Growth of Cost of Malpractice Cases Outpaces Inflation

SANTA MONICA, Calif—Currently, the cost of malpractice premiums is low, compared with rates in the 1980s. However, these decreased rates are more the effect of market competition than any reduction in the financial exposure physicians and insurers face.

In fact, tort system costs—the direct costs paid by insurers, such as indemnity amounts and expenses—are increasing almost three times as fast as inflation as measured by the consumer price index, Lawrence E. Smarr said at a seminar sponsored by the Defense Research Institute, Chicago. Mr. Smarr is president of Physician Insurers Association of America (PIAA), Rockville, Md, an international trade association of 60 insurance company members, all owned and operated by physicians or dentists.

Several organizations, including the PIAA, collect data on medical malpractice tort system costs in the United States. One source is the National Practitioner Data Bank (NPDB), begun in 1990 as a repository of medical malpractice claim payments made against physicians and other health care providers. The data base is maintained by the US Department of Health and Human Services and will grow to be the largest source of this kind of information, he said.

The NPDB currently contains data on approximately 140,000 payments. The average payment reported has risen from $163,000 in 1990, to $193,000 in 1996, an 18% increase.

Mr. Smarr noted that, by law, an insurer has to report the first payment made on a claim to the NPDB within 30 days. Therefore, NPDB data probably underestimate total payments made, particularly in structured settlements.

For example, if an initial payment of $50,000 is made to cover up-front costs, and then the value of a million dollar annuity is paid at a later date, only the first $50,000 would have been entered into the NPDB.

Jury Verdict Research is another organization that collects data on jury verdicts and settlements. Their data also show that payments are up: In 1990, the average jury award was $1.5 million; in 1996, it had risen to $2.25 million. However, Mr. Smarr cautioned that these data capture the amount of the initial award; if the amount was reduced through a later settlement, the data are not modified.

Information from this organization shows that the average settlement, while less than jury awards, is also rising: From $500,000 in 1990 to $800,000 in 1996.

Tort Reform

Punitive damages are alleged quite often in medical malpractice cases. The PIAA is very actively lobbying in Washington for tort reform, but Mr. Smarr maintains that punitive damage reform is only one area in need of legislative attention.

“Congress thinks that reforming this aspect of the medical liability system will save a lot of money,” he said. “While it may take the pressure off the settlement situation, the actual incidence of punitive damage awards is very low (2% of cases in 1996). However, the mean punitive award is not low. In 1990 it was $500,000, rising to $1.2 million in 1996.”

In 1985, the PIAA began tracking the amount of indemnity payments made on behalf of individual practitioners. From 1985 to 1996, the average payment value for all specialties grew to $205,000—a compounded annual growth rate of 8.1%, or 2.3 times the rate of inflation.

These data do show differences by specialty. Family practice is a low-frequency specialty and has below average claims payments. Mr. Smarr noted that radiologists are involved in many claims of failure to diagnose cancer. While 20 years ago, most malpractice claims resulted from surgical errors, now general surgery is about average in payment values. The values resulting from claims relating to obstetrics continue to be well above average, compared with other specialties.

In general, about 70% of all medical malpractice claims and suits filed are dropped, discontinued, or otherwise won by the defense. For every 100 cases, only six go to verdict, with the plaintiff prevailing in one case. But defending against claims is costly, with allocated loss adjustment expenses mounting quickly.

Allocated loss adjustment expenses include defense council, expert witnesses, medical records, depositions, and other costs purchased from sources outside the insurer. Mr. Smarr noted that these expenses are becoming a greater share of the total payments made in the remuneration of claims.

In 1995, even cases that were dropped cost an average of $9,661 in allocated loss adjustment expenses to investigate and defend. Defense verdicts cost $63,564, and plaintiff verdicts, $95,722.

“You can see why companies want to settle claims up front,” he said. “Since the companies that make up PIAA are owned and controlled by doctors, they really do try to settle the claims that are warranted. The companies typically employ claims committees of physicians that review cases and make decisions regarding settlements, based primarily on the merits of the medical practice involved in the case.”

The PIAA data base uses ICD-9 codes to capture information from claims, such as the patient’s condition, the procedure performed, any misdiagnosis made by the doctor, and the injury to the patient. “We use this information in loss-prevention seminars,” he said, “and do our best to try to teach physicians how to practice better medicine.”