During the insurance crisis of the 1980s, California's 1975 law restricting the right of injured patients to sue doctors, hospitals and HMOs for medical mistakes and negligence was touted by the insurance industry and medical industry as a model "tort reform" for the nation. Doctors were told that the skyrocketing premiums they must pay to purchase malpractice insurance coverage would be reduced if MICRA-type laws were enacted.
Studies conducted during and after the 1980s "crisis" told a different story. The U.S. General Accounting Office, published a study of six states that had enacted many different forms of tort law restrictions during the "crisis" of the mid-1970s, including caps on compensation. The GAO report showed that the price of medical malpractice liability insurance in California had increased dramatically since the passage of MICRA. In fact, "premiums for physicians increased from 16 to 337 percent in southern California ... between 1980 and 1986."1 The GAO study concluded:
While it is not possible to assess the extent to which the act [MICRA] has had an impact on the state's malpractice situation, our analysis of key indicators indicated that the problem is continuing to worsen in California.2
According to the GAO, four states (Arkansas, Florida, New York and North Carolina) reported that the restrictions had had "little effect" on insurance premiums.3
A later, comprehensive review of insurance industry data spanning the period from 1976, when MICRA took effect, through 1991, demonstrated that its restrictions did nothing to ease the cost of malpractice insurance premiums. The average malpractice premium per California physician was higher than the national average in most years after MICRA's passage. The total cost of malpractice liability insurance premiums paid as a percentage of total health care costs was higher in California than in the nation. Moreover, the price of malpractice coverage increased in California after the passage of the law. Premiums grew 191 percent through 1988, when they began to fall, dropping 20 percent by 1991. The same pattern emerged in the nation: premiums grew 331 percent through 1989, then fell 5 percent by 1991.4
That study concluded that MICRA was not responsible for the reversal in premium growth; tougher insurance regulation imposed in California in 1988 -- Proposition 103 -- probably accounted for the greater reduction in premiums witnessed in recent years.5 But insurers still charged too much for malpractice liability insurance in California, according to the report; MICRA's chief effect was to enrich the insurance industry.6
Higher profits for insurers, fewer rights for malpractice victims:
Investigations of the insurance industry's financial operations confirm that insurers took advantage of the crises they concocted to engage in profiteering. According to the National Insurance Consumer Organization (NICO), medical malpractice insurers earned a 12.6 percent return on net worth in 1987, when their complaints about the litigation explosion were at a fever pitch.7 This rate of return is twice that of most other industries. Moreover, between 1975 and 1984, the entire property/casualty insurance industry made a record-breaking profit of $75 billion, yet, due to preferential treatment under federal tax laws, paid no federal income tax, according to the U.S. General Accounting Office.8
In 1991, insurers writing medical malpractice insurance in the United States earned a return of $1.4 billion, or 15.9 percent of net worth. But this immodest figure still underestimates the insurers' profitability. It reflects the industry's decision to retain much more capital than is necessary or reasonable to cover the risks they underwrite, according to NICO. Had insurers not retained so much previous profit, the return on net worth for America's medical malpractice insurers would have been even higher -- 29.2 percent. This is an excessively high rate of return, one that is more than double the profit required to reward the risk of underwriting this insurance.9
The 1993 study of medical malpractice insurance in California showed that MICRA had done little more than enrich California malpractice insurers with excessive profits, at the expense of malpractice victims. One measure of the insurers' greed is revealed by their "loss ratios," which is the amount estimated to be paid for malpractice claims, shown as a percentage of premiums sold. Carriers which sell medical malpractice policies in California had an average loss ratio of 36 percent in 1990 -- an astounding figure for an industry which usually relies on investment income, rather than underwriting, for most of its profits.10
Put another way, malpractice insurance companies operating in California paid out only 36 cents for every one dollar in premiums they took in from physicians, hospitals and other health facilities.11 The industry's legendary inefficiency and bloated bureaucracy, along with excessive profits, soak up 64 percent of premiums. And nationally, malpractice insurance companies' profits are even more excessive.12
Given the insurance industry's role in the "insurance crisis" of the 1970s, its behavior in the mid-1980s was predictable, and should have elicited a stringent response from law enforcement, insurance regulators and elected officials. But few paid attention to the conclusions of those investigators who took the time to sift through the evidence of the chaos that swept the insurance marketplace in the mid-1980s. A 1986 report prepared by six state attorneys general concluded:
The facts do not bear out the allegations of an 'explosion' in litigation or in claim size, nor do they bear out the allegations of a financial disaster suffered by property/casualty insurers today. They finally do not support any correlation between the current crisis in availability and affordability of insurance and such a litigation 'explosion.' Instead, the available data indicate that the causes of, and therefore the solutions to, the current crisis lie with the insurance industry itself.13
By early 1987, most of the states in the nation had enacted laws limiting the rights of injured consumers, premiums had stabilized at sharply higher levels, and the insurers' profits were skyrocketing. The "crisis" was over -- for everyone except the victims.
1- U.S. General Accounting Office, Medical Malpractice: Six State Case Studies Show Claims and Insurance Costs Still Rise Despite Reforms (Washington, D.C.: U.S. Government Printing Office, 1986), p. 25.
2- Ibid., p. 26.
3- Ibid., pp. 2-3.
4- Harvey Rosenfield, California's MICRA: Profile of A Failed Experiment in Tort Law Restrictions (Los Angeles, Ca. June 1993), pp. 11-16.
5- Ibid., pp. ii - iii.
6- Ibid. p. 15-16.
7- National Insurance Consumer Organization, Medical Malpractice Insurance: 1985-1991 Calendar Year Experience (Alexandria, Va.: National Insurance Consumer Organization, March, 1993), Exhibit 3, Sheet 1.
8- Statement of William J. Anderson, Director, General Government Division, U.S. General Accounting Office, on "Profitability of the Property/Casualty Insurance Industry," before the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, March 13, 1986, p. 4.
9- National Insurance Consumer Organization, Medical Malpractice Insurance: 1985-1991 Calendar Year Experience (Alexandria, Va.: National Insurance Consumer Organization, March 1993), pp. 8-9.
10- Harvey Rosenfield, California's MICRA: Profile of A Failed Experiment in Tort Law Restrictions (Los Angeles, Ca.: Voter Revolt, June 1993), p. 15. (See note 112 for instructions on how to obtain a copy of the report).
11- Ibid. Note that 1991's unusually low losses allowed California malpractice insurers to achieve a nine percent loss ratio. Ibid., p. 15, footnote 25.
12- Ibid., pp. 13 - 16.
13- Francis X. Bellotti, Attorney General of Massachusetts, et al., Analysis of The Causes of The Current Crisis of Unavailability and Unaffordability of Liability Insurance (Ad Hoc Insurance Committee of the National Association of Attorneys General, May 1986), p. 45. For a comprehensive critique of the "litigation crisis" by consumer advocate Ralph Nader read, "The Corporate Drive to Restrict Their Victims' Rights," Gonzaga Law Review, Vol. 22, No. 1 (1986-1987), p. 15.
14- "Insuring Health Clinics," Modesto Bee, February 19, 1987, p. A16.
From: Harvey Rosenfield, Silent Violence, Silent Death: The Hidden Epidemic of Medical Malpractice (Essential Books, 1994).
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