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The truth about med-mal premiums: a former insurance commissioner explains how the current 'crisis' came to be and what we can do about it.

Article Excerpt
It's no myth that doctor's malpractice insurance rates have skyrocketed in the last few years. While tort "reformers" point the finger at the high costs of medical negligence lawsuits to obscure some of the real issues, independent ratings groups, consumer groups, legislative committees, and even some in the insurance industry say that the business practices of insurers , not jury awards, drive up premiums.

To get at the truth about the malpractice insurance "crisis" and its effect on insurers, doctors, and consumers, TRIAL associate editor REBECCA PORTER spoke with JAY ANGOFF, former insurance commissioner of Missouri, past director of the Health Care Financing Administration's private health insurance groups including the national insurance consumer Organization and Congress Watch. He is now in private law practice in Jefferson City, Missouri.

TRIAL: Insurers say that a rise in lawsuits is forcing them to increase the rates they charge doctors for malpractice insurance. Trial lawyers says lawsuits are not the cause, citing studies like one by Americans for Insurance Reform that found medical malpractice insurance premiums are rising much faster than company payouts, which are actually dropping. (1)

What is considered a normal profit margin for a company in the health insurance industry today?

ANGOFF: Big for-profit carriers like AIG or St. Paul typically have a target of at least a 15 percent return on each type, or line, of insurance they offer. When interest rates are low, as they are today, it's very tough to get a 15 percent return on a long-tail line like medical malpractice. And that's one of the reasons why St. Paul withdrew from medical malpractice, although it will probably get back into it when the interest climate improves.

TRIAL: Are companies actually withdrawing from handling this type of insurance?

ANGOFF: The industry likes to talk about how companies are leaving the state or how they're withdrawing from the market. And there's no question that there are fewer companies today writing medical malpractice insurance than when I was commissioner in Missouri [1993-1998] or deputy commissioner in New Jersey [1990-1991].

But some companies are no longer in the medical malpractice business because the people running them went to jail or soon will be in jail. Other companies are no longer in the business because they've been mismanaged and become insolvent--for reasons that have nothing to do with medical malpractice. Other companies, like St. Paul, are not writing medical malpractice today but have in the past and are likely to come back in when the investment climate improves.

Interest on investments

TRIAL: The insurance industry seems to suffer periodic crises--rates rose in the 1980s, fell in the 1990s, and are rising again. If more lawsuits aren't the cause, what is? For example, it is said that insurance company profits are tied to the stock market. How does that work?

ANGOFF: Insurance company profits are tied to their investment income--to the money they make on investments--but their investments are mostly in bonds, with a relatively small percent in the stock market. Insurance companies make their money not by taking in more premiums than they ultimately pay out in claims but by investing the premiums they collect. And by state law, they have to invest the large majority of premiums in bonds. So today, when interest rates are at a 40-year low, they make very little on their investments.

So insurance companies are making much less than they did just a few years ago, when interest rates were much higher than they are today and the stock market was booming.

Insurance companies are making so much less on their investments today that they have to make it up by raising rates. The problem is particularly acute in the medical malpractice business because it traditionally depends on investment income much more...

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