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February 23, 2005
The Times on med-mal, I: payouts and rates
Yesterday's New York Times article on medical malpractice insurance wasn't a complete botch. The chart plotting rises in rates and in payouts since 1975 makes an excellent starting point for understanding the controversy, even if it tells only part of the story; the discussion of insurance company investments was generally on target; and much of the remainder of the article practices fairly standard "on the one hand, on the other hand" journalism.
But those aren't the parts of the article likely to make a sensation. Foes of malpractice-suit reform are sure to seize on the following pair of assertions as providing a Times imprimatur to what they've been saying all along: "legal costs do not seem to be at the root of the recent increase in malpractice insurance premiums" and "The recent jump in premiums shows little correlation to the rise in claims." In point of fact, these assertions are flatly in conflict with the evidence presented in the rest of the article, so much so that it's baffling that editors could have chosen to include them. To make matters worse, the article is highly tendentious in its treatment of the issue of how damage caps affect insurance races, and once again the slant is helpful to the anti-reform side.
As for breaking news, there's one bit of that in the article, namely that aggregate payouts in malpractice claims showed an unusual downward tick last year, down 8.9 percent to a nationwide total of $4.6 billion, according to HHS. The article correctly doesn't make a very big deal of this new data point -- in part because it would not be unusual for numbers to jump around from one year to the next, in part because it's anything but clear that such a drop could have been predicted in advance (did it owe more to shifts in public attitude following recent discussion of the subject? To newly passed tort reform laws? Or to other factors?).
In any event, consider the centerpiece graphic of the Times piece, which plots the rise of rates and payouts since 1975 based on data from the highly regarded firm of A.M. Best. (I suggest keeping it open in a second window.) If I were trying to get people to believe that there's no connection between high courtroom payouts and high rates charged for malpractice insurance, I must say this is the very last chart I'd ever let them see, because it tends so strongly to show the two lining up together over the long term.
How steeply have inflation-adjusted payouts risen since 1975? Very, very steeply, according to the Times graphic. It's hard to discern exactly where the 1975 figure starts (and I don't have the original numbers at hand), but I'd guess somewhere around $600 million. If so, then payouts have risen nearly 10-fold after inflation over 28 years, since the 2003 number is shown as being a little below $6 billion. Meanwhile, the figure for premiums charged (likewise inflation-adjusted) has risen from what looks like about $3 billion in 1975 to about $10 billion in 2003.
In other words, the Times's own chart shows inflation-adjusted payouts 1) zooming upward at an incredibly fast clip; and 2) rising much faster than premiums charged. Too bad they didn't do a better job of alerting readers to these trends in the article itself.
Another major element of expense in liability insurance -- one that is particularly significant in the medical malpractice line -- is the cost of responding to claims and defending suits aside from any money that actually winds up being paid out. These costs go almost entirely unmentioned in the Times report; because they are omitted from the two-line graphic, for example, some novice readers may be left with the erroneous impression that the gap between the two lines consists of "markup" or even insurer profit. In practice, while the cost of paying claims ordinarily will fall well below the levels of premiums being collected, the high cost of defense contributes toward bringing the line's "combined ratio" (see I.I.I.) up to the point where, as in 2003, malpractice insurers can be observed paying out $1.38 for every $1.00 they take in, with the difference to be made up, if at all, only by way of investment income. The Times does not worry its readers' heads with combined ratios, however.
Nonetheless, the Times article does manage to get across, among its several themes, one story line that seems roughly accurate: insurers priced their product during the 1990s with what we can see in retrospect was undue optimism, and when claim trends continued to worsen, they had to start playing some serious rate catch-up, especially since investment returns, while still positive, had fallen and were of less use in bridging the gap. Nothing wrong with that analysis, necessarily, except that it completely contradicts the Times's assertion that "legal costs do not seem to be at the root of the recent increase in malpractice insurance premiums". If it's a case of cyclical rate catch-up, what is being caught up with?
The article also does a very poor job of explicating the relationship between damage caps and malpractice rates, but since this post is already too long (and since, on a personal note, I'm really sick with a flu relapse and need to go to bed) I'll leave that for a later post by myself or someone else. In the mean time, Martin Grace also comments. (Update: part II of the post is here.)
Posted by Walter Olson at 01:08 PM
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