STATEMENT OF JAY ANGOFF

before the

Human Rights and Wellness Subcommittee

of the

House Government Reform Committee

on

Medical Liability Insurance Costs

October 1, 2003

Mr. Chairman and members of the Committee, my name is Jay Angoff and I
am a lawyer from Jefferson City, Missouri. I served as insurance
commissioner of Missouri between 1993 and 1998, and I have also served
as deputy insurance commissioner of New Jersey and director of the
Private Health Insurance Group at the U.S. Health Care Financing
Administration (now the Centers for Medicare and Medicaid Services). I
appreciate the opportunity to testify here today on the question whether
patients are needlessly suffering because of the high cost of liability
insurance.

One way, and perhaps the best way, to answer this question is to seek to
quantify any changes in access to health care and to determine the
causes of access problems in states in which such problems have been
reported. This is what the GAO did in its August 2003 Report entitled
Medical Malpractice: Implications of Rising Premiums on Access to Health
Care (\"GAO Access Report\"). As you know, the GAO found only scattered
access problems in the five states it analyzed with reported problems,
and it found that such problems typically existed only in rural areas
and that there were long-standing causes of these problems. GAO also
emphasized that reports of access problems were often exaggerated. It
summarized its findings as follows:

> \"GAO also determined that many of the reported provider actions were
> not substantiated or did not affect access to health care on a
> widespread basis. For example, although some physicians reported
> reducing certain services they consider to be high risk in terms of
> potential litigation, such as spinal surgeries and mammograms, GAO did
> not find access to these services widely affected, based on a review
> of Medicare data, and contacts with providers that have reportedly
> been affected.\"

The Executive Summary from the GAO Access Report is attached as Exhibit
1.

Another way to answer the question whether high malpractice premiums are
a likely cause of access problems is to determine the percentage of
doctors\' incomes that is accounted for by malpractice premiums: the
higher this percentage, the more likely it is that an increase in this
percentage could result in a doctor restricting his practice in order to
reduce his malpractice premium. The magazine Medical Economics publishes
data relevant to this issue. For example, Medical Economics does an
annual survey of doctors\' incomes by specialty and by region, and has
also done a recent survey of the average malpractice premium paid by
specialty. In November 2002 Medical Economics found that the average
doctor\'s net income\--after malpractice premiums and other
expenses\--ranged from \$146,601 for family practitioners without
obstetrics to \$362,208 for invasive cardiologists. See Exhibit 2. It
also found that doctors\' incomes were highest in the south, and lowest
in the west: for example, the average gastroenterologist made \$354,680
in the south, but only \$251,252 in the west. See Exhibit 3. Medical
Economics also found that malpractice premiums accounted for between
1.2% and 5.5% of a doctor\'s gross receipts, with cardiologists paying
the lowest malpractice premiums as a percentage of their gross and
ob-gyn\'s paying the highest. See Exhibit 4.

The Medical Economics surveys were conducted before the malpractice
insurance increases of the last two years. As I will explain, these
increases are likely to prove to be excessive, just as the malpractice
insurance increases during the mid-1980\'s have proven to be excessive.
Nevertheless, even assuming 100% increases in insurance premiums for all
doctors since the Medical Economics surveys were conducted, and even
assuming that no doctor\'s gross compensation increased, malpractice
premiums today have reduced doctors\' net incomes by only 1.2% (for
cardiologists) to 5.5% (for ob-gyn\'s). Reductions in compensation of
these magnitudes\--particularly when doctors\' average net incomes range
from \$147,000 to \$362,000\--would not appear likely to have a material
adverse impact on doctors or their patients.

Both the findings of the GAO and the level of malpractice premiums in
relation to doctors\' incomes indicate, therefore, that the level of
malpractice premiums is not having an adverse effect on access to care.
Nevertheless, there is no denying that malpractice insurance rates have
increased sharply in the last two years, just as they did in the
mid-1980\'s, and just as they did in the mid 1970\'s. To a certain
extent, short periods of sharp increases in insurance rates are an
inevitable result of the insurance cycle, as the GAO found in its June
2003 Report entitled Medical Malpractice Insurance: Multiple Factors
Have Contributed to Increased Premium Rates (\"GAO Multiple Factors
Report\"). Nevertheless, Congress, state legislatures and state
insurance commissioners can take certain actions to reduce these
periodic sharp increases in rates and moderate the insurance cycle. They
include the following:

[1. Compress the rating categories, and more heavily weight experience
within categories]{.underline}. Malpractice insurers typically charge
the specialties paying the highest premiums\--such as
ob-gyn\'s\--between 800% and 1300% of what they charge specialties
paying the lowest premiums\--such as psychiatrists and dermatologists.
Conversely, malpractice insurers typically charge doctors with incidents
no more than 200 to 300% of what they charge doctors with clean records.
By reducing the differential in rates between categories and possibly
combining certain categories, and by giving greater weight to experience
within the categories, rates for doctors with clean records who are
today paying the highest premiums\--such as ob-gyn\'s\--could be
materially reduced.

[2. Establish strict prior approval for both rate increases and rate
decreases]{.underline}. In most states today malpractice insurers can
implement rate changes\--both increases and decreases\--without first
obtaining the approval of the state insurance department. Allowing
insurers to unilaterally implement rate changes enables insurers to
respond to competitive pressures, and made it easy for malpractice
insurers to cut their prices during much of the 1990\'s when their
investment income was high\--which obviously benefited the doctors
buying the insurance. On the other hand, the ability of insurers to
increase their rates without first getting the insurance department\'s
approval\--particularly in combination with the insurance industry\'s
antitrust exemption\--makes it easy for insurers to substantially raise
their rates when their investment income is low, as is the case today.
If conscientiously enforced by insurance commissioners, strict prior
approval systems would moderate both price-cutting when investment
income is high and price increases when investment income is low.

[3. Require automatic hearings on any proposed rate increases of more
than 15%.]{.underline} This is one of the many reforms included in
California\'s Proposition 103, which was approved by the voters in 1988.
It has had the practical effect of limiting proposed malpractice
increases to less than 15%.

[4. Repeal the antitrust exemption for the insurance
industry]{.underline}. This is another of the reforms contained in
California\'s Proposition 103. Insurers are exempt from the federal
antitrust laws under the McCarran-Ferguson Act; in addition, most states
both expressly exempt the business of insurance from their antitrust
laws, and authorize conduct that would otherwise violate the antitrust
laws in their insurance rating laws. Proposition 103 makes insurers
subject to California\'s antitrust laws, as well as to its unfair
business practices laws. While the effect of the antitrust exemption
should not be overstated\--it does not, for example, prevent insurers
from cutting price when their investment income is high\--it does permit
insurers to raise their prices collectively when investment income is
low. And Prop 103 does appear to have had the effect of reducing
premiums: malpractice premiums tripled in California in the seven years
before Prop 103 was enacted in November 1988, but thereafter they
decreased, and even in 2000\--12 years after the enactment of Prop
103\--they were lower than they were in the year in which 103 was
approved. See Exhibit 5.

[5. Establish a state-authorized insurer to write medical malpractice
insurance]{.underline}. Missouri established such an insurer for workers
compensation insurance in 1994 with a \$5 million loan from the state,
and that insurer has been a success: it paid back its loan ahead of
schedule, and it is now a significant player in the Missouri workers
compensation market. It initially was exempted from certain solvency
requirements in order to facilitate its growth, which was controversial;
it is no longer exempt from such requirements. Establishing a
state-authorized medical malpractice insurer would also be
controversial, and might also require certain start-up exemptions. But
it potentially could be a major player in a state medical malpractice
market, just as Missouri\'s workers comp insurer is in the Missouri
workers comp market.

[6. Establish standards that insurers must follow in estimating their
\"incurred losses.\"]{.underline} Perhaps the most fundamental reason
for periodic sharp increases in insurance rates is that insurers base
their rates not on the amounts they have actually paid out in the past
but on the amounts they estimate they will pay out in the future, and
insurers have virtually unlimited discretion in determining those
estimates. Thus, the rates insurers are charging today are based not on
what they are paying out today, but on what they estimate they will pay
out in the future for claims covered by policies in effect today. We
therefore will not know whether the rates insurers are charging today
are excessive until they pay all the claims covered by policies in
effect today\--and that will not happen for another 10 years.

On the other hand, we do know today that the rates malpractice insurers
charged during the last insurance crisis were excessive, since according
to data from Best\'s Aggregates and Averages, the amount they predicted
they would pay out on claims-made policies in effect in 1986 and 1987
turned out to be 26.4% and 31.3% more than the amount they actually paid
out on those policies; and the amount they predicted they would pay out
on occurrence policies in effect in 1986 and 1987 turned out to be 32.2%
and 37.8% more than the amount they actually paid out on those policies.
Or as GAO put it, \"insurer losses anticipated in the late 1980s did not
materialize as projected, so insurers went into the 1990s with reserves
and premium rates that proved to be higher than the actual losses they
would experience.\" GAO Multiple Factors Report at 44. We can not know
definitively today whether the rates malpractice insurers are charging
today are excessive: as GAO put it, \"it remains to be seen whether
these increases will, as occurred in the 1980s, be found to have
exceeded those necessary to pay for future claims losses, thus
contributing to the beginning of the next insurance cycle.\"
[Id]{.underline}. at 45. Nevertheless, based on the precedent of the
mid-1980\'s\--as well as the dramatic difference between malpractice
insurers\' actual current payouts and their estimated future
payouts\--no one should be surprised if in 2012 or so the rates
malpractice insurers are charging today are revealed to be materially
excessive.

In short, incurred losses fluctuate substantially year-to-year because
insurers have virtually unlimited discretion in establishing their
incurred loss estimates. The substantial fluctuations in these
estimates, combined with fluctuations in investment income and
reinsurance rates, cause substantial fluctuations in insurance rates. If
states enacted standards that insurers were required to follow in
establishing their incurred loss estimates, these fluctuations could be
reduced.

In conclusion, the GAO Multiple Factors Report found that \"the medical
malpractice insurance market appears to roughly follow the same cycles
as the overall property-casualty insurance market, but the cycles tend
to be more volatiles,\" GAO Multiple Factors Report at 33, and that
\"the year-to-year increase in premium rates can very substantially
because of perceived future losses and a variety of other factors,
including investment returns and reinsurance rates.\" Id. at 43. Those
findings are supported by the evidence, as is the finding of the GAO
Access Report that malpractice rates are not substantially affecting
access to health care. I have tried in my testimony to set out an
alternative method of measuring the likely affect of malpractice rate
increases on access to health care, and to set out ways to moderate the
insurance cycle so that periodic sharp increases in medical malpractice
insurance rates do not continue to occur in the future as they have in
the past.

I appreciate the opportunity to testify here today and I would be happy
to answer any questions the committee may have.