The Center for Justice and Democracy
It’s The Insurance Industry, Stupid
In October, the Washington State Office of the Insurance Commissioner (OIC) fined Physicians Insurance, the leading medical malpractice insurance company, $450,000 for multiple violations of state insurance laws and regulations. The news was met by some with an exasperated,“again?” It’s easy to see why.
In May 2004, the OIC fined Physicians $10,000 for 2003 violations of rate filing requirements under state law. In March 2005, the OIC ordered Physicians to refund doctors more than $1.3 million plus interest for excess medical malpractice premiums charged in 2003. The company was also fined $90,000 for non-compliance with insurance code regulations. Then, in July 2005, Physicians refunded yet another $900,000 in premiums due to problems in their 2004 billing rates. The company also issued a rate reduction of 7.7 percent for 2005.
October’s $450,000 fine stemmed from an October 2004 market conduct examination into the company’s practices that uncovered serious and widespread compliance problems. The examination was terminated so the company could make corrections. Insurance Commissioner Mike Kreidler, convinced the company has achieved that, has “conditionally suspended” $400,000 of the current fine.
At first blush, this seems like the story of a wayward insurance company cheating its customers. And it is. But it’s also the story of a problem that can be fixed when an insurance commissioner does his or her job, like Kreidler did. Unfortunately, such strict oversight is the exception, and many state insurance departments don’t have the authority for such aggressive regulation. Another exception is California, where passage in 1988 of Proposition 103 requiring stringent rate regulation finally got premiums under control. And in Illinois, after rate regulation legislation passed last year, the state’s insurance division ordered a target rate reduction of 3.5 percent for ISMIE, the state’s largest medical malpractice insurer. That was followed by an announcement by another Illinois insurer in October that it would be lowering its rates by 30% and expanding its coverage due to the recent insurance reform.
To understand the wider implications of these trends, they need to be seen in their larger context. For years, this country has been mired in a debate about medical malpractice insurance rates. Insurance companies, and the politicians and business groups that look out for them, continuously blame malpractice lawsuits for premium problems. But as much as that might make intuitive sense, it’s simply not true.
The reason rates spike has everything to do with the insurance industry’s rate setting shenanigans. Rates are usually determined by the economic cycle and investment income. When investment income is up, insurers engage
in fierce competition to collect premium dollars to invest. As a result, they lower their premiums – sometimes even under-pricing policies – to collect more cash for investing. When investment income is down, insurers spike their premiums to make up for losses.
Last year, several national consumer organizations released a comprehensive study, written by former Missouri Insurance Commissioner Jay Angoff, showing that from 2000-20005, net malpractice claims paid by 15 leading medical malpractice insurers across the country had remained flat, while net premiums for doctors had surged 120 percent. Another study by Jay Angoff of Physicians Insurance in Washington State revealed that over a ten year period through early 2005, premiums had soared while paid claims had actually dropped. In fact, after previously blaming lawsuits, Washington State Insurance Commissioner Kreidler said last year that he’d come “full circle” and realized the insurance industry’s contribution to medical malpractice problems.
However, many states have ignored this evidence, passing laws limiting compensation to injured patients, known as “caps,” in malpractice suits. Fortunately, when confronted with such an option last year, Washington State voters wisely voted down a ballot initiative imposing caps. Cap amounts are usually ridiculously inadequate for catastrophically injured patients who have had their lives devastatingly altered by medical malpractice, adding insult to horrible injuries. And of course, caps fail to reduce premiums because lawsuits are not the real problem. In fact, when the Illinois insurer recently announced its premium reduction, state officials specifically pointed out that the caps were not the reason. A review of states reveals no consistent link between insurance premiums and caps.
Nobody denies that doctors’ insurance rates sometimes reach burdensome and unfair levels. But time after time, the data, and stories like Washington State, teach us the same lesson. The insurance industry – which continues to rake in record profits – is the culprit, and the solution is controlling their erratic responses to market forces. Misdirecting punishment to severely injured patients, on the other hand, is not. It not only doesn’t work, but it is cruel, to boot.