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AIR’s critique, Towers Perrin: “Grade F” For Fantastically Inflated “Tort Cost” Report, is co-written by actuary J. Robert Hunter, Director of Insurance for the Consumer Federation of America (CFA), former Commissioner of Insurance for the State of Texas, and former Federal Insurance Administrator under Presidents Carter and Ford; and by Joanne Doroshow, Executive Director of the Center for Justice & Democracy.

Co-author J. Robert Hunter said, “It is really past time for Towers to stop publishing such flawed data year after year.  The fact that they persist despite criticism after criticism shows a deep distain for fair and accurate presentation of facts.”

Joanne Doroshow said, “Even with all of its faults, which are extensive, the Towers Perrin report gives no credence whatsoever to any notion that tort costs are out of line, particularly medical malpractice costs.  Policymakers and opinion leaders should be extremely wary of how this document is used, because it is routinely presented in a misleading manner by corporate lobbyists who seek to weaken the tort system and limit consumers’ legal rights against corporate wrongdoing, so-called ‘tort reform.’  Fear-mongering is typical, for example, as taxpayers are often misled to believe they are paying these inflated costs in the form of a ‘tort tax’ or ‘litigation tax.’  Yet the Towers Perrin report provides absolutely no support for such a contention, nor for the insurance industry’s ‘tort reform’ agenda.”

Among AIR’s findings are:

• Towers Perrin figures do not represent the costs of the legal system.  For example, the report does not examine jury verdicts, settlements, lawyers’ fees, court costs, or any actual costs of what might generally be considered the “tort” system.
• Towers Perrin examines only insurance losses whether or not a lawsuit was filed, plus insurers “guess” (historically, widely overstated) of what future losses could be, plus all of the industry’s bloated overhead (salaries, bonuses, lobbying costs, jet planes etc.).
• Towers Perrin greatly pads its numbers by:
  • incorrectly counting as a “tort cost” the transfer of money from wrongdoers to victims, such as $500 to fix a dented car door;
  • including insurance costs whether or not a lawsuit was filed, including such incidents as common fender benders;
  • including billions of dollars of insurer future estimates of claims – not actual costs;
  • including billions of dollars of certain first party coverages, like auto insurance medical payments;
  • including the immense costs of operating the wasteful and inefficient insurance industry, an industry that is not fully competitive due to its exemption from anti-trust laws; fully 26.1 percent of Towers Perrin total “tort cost” figures are these administrative expenses, such as multi-million dollar salaries and bonuses of insurance industry executives, perks like private jets and country club memberships, lobbying and advertising expenses, rent and utilities for insurance company headquarters and commission paid to agents.

• Towers Perrin adjusts figures without any basis and fails to provide explanations or sources;
• Identifies as medical malpractice “costs”, which are largely unverifiable, all insurer expenses, which amount to fully 36.1 percent of its total cost figures; as for actual claims and reserves, Towers Perrin numbers are more than three times those of A.M. Best, considered the insurance industry standard;
• Towers Perrin entirely ignores the amount of money the civil justice system saves the economy in terms of injuries and deaths that are prevented due to safer products and practices, wages not lost, health care expenses not incurred, and so on.
• Towers Perrin’s calculations are not discounted one cent for the benefit that is gained from repairing damage.

Doroshow, said, “These figures have no connection whatsoever to the costs of lawsuits, litigation or the courts, for which there is no evidence of any increase at all. For Towers Perrin to call their study ‘U.S. Tort Cost Trends’ is intellectually dishonest.  These figures are so misleading that they are completely irrelevant to any discussion of the civil justice system.”

The full study can be found here.

Contact: Joanne Doroshow (212) 267-2801; Robert Hunter (703) 528-0062

The post National Consumer Group Slams Insurer “Tort Cost” Report appeared first on Consumer Federation of America.

The Honorable George W. Bush
President of the United States
Washington, DC 20500

Dear Mr. President:

I am a former Federal Insurance Administrator who advised President Ford on the situation pertaining to the Medical Malpractice crisis of the mid 1970s. At that time, I informed him that the problem was not an explosion in lawsuits, as some had suggested, but the economic cycle of the insurance companies. I am sorry to have to inform you that the Department of Health and Human Services report, upon which you based your recent call for severe limits on victims of medical negligence, is one-sided and full of errors. HHS appears to have relied solely on biased statistics developed by the insurance industry.

The cause of the current crisis is the same as I advised the President and Congress it was back in the 70s and again in the mid 80s (when I was President of the National Insurance Consumer Organization): fallout from the economic cycle and the business practices of the insurance industry. This is a well-known cyclical effect. It is a startling error for HHS to not mention the cycle in its report.

I have documented the cycle and the effects on current insurance rates in a letter to the state insurance commissioners dated July 30, 2002, attached, to show you the history. In a nutshell, during the “soft” phase of the market, rates do not rise as costs do, particularly if financial markets are producing positive results in long-tailed lines like malpractice, where the premium is paid years before claims are paid, giving enormous “float” profits to insurers. In the last decade, medical malpractice rates stayed flat while costs (claims, including jury verdicts) rose by exactly the rate of medical inflation. When interest rates and the stock market tanked, the rates had to catch up. As our letter to the commissioners shows, in order for medical malpractice rates to return to 1991 levels, they would have to rise by about 50%.

Ignoring the economic cycle as a cause of the current situation is an unforgivable error by HHS, given the widespread acceptance of the cycle and its impact on medical malpractice premium increases. Here are five other egregious examples of errors in the HHS report:

1. “The leading study estimates that limiting unreasonable awards for non-economic damages could reduce health care costs by 5-9% without adversely affecting quality of care. This would save $60-108 billion in health care costs each year.”

Comment: The total cost of medical malpractice premiums is $6.4 billion (not just for doctors, as the report says, but for doctors, hospitals and other facilities). This represents about one-half of a percent of total health care expenses. In other words, if an outright ban were placed on medical malpractice lawsuits the total savings would be about $6 billion. The idea that a cap of any kind can save $60 to $108 Billion is pure rubbish. How in the world could “defensive medicine” possibly be more than equal to the total risk measured in premiums, much less 10 to 20 times the risk, as HHS assumes? This makes no economic sense at all. Indeed, the Office of Technology Assessment has studied the prevalence of defensive medicine. It found no statistically significant defensive medicine impacts in its various surveys, with one exception. In that survey, OTA suggested that medical costs resulting from the fear of malpractice litigation represented “certainly less than 8%” of diagnostic procedures…”

The Congressional Budget Office took the position that “defensive medicine is probably not a major factor in the costs of medical care.” In a study of defensive medicine by Lewin-VHI, Inc, the estimate of the cost of defensive medicine was 2.7 times the cost of premiums (based on an AMA study that used self-reported doctor data “which is suspect because physicians have a direct financial incentive to overstate their costs,” according to the VHI study.) If this figure were used, the cost of defensive medicine would be, at most, $ 17.3 billion ($6.4 billion * 2.7).

These studies were conducted before managed care took hold in the mid to late 90s and placed increasing utilization restrictions on physicians. If anything, the studies overestimate the amount of defensive medicine that is occurring at the present time.

If the total cost of the malpractice system is at most $23.7 billion ($6.4 billion in premium and $17.3 billion for defensive medicine,) it is difficult to see how tort reform can cut costs by $60 billion or more.

2. “Insurance premiums are largely determined by the expensive litigation system.”

Comment: Litigation affects a tiny fraction of malpractice claims that are closed. The average cost of all claims closed over the decade that ended December 31, 2000 was $27,823.53. This includes all “million dollar” verdicts. Insurance premiums are determined by the overall costs, of which litigation is a small amount. Also, premiums are greatly influenced by costs other than claims (such as loss adjustment expense and underwriting costs) and investment results.

3. “The average payment per paid claim increased from approximately $110,000 in 1987 to $250,000 in 1999.”

Comment: These numbers do not reflect overall industry statistics and must be a biased sample. As mentioned above, the average claim paid over the decade of 1991 to 2000 was $27,823.53 according to AM Best statistics for the entire industry. This includes costs for insurer defense and claims adjustment. The figures over the decade showed no growth in average paid claim. If one looks at average payout just for claims with payments (as opposed to all closed claims, which include zero payments) the average loss was $112,987. This includes costs for defense of claims settled, adjudicated or otherwise closed with no payment, thereby overstating the cost per claim paid.

Even the incomplete statistics quoted by HHS show little real growth in paid claims. The increase from $110,000 in 1987 to $250,000 in 1999 is a 127% growth in 12 years or a 7.1% annual growth rate. The medical care services index of the CPI-U increased 95.7% during that time, or 5.8% per year. Medical malpractice costs are rising only about one percent more than the expected growth, even under the biased HHS sample, given the increasing number of doctors and medical inflation. It is remarkable that HHS ignored inflation in its analysis.

Had they used industry-wide data HHS would have seen that incurred losses, including insurer estimates of reserves as well as payments, rose from $3,335 per doctor in 1991 to $5,024 in 2000, an increase of 51%. This rise in costs is precisely the same as medical inflation (Bureau of Labor Statistics CPI-U Medical Care Services index). You would expect that treating medical injuries would show cost increases about the level of medical inflation. That is what happened. There is no “explosion” of medical malpractice costs.

However, there is mismanagement of the costs by the medical malpractice insurance companies. During the same decade, medical malpractice premiums per doctor went from $7,701 in 1991 to $7,844 in 2000. In other words, while costs went up by medical inflation, premiums stayed the same. It would take a 50% rate increase to catch up for this inaction by insurers during the decade.

4. “Premiums have increased rapidly over the past several years.”

Comment: As we have demonstrated, premiums have been flat.

5. “There is a substantial difference in the level of medical malpractice premiums in states with meaningful caps, such as California.”

Comment: Malpractice premiums in the USA averaged $7,844 in 2000; in California, rates averaged $7,201. This represents an 8% difference. Between 1991 and 2000, premiums rose by just 0.2% nationally and by 0.4% in California.

I am very surprised that your advisers did not warn you of the large number of errors in the HHS report. You would have received better advice, I am sure, were you governor instead of president. As I served as Texas Insurance Commissioner, I know the quality of the Texas Insurance Department. In order for the American people to trust your proposals, it is imperative that you base your decisions, particularly decisions that would restrict patients’ legal rights, on sound evidence, and not the shoddy, one-sided analysis HHS supplied to you.

Yours truly,

J. Robert Hunter
Director of Insurance

CC: Andrew H. Card, Jr.
Lawrence B. Lindsey

The post Letter to President Bush on HHS Study of Medical Malpractice Insurance Rates appeared first on Consumer Federation of America.

The Consumer Federation of America urges you to reject this amendment because it limits patients’ rights without attacking the root causes of the malpractice insurance crisis. Research by actuary and CFA Director of Insurance J. Robert Hunter shows that insurers are pointing fingers when they should be looking in the mirror. It is the “hard” insurance market and the insurance industry’s own business practices that are largely to blame for the rate shock that physicians have experienced in recent months. CFA has found that:

• Medical malpractice rates are not rising in a vacuum. Commercial insurance rates are rising overall.
• The rate problem is caused by the classic turn in the economic cycle of the industry, sped up by–but not caused by-the terrorist attacks. There have been three medical malpractice crises, in the mid-1970s, the mid-1980s and currently. These crises have coincided precisely with the bottom of the insurance cycle during this period, in which the operating income of the industry declined below the amount of premium written. According to the National Association of Insurance Commissioners, the three major causes of sharp underwriting cycles are large “loss shocks,” changes in interest rates, and underpricing in soft markets. Lower interest rates and under-pricing have been in place for quite some time and September 11th provided the shock loss in an achingly painful way. But the cycle had turned before September 11th–in late 2000.
• Insurers have under-priced malpractice premiums over the last decade. Inflation-adjusted malpractice premiums declined by 32.5 percent from 1991 to 2000. It would take a rate hike of nearly 50 percent to increase rates to the same level as existed ten years ago. Insurer pricing practices (e.g. under-pricing during a soft market followed by a sharp increase in premiums as the market has hardened) are the key culprit in the severe rate increases that are now occurring.
• Further limiting patients’ rights to sue for medical injuries would have virtually no impact on lowering overall health care costs. Over the last decade, for every $100 of national health care costs in the United States, medical malpractice insurance cost 66 cents. In the latest reported year (2000,) the cost is just 56 cents. Medical malpractice insurance is actually an amazing value as it covers all medical injuries for about one-half of one percent of all health costs.
• Insurer losses for medical malpractice have risen slowly in the last decade, by just over the rate of inflation. Incurred losses, including loss adjustment expense, have risen by one-half of one percent over the last decade on a per-capita basis more than medical inflation. In other words, losses have increased on a fairly regular, predictable basis, like most goods and services subject to inflation. The problem is that premiums have not kept up with losses.
• Malpractice claims have not “exploded” in the last decade. Only about one in four persons who bring a claim (24.6%) get any payment at all. Each closed claim in America-which includes all million-dollar verdicts-averaged only $27,824 for the decade ending December 31, 2000. This includes costs for insurer defense and claims adjustment. The figures over the decade showed no growth in average paid claim. If one looks at average payout just for claims with payments (as opposed to all closed claims) the average loss was $112,987. This includes costs for defense of claims settled, adjudicated or otherwise closed with no payment, thereby overstating the cost per claim paid.
• Medical Malpractice profitability over the last decade has been excellent, at just over 12 percent, despite a decline in profits in the last two years.

Each time the insurance cycle turns, the response by insurers is predictable: they shift from inadequate under-pricing to unconscionable over pricing, cut back on coverage and blame large jury verdicts for the problem. It is particularly appalling to see a crisis caused by insurer action being blamed, by the very insurers that caused the problem, on others. Insurers seem to expect legislators and the American public to swallow the dubious line that trial lawyers have managed to time their million-dollar jury verdicts to coincide precisely with the bottom of the insurance cycle three times in the last thirty years.

Before the Senate rushes through this amendment, I urge you to get the facts. As the evidence above shows, insurers have largely themselves to blame for the predicament they-and physicians and patients throughout the country-face.

Sincerely,

Travis B. Plunkett

Legislative Director

The post CFA Opposes McConnell Medical Malpractice Amendment appeared first on Consumer Federation of America.

I would like to thank Chairman Bilirakus, Ranking Member Brown and the other members of the Subcommittee for the opportunity to offer our comments on this extremely important issue. For the third time in less than thirty years, Congress and state legislators across the country are grappling with the problem of fast-rising medical malpractice rates. Insurers insist that a sharp increase in large, unwarranted jury verdicts is to blame for the crisis. As a result, lawmakers on this Subcommittee and in a variety of states are considering legislation to place further limits on the legal rights of Americans who have been harmed or killed by medical malpractice.

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