specialties rose as well, but no other specialty experienced rate increases comparable with those for obstet- rics (see Table 6.11. It should be noted that the 108 percent increase experienced by family and general practitioners reflects the combined increases for those who include obstetrics in their practice and those who do not. The figure would no doubt be higher if it represented only the increase for those who include obstetrics in their practice. In Califor- nia, for example, the median annual premium for family and general practitioners who performed deliveries in 1985 was $12,100; the pre- mium for those who did not was $6,800 (see Table 6.21. It is more difficult to track the history of premiums paid by family physicians, because there is no uniformity in their treatment by in- surers. Most insurers classify family physicians in the same category as general practitioners who do surgery. The classification schedule for physicians from the Medical Liability Mutual Insurance Company (Ta- ble 6.3), located in New York, is typical and is followed in Pennsylvania and New Jersey as well. According to this schedule, a general practi- tioner in the New York City outer boroughs performing no surgery
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OBSTETRICS M~P~CTICE ~SU~CE 101 TABLE 6.2 Mean Professional Liability Premiums for Physicians With and Without Obstetrical Procedures Premium (thousands of dollars) Deliveries Deliveries Not Including Including Specialty No Deliveries Cesarean Sections Cesarean Sections . . . Obstetrics-gynecology Nca Nca Nca National California, 1985 b 18.9 26.9 Washington, 1986 21.8 33.0 Family, general practice 5.2 7.8 9.8 National, 1986 California, 1985 b 6.8 12.1 Washington, 1986 4.3 aNot calculated. bThe California Medical Association reported the median, rather than the mean, pre- mium costs. The median is lower than the mean would have been in this case, but for comparisons of data for California with and without deliveries the median can be used as the mean. SOURCES: National data, American Academy of Family Physicians. 1987. Family Physicians and Obstetrics: A Professional Liability Study. Kansas City, Mo.; California data, California Medical Association. 1987. Professional liability issues in obstetrical practice. Socioecon. Rep. Nos. 6 and 7; Washington data, Rosenblatt, R. A., and B. Deter- ing. 1988. Changing patterns of obstetric practice in Washington State. Finn. Med. 20:101-107. would pay $12,906 for $1 million/$3 million, whereas a general practi- tioner doing obstetrics and performing minor surgery would pay $25,828 and an obstetrician-gynecologist would pay $94,113 (Medical Liability Mutual Insurance Company, 19871. The St. Paul Companies also classify general practitioners doing obstetrics as lower risk than obstetrician-gynecologists, provided the practitioner performs no cesarean sections. By contrast, the Colorado Physician Mutual Company recently tried to reclassify family physi- cians practicing obstetrics into the obstetrician-gynecologist class, which would have doubled the premiums for these physicians. The state insurance department rejected the rate on the basis that no evidence was presented to support it. The Colorado insurance department had previously approved the classification of family physicians practicing obstetrics as obstetrician-gynecologists by the Doctors' Company of Cal- ifornia, which had justified the classification using California data. The committee noted that there has been little systematic analysis of insurance company underwriting practices with regard to family physi- cians or the risk experience of family physicians (Needieman and Hack- barth, 19881. The actuarial experience of family physicians and the
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114 MEDICAL PROFESSIONAL STY: VOICE ~ are hard to foresee. Moreover, the use of statistics from past years to predict future Tosses is based on the law of large number~as the number of insured physicians and hospitals increases, actual losses will approximate more closely expected losses. However, because the medical malpractice insurance market is small in comparison to the overall insurance industry, the statistical base is, in turn, small and it is particularly difficult to set accurate premiums in this market (GAO, 1986). Profitability in the insurance industry is determined by combining both underwriting results and investment results. Profitability esti- mates for medical malpractice and for general liability insurance de- pend on the adequacy of the reserves for future payment of claims (losses) and whether those reserves are discounted to reflect their pres- ent values. Insurance reserves, which are accounted for as an expense, reflect actuarial estimates of future losses. Because of the problem of accounting for reserves, measurements of the profitability of an insurer in any given year may understate or overstate the ultimate results of an insurance operation (GAO, 19871. Given all the sources of uncertainty, insurance and reinsurance com- pany personnel try to set premiums that will maintain long-term busi- ness profitability, but there are typically cycles of competitive rate- cutting followed by sudden increases in premiums. The mid-1970s and mid-1980s are examples of this pattern, which goes back decades and can be expected to continue in the future. Although individual states may vary, recent reports indicate that nationwide there has been a decline in the rate of increase of liability insurance premiums because of the increased capital that insurers have accumulated (NeedIeman and Hackbarth, 19881. The question ofthe profitability of medical malpractice insurance has been examined by several groups, including the General Accounting Office (GAO), Florida's Academic Task Force for Review ofthe Insurance and Tort Systems, and the Tort Policy Working Group, an interagency working group of the federal government and the New York State Department of Insurance (NeedIeman and Hackbarth, 19881.All these groups concluded that the rate of return earned by the medical malprac- tice insurance industry was comparable with or less than that of other industries competing for the same investment capital. The GAO study estimated the profitability of the property-casualty insurance industry, concentrating on the medical malpractice and gen- eral liability insurance lines for the period 1975 through 1985 (GAO, 19871. It relied on data on premiums, losses, and expenses reported by the A. M. Best Company. Best's data do not include joint underwriting associations, reinsurers, or self-insurance mechanisms. The GAO con
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OBSTETRICAL M~PRACTICE INS URGE 115 eluded that, despite incurring substantial underwriting Tosses from 1976 through 1985, the property-casualty insurance industry has more than offset those losses with investment gains (GAO, 19871. The GAO concluded that the underwriting losses resulted, in part, from the indus- try's strategy of sacrificing underwriting gains in an attempt to attract more business and thereby enhance investment gains. The GAO esti- mated that the industry's average rate of return for the period was 11 percent. This compares with a return in banking of 12.7 percent, util- ities of 12.2 percent, transportation of 11.5 percent, and all industries of 13.2 percent. The GAO concluded that the returns were not out of line with those of other industries. The Tort Policy Working Group also evaluated the industry's prof- itability (Tort Policy Working Group, 19871. Using data from the Insur- ance Information Institute, the group concluded that iThe insurance] industry's rate of return on net worth for 1986 was 11.6 percent. This rate of return is roughly equivalent to the industry's ten-year average for 1976 to 1985 . . . and is slightly less than the ten-year rate of return for Fortune 500 industrial corporations.... Thus, while the industry significantly im- proved its rate of return, that rate was substantially less than its most recent high years (19 percent in 1977 and 18.1 percent in 1978), and was still less than the rate of return of many companies competing with the industry for invest- ment capital (Tort Policy Working Group, 1987~. The Florida task force conducted a similar analysis and reached a similar conclusion. It found that "the average annual compound rate of return on equity for these insurers from 1977 through 1985 was 16.3 percent. This return was slightly greater than the return in the prop- erty-casualty industry as a whole, but it still was well within the normal range for American corporations." The task force concluded that it must "reject the assertion that excess insurance company profits are a cause of the medical malpractice crisis. On the other hand, the liability insur- ance industry's financial condition is not nearly as serious as it some- times claims.... " (Nye et al., 19881. The New York State Department of Insurance conducted a study that examined the financial results for medical malpractice policies written from 1959 through 1976 in New York State to determine when the funds, including interest earnings, to pay claims were exhausted for the claims for a given year and whether additional liability remained. The department concluded that to fund claims on policies for these years insurers should have collected an additional $272.5 million in premiums for this period. This study concluded that rates were deficient during this period (Needleman and Hackbarth, 1988).
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116 MEDICO PROFESSIONAL CITY: VOICE ~ Insurer Risk Management Activity Several insurers have undertaken significant risk management ac- tivities in the last decade to stem the tide of rising medical malpractice claims. Some of these efforts have occurred in commercial insurance companies, but more have been initiated in the physician- and hospital- sponsored organizations. For example, the Harvard Risk Management Foundation, which provides services to 14 health care facilities and the thousands of physicians participating in the Harvard Medical Institu- tions insurance program, has been highly influential in the field of risk management. The foundation engages in a full range of risk manage- ment activities, including assisting its member institutions in analyses of loss and loss prevention protocols in an effort to improve risk manage- ment and quality assurance programs. The committee was interested in any efforts by insurers to use their information bases to identify high-risk areas and to encourage more effective or appropriate methods of managing the risks of medical care. Accordingly, it commissioned the firm of Lewin/ICF to conduct a study of the extent to which risk management activities are currently under way in obstetrics. A list of insurers and organizations surveyed and the results of the survey may be found in Appendixes E and F. Risk management efforts tended to fall into one of four categories: (~) activities related to data gathering and analysis, (2) clinical standard setting and the development of protocols, (3) educational efforts, and (4) discounted premiums as incentives to involve physicians in risk man- agement activities. The committee found that many insurers engaged in all four types of activities. Data Gathering and Analysis There are signs that medical malpractice insurers are increasingly committed to using their claims data to assist providers in identifying and avoiding risks. The St. Paul Fire and Marine Insurance Company has established a closed-cIaim file for obstetrical and birth injury cases. St. Paul has involved physicians and health services researchers from the University of Minnesota in analyzing the incidents in this data base. At least one study on risk factors in obstetrical malpractice has already been published (Julian et al., 1985~. St. Paul claims that it has imple- mented some risk management programs based on the study and is helping obstetrician-gynecologists identify high-risk patients. Other insurers are also attempting to make use of their claims data. The Physician Insurers' Association of America (PlAA) is seeking ways to use the claims reports it receives from member companies about birth
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OBSTETRICAL M~PRACTICE INSUR~CE 117 injuries and other large losses as a basis for studies to identify the causes of losses and for educational programs for physicians. In addition, it is making its data available to the Council on Medical Specialty Societies. Several New York insurers have worked together to develop a cIaims- tracking system to identify problem physicians. The risk management- Toss prevention program of the Pennsylvania Medical Society Liability Insurance Company maintains a computerized risk management claims data base that is used to identify trends and patterns in claims by specialty. Similar programs exist in other states. Clinical Standard Setting and Protocol Development One of the most ambitious, advanced projects under way to develop obstetrical standards is the Clinical Standards Development Project for the Obstetrical Services ofthe Harvard Medical Institutions. During the autumn of 1986, the Harvard obstetrical chiefs reviewed a detailed study of 54 open and closed obstetrics-related claims managed over a 10- year period by the Harvard Risk Management Foundation. Without attributing fault or blame, they identified approximately 30 areas in which they believed implementation of uniform standards might help identify and prevent certain types of mishaps. These areas included documentation of obstetrical care from the prenatal period through postpartum care; assessment of fetal well-being in labor, including the use of electronic fetal monitoring; and physician coverage and availabil- ity in labor and delivery. Beginning in November 1986 and continuing periodically throughout 1987, the chiefs met to draft standard lan- guage, with the assistance of Risk Management Foundation staff. The project authors framed their recommendations as standards, not as guidelines or options. The project set forth the view that the stan- dards should be stated in objective, measurable language so that compli- ance could be evaluated as part of obstetrical peer review. In addition to the Harvard claims data, sources for the standards included ACOG's Standards for Obstetric-Gynecologic Services, the collective expertise of the Harvard medical community, existing departmental rules and regu- lations, and certain loss prevention or underwriting guidelines devel- oped by other groups, such as the Insurance Requirements for Obstetri- cal Practice of the Utah Medical Insurance Association. Phase ~ Clinical Standards for the Obstetrical Services ofthe Harvard Medical Institutions were finalized by the obstetrical chiefs in August 1987. Phase ~ standards address such issues as preserving fetal monitor- ing records and mandatory assistance when an obstetrician's labor or delivery caseload may be unsafe. Phase I} standards will address assess- ment of fetal well-being in labor, including the use of midforceps and the
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118 MEDICAL PROFESSIONAL LIABILITY: VOLUME I vacuum extractor. In addition, the project is in the process of reviewing consent forms for certain obstetrical procedures. Draft language is also being developed for the portion of Phase III standards that focuses on management protocols for special clinical situations, such as premature labor and toxemia. The Utah Medical Insurance Association is also active in standard- setting activities as a method of risk management. It has developed a manual with specific protocols that its insured physicians are expected to follow. A panel of physicians, including faculty from the University of Utah and individuals insured under the plan, developed these protocols from ACOG guidelines and company claims data. The manual addresses a variety of issues, including prenatal recor~keeping, criteria for consul- tation and referral, antepartum testing, hypertension and pregnancy, antepartum fetal surveillance, forceps and vacuum extraction, breech delivery, protocols for oxytocin, and standards for the services that should be available at the hospital (NeedIeman and Hackbarth, 19881. The Colorado Physician Insurance Company is also promoting the use of clinical standards. It currently requires its insureds to use pre- established flow sheets for prenatal data and to use ultrasound on a specified schedule near term. The survey performed for the committee revealed a range of attitudes among insurers regarding the development and imposition of clinical standards. Some insurers are prepared to make strong recommenda- tions regarding actual procedures to follow, such as the use of fetal monitoring. Others fee! comfortable making recommendations regard- ing documentation or certain follow-up activities to high-risk deliveries. Other insurers eschew standards altogether, both because they believe that physicians should be in charge of their own practices and because they fear that any insurer recommendations will become a legal stan- dard of care that will be used to discredit an insured physician who does not follow them (NeedIeman and Hackbarth, 19881. Educational Efforts The survey done for the committee revealed that medical malpractice insurers are engaging in a broad range of educational efforts aimed at promoting risk management on the part of insureds. Several insurers, including St. Paul and the Pennsylvania Medical Society Liability In- surance Company, publish monthly or bimonthly newsletters contain- ing both general information and discussions of specific problems that have surfaced. Some insurers have developed home-study materials, including videotapes and free medical-legal correspondence courses. The Pennsylvania Medical Society Liability Insurance Company offers a "Self-Assessment of Practice" for physicians and will conduct office
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OBSTETRICAL M~PRACTICE INSUR~CE 119 audits for interested physicians and programs for office staff. This in- surer is also developing a program to improve physician-patient rapport through the use of such tools as the Myers-Briggs personality test to help physicians understand their strengths and weaknesses in interac- tions with patients. Discounted Premiums as Risk Management Incentives Some companies offer reduced premiums as an incentive to involve physicians in risk management activities, the survey found. These dis- count programs vary widely, with some available only to groups of physicians and others to individuals. Eligibility is predicated on such factors as taking specific seminars or courses, agreeing to follow specific procedures, and undergoing audits of office recor~keeping and back-up procedures. Other companies reported a reluctance to introduce such plans out of concern for adverse customer reaction. Some companies reported that plans including discounted premiums were rejected by state insurance commissioners. PROPOSALS TO ALTER THE MEDICAL MALPRACTICE INSURANCE SYSTEM A number of proposals have been advanced in the last decade to address the medical professional liability problem by altering the prac- tices of medical malpractice insurers. The committee found that these proposals tend to fall into five categories: ~ proposals to reduce the cost of medical malpractice insurance by spreading the costs over a wider base, · proposals to limit the number of insured claims by resolving certain types of claims outside the tort system, proposals to limit the amounts of awards, ~ proposals to increase physician coinsurance or self-insurance in an effort to increase accountability, and · proposals to expand insurer involvement in risk management and insurer-provider cooperation in such activities. Below are the committee's findings concerning the current state of the debate on these proposals. Spreading the Costs of Coverage Over a Wider Base Several strategies for reducing the costs of premiums for physicians have been discussed. These include
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120 MEDICO PROFESSIONAL CITY: VOICE ~ · reducing the number of risk classifications, thereby spreading the risk of higher risk specialists over larger groups of physicians and making claims results more predictable over time, · allowing physicians to purchase lower levels of insurance when coverage for higher levels is provided elsewhere, and · subsidizing the JUA or residual policy market from other sources or by postponing needed rate increases. Many malpractice insurance companies have 14 or more categories of risk. These rating distinctions have the effect of segregating high-risk specialties into a narrow group that is intended to be self-supporting through high premium payments. A system with fewer classifications would pool risks, thereby lowering premiums for physicians in the high- risk specialties. Closely related to this approach are proposals providing for the ex- plicit cross-subsidization of high-risk specialties by low-risk specialties. Rather than reclassification, surcharges would be levied on lower risk classes to Tower the premiums for higher risk practitioners. These types of proposals were considered by the Florida task force on medical malpractice and by the New York State Department of Insur- ance. Both groups rejected the approach. First, there was a practical concern that such practices would lead to cream skimming, that is, insurers taking only the lower risk physicians who fell into any given category. It was believed that the approach would not work in a competi- tive market for this reason. Moreover, most insurance consumers, in- cluding physicians, purchase policies in the belief that the premiums reflect individualized risk assessments that relate to their individual exposure to losses. Wide physician resistance can be anticipated from cross-subsidization schemes that do not account for the real differences in risk profiles among specialties. Various proposals have been advanced to allow physicians to reduce the limits oftheir coverage because others are assuming some ofthe risk oftheir practices. The patient compensation fund is one such device. It is designed to insure Physicians against all risks above a certain level or in a certain category. This system requires participating physicians to purchase coverage up to the level at which the fund would assume liability but permits them to limit their coverage to the level at which fund participation begins. Many states support patient compensation funds by surcharging med- ical malpractice insurance of physicians and hospitals. Because the funds have often operated in whole or in part on a cash flow basis rather than on a basis of funding future liabilities, this has allowed the com- bined premium and surcharge to be lower initially than an insurance
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OBSTETRICAL MALPRACTICE INSURANCE 121 premium for comparable coverage would be. As the coverage provided by such funds matures, however, surcharges can rise quickly. For this reason, some states that developed such funds still encounter financing problems. For example, the Florida Patient Compensation Fund col lapsed when it was unable to collect adequate funds through assess- ments. Patient compensation funds can also be funded through levies on providers based on their volume of patients or levies on institutional providers such as hospitals (NeedIeman and Hackbarth, 19881. The AMA has endorsed the development of patient compensation funds. New York State has developed a variation on this approach. Most physicians in New York purchase primary medical malpractice cover- age of $1 million/$3 million. In 1985, because of mounting physician concern about high awards and the high cost of insurance coverage, the New York legislature required hospitals, at the request of their attend- ing physicians, dentists, and oral surgeons, to obtain an additional layer of $1 million/$3 million, to be paid for by the hospital. The cost of this additional coverage in 1985 was 30 percent of the primary coverage (in 1987, it rose to 40 percent). In 1986 and 1987 the legislature continued the program and allowed physicians to obtain a third layer of coverage through the state's JUA, for 15 percent of the base coverage in 1986 and 28 percent in 1987. This Excess Liability Insurance Pool program effectively shifts a significant portion of the burden of purchasing higher limits of malprac- tice insurance from the physician to the hospital and to those who purchase hospital services. The state had hoped to obtain federal partic- ipation in this program through Medicaid, but the Department of Health and Human Services ruled in 1987 that the program was not entitled to reimbursement under either Medicaid or Medicare. Despite the fact that New York was not able to broaden the funding base for the program, it is viewed favorably by physicians in the state. It is believed that hospitals can spread the cost of risk more evenly than physicians, and the greater burden on hospitals is viewed as providing greater incentives for improved risk management. The New York State Department of Insurance has proposed that the level of insurance re- quired of physicians in the program be reduced to $500,000/$1,000,000 and that hospitals be required to provide $1.5 million/$4.5 million in excess coverage for their attending physicians. In addition, the shift to $500,000/$1,000,000 from $1 million/$3 million is estimated to reduce the premium by 25 to 30 percent. Another alternative that has been discussed is to subsidize the JUA, or residual policy market. Under this approach, premiums for insurance through adUA are set, and liabilities in excess of premiums andinterest income can be funded through assessments on other property and casu
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122 MEDiC~ PROFESSIONAL CITY: VOLUME ~ alty companies in the state. Several states have, in effect, operated in such a manner by holding premium increases down, keeping premiums low, and building up unfunded liabilities that are likely to be imposed on other insurers through assessments. Limiting the Number of Claims A second set of options involves moving some liability claims out ofthe tort system into an insurance system that would compensate victims of certain specified maloccurrences, rather than determine liability on the basis of fault. Several models for such schemes, usually known as desig- nated compensable events plans, have been proposed. Both Virginia and Florida have adopted variants of this system intended to compensate victims of certain neurologically impaired infants. These plans are discussed in Chapter 7. Limiting the Amount of Awards One reason that medical malpractice awards in obstetrics are so high is that the awards are expected to cover the full costs of treating the condition for the life of the infant. In periods of inflation, awards may reflect uncertainty concerning the future. To reduce these costs, a pro- posal was developed by the New York State Department of Insurance to create a separate fund to defray all future medical expenses of medical malpractice victims. The fund would purchase a health policy, and there would be less need to estimate future medical expenses. Payments by defendants would be based on actuarial projections of expected medical costs, with reversion of unused funds to the insurer. Experience Rating of Physicians for Medical Malpractice Experience rating of physicians involves charging higher premiums to physicians with the highest claims experience and less to physicians with fewer claims. Currently, several insurers place surcharges on pre- miums for physicians with poor records, and the Florida Tort Reform and Insurance Act of 1986 requires that ratings reflect the number of sur- geries and claims experience of individual physicians. Other insurers who have tried to implement experience rating report that it presents practical difficulties. St. Paul promoted experience rat- ing in Georgia but discontinued it, concluding that it does not work well in insurance markets with infrequent, severe occurrences. St. Paul relied on closed claims but found the experience reflected in them too old to be useful. It was obviously unfair to rely on open claims data, because a particular claim could be resolved in a physician's favor.
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OBSTETRICS MALPRACTICE INSURANCE 123 New York State had tried to implement experience rating by a statute enacted in 1985 [N.Y. Insurance Law §2343 (McKinney, 19881] that required the Insurance Department to promulgate regulations estab- lishing a merit rating plan for physicians. The department subse- quently concluded that its experience with merit rating was not satisfac- tory. Among the problems cited were the opposition of the medical community, particularly high-risk physicians, and the practical prob- lems involved in evaluating claims data. CONCLUSION The number and variety of risk management activities and the gen eral efforts to use insurance claims data to diagnose, and ultimately reduce, the risks of obstetrical services are impressive. There are not enough data available to enable the committee to evaluate these efforts on the part of insurers, however. Moreover, because of the differences in the markets and regulatory environments, it seems possible that cer- tain approaches will be effective in some states but not in others. REFERENCES Academic Task Force for Review of the Insurance and Tort Systems. 1987. Preliminary Fact-Finding Report on Medical Malpractice. Gainesville, Fla. American College of Obstetricians and Gynecologists (ACOG). 1983. Professional Lia- bility Insurance and Its Effects: Report of a Survey of ACOG'S Membership. Washing- ton, D.C. American College of Obstetricians and Gynecologists (ACOG). 1985. Professional Lia- bility Insurance and Its Effects: Report of a Survey of ACOG'S Membership. Washing ton, D.C. American College of Obstetricians and Gynecologists (ACOG). 1988. Professional Lia- bility and Its Effects: Report of a 1987 Survey of ACOG's Membership. Washington, D.C. American Medical Association (AMA), Center for Health Policy Research. 1987. Socio- economic Characteristics of Medical Practice. Chicago. California Medical Association (CMA). 1987. Professional liability issues in obstetrical practice. Socioecon. Rep. 25, Nos. 6 and 7. Damon, P. A.1985. Medical Malpractice: Theory, Evidence, and Public Policy. Cambridge, Mass.: Harvard University Press. Freedman, M. 1985. General liability and medical malpractice insurance marketing- 1984. Best's Rev. 86:16-18, 106-109. General Accounting Office (GAO), U.S. Congress. 1986. Medical Malpractice: No Agree- ment on the Problems or Solutions. GAO/HRD-86-50. Gaithersburg, Md. General Accounting Office (GAO), U.S. Congress. 1987. Insurance: Profitability of the Medical Malpractice and General Liability Lines. GAO/GGD-87-67. Gaithersburg, Md. Julian, T. M., B. C. Brooker, J. C. Butler, Jr., M. S. Joseph, P. L. Ogburn, Jr., P. P. William, M. L. Anderson, A. C. Shepard, W. C. Preisler, Jr., and M. L. Capell. Investigation of obstetric malpractice closed claims: Profile of events. Am. J. Perinatol. 2:320-324.
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124 MEDiC~ PROFESSIONAL PITY: VOICE ~ Kenney, R. K. 1987. Financial Condition of Medical Malpractice JUAs. Schaumberg, Ill.: Alliance of American Insurers. Korenbrot, C. 1988. Effects of professional medical liability premiums on obstetric pro- viders and the practice of obstetrics. Paper prepared for the Institute of Medicine. Washington, D.C. Lazarus, W., E. S. Levine, and L. S. Lewin. 1981. Competition Among Health Practi- tioners: The Influence of the Medical Profession on the Health Manpower Market. Washington, D.C.: Lewin and Associates, Inc. Medical Liability Mutual Insurance Company. 1987. Premium Rate Schedules for Physi- cians and Surgeons, Occurrence and Claims-Made Policy Forms, effective July 1. New York. Needleman, J., and M. Hackbarth.1988. The malpractice insurance system and obstetri- cal care: Recent experience and options for change. Paper prepared for the Institute of Medicine. Washington, D.C. Nye, D. J., D. G. Gifford, B. L. Webb, and M. A. Dewar. 1988. The causes of the medical malpractice crisis: An analysis of claims data and insurance company finances. George- town Law. J. 76:1495-1561. Patch, F. B., and S. Holaday.1988. Effects of changes in professional liability insurance on certified nurse-midwives. Paper presented at the 33rd ACNM annual convention re- search forum. Detroit. Pierce, R. 1985. What legislators need to know about medical malpractice. Paper pre- sented at the National Conference of State Legislators. Denver. Reynolds, R. A., J. A. Rizzo, M. L. Gonzalez.1987. The cost of medical professional liability. JAMA 257:2776-2781. Stern, L. J. 1988. Medical malpractice, fidelity and surety. Best's Rev. 89:34-40, 125. Tort Policy Working Group. 1987. An Update on the Liability Crisis. Washington, D.C.: U.S. Department of Justice.
Representative terms from entire chapter: