Tuesday, February 22, 2005

The New York Times reports that "skyrocketing costs" of "junk lawsuits" aren't the real reason malpractice insurance rates regularly spike, and have spiked recently:

...for all the worry over higher medical expenses, legal costs do not seem to be at the root of the recent increase in malpractice insurance premiums. Government and industry data show only a modest rise in malpractice claims over the last decade. And last year, the trend in payments for malpractice claims against doctors and other medical professionals turned sharply downward, falling 8.9 percent, to a nationwide total of $4.6 billion, according to data compiled by the Health and Human Services Department.

"There is an underlying cost push," said J. Robert Hunter, the director of insurance for the Consumer Federation of America, who is a former insurance regulator in Texas. "But there has not been an explosion of big jury verdicts or settlements. It's a constant drip, drip every year." ...

The recent jump in premiums shows little correlation to the rise in claims. According to the National Practitioner Data Bank of the Health and Human Services Department, the total paid out by insurance companies for claims against doctors and other medical professionals rose 3.1 percent annually, on average, between 1993 and 2003 and then declined last year.

...[Martin D.] Weiss of Weiss Ratings [an independent financial rating agency] and researchers at Dartmouth College, who separately studied data on premiums and payouts for medical mistakes in the 1990's and early 2000's, said they were unable to find a meaningful link between claims payments by insurers and the prices they charged doctors.

"We didn't see it," said Amitabh Chandra, an assistant professor of economics at Dartmouth. "Surprisingly, there appears to be a fairly weak relationship."

The insurance industry touts caps on pain-and-suffering awards as a magic bullet to solve this problem, as do the White House and Republicans in Congress. But are insurance rates for doctors really lower in states with such caps? There doesn't seem to be any correlation:

The most expensive place in the country [for medical liability insurance] is South Florida, where some obstetricians and general surgeons paid nearly $280,000 for coverage last year, according to The Monitor. Obstetricians in Illinois paid as much as $230,428, The Monitor said, while in Nebraska, the least expensive place in the country for malpractice insurance, obstetricians paid $16,194. Florida adopted a cap on awards of $500,000 to $1 million in 2003. Illinois has no cap and Nebraska has a cap of $500,000.

So what causes the spikes? Frequently it's just a lousy stock and bond market. Insurance companies, obviously, don't take premiums and put them under the mattress -- they invest those premiums on Wall Street. And when Wall Street suffers, insurance companies suffer.

Also, the insurance industry tends to go through price wars, after which insurance companies raise prices sharply to make up for lost revenue.

Yes, as this chart shows, insurance rates seem to go up steadily, even after an adjustment for inflation, no matter what. But I'd say that's just because the cost of medical care regularly rises faster than the inflation rate.

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