Concurrent Session:Medical Malpractice

2002 CAS Seminar on ReinsuranceJune 3

Peter Schultheiss, FCASZurich NA

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Actuarial Quiz - Part 2B$325 million represents which of the

following:• A: April’s Powerball

prize - nominal value

• B: The largest 2001 Medical Professional jury verdict

• C: The 1990 GDP of Guyana

• Select the correct answer:

• 1 - A only• 2 - B only• 3 - C only• 4 - A and B only• 5 - A, B and C

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Trends in Medical Professional Liability• Long Term Care - Customers out of focus• Physicians and Surgeons: - Means vs. medians and

defense expense - Credible class shifts• Hospital Professional: - Deep pockets - some

examples - Severity, frequency, success rates and time to settlement - Increased limit factor considerations plus state/account variation

• What the future holds?

4

Long Term CareCustomers Out of Focus

• On 1/28/2000 the CEO of IHS finished a project• The deal closed that day had nothing to do with IHS

or its patients• The CEO purchased a $1 million dollar painting,

carried as an asset on the company books• Within a week, the company filed for Chapter 11

protection

Wall Street Journal - 5/24/02

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LTC - Customers Out of FocusPre through early 1990’s

• Industry characterized by small to medium firms with few locations operating on local to regional basis

• Non-profits predominate

6

LTC - Customers Out of FocusEarly to mid 1990’s

• Aging of population seen as business growth opportunity

• Financially oriented management companies form large regional to national chains acquiring smaller firms

• Highly leveraged acquisition and growth• Attractive operating margins from medicare/medicaid

reimbursement• Loose enforcement of billing regulations and hospital

care overlap

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LTC - Customers Out of FocusMid 1990’s - 2000

• Balanced budget acts - severe reduction in medicare/medicaid reimbursement

• Unattractive margins reverse leverage impacts• Reduced cash flow• Cost cutting and high employment adversely impact

labor pool quality• Patient’s rights - adverse development of tort climate• Aging of jury pool with the public personally affected• Try the facility - punitive damages

8

LTC - Customers Out of FocusLoss Cost Trend = 24.5%

0

500

1,000

1,500

2,000

2,500

3,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Policy Year

Loss

Cos

ts

Loss Costs Fitted

Source: AON Risk Consultants - 2/28/02

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LTC - Customers Out of FocusTrend Components

• Loss cost trend of 24.5% : 90% confidence of 7.3%

• Loss cost trend of 21.5% based on 1996 - 200190% confidence of 3.3%

• Frequency trend of 9.6%• Severity trend of 13.5%

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LTC - Customers Out of FocusStates in the Forefront

• Leaders - Texas and Florida

• Southeast including Alabama, Mississippi, Georgia and Arkansas

• Other states are not far behind including California TX

CA

NV

AZ NM

OKAR

LA

MS

FL

TN

AL GA

NC

SC

OR

UT COKS

WYID

MT ND

SD

NE

MO KY

MN

VAWV

IAIL

WI

IN OH

MIPA

NY

MEVT

NH

MA

NJ

MDDE

WA

RICT

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Physicians and SurgeonsCurrent Trends

• Physicians limits cap awards - not viewed as deep pockets relative to institutions

• Limits remain low with more than 55% purchasing $1 million of coverage

• Long term trend is 6.4%, but 9.2% since 1995• A survey of recent rate filings indicated 2% to 5% is being

used• Median trends are outpacing mean trends• Changes are not equal by class: -watch the gatekeepers

-some favorable trends in special situations

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Physicians and SurgeonsSeverity Trend

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Claim Closed Year

Aver

age

L&AL

AE

Severity Fitted Long Term Fitted from 1995

Source: PIAA

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Physicians and SurgeonsMeans vs. Medians

Source: PIAA

Claim Closed Median/Year Mean1988 39%1989 38%1990 40%1991 44%1992 44%1993 48%1994 48%1995 47%1996 50%1997 48%1998 53%1999 56%

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Physicians and SurgeonsCredible Class Shifts

Class Indicated Class RelativityCode Description Change from late 1980's - 1990's

80143 Surgery, NOC +25%80241 Gastroenterology - no surgery +45%80289 Ophthalmology - minor surgery +40%

80151 Anesthesiology -25%80263 Ophthalmology - no surgery -45%80473 Oncology - no surgery -20%

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Hospital ProfessionalCurrent Trends

• Hospitals are viewed as having very deep pockets• Impacted by medicare/medicaid cutbacks and HMO’s with some

similarities to long term care• Severity trend is +13.6% since 1993 and + 14.9% since 1995

based on Jury Verdict Data• Our data indicates total limits trend to be 4 to 5 points less• Frequency flat, however, plaintiff success rates are up 2% a year • Speed to trial initiatives have reduced large case settlement time

by 12 months on average • Jury awards are roughly twice the final demand on average

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Hospital ProfessionalCurrent Trends - continued

• Plaintiff lawyers receive 30% to 40% in contingent fees. Overall defense is 18.5% of indemnity and 9.5% of indemnity when the settlement is greater than $1 million

• 11% of verdicts against hospitals are greater than $10 million • Large awards can occur anywhere - need to recognize frequency

of large cases by territory• Lower average severity territories imply higher coefficients of

variation than higher average severity territories• 25% of brain injury verdicts are greater than $12 million• 25% of childbirth verdicts are greater than $7.5 million• Mixed results of Patient Compensation Funds

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Hospital ProfessionalDeep Pockets

TrialYear State Class Injury Jury Award1999 CA Childbirth Brain Damage 50,000,000$ 2000 CA Surgery - child Paraplegia 61,000,000$ 1999 CT Surgery Brain Damage 27,000,000$ 2000 ID Childbirth Brain Damage 23,000,000$ 2000 IL Lack of care Brain Damage 55,000,000$ 2001 NC Childbirth Brain Damage 35,000,000$ 1996 NV Surgery Paraplegia 17,000,000$ 2001 NY Childbirth Cerebral Palsy 108,000,000$ 2000 * PA Childbirth Brain Damage 118,000,000$ 1997 * SC Childbirth Brain Damage 18,000,000$ 2001 TX Surgery-anesthesia Death 269,000,000$ 1997 * WI Medication Quadraplegic 16,000,000$

*PCF state

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Medical Professional LiabilityJury Verdict Data - Mean vs. Median Trends

0

500

1000

1500

2000

2500

3000

3500

4000

1993 1994 1995 1996 1997 1998 1999 2000

Year

Thou

sand

s

0

200

400

600

800

1000

1200

Mean Median

Source: Jury Verdict Research

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Medical Professional LiabilityJury Verdict Data - Time to Trial

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000

Year

Mon

ths

Incident to Trial Filing to Trial

Source: Jury Verdict Research

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Hospital ProfessionalAccount Variation

Complementary distributionLEV

Account fitted distribution

`

Limits

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Hospital ProfessionalLimited Expected Values and

CV’sCurrent Percent

Limit Prior Medium Change1,000,000 92,141 116,125 26%5,000,000 131,977 181,161 37%

10,000,000 144,293 204,557 42%25,000,000 155,346 228,117 47%

CurrentCoefficient of Prior Low Medium High

variation = 11.2 14.6 13.7 10.3

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Hospital ProfessionalPatient Compensation Funds

• Indiana - Voluntary• Kansas - Mandatory• Louisiana - Voluntary• Nebraska - Voluntary• New Mexico - Voluntary• Pennsylvania - Mandatory• South Carolina - Voluntary• Wisconsin - Mandatory

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What the future holds?The Bad

• Company failures will continue until pricing practices are corrected

• Nebraska cap was struck down• California cap is bypassed in certain situations• LTC litigation spreading to other states• Precedent setting cases and jury outrage makes it

hard to control costs• HMO’s are vulnerable

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What the future holds?The Good

• Rate increases are accelerating in 2002• Congress approved during 2000 - 2001 $5 billion in

Medicare spending for nursing home patients• Some abatement seen in 2000 - 2001 large loss

growth rate arena• The situation is now viewed as a crisis in a number of

jurisdictions• Tort reform introduction implemented in Pennsylvania• Federal reform is under consideration

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Trends in Medical Professional Liability• Long Term Care - Customers out of focus• Physicians and Surgeons: - Means vs. medians and

defense expense - Credible class shifts• Hospital Professional: - Deep pockets - some

examples - Severity, frequency, success rates and time to settlement - Increased limit factor considerations plus state/account variation

• What the future holds?