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January 12, 2005


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Today's other guest blogger is Georgia State University Professor Martin Grace, whose own blog is RiskProf. His post is titled "Continuing the Med-Mal Debate: Insurance as a Whipping Boy?" and continues the medical malpractice and tort reform debate ... [Read More]

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» CJD's Med Math Part II from PointOfLaw Forum
James Copland took the Center for Justice and Democracy to task earlier this week for its recent report by Jay Angoff.  Mr. Angoff is a former Insurance Commissioner for the State of Missouri and he seems to have particular problem... [Read More]



I know very little about the med mal lines of business, but wouldn't it pay to take a look at the combined ratios of med mal insurers in order to determine whether they are gouging doctors on premiums or whether the premiums are sufficient to cover their losses? In other words, if med mal insurers tend to have a combined ratio of over 100, and in particular over 105, then I think there is a strong argument that premiums are fairly set to cover what they're paying out. And, indeed, perhaps doctors are even getting a break. If the combined ratios are between 95 and 100, then you could argue that the system is in balance, i.e., premiums are sufficient to cover the losses and to allow for a small underwriting profit prior to investment profit, which is where both sides of the equation -- insurers and insurerds -- should want to see the system. But if the combined ratios are under 95, then maybe plaintiffs lawyers have a point, high premiums are caused by insurers attempting to take large underwriting profits.


You have a point, but many of the largest players are non-profit companies owned by the doctors. So why do they charge themselves high premiums? I think they do it because they are afraid of a judgment against the company that is an order of magnitude higher than they currently can conceive. If losses don't increase in the future, then the doctors get a dividend for the unneeded premium plus some low rate of interest. So, mutual med mal insurers are really sensitive to perceptions (rightly or wrongly) about the litigation environment.

Note the question is answered differently if we are talking about for profit insurers. If losses do not materialize, then the profits go to the shareholders. However, for-profit companies do not seem to think this is a good business and they charge a higher premium too for the risk they believe they are bearing. It will take 3-10 years to really discern whether policies written this year are profitable. What would be interesting to do (from an academic point of view) is to go back to the crisis of the mid 80's and look at the long term profitability of those contracts. However, I think there are fewer for-profit companies writing this business and that suggests firms did not think it was a profitable line.

Prof. Yabut

Why would physicians in doctor-owned med-mal companies charge themselves high rates? Maybe to "prove" a crisis exists in order to get damage caps enacted. As you state, Martin, the reserves built up with high premiums will either be needed in the future or paid back to the doctor-owners as dividends. What do they have to lose?

With few insurers in each market, oligopoly interdependence would then allow the for-profits to piggy-back on the high premiums without fear of losing market share to the non-profits. [and you thought economists were cynical!]


As for a company owned by doctors not having a motive to charge excessive premiums, the point that is not raised is that while the company may be owned by SOME doctors, it sells insurance to ALL doctors. Those stakeholder doctors certainly have a profit-motive. I assume that those stake-holder doctors are also going to be older, wealthier (and therefore less impacted by higher premiums)than the doctor population as a whole. Sure they may pay a more for their premiums, but what does that matter against larger capital gains and dividends?
Do you think the proposed reforms came from doctors? I doubt it. It is more likely that they were developed by lawyers (who represent doctors and insurers). Why would these lawyers have any interest in proposals that would have a negative financial impact on the legal industry (both plaintiff and defense attorneys)? What is their "economic incentive"? My guess is that it is because THEY are being paid to do it (or maybe they are just trying to 'do the right thing').

"Record Setting" Jury Awards & CAPS:
What does it matter to an insurer if a jury awards $150 million if there is only $1 million in coverage? What does it matter to a millionaire doctor if the jury awards $5 million or $50 million? Woudn't the bankruptcy be the same either way? How will CAPs improve the situation? Is it just because doctors would purchase lower limits policies? This is not entirely a rhetorical question - I really don't know, but I compare it to criminal law.
Courts convict innocent people (I've read it in the paper), some of those people spend incredibly long periods of time behind bars (horrible). To discourage this from happening, we should put Caps on the length of prison sentences (unless they cause economic damage). Does that make sense?


Rufus writes: if med mal insurers tend to have a combined ratio of over 100, and in particular over 105, then I think there is a strong argument that premiums are fairly set to cover what they're paying out. And, indeed, perhaps doctors are even getting a break. If the combined ratios are between 95 and 100, then you could argue that the system is in balance, i.e., premiums are sufficient to cover the losses and to allow for a small underwriting profit prior to investment profit, which is where both sides of the equation -- insurers and insurerds -- should want to see the system. But if the combined ratios are under 95, then maybe plaintiffs lawyers have a point

Rufus: the combined ratio for med-mal insurers in 2003 was 137.5. Once you pick your jaw off the floor, I'm curious what conclusions you derive from this.

To be fair, I think your equilibrium numbers are too low; though I don't know for sure, I strongly suspect that a med-mal insurer can be reasonably profitable with a combined ratio of 105 and maybe even 110 in a better investment environment. I defer to Martin's expertise there.

"Innerstation" misunderstands the nature of a mutual insurance company: a mutual is owned by the policyholders. So it's all doctors selling insurance to all doctors: if there are profits, they are rebated to the policyholders.

"Innerstation" also misunderstands the risk that an insurer faces if there is a jury award greater than the amount of coverage. Many states allow the plaintiff to then go after the insurer for "bad faith refusal to settle" for the difference in the policy coverage and the amount awarded. In other words, large lottery awards, even if technically they're not subject to coverage, (1) pose real risks of loss to insurers; and (2) create settlement pressure to settle at the amounts of the policy limits to avoid the risk of a second second-guessing jury finding the refusal to settle was in bad faith. (One could argue that this is perhaps another place where reform is appropriate.)

Yabut's conspiracy theory works only if market entry is exceedingly difficult. It's also inconsistent with the empirical evidence of for-profit insurers leaving the market and the combined ratios I discuss above. Premiums are high because losses are high.


Thanks, Ted. In the casualty world, a combined ratio of 137.5 would be a good predictor of a future insolvency. I know at some companies that I might perhaps maybe a little familiar with there is a real expectation of a combined ratio under 100 and if it's over 100 heads roll. That number for med mal insurers indicates to me very poor underwriting or a lot of unexpected high claims. And remember, med mal policies are usually written on a claims made basis, which is suppossed to allow the underwriters to more accurately set premiums because there are fewer long tail exposures. Of course, there may be other explanations, such as bad claims handling or poor controls of hard costs. Regardless, I do interpret a combined ratio of 137.5 as a sign of poor health in the industry unrelated to the lack of investment profit.


Innerstation, medical malpractice mutuals are owned by every doctor with a current policy. Every doctor who pays premiums are equitable owners of the company. That is the (simple) legal definition of the mutual. There are likely some types of med mal companies that are owned by some physicians and sell to others. These would be stock for-profit companies. There are also some mutuals that have stock subsidiaries. Insureds of the stock subsidiary are not owners of the mutual parent. This is mildly confusing except for the fact that most physician mutuals are relatively simple mutual companies. (I just noted that Ted cleared this point up above).

Prof. Yabut asks an interesting question. Why not charge yourself more, create a crisis, get tort reform, and then get your money back anyway? Well, it turns out that Ted's other point about entry is important. If there are low barriers to entry, then if the mutuals charge people too much, doctors would rather have the lower premium and would choose from a competitive contract offer. One of the problems in Georgia is that no one wants to enter and there are people with all sorts of crazy (from an economics persepctive) plans to try to get more med mal insurers in the state. This suggests to me that for profit companies see no profit in the Georgia market. The reason they see no profit in Georgia is the same reason the domestic mutual charges high prices: Risk.

I believe that med mal has significant barriers to entry and this has to do with the ability to set proper actuarial prices. It has become more difficult to do so and this deters entry. This is not a barrier to entry caused by the incumbent, but one caused by the state's mal practice environment.

E L Eversman

It seems to me that some of the med-mal and tort reform debates occur in isolation. The greediness of plaintiffs and their lawyers are the cause of high premiums according to the popular cant. However, there are clearly interrelated issues that undergird some of the litigation which never seems to be brought to light.

For example, I believe a good deal of the med mal lawsuits would never be brought if health insurers would butt out of the business of medicine and get back to the business of insurance (what ever that may be a la McCarran-Ferguson). It seems that physicians are often hamstrung in practicing medicine and follow the dictates of insurers about which tests they can/should order, which prescriptions to write because it might not be covered by the patient's carrier, and a bunch of other silly hoop jumping administrative nonsense that detracts from their real jobs.

If doctors could go back to just practicing medicine, and we stopped allowing insurers to engage in acts that seem to me to be the unauthorized practice of medicine, I suspect we would see a rise in quality health care and a decrease in malpractice suits.


Eversman's argument is falsifiable: are patients who are members of HMOs more likely to suffer malpractice than those who aren't? I vote for the null hypothesis myself. Outside of John Grisham novels, there just aren't an appreciable number of incidents (if any) where HMOs required doctors to perform below the applicable standard of care. If anything, evidence is that the problem is the opposite one of too many unnecessary tests being run.

Another problem is, as doctors will happily tell you, the majority of malpractice lawsuits involve cases where no malpractice has taken place, so even if Eversman's theory that health insurers cause too much malpractice, it wouldn't solve the malpractice liability problem.


Medical Economics has a fair look at the issue here:


Tort reform has not properly addressed the problem(s) of the ever increasing medical malpractice premiums, despite the fact that mostly all insurers have benefited greatly from an increased slowdown in the number of claims. The increasing medical malpractice situation will not be resolved until the industry and regulators properly address the other, apparently more important factors pusing premiums higher.

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