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Testimony:

Before the Subcommittee on Wellness and Human Rights, Committee on 
Government Reform, House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 2:00 p.m. EDT:

Wednesday, October 1, 2003:

Medical Malpractice Insurance:

Multiple Factors Have Contributed to Premium Rate Increases:

Statement of:

Richard J. Hillman, Director Financial Markets and Community 
Investment:

Kathryn G. Allen, Director:

Health Care - Medicaid and Private Health Insurance Issues:

GAO-04-128T:

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss our work examining recent 
increases in premium rates for medical malpractice insurance and the 
effect of certain tort reform laws on premium growth. Since the late 
1990s, medical malpractice insurance rates have increased dramatically 
for physicians in certain specialties in some states. These increases 
have heightened concerns that some health care providers may no longer 
be able to afford malpractice insurance, resulting in shuttered 
practices and reducing access to high-risk services. In response, some 
states have recently revised or have considered revising their tort 
laws, sometimes placing caps on damages in malpractice lawsuits, and 
the Congress is considering similar legislation.[Footnote 1]

Our testimony today will focus on the factors that have contributed to 
the recent increases in insurance premium rates and the differences in 
rates among states that have passed varying levels of tort reform laws. 
Our findings are based on two reports we recently issued addressing 
various aspects of the recent increases in medical malpractice 
insurance rates.[Footnote 2] Recognizing that the medical malpractice 
market varies considerably across states, as part of these reviews we 
judgmentally selected a number of states and conducted more in-depth 
reviews in each of those states.[Footnote 3] Both our analyses and our 
conclusions are based in part on data and information we received from 
the states we visited and in part on analyses of national data from 
various sources.

In summary, multiple factors have contributed to the recent increases 
in medical malpractice premium rates in the states we analyzed. First, 
since 1998, insurers' losses on medical malpractice claims have 
increased rapidly in some states. We found that the increased losses 
appeared to be the greatest contributor to increased premium rates, but 
a lack of comprehensive data at the national and state levels on 
insurers' medical malpractice claims and the associated losses 
prevented us from fully analyzing the composition and causes of those 
losses. For example, data that would have allowed us to analyze claim 
severity at the insurer level on a state-by-state basis or to determine 
how losses were broken down between economic and noneconomic damages 
were unavailable. Second, from 1998 through 2001, medical malpractice 
insurers experienced decreases in their investment income[Footnote 4] 
as interest rates fell on the bonds that generally make up around 80 
percent of these insurers' investment portfolios. While almost no 
medical malpractice insurers experienced net losses on their investment 
portfolios over this period, a decrease in investment income meant that 
income from insurance premiums had to cover a larger share of costs. 
Third, during the 1990s, insurers competed vigorously for medical 
malpractice business, and several factors, including high investment 
returns, permitted them to offer prices that, in hindsight, did not 
completely cover the ultimate losses some insurers experienced on that 
business. As a result, some companies became insolvent or voluntarily 
left the market, reducing the downward competitive pressure on premium 
rates that had existed through the 1990s. Fourth, beginning in 2001, 
reinsurance rates for medical malpractice insurers also increased more 
rapidly than they had in the past, raising insurers' overall 
costs.[Footnote 5] In combination, all of these factors have 
contributed to the movement of the medical malpractice insurance market 
through hard and soft phases--similar to the cycles experienced by the 
property-casualty insurance market as a whole--and premium rates have 
fluctuated with each phase.[Footnote 6] Cycles in the medical 
malpractice market tend to be more extreme than in other insurance 
markets because of the longer period of time required to resolve 
medical malpractice claims, and factors such as changes in investment 
income and reduced competition can exacerbate the fluctuations.

In an attempt to constrain increases in medical malpractice premium 
rates, states have adopted various tort reform measures.[Footnote 7] Of 
particular focus recently have been tort reform measures that include 
placing caps on monetary awards for noneconomic damages--such as pain 
and suffering--that may be paid to plaintiffs in a malpractice lawsuit. 
Available data, while somewhat limited in scope, indicate that rates of 
premium growth have been slower on average in states that have enacted 
tort reforms with noneconomic damage caps than in states with more 
limited reforms. Premium rates reported for three specialties--general 
surgery, internal medicine, and obstetrics and gynecology--were 
relatively stable on average in most states from 1996 through the late 
1990s and then began to rise, but more slowly, in states with certain 
noneconomic damage caps. For example, from 2001 through 2002 average 
premium rates rose approximately 10 percent in the four states with 
noneconomic damage caps of $250,000 but approximately 29 percent in 
states with more limited tort reforms. As we have discussed, premium 
rate increases are influenced by multiple factors, and our analyses did 
not allow us to determine the extent to which the differences premium 
rate increases at the state level could be attributed to tort reform 
laws or to other factors.

Overall, adequate data do not exist that would allow us and others to 
provide definitive answers to important questions about the market for 
medical malpractice insurance, including an explanation of the causes 
of rising losses over time and the precise effect of tort reforms on 
premium rates. This lack of data is due, in part, to the nature of 
regulatory reporting requirements for all lines of insurance, which 
focus primarily on the information needed to evaluate a company's 
solvency. However, comprehensive data on individual awards actually 
paid in malpractice cases are also lacking, as are data on conditions 
in the health care sector that might affect the incidence and severity 
of medical malpractice suits.

Background:

Nearly all health care providers buy medical malpractice insurance to 
protect themselves from potential claims that could otherwise cause 
financial distress or even bankruptcy. Under a malpractice insurance 
contract, the insurer agrees to investigate claims, to provide legal 
representation for the health care provider, and to accept financial 
responsibility for payment of any claims up to a specified monetary 
level during an established time period. The insurer provides this 
coverage in return for a fee--the medical malpractice premium. The most 
common physician policies provide coverage limits of $1 million per 
incident and $3 million per year.

Since 1999, medical malpractice premium rates for physicians in some 
states have increased dramatically. Among the states that we analyzed, 
however, we found that both the extent of the increases and the premium 
levels varied greatly not only from state to state but across medical 
specialties and even among areas within states. For example, the 
largest writer of medical malpractice insurance in Florida increased 
premium rates for general surgeons in Dade County by approximately 75 
percent from 1999 to 2002, while the largest insurer in Minnesota 
increased premium rates for the same specialty by about 2 percent over 
the same period. The resulting 2002 premium rate quoted by the insurer 
in Florida was $174,300 a year, more than 17 times the $10,140 premium 
rate quoted by the insurer in Minnesota. In addition, the Florida 
insurer quoted a rate of $89,000 a year for the same coverage for 
general surgeons outside Dade County, or about half the rate it quoted 
inside Dade County.

In order to improve the affordability and availability of malpractice 
insurance and to reduce pressure on providers who could be faced with 
heavy liabilities, all states have adopted varying types of tort reform 
legislation. Tort reforms are generally intended to limit the number of 
malpractice claims or the size of payments in an effort to reduce 
malpractice costs and insurance premiums. Among the various types of 
tort reform measures adopted by states during the past three decades, 
caps on noneconomic damage awards have been the focus of particular 
interest. They have also been an issue of some debate.[Footnote 8] 
Noneconomic damages are awarded to plaintiffs in a medical malpractice 
suit to compensate for harm that is not easily quantifiable, such as 
pain and suffering. Proponents of caps believe that such limits can 
help reduce the rate of growth in malpractice insurance premiums by, 
among other things, helping to prevent excessive awards and 
overcompensation and by ensuring more consistency in jury verdicts. In 
contrast, opponents of these caps believe that factors other than award 
amounts affect malpractice insurance premiums and that caps can result 
in undercompensation for severely injured persons. Congress is 
currently considering federal tort reform legislation that includes 
several of the measures states have adopted, including placing caps on 
noneconomic and punitive damages.

Multiple Factors Have Contributed to the Increases in Medical 
Malpractice Premium Rates:

Among the factors that have contributed to increases in medical 
malpractice premium rates are insurers' losses, declines in investment 
income, a less competitive climate, and climbing reinsurance rates. We 
found that increased losses appeared to be the greatest contributor to 
premium rate increases, but a lack of comprehensive data at the 
national and state levels on claims and associated losses prevented us 
from fully analyzing the composition and causes of those losses at the 
insurer level.

Rising Paid Losses Increase Insurers' Expectations of Required 
Premiums:

In the long term the price insurers need to charge for their premiums 
is the sum of actual paid losses and expenses, plus a reasonable return 
in a competitive market.[Footnote 9] Paid losses, one of the two ways 
that insurers define losses, are the cash payments insurers make in a 
given year, irrespective of the year in which the claim giving rise to 
the payments occurred or were reported. Most payments made in any given 
year are for claims that were reported in previous years. Medical 
malpractice insurers saw these losses begin to rise rapidly in 1998.

Short-term changes in rates--from year-to-year--are affected by 
incurred losses, which, in contrast to paid losses, reflect an 
insurer's expectations of the amounts it will have to pay on claims 
reported in that year and any adjustments, whether up or down, to the 
amounts the company expects to pay out on claims from previous years 
that are still pending.[Footnote 10] Incurred losses are the largest 
component of medical malpractice insurers' costs. For the 15 largest 
medical malpractice insurers in 2001--whose combined market share 
nationally was approximately 64.3 percent--incurred losses (including 
both payments to plaintiffs to resolve claims and the costs associated 
with defending claims) accounted for around 78 percent, on average, of 
the insurers' total expenses.

Figure 1 helps illustrate the relationship between incurred and paid 
losses and between short-term and long-term determinants of changes in 
premium rates. The figure shows paid and incurred losses for the 
national medical malpractice market from 1975 to 2001, adjusted for 
inflation. After adjusting for inflation, we found that the average 
annual increase in paid losses from 1988 to 1997 was approximately 3.0 
percent but that this rate rose to 8.2 percent from 1998 through 2001. 
Inflation-adjusted incurred losses decreased by an average annual rate 
of 3.7 percent from 1988 to 1997 but increased by 18.7 percent from 
1998 to 2001.

Figure 1: Figure 1. Inflation-Adjusted Paid and Incurred Losses for the 
National Medical Malpractice Insurance Market, 1975-2001 (Using the 
CPI, in 2001 dollars):

[See PDF for image]

[End of figure]

The recent increases in both paid and incurred losses among our seven 
sample states[Footnote 11] varied considerably, with some states 
experiencing significantly higher increases than others. From 1998 to 
2001, for example, paid losses in Pennsylvania and Mississippi 
increased by approximately 70.9 and 142.1 percent, respectively, while 
paid losses in Minnesota and California increased by approximately 8.7 
percent and 38.7 percent, respectively.

According to actuaries and insurers contacted with, increased losses 
affect premium rates in several ways. First, increasing levels of paid 
losses on claims reported in current or previous years can increase 
insurers' estimates of what they expect to pay out on future claims. 
Insurers then raise premium rates to match their expectations. In 
addition, large losses on even one or a few individual claims can make 
it harder for insurers to predict the amount they might have to pay on 
future claims. Some insurers and actuaries we spoke with told us that 
when losses on claims are hard to predict, insurers will generally 
adopt more conservative expectations regarding losses--that is, they 
will assume losses will be toward the higher end of a predicted range 
of losses. Further, large losses on individual claims can raise 
plaintiffs' expectations for damages on similar claims, ultimately 
resulting in higher paid losses for both claims that are settled and 
those that go to trial. As described above, this tendency in turn can 
lead to higher expectations of future losses and thus to higher premium 
rates. Finally, an increase in the percentage of claims on which 
insurers must make payments can also increase the amount that insurers 
expect to pay on each policy, resulting in higher premium rates. That 
is, insurers expecting to pay out money on a high percentage of claims 
may charge more for all policies in order to cover the expected 
increases.

Declining Investment Income Has Affected Premiums:

State laws restrict medical malpractice insurers to conservative 
investments, primarily bonds. In 2001, the 15 largest writers of 
medical malpractice insurance in the United States[Footnote 12] 
invested, on average, around 79 percent of their investment assets in 
bonds, usually some combination of U.S. Treasury, municipal, and 
corporate bonds. While the performance of some bonds has surpassed that 
of the stock market as a whole since 2000, annual yields on selected 
bonds have decreased steadily since 2000. We analyzed the average 
investment returns of the 15 largest medical malpractice insurers in 
2001 and found that the average return fell from about 5.6 percent in 
2000 to an estimated 4.0 percent in 2002. However, none of the 
companies experienced a net loss on investments at least through 2001, 
the most recent year for which such data were available. Additionally, 
almost no medical malpractice insurers overall experienced net 
investment losses from 1997 to 2001. We roughly estimated that, all 
else held constant, the 1.6 percent decrease in average investment 
return from 2000 to 2002 would have resulted in an increase in premium 
rates of approximately 7.2 percent over the same period.

Medical malpractice insurers are required by state insurance 
regulations to reflect expected investment income in their premium 
rates. That is, insurers are required to reduce their premium rates to 
consider the income they expect to earn on their investments. As a 
result, when insurers expect their returns on investments to be high, 
as returns were during most of the 1990s, premium rates can remain 
relatively low because investment income will cover a larger share of 
losses on claims. Conversely, when insurers expect their returns on 
investments to be lower--as returns have been since around 2000--
premium rates rise in order to cover a larger share of losses on 
claims. During periods of relatively high investment income, insurers 
can lose money on the underwriting portion of their business but still 
make a profit. Although losses from medical malpractice claims and the 
associated expenses may exceed premium income, income from investments 
can still allow the insurer to operate profitably. Insurers are not 
allowed to increase premium rates to compensate for lower-than-expected 
returns on past investments but must consider only prospective income 
from investments.

Downward Pressure on Premium Rates Has Decreased as Profitability Has 
Declined:

Since 1999, the profitability of the medical malpractice insurance 
market as a whole has declined--even with increasing premium rates--
causing some large insurers to pull out of the market in some states or 
even nationwide. With fewer insurers offering this insurance, there is 
less price competition and thus less downward pressure on premium 
rates. According to some industry and regulatory officials in our seven 
sample states, premium rates were kept from rising between 1992 and 
1998, in part, by price competition, even though losses generally did 
rise. In some cases, premium rates actually fell. For example, during 
this period premium rates for obstetricians and gynecologists covered 
by the largest insurer in Florida--a state where these physicians are 
currently seeing rapid premium rate increases--actually decreased by 
approximately 3.1 percent. Some industry participants we spoke with 
told us that, in hindsight, premium rates charged by some insurers 
during this period might have been lower than they should have been. As 
a result, the premium increases that began in 1998 were actually 
bringing premiums more in line with insurers' losses on claims. Some 
industry participants also pointed out that the pricing inadequacies of 
the 1990s were to some extent masked by insurers' adjustments to 
expected losses on claims reported during the late 1980s and by their 
high investment income.

According to industry participants and observers, as the competitive 
pressures on premium rates decreased, insurers apparently were able to 
raise premium rates to a level more in line with their expected losses 
relatively quickly and easily. That is, absent the competitive pressure 
that may have caused insurers to keep premium rates lower, insurers 
were able to raise premium rates to match their loss expectations.

Reinsurance Premium Rates Have Increased:

The rising cost of reinsurance was an additional reason for the recent 
increases in medical malpractice premium rates in our seven sample 
states. Insurers in general purchase reinsurance to protect themselves 
against large unpredictable losses. Medical malpractice insurers, 
particularly smaller insurers, depend heavily on reinsurance because of 
the potentially high payouts on medical malpractice claims.

The Medical Malpractice Market Moves through Hard and Soft Insurance 
Cycles:

The medical malpractice insurance market appears to roughly follow the 
same "hard" and "soft" cycles as the overall property-casualty 
insurance market. However, the cycles tend to be more volatile--that 
is, the swings are more extreme--because of the length of time involved 
in resolving medical malpractice claims and the volatility of the 
claims themselves. Hard markets are generally characterized by rapidly 
rising premium rates, tightened underwriting standards, narrowed 
coverage, and often by the departure of some insurers from the market. 
In the medical malpractice market, some market observers have 
characterized the period from approximately 1998 to the present as a 
hard market. (Previous hard markets occurred during the mid-1970s and 
mid-1980s.) Soft markets are characterized by slowly rising premium 
rates, less stringent underwriting standards, expanded coverage, and 
strong competition among insurers. The medical malpractice market from 
1990 to 1998 has been characterized as a soft market.

States with Tort Reforms that Include Certain Noneconomic Damage Caps 
Had Lower Recent Growth in Malpractice Insurance Premium Rates:

In order to constrain the rate of growth in malpractice insurance 
premiums, states have adopted various tort reform measures, some of 
which include placing caps on monetary awards for noneconomic damages. 
Premium rates reported for the physician specialties of general 
surgery, internal medicine, and obstetrics and gynecology--the only 
specialties for which data were available--were relatively stable on 
average in most states from the mid-to late 1990s and then began to 
rise, but more slowly among states with certain noneconomic damage 
caps.[Footnote 13] From 1996 to 2000, average premium rates for all 
states changed little, as did average premium rates for states with 
certain caps on noneconomic damages and states with limited reforms, 
increasing or decreasing annually by no more than about 5 percentage 
points on average.[Footnote 14] After 2000, premium rates began to rise 
across most states on average, but more slowly among states with 
certain noneconomic damage caps. In particular, from 2001 to 2002, the 
average rates of increase in the states with noneconomic damage caps of 
$250,000 and $500,000 or less were 10 and 9 percent, respectively, 
compared with 29 percent in the states with limited reforms (see fig. 
2).[Footnote 15]

Figure 2: Premium Rates for Three Physician Specialties Rose After 
2000, but to a Lesser Extent in States with Noneconomic Damage Caps:

[See PDF for image]

Notes: GAO analysis of MLM base premium rates, excluding discounts, 
rebates, and surcharges, reported for the specialties of general 
surgery, internal medicine, and OB/GYN.

Premiums are adjusted for inflation to 2002 dollars.

[A] This category excludes states with caps of $250,000.

[End of figure]

The recent increases in premium rates were also lower for each reported 
physician specialty in the states with these noneconomic damage caps. 
From 2001 to 2002, the average rates of premium growth for each 
specialty in the states with these noneconomic damage caps were 
consistently lower than the growth rates in the limited reform states 
(see fig. 3).

Figure 3: Recent Premium Growth Was Lower for Three Physician 
Specialties in States with Noneconomic Damage Caps:

[See PDF for image]

Note: GAO analysis of MLM base premium rates, excluding discounts, 
rebates, and surcharges, reported for the specialties of general 
surgery, internal medicine, and OB/GYN.

Premiums are adjusted for inflation to 2002 dollars.

[A] This category excludes states with caps of $250,000.

[End of figure]

Other studies have found a relationship between direct tort reforms 
that include noneconomic damage caps and lower rates of growth in 
premiums.[Footnote 16] For example, in a recent analysis of malpractice 
premiums in states with and without certain medical malpractice tort 
limitations, the Congressional Budget Office (CBO) estimated that 
certain caps on damage awards in combination with other elements of 
proposed federal tort reform legislation would effectively reduce 
malpractice premiums on average by 25 to 30 percent over the 10-year 
period from 2004 through 2013.[Footnote 17] A 1997 study that assessed 
physician-reported malpractice premiums from 1984 through 1993 found 
that direct reforms, including caps on damage awards, lowered the 
growth in malpractice premiums within 3 years of their enactment by 
approximately 8 percent.[Footnote 18]

Differences in malpractice premiums across states are influenced by 
several factors other than noneconomic damage caps. First, the manner 
in which damage caps are administered can influence the ability of the 
cap to restrain claims and thus premium costs. Some states permit 
injured parties to collect damages only up to the specified level of 
the cap regardless of the number of defendants, while other states 
permit injured parties to collect the full cap amount from each 
defendant named in a suit. Malpractice insurers informed us that 
imposing a separate cap on amounts recovered from each of several 
defendants increases total claims payouts, which can hinder the 
effectiveness of the cap in constraining premium growth. Second, tort 
reforms unrelated to caps can also affect premium and claims costs. For 
example, California tort reform measures include not only a $250,000 
cap but also allow other collateral sources to be considered when 
determining how much an insurer must pay in damages and allow periodic 
payment of damages rather than requiring payment in a lump sum, among 
other measures. Malpractice insurers told us that these provisions, in 
addition to the cap, have helped to constrain premium growth in that 
state. In contrast, while Minnesota has no caps on damages, it has 
experienced relatively low growth in premium rates. Trial attorneys say 
this development is the result of mandatory prescreening requirements 
that have reduced claim costs, and thus premiums, by preventing some 
meritless claims from going to trial. Third, state laws and regulations 
unrelated to tort reform, such as premium rate regulations, vary widely 
and can influence premium rates. Finally, insurers' premium pricing 
decisions are affected by their losses on medical malpractice claims 
and income from investments, and other market conditions as we 
previously discussed. Because of these various factors, we could not 
determine the extent to which differences in premium rates across 
states were attributable solely to damage caps or also to these 
additional factors.

Comprehensive Data on the Composition and Causes of Increased Losses 
Were Lacking:

A lack of comprehensive data at the national and state levels on 
medical malpractice claims filed against various insurers and the 
losses associated with these claims prevented us from answering 
important questions about the market for medical malpractice insurance, 
including exactly why losses are rising over time and, as just noted, 
the extent to which tort reforms may have affected premium rates. For 
example, comprehensive data that would have allowed us to fully analyze 
the frequency and severity of medical malpractice claims at the insurer 
level on a state-by-state basis did not exist. As a result, we could 
not determine the extent to which increased losses were the result of 
an increased number of claims, larger claims, or some combination of 
both. In addition, data that would have allowed us to analyze how 
losses were divided between settlements and trial verdicts or between 
economic and noneconomic damages were not available. Insurers do not 
submit information to the National Association of Insurance 
Commissioners on the portion of losses paid as part of a settlement and 
the portion paid as the result of a trial verdict, and no other 
comprehensive source of such information exists. As a result, we could 
not analyze the effect of certain tort reforms on noneconomic losses, 
and thus on premium rates.

While more complete data on the insurance industry would help provide 
better answers to questions about how the medical malpractice insurance 
market is working, other data are equally important to analyzing the 
underlying causes of rising malpractice losses and associated costs. 
These data relate to factors outside the insurance industry, such as 
policies, practices, and outcomes in both the medical and legal arenas. 
However, collecting and analyzing such data were beyond the scope of 
our reviews.

Conclusions:

As we have discussed, multiple factors, including falling investment 
income and rising reinsurance costs, have contributed to recent 
increases in premium rates in our sample states. However, we found that 
losses on medical malpractice claims--which make up the largest part of 
insurers' costs--appear to be the primary driver of rate increases in 
the long run. And while losses for the entire industry have shown a 
persistent upward trend, insurers' loss experiences have varied 
dramatically across our sample states, resulting in wide variations in 
premium rates. In addition, factors other than losses can affect 
premium rates in the short run, exacerbating cycles within the medical 
malpractice market.

We have also seen that the severe premium rate increases of the last 
few years followed a period of relatively stable premium rates in the 
early 1990s, when insurers had excess reserves and sufficient 
investment income to keep rates low. But by the mid-to-late 1990s, as 
insurers exhausted their excess reserves and investment income fell 
below expectations, the profitability of malpractice insurance had 
declined. Regulators found that some insurers were insolvent, and in 
2002 one of the two largest medical malpractice insurers, which had 
been selling insurance in almost every state, stopped selling medical 
malpractice insurance altogether. Other companies reduced the amount of 
insurance they sold and consolidated their markets, resulting in large 
rate increases in many states. It remains to be seen whether these 
increases will be found to have exceeded those necessary to pay for 
future claims losses, as they did in the 1980s.

Tort reforms, particularly those that limit noneconomic damages, have 
frequently been proposed as a means of controlling increases in medical 
malpractice insurance premium rates. While the limited available data 
indicate that premium rates have grown more slowly in states with tort 
reform laws that include certain caps on noneconomic damages, a lack of 
comprehensive data prevented us from determining the exact effects of 
these laws on premium rates. Tort reforms and other actions that reduce 
insurer losses below what they otherwise would have been should 
ultimately slow the increase in premium rates, if all else holds 
constant. But several years may have to pass before insurers can 
quantify and evaluate the effect of the laws on losses from malpractice 
claims and before an effect on premium rates is seen.

More time is also needed before we can determine whether the medical 
malpractice insurance market will continue its cycle from the current 
hard to a soft phase and thus are better able to understand the part 
the cycle itself has played in the rise in premium rates. However, any 
evaluation of the effect of tort reforms and cyclical behavior on 
premium rates requires sufficient data. In order for Congress and 
others to better understand conditions in the medical malpractice 
market and the effects of the actions that have already been or will be 
taken, better data need to be collected, including more comprehensive 
data on insurers' losses, jury verdicts in malpractice cases, and 
conditions in the medical industry that might affect the incidence and 
severity of medical malpractice suits. Without question, the absence of 
such data complicates the ability of insurers, regulators, and the 
Congress to understand current market conditions and to formulate 
effective, sustainable solutions.

Mr. Chairman, this concludes our prepared statement. We would be 
pleased to answer any questions you or other members of the 
subcommittee may have at this time.

Contacts and Acknowledgements:

For further information regarding this testimony, please contact 
Richard J. Hillman at (202) 512-8678 or Kathryn G. Allen at (202) 512-
7059. Individuals from our Financial Markets and Community Investment 
team making key contributions to this testimony include Lawrence Cluff, 
Patrick Ward, Melvin Thomas, and Andrew Nelson. Individuals from our 
Health Care team making key contributions to this testimony include 
Randy DiRosa and Corey Houchins-Witt.

FOOTNOTES

[1] For example, on March 13, 2003, the House of Representatives passed 
the Help Efficient, Accessible, Low-cost, Timely Healthcare (HEALTH) 
Act of 2003 (H.R. 5); on June 27, 2003, a similar version (S.11) of 
this bill was introduced in the Senate. 

[2] U.S. General Accounting Office, Medical Malpractice Insurance: 
Multiple Factors Have Contributed to Increased Premium Rates, 
GAO-03-702 (Washington, D.C.: June 27, 2003), and Medical Malpractice: 
Implications of Rising Premiums on Access to Health Care, GAO-03-836, 
(Washington, D.C.: Aug. 8, 2003). 

[3] The states we visited were, for GAO-03-702, California, Florida, 
Minnesota, Mississippi, Nevada, Pennsylvania, and Texas; and for 
GAO-03-836, California, Colorado, Florida, Minnesota, Mississippi, 
Montana, Nevada, Pennsylvania, and West Virginia.

[4] In general, state insurance regulators require insurers to reduce 
their requested premium rates in line with expected investment income. 
That is, the higher the expected income from investments, the more 
premium rates must be lowered. 

[5] Reinsurance is insurance for insurance companies. They routinely 
use reinsurance as a way to spread the risk associated with the 
insurance they sell.

[6] Some industry officials have characterized hard markets as periods 
of rapidly rising premium rates, tightened underwriting standards, 
narrowed coverage, and the withdrawal of insurers from certain markets. 
Soft markets are characterized by relatively flat or slow rising 
premium rates, less stringent underwriting standards, expanded 
coverage, and strong competition among insurers.

[7] Medical malpractice lawsuits are generally based on principles of 
tort law. A tort is a wrongful act or omission by an individual that 
causes harm to another individual. To reduce malpractice claims 
payments and insurance premiums and for other reasons, some have 
advocated changes to tort laws, such as placing caps on the amount of 
damages or limits on the amount of attorney fees that may be paid under 
a malpractice lawsuit. These changes are collectively referred to as 
"tort reforms."

[8] Other tort reform measures adopted by states include placing caps 
on economic and punitive damages; abolishing the "collateral source 
rule" that prevents a defendant from introducing evidence that the 
plaintiff's losses and expenses have been paid in part by other parties 
such as health insurers or prevents damage awards from being reduced by 
the amount of any compensation plaintiffs receive from third parties; 
abolishing "joint and several liability" to ensure that damages are 
recovered from defendants in proportion to each defendant's degree of 
responsibility, not each defendant's ability to pay; placing limits on 
fees charged by plaintiffs' lawyers; imposing stricter statutes of 
limitations that shorten the time injured parties have to file a claim 
in court; and establishing pretrial screening panels to evaluate the 
merits of claims before proceeding to trial.

[9] We identified several factors suggesting that this market was not 
anticompetitive. That is, these factors suggested that insurers in this 
market were not charging premium rates that were inconsistent with 
expected losses. 

[10] That is, as more information becomes available on a particular 
claim, the insurer may find that the original estimate was too high or 
too low and must make an adjustment. If the original estimate was too 
high, the adjustment will decrease incurred losses, but if the original 
estimate was too low, the adjustment will increase them.

[11] For analysis of the medical malpractice insurance market, we 
visited seven states--California, Florida, Minnesota, Mississippi, 
Nevada, Pennsylvania, and Texas. We selected these states because they 
contained a mix of characteristics, including the extent of any 
recently reported increases in premium rates, status as a "crisis" 
state according to the American Medical Association, presence of caps 
on noneconomic damages, state population, and aggregate loss ratios for 
medical malpractice insurers within the state.

[12] As reported by A.M. Best. These insurers included a combination of 
commercial companies and non-profit physician-owned insurers. Some of 
these insurers sold more than one line of insurance, and changes in 
returns on investments might not be reflected equally in the premium 
rates of each of those lines.

[13] Premium rate data are reported by the Medical Liability Monitor 
(MLM). MLM is a private research organization that annually surveys 
professional liability insurance carriers in 50 states and the District 
of Columbia to obtain their base premium rates for the specialties of 
internal medicine, general surgery, and OB/GYN. 

[14] We focused our analysis on those states with noneconomic damage 
caps as a key tort reform because such caps are included in proposed 
federal tort reform legislation and because published research 
generally finds these caps to have a greater impact on medical 
malpractice premium rates and claims payments than some other tort 
reform measures. 

[15] Because research suggests that any impact of tort reforms on 
premiums can be expected to follow the implementation of the reforms by 
at least 1 year, we grouped states into their respective categories 
based on reforms in place as of 1995 and reviewed premium rate data for 
the period 1996 through 2002. Four states had noneconomic damage caps 
of $250,000 (California, Colorado, Montana, Utah), 8 states had 
noneconomic damage caps of $500,000 or less (Hawaii, Louisiana, 
Massachusetts, Michigan, Missouri, North Dakota, South Dakota, and 
Wisconsin), and 11 states had limited reforms, defined as no damage 
caps of any type or collateral source reforms (Arkansas, District of 
Columbia, Kentucky, Mississippi, Nevada, Ohio, Oklahoma, Pennsylvania, 
South Carolina, Vermont, and Wyoming). We categorized the remaining 28 
states as "other reforms" for analysis purposes, indicating they had a 
noneconomic or total damage cap greater than $500,000, any punitive 
damage cap, or any collateral source rule reform.

[16] Direct reforms are limits on amounts that can be recovered in a 
malpractice action including caps on noneconomic or total damages, 
abolition of punitive damages, collateral source rule reforms, and 
abolition of mandatory prejudgment interest.

[17] U.S. Congress, Congressional Budget Office, Cost Estimate: H.R. 5 
- Help Efficient, Accessible, Low-cost, Timely Healthcare (HEALTH) Act 
of 2003 (March 2003).

[18] Daniel P. Kessler and Mark B. McClellan, "The Effects of 
Malpractice Pressure and Liability Reforms on Physicians' Perceptions 
of Medical Care," Law and Contemporary Problems, vol. 670, no. 1 
(1997): 81-106.