Nearly all health care providers, such as physicians and hospitals, purchase insurance that covers expenses related to medical malpractice claims, including payments to claimants and legal expenses. The most common physician policies provide $1 million of coverage per incident and $3 million of coverage per year. Today the primary sellers of physician medical malpractice insurance are the physician-owned and/or operated insurance companies that, according to the Physician Insurers Association of America, insure approximately 60 percent of all physicians in private practice in the United States. Other health care providers may obtain coverage through commercial insurance companies, mutual coverage arrangements, or state-run insurance programs, or may self-insure (take responsibility for claims themselves). Most medical malpractice insurance policies offer claims-made coverage, which covers claims reported during the year in which the policy is in effect. A small and declining number of policies offer occurrence coverage, which covers all claims arising out of events that occurred during the year in which the policy was in effect. Medical malpractice insurance operates much like other types of insurance, with insurers collecting premiums from policyholders in exchange for an agreement to defend and pay future claims within the limits set by the policy. Insurers invest the premiums they collect and use the income from those investments to reduce the amount of premium income that would have been required otherwise. Claims against a policyholder are recorded as expenses, or incurred losses, which are equal to the amount paid on those claims as well as the insurer’s estimate of future losses on those same claims. The liability associated with the portion of these incurred losses that have not yet been paid by the insurer is collectively known as the insurer’s loss reserve. In order to maintain financial soundness, insurers must maintain assets in excess of total liabilities—including loss reserves and reserves for premiums received but not yet earned—to make up what is known as the insurer’s surplus. State insurance departments monitor insurers’ solvency by tracking, among other measures, the ratio of total annual premiums to this surplus. Medical malpractice insurers generally attempt to keep their surplus approximately equal to their annual premium income. Medical malpractice insurers establish premium base rates for particular medical specialties within a state and sometimes for particular geographic regions within a state. Insurers may also offer discounts or add surcharges for the particular characteristics of policyholders, such as claim histories or whether they participate in risk-management programs. The premium rates are based on anticipated losses on claims and related expenses, expected investment income, the need to build a surplus, and, for for-profit insurers, the desire to earn a reasonable profit for shareholders. In most states the insurance regulators have the authority to approve or deny proposed changes to premium rates. For several reasons, accurately predicting losses on medical malpractice claims is difficult. First, according to a national insurer association we spoke with, most medical malpractice claims take an average of more than 5 years to resolve, including discovering the malpractice, filing a claim, determining (through settlement or trial) payment responsibilities, if any, and paying the claim. In addition, some claims may not be resolved for as long as 8 to 10 years. As a result, insurers often must estimate costs years in advance. Second, the range of potential losses is wide. Actuaries we spoke with told us that individual claims with similar characteristics can result in very different losses for the insurer, making it difficult to predict the ultimate cost of any single claim. Third, the predictive value of historical data is further limited by the often small pool of relevant policyholders. For example, a relevant pool of policyholders would be physicians practicing a particular specialty within a specific state and perhaps within a specific geographic area within that state. In smaller states, and for some of the less common but more risky specialties, this pool could be very small and provide only a limited amount of data that could be used to estimate future costs. Medical malpractice insurance is regulated by state insurance departments and subject to state laws. That is, insurers selling medical malpractice insurance in a particular state are subject to that state’s regulations for their operations within that state, and all claims within that state are subject to that state’s tort laws. Insurance regulations can vary across states, creating differences in the way insurance rates are regulated. For example, one state insurance regulator we spoke with essentially let the insurance market determine appropriate rates, while another had an increased level of review, including approving specific company rates on a case-by-case basis. NAIC assists state insurance regulators in developing these regulations by providing guidance, model (or recommended) laws and guidelines, and information-sharing tools. In response to concerns over rising premium rates, physicians, medical associations, and insurers have pushed for state and federal legislation that would, among other things, limit the amount of damages paid out on medical malpractice claims. A few states have passed legislation with such limitations over the past several years, and federal legislation is pending. On March 13, 2003, the House of Representatives passed the Help Efficient, Accessible Low-Cost, Timely Healthcare (HEALTH) Act of 2003, which includes, among other things, a limit on certain types of damages in medical malpractice claims. On March 12, 2003, a similar bill of the same name was introduced in the Senate, but as of June 2003, no additional action had been taken. Beginning in 1999 and 2000, medical malpractice insurers in our seven sample states increased their premium rates for the physician specialties of general surgery, internal medicine, and obstetrics/gynecology faster than they had since at least 1992. These specialties were the only ones for which data were available, and 1992 was the earliest year for which we could obtain comprehensive survey data. However, both the extent of these changes and the level of the premium rates insurers charged varied greatly across medical specialties, states, and even areas within states. From 1999 through 2002, one large insurer raised rates more for internal medicine than for general surgery, while another raised rates 12 times more for general surgery than for internal medicine. Changes in premium base rates among some of the largest insurers in each state ranged from a reduction of about 9 percent for obstetricians and gynecologists insured by one California company to an increase of almost 170 percent for doctors in the same specialty in one area of Pennsylvania. At the same time, premium rates for the same amount of coverage for the same medical specialty varied by a factor of as much as 17 among states—that is, the rate in one state was 17 times higher than the rate in a different state. As figure 1 shows, premium base rates varied across our seven sample states from 1992 to 1998 but for most insurers remained relatively flat. Beginning in 1999 and 2000, however, most of these insurers began increasing their rates in larger increments. Many of the increases were dramatic, ranging as high as 165 percent, although some rates remained flat. Figure 2 shows the percentage increase in premium rates for the largest insurers in our seven sample states from 1999 through 2002. In the Harrisburg area of Pennsylvania, for example, the largest insurer increased premium base rates dramatically for three specialties: obstetrics/ gynecology (165 percent), general surgery (130 percent), and internal medicine (130 percent). At the same time, the consumer price index (CPI) increased by 10 percent. However, in California and Minnesota, premium base rates for the same specialties rose between 5 and 21 percent and in some cases fell slightly. The variations in the changes in premium base rates among our sample states appears to be consistent with the changes in states outside our sample, with insurers in some states raising premium rates rapidly after 1999 and insurers in other states raising them very little. We found that premium rates quoted by insurers in our seven sample states varied across medical specialties and states. According to some of the insurers and actuaries we spoke with, the differences in rates reflect the costs associated with medical malpractice claims against physicians in particular specialties. Specialties with a high risk of large or frequent losses on medical malpractice claims will have higher premium rates. For example, in 2002 the largest medical malpractice insurer in Texas quoted a base rate for the same level of coverage of $92,000 to obstetricians and gynecologists, $71,000 to general surgeons, and $26,000 to internists. Figure 3 shows the premium rates quoted by the largest medical malpractice insurers in our sample states for these three specialties. Premium rates quoted by insurers in our seven sample states for the same medical specialty also varied across states and geographic areas within states (see fig. 3). Some of the insurers and actuaries we spoke with told us that these variations also reflect differences in insurers’ loss experiences in those venues. As figure 3 shows, the largest insurer in Florida quoted a premium base rate of $201,000 for obstetricians and gynecologists in Dade County, while the largest insurer in California quoted a premium based rate of $36,000 for similar physicians in northern California. Within Florida, the same large insurer quoted a premium base rate of $103,000 for obstetricians and gynecologists outside of Dade County—approximately 51 percent of the Dade County rate. Within Pennsylvania, the largest insurer quoted a premium base rate of $64,000 for doctors in Philadelphia— approximately 83 percent more than the rate it quoted outside the city. Insurers’ losses, declines in investment income, a less competitive climate, and climbing reinsurance rates have all contributed to rising premium rates. First, among our seven sample states, insurers’ losses have increased rapidly in some states, increasing the amount that insurers expect to pay out on future claims. Second, on the national level insurers’ investment income has decreased, so that insurance companies must increasingly rely on premiums to cover costs. Third, some large medical malpractice insurers have left the market in some states because selling policies was no longer profitable, reducing the downward competitive pressure on premium rates that existed through most of the 1990s. Last, reinsurance rates for some medical malpractice insurers in our seven sample states have increased substantially, increasing insurers’ overall costs.