FDCH TRANSCRIPTS
Congressional Hearings
Feb. 11, 2003
Senate Health, Education, Labor and Pensions Committee and Senate Judiciary Committee Hold Joint Hearing on Role of Litigation in Patient Access to Care
KENNEDY:
That's fine.
GREGG:
Five minutes.
KENNEDY:
Thank you, Mr. Chairman.
Today we are beginning an investigation into the sudden very substantial increases in the cost of medical malpractice insurance, which some doctors in a number of states have experienced. I hope the committee will conduct a thorough and unbiased examination of this problem, one which seeks real solutions.
We must reject the simplistic and ineffective response proposed by those who contend that the only way to help doctors is to further hurt seriously injured patients.
Unfortunately, as we saw in the patients' bill of rights debate, the Bush administration is again advocating a policy, which will benefit neither the doctors nor the patients, only the insurance companies.
Caps on compensatory damages and other extreme tort reforms are not only unfair to the victims of malpractice; they do not result in reduction of malpractice insurance premiums.
Placing arbitrary caps on compensations, but not economic loss only serves to hurt those patients who have suffered the most severe, permanent injury. They are the paralyzed, the brain injured and the blinded. They are the ones who have lost limbs, organs, reproductive capacity, and in some cases, even years of life.
The Bush administration talks about deterring frivolous cases, but caps by their nature apply only to the most serious cases, which have been proven in court.
The person with the severe injury is not made whole merely by receiving reimbursement for their medical bills and lost wages. Non- economic damages compensate victims for the very real, though not easily quantifiable loss in quality of life that results from a serious permanent injury.
It is absurd to suggest that $250,000 is fair compensation for a person confined to a wheelchair for life. Less accountability for health care providers will never lead to better health care. It will not even result in less costly care. The total cost of medical malpractice premiums constitute less than two thirds of 1 percent -- two third of 1 percent -- of the nation's health care expenditures each year.
Malpractice premiums are not the cause of the high rate of medical inflation. In the past year, there have been dramatic increases in the cost of medical malpractice insurance in states that already have damage caps and other restrictive tort reforms under statute book as well as in the states that do not.
The reason for sky-high premiums cannot be found in the courtroom. Comprehensive national studies show that medical malpractice premiums are not lower, on average, in states that have enacted damage caps in other restrictions on patients' rights than the states without these restrictions.
Insurance companies are merely pocketing the dollars, which patients no longer receive when tort reform is enacted. Let's look at the facts. Twenty-three states had a cap on damages in medical malpractice cases. In 2001, 27 states did not.
The best evidence of whether the cap affects the cost of malpractice insurance is to compare the rates in the two groups of states. The average liability premium in 2002 for doctors practicing in states without caps on malpractice damages was virtually the same as the average premium for doctors practicing in states with caps -- $31,926 to $30,521. The examination of the rates for range especially show similar results.
There are many reasons why insurance rates vary substantially from state to state. This data demonstrates that it is not states' tort reforms that make the difference.
Insurance industry practice are responsible for the sudden steep premium increases which have occurred in some states in the last year. The National Association of Insurance Commissioners studies show that in 2000, the latest year for which data is available, total insurance industry profits as a percent of premium for medical malpractice insurance was nearly twice as high -- 13.6 percent, as overall casualty and property insurance profits -- 7.9 percent.
In fact, malpractice was a very lucrative line of insurance for the industry throughout the 1990s. Recent premium increases have been an attempt to maintain high profit margins despite sharply declining investment earnings.
The industry creates malpractice crisis whenever it invests -- investments do poorly. Doctors, especially those in high-risk specialties whose malpractice premiums have increased dramatically over the past year do deserve premium relief. That relief will only come as a result of tougher regulation of the insurance industry.
When insurance companies lose money on their investments, they should not be able to recover those losses from the doctors they insure. Unfortunately, that is what is happening now. Doctors and patients are both victims of the insurance industry. Only be recognizing the real problem can we begin to structure an effective solution to end unreasonably high medical malpractice premiums.
BREAK IN TRANSCRIPT
KENNEDY:
Thank you very much.
Mr. Montemayor, you state that investment income is not the real culprit in medical malpractice, rate hikes of 80 percent to 140 percent for the major companies in Texas because of a preponderance of the investments in bonds.
Aren't you overlooking the fact that with the interest rates nearly a 40-year low, the bonds have not been doing very well in recent years? In fact, I have the document from the Texas department of insurance dated August 15, 2002, which shows that the net investment income is way down for medical malpractice insurance, steadily dropped from $1.347 billion in '97 to $1.228 billion in 2000.
This is a decline of $120 million. In 2000, they also sustained $441 million in unrealized capital losses. The total yield on the investments has fallen from 8.1 percent in '97, 5 percent in 2000. The reduction in investment earnings these companies sustain sounds pretty substantial. Isn't that what your department data shows and how can you discount it as a cause of the substantial premium increase which Texas doctors are seeing.
MONTEMAYOR:
Without doubt, Senator, the level of investment income has, in fact, decreased, as you pointed out due to a lower prevailing interest rate on the bond market.
However, all rates are set on a prospective basis and what that really means is the level of help that you would normally get, in other words, you ability to price it at 117 percent now means that you've got to price it at 110 percent of expected losses in order to break even.
The medical liability trust, which is the primary driver or writer in Texas, they write some 10,000 doctors out of the approximately 30,000 doctors that were in practice in Texas, projects that they will need about 10 percent return in income. It's a medical liability trust. In other words, the level of help is just not there.
KENNEDY:
The point about it is, you've had a decline of $120 million, $441 million in unrealized capital losses. No one is questioning you've got the losses. Some one has to make it up and it appears to me that the doctors are being asked to make it up.
Mr. Smarr, you state in your testimony that the net income for the PIAA companies was only 4 percent in 2000. It fell to minus tenth percent in 2001. By comparison, on page six, on graph six of your testimony shows that the net income was over 20 percent per year -- 1995, '96, '97 and was 17 percent in '98 and 12 percent in '99. Those are all very good rates.
Net income was so strong in those years because as the graph on page eight shows, investment income as a percent of premiums was between 43 and 46 percent. Then in '99 it dropped to 33 percent. In 2001, it dropped to 31 percent. That is a substantial decline. Companies were taking in one quarter less in investment profit.
Isn't this substantial decline in investment income the largest factor in the timing and the amount of premium increase we've seen in the last two years?
SMARR:
No, Senator Kennedy, I don't believe that it is. Our companies did earn more investment income in prior years because prevailing market interest rates were higher. And that is a fact of life that we have to live with.
KENNEDY:
That's just what we are saying. That's just what I am saying. Then you have less and so you have the losses and you're increasing the premiums on the doctors.
SMARR:
It's not losses, Senator.
KENNEDY:
Well, whatever way you want to describe it. It's not there. I mean, we've got the charts just reflect that in terms of it. We don't want to spend the time. Whatever way you want to show it, it wasn't getting the kind of income that you were getting in previous years.
SMARR:
Yes, sir. I think none of us are getting the kind of investment...
KENNEDY:
Why don't we just admit it? This is what the charts show. There's 23 percent, 20 percent, in '96, '97, 21 percent, 17 percent in '98 and minus 10 percent in 2001. That is what your charts show. And let me go to the issue about California, the MICRA I'd like to ask Mr. Angoff if he would interpret the figures on California. I have them here. They are part of your testimony, Exhibit Three.
We've heard a great deal about MICRA and about the starting in '76 and how it basically stabilized. Then we see MICRA is upheld by the California Supreme Court. We get the largest increases and then we have Proposition 103, which is the insurance reform in 1988, where from 1988, the premiums are winned (ph), I guess, hundreds of thousands, $663,000, $155,000, hundreds of thousands to in 2000, $609,000, so there is virtually no -- actually decline.
Can you explain since we've heard a great deal about from '76 to 2000, there are really three sets of figures -- one where you have stability in premiums earned for the first years, then a very dramatic, 2 or 3 percent bubble up and then the stable figures afterwards. What should we know? What do those figures tell us? What were the factors that influenced that and what should we -- how should we take those figures in trying to understand the medical malpractice question?
ANGOFF:
Mr. Smarr is correct that the aggregate increase between '76 and the present in California is much less than the aggregate increase countrywide. But the facts show that that relatively good experience in California is due to Prop 103 for the following reason. MICRA was tied up in litigation for the first couple of years. The California Supreme Court finally upheld the two most significant parts of MICRA, the limit on non-economic damages and the limit on attorneys' fees in 1985.
A year after, the California supreme court upheld those two provisions, medical malpractice premiums in California rose by 35 percent. Now, does this mean that MICRA caused malpractice premiums to rise? No, that would be pure demagoguery to take that position. That is not the position that I am taking.
On the other hand, MICRA clearly didn't cause malpractice premiums to fall. Malpractice premiums only started falling after Prop 103 was enacted in 1988. In 1988, medical malpractice premiums were $663 million. They went down to $633 million the next year. They kept going down and even in 2000, 12 years after Prop 103 was enacted, malpractice premiums in California are $609 million, about 10 percent less than they were in the year before Prop 103 was enacted.
Now, Prop 103 did roll back rates by 20 percent. And as I said in my testimony, that is a very extreme measure. It might sound a little wacky. You can't just mandate companies to roll back their rates by 20 percent, but the California Supreme Court upheld that roll back as long as insurers had an opportunity to avoid the roll back if they can show that they can't earn a fair rate of return with the roll back.
So, that was upheld by the California Supreme Court and in addition, very importantly, Prop 103 did not only roll back rates by 20 percent, which was very important, but it also repealed the state antitrust exemption so that in California, insurers can share data that will allow them to set prices more accurately. They can share their past cost data, which is permitted under the antitrust laws, but they can't get together and agree on future prices, which is not permitted.
And then, finally, Senator, MICRA also gave doctors and consumers automatic standing to intervene in rate cases before the insurance department. That is, if an insurance company files for a rate increase, under Prop 103, any consumer, any policyholder, including a doctor, can intervene and can try to show why that increase is excessive.
So, yes, I think the evidence shows that Prop 103 is what is responsible for the relatively good experience in California.
KENNEDY:
Thank you.