Topic:
MEDICAL MALPRACTICE; MALPRACTICE; MEDICAL MALPRACTICE INSURANCE;
Location:
MALPRACTICE;

OLR Research Report


July 13, 2004

 

2004-R-0548

MEDICAL MALPRACTICE - FLORIDA AND NEW YORK

By: Janet L. Kaminski, Associate Legislative Attorney

You asked (1) what has happened to Florida medical malpractice rates since non-economic damage caps were imposed and (2) how the Medical Malpractice Insurance Pool of New York State works.

SUMMARY

In 2003, Florida enacted legislation regarding medical negligence, including caps on non-economic damages and changes to bad faith allegation requirements (Committee Substitute for Senate Bill 2D, effective September 15, 2003). According to a Deloitte & Touche LLP study, the legislation impacted current medical malpractice insurance rates by 7.8%. Of this, 5.3% was attributed to caps. Insurers were required to submit rate filings to the Office of Insurance Regulation (OIR) by January 9, 2004 reflecting this 7.8% savings. This did not mean that rates would decrease by 7.8%, but that requested rate increases should be reduced by 7.8%. When compared to past years, OIR reports a substantial reduction in the rate increases requested this year and an increase in the number of insurers writing medical malpractice insurance. A copy of Deloitte's report is enclosed.

The New York Superintendent of Insurance established by regulation the New York Medical Malpractice Insurance Plan (“MMIP”) (Regulation No. 170, 11 NYCRR 430). MMIP is an assigned risk mechanism through which health care providers unable to obtain medical malpractice insurance in the voluntary commercial market are assigned to authorized medical malpractice insurers and provided coverage. The insurers are responsible for all expenses and losses related to the policies assigned to them. All medical malpractice insurers in New York are mandated to accept any risks assigned under MMIP.

Alternatively, the insurers can agree to participate in the Medical Malpractice Insurance Pool of New York State (“the pool”), which is a joint underwriting mechanism. If they become a pool member, they do not have particular providers assigned to them. Instead, member insurers share losses from all policies issued by the pool proportionately. Health care providers denied medical malpractice coverage in the commercial market may apply for coverage from the pool. Claims against the insureds, including investigation expenses, fees, and pool administration expenses, are paid from the premiums collected. If the premiums are insufficient to cover these costs, member insureds are proportionately assessed the excess amount needed. A copy of documents related to the pool operation and Regulation No. 170 are enclosed.

FLORIDA MEDICAL MALPRACTICE RATES

Recent news reports cite “soaring malpractice insurance rates” in Florida (e.g., High Rates Drive Doctors to Drop Insurance, Hide Assets, Associated Press, June 19, 2004). However, according to the Florida Office of Insurance Regulation (OIR), these reports were prepared without its input and provided only opinions from a few doctors. Contrary to these reports, OIR reports that data suggests a stabilization of the Florida medical malpractice insurance market for a variety of reasons, including recent legislation.

Presumed Factor

Florida Committee Substitute for Senate Bill 2D (CS/SB-2D), which became effective September 15, 2003, contains numerous tort reforms specific to medical malpractice. Section 40 of the law required OIR to calculate and publish a presumed factor reflecting the impact the reforms will have on medical malpractice insurance rates within 60 days of the law's effective date.

The law prohibited any medical malpractice insurance rate changes from July 1, 2003 to January 1, 2004. The law also required insurers to file new rates within 60 days of the OIR's publication of the presumed factor reflecting the anticipated savings of the reforms. The insurers would be expected to reduce their rate action by the presumed factor. This does not mean that rates would necessarily decrease, but that the anticipated rate increase would decrease by that factor.

OIR retained Deloitte & Touche LLP (Deloitte) to conduct an independent analysis of the legislative reforms and compute the presumed factor required by the legislation. Deloitte is a professional services firm that provides independent audit, tax, consulting, and financial advisory services. Of the various reforms enacted in Florida, Deloitte determined that most would have zero to de minimas insurance rate savings in the near term. However, Deloitte reports that two measures would have a more immediate and measurable impact: caps on non-economic damages and changes to bad faith law (e.g., when an insurer can be sued for bad faith for not satisfying its contractual obligations). Deloitte's CS/SB-2D analysis resulted in a 7.8% presumed factor, of which 5.3% is attributed to caps and 2.5% to bad faith reform.

Caps on Non-Economic Damages (CS/SB-2D 54)

The Florida law imposes caps on non-economic damages in all court cases involving injury or death due to medical negligence. Regardless of the number of defendants, the law caps non-economic damages at $500,000 per claimant in suits against health care practitioner defendants (e.g., physicians and surgeons) and $750,000 per claimant in suits against non-practitioner defendants (e.g., hospitals and other non-physician entities). The court can decide to exceed these caps in certain circumstances. In cases of catastrophic injury, as determined by the trier of fact, and when the court determines that manifest injustice would occur otherwise, an injured patient may recover up to $1 million and $1.5 million, respectively. (Note that this “pierced cap” applies only to the injured patient, and not to all claimants, who may include a spouse, a child, or a parent of the injured patient.)

If the negligence resulted in a permanent vegetative state or death, the law caps non-economic damages at $1 million and $1.5 million, respectively. For any type of injury resulting from emergency care, the law caps non-economic damages at $100,000 per claimant, but not to exceed $300,000 for all claimants, in suits against practitioner defendants and $750,000 per claimant, but not to exceed $1.5 million for all claimants, in suits against non-practitioner defendants.

According to Deloitte, the impact of the caps will take up to six years to phase in because they apply to medical negligence injuries occurring after September 15, 2003. This allows pre-CS/SB-2D claims to clear out of the legal system and post CS/SB-2D claims to enter the system and operate under the new rules. Deloitte's calculations estimate a current presumed factor of 5.3% savings that insurers can apply in their rate filings because of the caps.

Bad Faith Law Reforms (CS/SB-2D 56)

Section 56 of CS/SB-2D creates a new statutory provision that governs bad faith in medical negligence actions. When an insurer is found to have acted in bad faith (i.e., not acting in good faith to settle claims), it is liable for the full amount of a judgment against its insured, even if that amount exceeds the policy limits. Bad faith actions in Florida may be brought under statutory law ( 624.155(1)(b)(1), Fla. Stat.) or common law. Under statutory law prior to enactment of CS/SB-2D, an insurer could avoid a finding of bad faith if it paid a claim within 60 days. However, common law has no defined period for payment. As a result, according to Deloitte, a plaintiff could demand payment in 10 or 20 days and then, if no payment is made within that limited timeframe, assert a bad faith action.

The new law regarding bad faith in medical negligence actions indicates that it applies to both statutory and common law claims. It provides that an insurer cannot be held to have acted in bad faith for failure to timely pay policy limits if it tenders the policy limits and meets other reasonable settlement conditions before the earlier of two events: (1) the 210th day after service of the complaint or (2) the 60th day after conclusion of (a) the deposition of parties and expert witnesses, (b) initial disclosure of witnesses and production of documents, and (c) required mediation. The law provides that the failure to tender policy limits during these time periods does not create a presumption of bad faith.

The law includes the following factors for the trier of fact to consider when determining whether an insurer acted in bad faith: (a) the insurer's willingness to negotiate in anticipation of settlement; (b) the propriety of the insurer's methods of investigating and evaluating the claim; (c) whether the insurer timely informed the insured of an offer to settle within the policy limits, the right to retain counsel, and the risk of litigation; (d) whether the insured denied liability or requested that the case be defended after the insurer fully advised him as to the facts and risks; (e) whether the claimant imposed any condition, other than the tender of the policy limits, on the claim settlement; (f) whether the claimant provided relevant information to the insurer on a timely basis; (g) whether and when other defendants in the case settled or were dismissed from the case; (h) whether there were multiple claimants seeking compensation, in total, in excess of policy limits from the defendant or his insurer; (i) whether the insured misrepresented material facts or made material omissions of fact to the insurer; and (j) any additional factors the court determines to be relevant.

The law also provides that when an insurer tenders policy limits and the claimant accepts the tender, the insurer is entitled to a release of its insured.

Based on Deloitte's research, there is evidence that insurers in Florida automatically settle 52% of medical malpractice claims, before knowing if the claims are meritorious, to avoid bad faith allegations, as compared to 30% nationwide. Deloitte believes the extended time period under the new bad faith provisions allows insurers more time to determine the strengths and weaknesses of a plaintiff's case before making a settlement decision. This should reduce the instances where an uninformed settlement results in an erroneous decision to pay the full policy limit. In other words, the additional time should reduce the number of times an insurer quickly agrees to pay the policy limit in an effort to avoid a bad faith action. Time will be used to fully investigate claims and make better decisions.

Deloitte's analysis predicts a reduction in (1) insurance company payments in excess of policy limits (presumably due to fewer bad faith findings) and (2) reinsurance premiums (reflecting the lower bad faith exposure). In addition, Deloitte expects insurers to revise their claim handling strategies relative to bad faith. As a result, Deloitte estimates a 2.5% presumed factor savings that insurers can apply in their rate filings because of the new bad faith provision.

Insurer Rate Filings

Taking the impact of caps and bad faith reform together, Deloitte calculates a 7.8% presumed factor for CS/SB-2D. OIR published notice of the 7.8% presumed factor on November 10, 2003 (OIR-03-020M). Insurers were required to submit, by January 9, 2004, new rate filings that take into consideration the presumed factor.

Florida has over 30 property and casualty insurers writing medical malpractice insurance, of which about 12 dominate the market place with a total market share of 80%. Table 1 provides “presumed factor rate filing” details for some of these insurers.

TABLE 1: FLORIDA PRESUMED FACTOR RATE FILINGS

Market Share Rank*

Insurer Name

Rate Need per Insurer with Presumed Factor

Rate Change Requested by Insurer and Approved by OIR

1

First Professionals Insurance Company (Physicians & Surgeons)

10.9%

8.0%

1

First Professionals Insurance Company (Dentists)

-3.0%

-3.0%

2

Health Care Indemnity Inc. (Physicians & Surgeons)

-1.6%

-1.6%

3

Pronational Insurance Company (Physicians & Surgeons)

22.0%

17.3%

4

MAG Mutual Insurance Company (Physicians & Surgeons)

15.4%

7.0%

4

MAG Mutual Insurance Company (Health Care Facilities)

0.0%

0.0%

5

Truck Insurance Exchange (Physicians & Surgeons)

45.4%

6.0%

7

Medical Protective Company (Physicians & Surgeons)

69.8%

45.0%**

8

The Doctors Company and Interinsurance Exchange (Physicians & Surgeons)

18.6%

8.9%

14

National Fire Insurance Co. of Hartford (Physicians & Surgeons)

11.7%

11.7%

14

Continental Casualty Company (Physicians & Surgeons and Hospitals)

No data

-7.8%

15

Chicago Insurance Company (Physicians & Surgeons)

110.3%

15.8%

15

Chicago Insurance Company (Nurses)

106.2%

8.2%

Source: Florida Office of Insurance Regulation

*Based on 2002 property and casualty direct written premium.

**Per OIR, this rate increase brought Medical Protective in line with competitors.

Stabilization of Market

According to OIR's Mr. Robert Lotane, the Florida medical malpractice insurance market is beginning to stabilize. This is seen by the increase in carriers offering and writing the insurance and a substantial reduction in the increase of rates.

Mr. Lotane noted that as of April 2004, all 12 of the largest medical malpractice insurance carriers are accepting new business, instead of just four or five of them two years ago. Also, three property and casualty companies licensed in Florida have added medical malpractice insurance to their certificate of authority, demonstrating their interest in entering the market. Finally, about 12 new risk retention groups (RRGs) have registered with the OIR, signaling their intent to sell medical malpractice insurance in Florida. (The federal Liability Risk Retention Act of 1986 authorizes the creation and operation of RRGs (15 U. S. C. 3901, et seq.) For more information on RRGs, see OLR report 2004-R-0408.)

The recent presumed factor rate filings showed a moderation of rate increases. Mr. Lotane observed that instead of increases in the high teens and above as in past years, the increases requested and approved mostly ranged in single digits to low teens. Some rates even decreased. While the insurers were required to consider the impact of the new legislation, particularly the imposition of non-economic damage caps and changes to bad faith requirements, they may also have weighed the increased competition in the marketplace.

While it is early to know the full impact of CS/SB-2D on Florida's medical malpractice insurance market, it appears that CS/SB-2D is already having a positive impact.

MEDICAL MALPRACTICE INSURANCE POOL OF NEW YORK STATE

Regulation No. 170

The New York Superintendent of Insurance established by regulation the New York Medical Malpractice Insurance Plan (“MMIP” or “the plan”) (Regulation No. 170, 11 NYCRR 430). MMIP is an assigned risk mechanism through which “eligible health care providers” unable to obtain medical malpractice insurance in the voluntary commercial market are equitably distributed (i.e., assigned) to authorized medical malpractice insurers and provided coverage under the plan.

An “eligible health care provider” is a New York-licensed physician, dentist, podiatrist, certified nurse-midwife, certified registered nurse anesthetist, or hospital that has been declined medical malpractice coverage by at least three authorized insurers in New York (or, if fewer than three insurers are writing coverage for the specific specialty or type of facility, then declined by that number of insurers).

MMIP and Medical Liability Mutual Insurance Company (“Medical Liability”) entered into a management agreement under which Medical Liability administers the plan (e.g., issues policies and cancellations, collects premiums, settles and pays losses, maintains books and records).

Participation in MMIP is mandatory for all insurers licensed in New York and writing medical malpractice insurance on a direct basis. Member insurers bear all expenses and losses related to their assigned risks. However, instead of accepting assigned risks, insurers may agree to join an insurance pool where all expenses, fees, and losses related to the risks are shared proportionally among all pool members. According to Mr. John DeLosh of Medical Liability, all insurers have opted to participate in the pool. As a result, MMIP has never assigned a policy to an insurer.

The Pool

The Medical Malpractice Insurance Pool of New York State (“the pool”) is a joint underwriting mechanism through which member insurers provide a medical malpractice insurance market for “eligible health care providers” (as defined above) who are unable to obtain insurance in the voluntary market.

Pursuant to Regulation No. 170, insurers who agree to participate in the pool are not assigned risks under MMIP. As the servicing company for the pool, Medical Liability is authorized to (1) review and approve coverage applications; (2) issue policies, non-renewals, and cancellations; (3) collect premiums; (4) settle claims and pay losses; and (5) maintain books and records, among other administrative duties.

Each member insurer is assigned a “participation percentage” which is determined by dividing its net direct medical malpractice insurance premiums written in New York by the aggregate net direct medical

malpractice insurance premiums written in New York by all member insurers. Participating percentages are determined annually based on premiums written the preceding calendar year. The participation percentage is the amount of risk that the member insurer agrees to accept on every policy written by the pool.

Policies issued by the pool are effective for one year. The coverage provided by the pool to an individual is limited to $1,000,000 per claim and $3,000,000 for all claims in the year. Physicians, dentists, and podiatrists may be eligible for excess coverage from the pool. Coverage provided to a hospital is limited to $1,000,000 per claim and $6,000,000 for all claims in the year.

Pool Funding

On behalf of the member insurers, Medical Liability collects and deposits premiums in a bank account in the pool's name, called the working fund account. The premiums collected, and interest accrued on them, funds the pool's operations. From the working fund account, Medical Liability pays losses resulting from claims against the insureds, including expenses incurred in investigating and settling claims, as well as all pool-related fees and expenses.

If the working fund account has insufficient funds to cover losses or expenses, member insureds are assessed the excess amount needed based on their participation percentage. (Mr. DeLosh noted that limiting the assessment to medical malpractice insurers might be an area of concern in New York. He suggests that a more effective method is to spread the assessments across all New York licensed property and casualty insurers to minimize the impact on insurers, and in turn, insureds.)

Rates

Medical malpractice insurance rates are established in accordance with New York insurance law, which permits consideration of: (1) past and prospective loss and expense experience for medical malpractice insurance in New York, (2) trends in the frequency and severity of losses, and (3) other information the superintendent may require.

Insurance written through the pool is significantly more expensive than through the voluntary commercial market due to the inherent adverse selection. Adverse selection occurs when poorer risks or less desirable insureds use insurance more frequently than better risks. Since the pool is the insurer of last resort, it presumably only contains poorer risks, whose loss experience drives up rates.

According to Mr. DeLosh, rates for medical malpractice insurance written through the pool are about 243% higher than in the commercial market. Part-time practices working 20 hours per week or less are permitted discounted rates. In addition, a 5% discount may be offered to doctors who have completed a New York State Department of Insurance Approved Risk Management course. Insureds covered by the pool may also be subject to significant surcharges based upon individual rating considerations (i.e., paid losses, specialty, territory).

While commercial insurers can submit information to the insurance department requesting particular rate actions for their direct-written business, the New York insurance superintendent is authorized by law to set medical malpractice rates. This authority was given in 1986 in an effort to stabilize the market and moderate rate increases. The superintendent recently announced a 7% increase for all medical malpractice insurers except the pool, for which he granted 20% rate increase effective July 1, 2004.

In 2003, the pool insured 4,115 individuals. Table 2 provides a breakdown of the individuals by type (primary or excess insurance) and a comparison with past years.

TABLE 2: MEDICAL MALPRACTICE INSURANCE POOL

Type of Insured

Policies as of 12/31/2003

Policies as of 12/31/2002

Policies as of 12/31/2001

Primary Insureds

     

Physicians

561

551

572

Dentists

163

168

135

Podiatrists

73

64

47

Nurse-Anesthetists

10

5

5

Nurse-Midwives

9

2

0

Professional Corporations

29

29

28

Total

845

819

787

-Continued-

Type of Insured

Policies as of 12/31/2003

Policies as of 12/31/2002

Policies as of 12/31/2001

Excess Insureds

     

First layer excess

1,701

292

151

Second layer excess

1,569

1,295

165

Total

3,270

1,587

316

       

TOTAL

4,115

2,406

1,103

Source: New York State Department of Insurance

Note: Most of the increase in excess insureds from 12/31/2002 to 12/31/2003 was a result of one voluntary insurer non-renewing its excess book of business for the policy year beginning July 1, 2003. Most of the increase in excess insureds from 12/31/2001 to 12/31/2002 resulted from one voluntary insurer non-renewing its excess book of business for the policy year beginning July 1, 2002.

Effectiveness of Pool

Various bills have been proposed in New York that would require the insurance superintendent to provide the governor with an assessment of the MMIP and pool system. However, the bills appear to have stalled in the state assembly.

In Mr. DeLosh's personal opinion, the pool is having a good effect in the marketplace for several reasons. First, it makes insurance available to doctors who have difficulty obtaining it elsewhere. Second, because of its high rates, he believes the pool is having a filtering effect on New York's health care provider community by perhaps encouraging those who should not be practicing to go out of business. In other words, doctors who cannot obtain insurance elsewhere because of their past medical malpractice liability or afford the insurance through the pool retire or change professions.

Finally, the pool may ultimately put downward pressure on commercial market rates as insurers divest themselves of riskier insureds, who are shifted to the pool. However, such a trend is speculative. Because current rates reflect past experience, losses are already in the system that will take years to come to fruition (e.g., according to the National Practitioner Data Bank's 2002 annual report, the average time between medical malpractice incident and payout was 4.35 years nationally). The full impact of the pool will be determined over time.

JLK:ts