State Insurance Commissioner Rules 2nd Largest Med Mal Insurer's Increase Request Excessive, In Violation of Proposition 103 Regulations
Santa Monica, CA --The California Insurance Commissioner has ordered the state's second largest medical malpractice insurer, SCPIE Indemnity, to slash its proposed rate increase for doctors by 36% after an eight-month regulatory investigation of the firm's rate request. Consumer advocates called the ruling another tribute to the effectiveness of California's insurance reform initiative known as Proposition 103, which has held down medical malpractice and other insurers' rates since the initiative was approved in 1988 by creating a "prior approval" regulatory system that requires insurers to justify rates to the insurance commissioner and allows consumers to challenge excessive rates. Last week's ruling was in response to the first-ever consumer group challenge to a medical malpractice insurance rate hike request, brought by the Foundation for Taxpayer and Consumer Rights (FTCR), a California nonprofit organization.
Instead of the company's proposal for a 15.6% increase that would have gone into effect on January 1, 2003, the Commissioner will only allow SCPIE and its affiliate, American Healthcare Indemnity, to increase premiums by 9.9% beginning on October 1, 2003. The net impact is a $16 million savings for the insurer's 9,000 physicians in 2003 and an additional $7.2 million of savings in next year's premiums. Although the company had insisted that it needed the entire rate increase, the firm recently announced a second quarter profit despite not having been allowed to implement any 2003 hike while its request was reviewed.
"Proposition 103 and insurance regulation saved California doctors more than $23 million in unjustified premium hikes by SCPIE," said FTCR's staff attorney Pamela Pressley. "When you actually look at the books of an insurance company, the argument for massive rate increases falls apart. The success of this consumer challenge under Proposition 103 is more proof that the solution to high medical malpractice premiums is to increase the accountability of insurance companies, not restrict the legal rights of injured patients."
Insurance Regulation, Not Malpractice Caps, Shields Physicians From Unfair Rates
In recent months insurers and medical associations have pressed lawmakers to restrict the rights of injured patients to recover damages in medical malpractice cases, arguing that such restrictions are crucial to reducing medical malpractice premiums. Consumer advocates disagree, pointing to the SCPIE ruling, and information that became public as a result of this rate challenge, as proof that insurance reform and not malpractice caps will restrain physicians' malpractice insurance rates throughout the nation.
"Several states have passed malpractice caps, none of which have been able to turn back the rate increases, but due to Prop 103 in California you can point to 9,000 doctors who have saved millions," said Daniel Zohar of the Zohar Law Firm, FTCR's lead attorney at the SCPIE hearings.
Insurer Acknowledges MICRA Failed to Reduce Risk in California
The hearing on SCPIE's rate increase also uncovered information about the impact of California's medical malpractice damage caps law, known as the Medical Injury Compensation Reform Act of 1975, or MICRA. Insurers and medical associations lobbying for caps on malpractice awards have pointed to MICRA as a model for the nation. Despite the allegation that caps will lower rates, the reality is that even under MICRA insurers have sought major increases in recent years. SCPIE has increased rates by 23% since 1999 and the state's largest medical malpractice insurer, Norcal Mutual, has increased rates by 26% since 2001. Indeed, during the rate challenge SCPIE stated that California's strict malpractice caps law did not hold down insurance rates. In written testimony, SCPIE's actuary and Assistant Vice President James Robertson stated:
"While MICRA was the legislature's attempt at remedying the medical malpractice crisis in California in 1975, it did not substantially reduce the relative risk of medical malpractice insurance in California."
According to FTCR, the combination of the company's acknowledgement that malpractice caps do not reduce risk and the finding that SCPIE's proposed rate increase was excessive must change the way lawmakers respond to the reported medical malpractice insurance crises around the country.
"Insurance companies tell doctors and lawmakers that caps will reduce rates, but under the spotlight of regulation, SCPIE admitted that California's caps do not keep physicians' rates down," said FTCR's senior consumer advocate Douglas Heller. "California's malpractice cap has been prescribed as the cure-all for the medical malpractice premium crisis, but that is a misdiagnosis with dangerous side-effects. The problem has never been litigious victims; it has been greedy insurance companies."
In California, insurance companies are subject to Proposition 103, a voter approved 1988 ballot initiative that governs the insurance industry. Under that law, insurers were required to immediately roll back rates and justify future rate increases prior to increasing premiums. As a result, medical malpractice providers refunded more than $75 million directly to physicians. Proposition 103 created a "prior approval" system in which companies must justify any rate changes to the insurance commissioner before the rate can take effect. The law forces insurers to comply with a series of regulatory formulae that limit company profits and administrative costs as well as requiring full disclosure of the data that go into rate proposals. The law also ended the insurance industry's exemption from state anti-trust laws and allowed consumers and groups to challenge rate hike proposals, as is the case with FTCR's successful intervention to reduce SCPIE's rate increase proposal.
According to the decision issued by California Insurance Commissioner John Garamendi, SCPIE tried to justify its rate hike by claiming that it should not be subject to a strict application of rate regulations and did not have the burden of proving its rates were reasonable, despite California's stringent regulatory structure. The Commissioner rejected that argument and, to ensure regulatory compliance by SCPIE and other insurers, officially designated portions of his ruling as legal precedent.
While under Proposition 103 the insurance commissioner has always been able to deny excessive rate hikes or require a company to lower its rates, the law provides another layer of consumer protection, giving consumers and groups like FTCR an independent right to challenge rate hike proposals. Although doctors and their organizations have never availed themselves of the independent consumer action aspect of Proposition 103, FTCR challenged the SCPIE proposal to protect doctors who would have been overcharged if the rate hike had been approved. Aside from the SCPIE rates, FTCR has reviewed a number of other recent rate proposals by medical malpractice insurers, which the group believes to be excessive, and recently sent a letter to the California Medical Association urging that group to get involved with regulatory efforts to protect their physician members. Medical associations throughout the country have typically sided with insurance companies, arguing that laws should restrict victim's legal rights rather than subject insurance companies to strong regulation.
"The medical associations could save physicians a lot of money if the groups pushed for regulatory reforms, rather than putting all their eggs in the insurance industry's basket," said FTCR's Heller.