Testimony Given by Dr. Anderson at the Invitation of the Montana Legislature
January 15, 2004
Question: How does The Doctors Company determine premium rates for the doctors that it insures?
TDC rates in Montana are based solely on claims experience specific to Montana. The rate process begins by accumulating historical statewide claim data and calculates the overall annual loss amount per doctor, known as loss cost. This is defined as the sum of all payouts for settlements and awards incurred on behalf of TDC policyholders, plus associated legal defense costs.
The data includes information from all doctors, whether or not they have had a claim, and the resulting base rates are applied to our specific population of policyholders as a whole. Thus, the ratemaking process starts at an aggregate level, rather than at an individual doctor level. This is a basic principle of insurance. Were this not the case, then a doctor with no claims would have no premium and a doctor with a $1 million claim would have a $1 million premium. The fundamental notion of insurance is the sharing of risk.
The overall average loss amount is influenced both by the number of claims and the size of claims. Some specialties have a propensity toward a higher or lower than average number or size of claims. The number of claims is generally referred to as the frequency(number of claims per hundred doctors) and the size of claims the severity(the cost of the average claim). The product of frequency and severity for a given specialty, in turn, may drive that specialty rate above or below the average for the state or territory. In this way, rates for the individual specialties are calculated.
Once the average annual loss amount is determined, it is necessary to add an expense load that considers company overhead, business acquisition costs, taxes, licenses, fees, etc. Although TDC is a mutual company, a small amount of profit is necessary to grow surplus to support higher premiums and losses. Surplus provides TDC the ability to meet its financial commitments to policyholders and is absolutely required from a regulatory point of view.
Moving to the underwriting of individual physicians, the primary factors considered include the doctor’s practice profile, loss history, and the presence or absence of prior liability coverage. The practice profile includes the number and type of medical procedures performed compared to the average for the doctor’s specialty, the office staff, the business structure of the practice, and any responsibilities outside of regular practice. Considering loss history, we evaluate the number and dollar amount of claims compared to the average for the doctor’s specialty, the outcome of these claims, and the factors involved in the claims. For example, does the claim result from an adverse event or was this true negligence? Prior liability coverage is evaluated to make sure the doctor has not practiced without coverage in the past.
Generally speaking, surgical classifications necessitate higher premium rates than nonsurgical specialties. For example, historical claims data suggest that loss costs associated with obstetricians are, on the average, about four times the level of loss costs associated with internists. Neurosurgeons average roughly six times the annual loss cost of an internist. Conversely, low-risk specialties such as administrative medicine receive premium rates lower than the average specialty.
The venue in which the doctor practices also plays a critical role in determining the premium rate. As insurance is regulated on a state-by-state basis, TDC’s ratemaking method generally utilizes state-specific information to develop loss cost projections as a starting point for premium rates. In this context, the presence or absence of legal reform is critical in the ratemaking process, as is the overall judicial climate.
Other pricing considerations include whether or not a doctor practices full time, the limits of the policy, and the length of time in practice. Claims history, of course, also plays a part for individual physician pricing.
Question: What effect, if any, does a paid claim have on an individual doctor’s future medical liability premium or on the premiums of other doctors?
An individual doctor’s claims history is compared to the average expected for the specialty. Doctors with no claims receive a claims-free discount. Doctors who have a worse than average liability history may receive a surcharge on their premium levels. In assessing the appropriateness of a surcharge, the company makes an effort to distinguish between adverse medical outcomes and medical negligence. Ultimately, however, there is a Solomonic issue of how to apportion the burden of premium among policyholders. In general, we ask those who have incurred losses to pay more than those who have not, even if we do not feel the doctor was negligent.
Ultimately, the rate for the state is the sum of the experience of the individual policyholders. Although a single large claim occurring in a highly populated state may have a nearly immaterial effect on the rates in that state, in a less populated state like Montana, the impact of a few larger claims is more substantive. The burden of a $1 million claim, for example, must be divided among hundreds rather than thousands of physicians in Montana.
Question: What factors have caused or are causing rate increases in medical liability premiums?
In the years immediately following the enactment of Montana medical tort reform statutes, we observed a notable decline in Montana claims severity, but this picture has, unfortunately, reversed. While difficult to pinpoint, we attribute the sharp rise in claims costs to medical cost inflation, increasingly liberal court awards, and societal norms relating to litigiousness and entitlement.
This effect has been especially dramatic in the last two years. In 2003, TDC’s loss ratio is expected to be 137% and in 2002, 151%. This compares to an average of 86% in the two years prior. Please note that loss ratios at this level signify a substantial loss. When expenses are added to loss costs, even with the effect of investments, loss ratios at this level reflect a large loss for the state. Cumulatively, between 1999 and 2003, TDC’s loss ratio has been 118%. In 2003, we are projecting a loss ratio of 210% a loss in excess of $5,000,000.
Despite this history of losses, TDC’s current rate is expected to produce an underwriting profit of only 5%. While the 2004 rate increase is quite substantial, even with it, the average annual rate increase over the past 8 years has been only 4.6%.
Question: What is the impact of tort reform on rates?
It is important to respond to the issue of Montana’s tort reform and how this affects rates. The Montana statute, which incorporates a $250,000 cap on noneconomic damages, is indeed an excellent one, and it has a major effect on controlling rates in the state. For example, the average rate in Montana is 34% less than the average rate in Wyoming, and 49% less than the average rate in Arizona. Indeed, it is 78% less than the average rate in Florida, 64% less than the average rate in Chicago, and 72% less than the average rate in Las Vegas.
Even the best tort reforms do not guarantee that rates will not move, however. Caps do not prevent lawyers from filing more unmeritorious claims (approximately 80% of all malpractice claims are found to be without merit). Caps do not prevent juries from awarding massive sums for economic losses. What effective tort reform does guarantee, however, is that rates will be lower than in states that lack such fundamental reforms and, certainly, that is the case in Montana today.
There is another issue, however that has a significant effect on the state’s legal climate and that is the fact that Montana’s reforms have not been tested by the state Supreme Court. This is a particular concern in the state because Montana has the reputation of having an activist court. There is a genuine concern that the current Montana Supreme Court could, at any time, overturn Montana’s existing reform statutes. This casts a pall over the entire ratemaking process, since it becomes extremely difficult to anticipate the environment for the future, and the future is what rates must address. Moreover, even in the present, operating with the benefit of reform, there is a tendency to settle some cases that might otherwise be defended for fear that an adverse trial court decision could set off a chain of events that would inactivate the reform. Therefore, it should be recognized that the state of Montana does not yet receive full benefit from the $250,000 cap. On the other hand, in comparing rates to appropriate states, it is equally clear that Montana rates are considerably lower than they would be without this reform.
The single most important thing the state could do to assure a moderated rate environment going forward is for the Supreme Court to uphold Montana’s reforms or, alternatively, for a constitutional amendment to enshrine them. In addition, several reforms included in California’s MICRA statutes would also be of benefit for the state of Montana.
