Table Of ContentInsuring Medical Malpractice
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Insuring
Medical
Malpractice
Frank A. Sloan
Randal! R. Bovbjerg
Penny B. Githens
New York Oxford
Oxford University Press
1991
Oxford University Press
Oxford New York Toronto
Delhi Bombay Calcutta Madras Karachi
Petaling Jaya Singapore Hong Kong Tokyo
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Melbourne Auckland
and associated companies in
Berlin Ibadan
Copyright © 1991 by Oxford University Press, Inc.
Published by Oxford University Press, Inc.,
200 Madison Avenue, New York, New York 10016
Oxford is a registered trademark of Oxford University Press
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise,
without the prior permission of Oxford University Press.
Library of Congress Cataloging-in-Publication Data
Sloan, Frank A.
Insuring medical malpractice / Frank A. Sloan, Randall R.
Bovbjerg, Penny B. Githens.
p. cm.
Includes bibliographical references and index.
ISBN 0-19-506959-5
1. Insurance, Physicians'liability—United States. I. Bovbjerg,
Randall R. II. Githens, Penny B. HI. Title
[DNLM: 1. Insurance, Liability—United States—legislation.
2. Malpractice—United States—legislation.
W 33 AA1 S6i] HG8054.S56 1991 368.5'64—dc20
DNLM/DLC for Library of Congress 90-14361
9 8 7 6 5 4 3 2 1
Printed in the United States of America
on acid-free paper
PREFACE
Why this book? The resurgence in the 1980s of an apparent crisis in medical malprac-
tice insurance—indeed, in liability coverage generally—focused public attention anew
on this important branch of the property-casualty insurance industry. In contrast to the
mid-1970s, when the issue for physicians was availability, this crisis has been one
mainly of affordability. But there is also the issue of its fairness in pricing and its effects
on medical providers, especially physicians, the key decision makers in our health care
system. In keeping with this status, physicians are held responsible for most of the
damages in malpractice and hence pay more of the total premiums than hospitals or
other individual practitioners.
Many policy participants see the behavior of the insurance industry as a major
contributor to the crisis. Some physicians, consumer advocates, attorneys, and public
officials have been known to harbor dark suspicions that the insurance market is
insufficiently competitive, underregulated, and subject to considerable overpricing, at
least in certain periods. At the same time, uncertainty exists as to how regulation
affects premium setting and returns.
Thus, policymakers want to know whether malpractice insurers as a group price ac-
curately, in accordance with cost, whether fair or excessive returns are earned, and to
what extent insurance cycles exacerbate underlying loss trends, affecting availability and
price. Insurance practices of underwriting, establishing rate categories, and pricing are
of genuine public policy and research interest.
Insurance is also the mediating mechanism between the medical, social, and legal
factors that create claims and the health care system that must contribute funds to pay
claims and otherwise respond to the incentives created. Our tort regime must accom-
plish its goals of compensating wrongfully injured patients and deterring substandard
medical practice through insurance mechanisms—or not at all.
In the wake of the crisis, renewed proposals have been heard for stricter regulation
to control allegedly excessive profits and other aspects of the insurance business.
Further "tort reforms" to rein in perceived excesses of the legal system also continue to
receive major legislative attention.
However, policymakers weighing various calls for relief have found virtually no
reliable objective information in the public domain (Sloan and Bovbjerg 1989). This
situation persists not for lack of public attention or interest, but because no one has
joined carefully analyzed data with institutional knowledge of the field. No single book
has successfully addressed the policy issues. Lack of information is one reason that
there is so little agreement on the causes or cures for the crisis. Much common
knowledge is simply not written down. What descriptions of insurance practice do
exist tend to be quite technical and inaccessible to policymakers and analysts outside
the industry. Information about observed dynamics in the industry is even less accessi-
vi PREFACE
ble. More analysis is needed to enable us to assess the pricing behavior of insurers, the
comparative performance of physician-sponsored versus commercial stock insurance
companies, the role of insurance regulation, the institution and effects of reinsurance,
and comparisons with other lines of coverage. So, policymakers have had to rely
unduly on the expertise of advocates on various sides of the debate.
Hence the project that has spawned this book. Funded primarily by the Agency for
Health Care Policy and Research (then the National Center for Health Services Re-
search and Health Care Technology Assessment), our goal has been to describe the
workings of physicians' professional liability insurance. Our related work has focused
on the effects of past tort reform (Sloan 1985; Sloan et al. 1989a; Zuckerman et al.
1990) and possible new reforms of law and insurance (Bovbjerg et al. 1989; Sloan
1990). This book describes the physicians' malpractice sector of the industry, its
practices, and its regulation, then analyzes its performance empirically and puts the
results in a policy context. We have addressed this book both to policymakers and to
specialists in an effort to reach the several constituencies interested in this information.
The book's organization and style reflect this need to be accessible to general
readers while presenting often technical material. Hence the book begins (Chapter 1)
with a nontechnical introduction and ends (Chapter 10) with a conclusion also written
in accessible style. Each chapter similarly begins and ends in nontechnical fashion.
Quantitative presentations have been kept as clear and concise as possible. Often,
particular material is boxed for a separate mini-presentation to avoid breaking up the
main text; and, where possible, we have used figures instead of large numerical tables.
Heavily technical material appears in separate subsections, sometimes accompanied by
a nontechnical summary box. Notes are presented at the end of each chapter; references
are at the end of the book. Primary sources of information are explained at their first
use in the book; many are covered in the Appendix to Chapter 1.
Nashville F.A.S.
Washington, D.C. R.R.B.
Nashville P.B.G.
January 1991
ACKNOWLEDGMENTS
The authors are most grateful to many who made this book possible. Our research
support came from the Agency for Health Care Policy Research, Grant Number 1 R01
HS05693, with additional assistance for Chapter 8 on risk and rating from the Robert
Wood Johnson Foundation, Grant Number 12412. We also want to thank the insurance
companies that responded to our Survey of Malpractice Insurers (see Chapter 1), as
well as the numerous individuals within the industry and its regulatory agencies who
have contributed to our understanding on a less formal basis. Special appreciation goes
to the Physician Insurers Association of America, whose annual convention we at-
tended, and to Tillinghast, a Towers-Perrin company, whose seminar for malpractice
executives we have also drawn on.
We regret that reasons of space as well as confidentiality preclude listing everyone
by name. Circumstances dictate one exception. Peter Sweetland, Secretary-Treasurer
of the Physician Insurers Association of America and President of The New Jersey
State Medical Underwriter, who died at age 54 in April 1990, was very helpful to this
project. We greatly appreciate his sharing institutional knowledge and persuading
others to cooperate with our surveys. Peter was a large man in every sense of the word.
He was trained in commercial insurance but instrumental in the growth of the physician
insurers. He was devoted to his industry, yet public-spirited and appreciative of the
value of independent appraisal. He believed in advancing knowledge of malpractice
risks and insurance. And he was confident enough to run the risk of assisting outside
researchers. He is greatly missed by all who knew him.
Several colleagues not named as authors have contributed to parts of this book.
Mahmud Hassan, Chee Ruey Hsieh, and Paula Mergenhagen, all previously at Vander-
bilt University, worked on the empirical analyses in many chapters. Joseph Valvona,
Athena Lee, and Jay Caldwell contributed to the early stages of data base construction
and preliminary analyses. Thomas Hoerger, of the Department of Economics and
Health Policy Center at Vanderbilt University, took the lead on some of the reinsurance
analysis described in Chapter 5. Stephen Zuckerman and Mo Cyr of the Urban Institute
ran the premium regressions for Chapter 7. John Newmann, also then with the Urban
Institute, joined Penny Githens in doing the survey interviews.
Finally, Sharon T. Stanley of Vanderbilt's Health Policy Center has our greatest
respect for dealing so capably with many drafts and revisions throughout production.
Of course, the authors are responsible for the contents of the book.
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CONTENTS
List of Tables xvii
List of Figures xix
List of Boxes xxi
1 Introduction 3
Background 3
Periodic Crises: The 1950s to the 1980s 4
The Mid-1970s and Before 4
Industry and Legislative Response 5
Renewed Crisis in the 1980s 6
Trends in Premiums and Claims 7
1980s Responses 10
Reasons for Public Concern 10
Insurance Availability and Price 10
Higher Prices for Medical Care and Reduced Access to Care 11
Quality of Medical Care 12
Chapter Plan 12
Conclusion 14
Notes 15
Appendix: Data Sources 16
Survey of Medical Malpractice Insurers 16
Survey of Former Medical Malpractice Insurers 17
Regulatory Survey of Insurance Departments 17
Premium and Claims Data 17
Premium Data 17
Claims Data 18
Data from A.M. Best Company 19
Best's Insurance Reports—Property/Casualty 19
Best's Casualty Loss Reserve Development 19
Best's Reproduction of Convention Statements 20
Market Share Data 20
Other Data Sources 20
2 Conceptual Framework and Institutional Context 21
A Portrait of Insurance Practice 21
The Nature of the Insurance Product 21
The Risk of Insurance 21
