Bad Medicine

For the third time in as many decades, doctors across the country are protesting rising medical-malpractice insurance premiums. The American Medical Association (AMA) is promoting its long-standing goal of medical-liability reform in the shape of a $250,000 cap on "pain and suffering" (noneconomic) damages in malpractice cases. Karl Rove must be thrilled. For an administration determined to deplete the coffers of Democratic trial-lawyer donors -- and damage presidential hopeful Sen. John Edwards (D-N.C.) in the process -- malpractice reform is a godsend.

It is also a powerful wedge issue with the potential to alienate doctors from Democrats after their recent collaboration on the Patients' Bill of Rights. Just one year ago, the AMA and trial lawyers were working together to pass legislation allowing patients to sue HMOs. But with reimbursements declining and malpractice premiums rising, trial lawyers are the physicians' new target.

President Bush's AMA-backed proposal to cap pain and suffering damages at $250,000 will satisfy the AMA's desire to shield doctors from liability while curtailing maimed patients' rights to sue. But in the end it is more likely to line the pockets of insurance companies than reduce rates for doctors.

Depending on whose statistics you use, the median jury award for malpractice ranges from $125,000 to $1 million. The Physician Insurers Association of America reports that claim payments of more than $1 million have increased from less than 2 percent in 1990 to almost 8 percent in 2001, driving the median up from $150,000 to more than $300,000. Contrary to insurance-industry claims, however, overall medical-malpractice payouts have not increased substantially. During market downturns, insurers set aside vast reserves to pay anticipated claims, counting these reserves as "incurred losses" -- even while these funds accrue investment income. But excluding these set-asides, actual insurance-company payouts increased only 15 percent from 1998 to 2001, according to Americans for Insurance Reform (AIR) -- far less than premium increases in most states.

Medical-malpractice law is a lucrative industry, as many a phone book cover will attest. But contrary to the administration's line, increasing jury awards are not single-handedly driving premiums through the roof. Rather, a steep decline in insurers' projected investment income is largely responsible for rising rates. Medical-malpractice insurers do not invest heavily in stocks; in fact, approximately 80 percent to 90 percent of their investments are in the bond market, and bond income has been declining. Moreover, insurance companies are technically barred from recovering past losses by raising premiums, an argument the AMA parrots to dismiss claims that insurance companies are at fault. But insurance companies do regularly raise rates based on projected investment losses. For medical-malpractice insurers, investment income represents a far greater share of profits than in other lines of coverage due to the long lag (up to 10 years) between premium payments and claim payouts. And when investment income evaporates, it hits hard. AIR's J. Robert Hunter, an actuary and former Texas insurance commissioner, tracked premiums and insurance-industry investment returns over the last 30 years. He found that each of the three malpractice insurance "crises" directly coincided with declining insurance investment returns.

Insurance competition in the 1990s, followed by steep drops in interest rates, drove premiums up sharply. As The Wall Street Journal exhaustively documented in 2002, malpractice insurers launched a price war in the 1990s after major companies realized they had set aside too much capital in loss reserves. As large insurers such as St. Paul Cos. released reserves, medical malpractice suddenly appeared immensely profitable and multiple new companies entered the market, aggressively undercutting the larger companies and one another. The result was a bargain for doctors and a brewing storm for insurers. As claims piled up, the low rates no longer proved adequate to cover costs. The largest insurer, St. Paul, left the market. To add to the mess, falling interest rates meant declining yields on bonds. To stay afloat, insurers had to raise rates. "When interest yields decrease, rates must increase," Jim Hurley, a medical-malpractice expert at the actuary firm Tillinghast-Towers Perrin, told the Senate Committee on Appropriations in March.

While general practitioners have not been particularly hard hit by rising premiums, neurosurgeons, obstetricians and other high-risk specialists have seen rates soar. According to the trade journal Medical Liability Monitor, annual premiums for obstetrician/gynecologists in Las Vegas increased from $79,000 in 2001 to nearly $108,000 in 2002, while those in Miami saw premiums skyrocket from $159,000 to more than $210,000. In states such as Pennsylvania, Nevada and Florida, doctors have retired early, left the state or stopped delivering babies to contain their insurance costs. While the overall number of doctors in these states is actually rising, certain specialties are feeling the pressure. Dr. Shripathi Holla, a neurosurgeon in Scranton, Pa., has seen his total malpractice insurance payments double in the last few years to approximately $150,000. Meanwhile, other area neurosurgeons have stopped practicing or retired early, and one recently moved to Maryland. "I am unable to recruit anyone to come to this town," says Holla. As a result, he finds himself on call for three different area hospitals on any given night, and he is sometimes the only surgeon willing to perform risky operations that trauma centers will no longer undertake. "Once some of us retire, this state is going to have a tremendous problem in terms of providing health care to its citizens," says Holla.

The Bush plan is modeled after California's 1975 Medical Injury Compensation Reform Act (MICRA). From 1976 to 2000, according to the AMA, California malpractice premiums remained stable, rising 167 percent compared with a 505 percent increase nationwide. However, California premiums increased dramatically in the years immediately following MICRA. They did not stabilize until 1988, three years after the California Supreme Court upheld MICRA and the same year that California voters passed Proposition 103, forcing publicly traded insurance companies to reduce rates by 20 percent. Both reforms likely played a role in stabilizing California's insurance rates.

But critics of caps insist that pain and suffering damages are necessary to deter careless medical practice and compensate for injuries such as blindness, disfigurement and the loss of sex function, which cannot be quantified in economic terms. Limiting these awards, they argue, will do nothing to reduce costs to doctors and will only trample patients' rights. Linda McDougal, the Minnesota woman whose breasts were mistakenly removed after she was incorrectly diagnosed with cancer because her files were mixed up with another patient's, suffered few quantifiable economic losses. She had health insurance, and her employer covered medical bills and lost wages. But "she will have to go through life mutilated for no reason," says Carlton Carl of the Association of Trial Lawyers of America. George Annas of the Boston University School of Public Health contends that doctors in general are far too worried about being sued.

"Most doctors don't get sued," says Annas, referring to a 1990 Harvard study showing that only one in eight malpractice victims ever takes his or her case to court. "Compare that to patients who worry about being killed; it's not even in the same league."

Far more effective than an arbitrary cap on damages would be a more systematic effort to weed out bad doctors and prevent malpractice in the first place. Dr. Sidney Wolfe, director of Public Citizen's Health Research Group, says, "You should protect patients with doctor discipline and protect good doctors with low premiums." Public Citizen ranks state medical boards according to their records of disciplining negligent doctors. "Five percent of the doctors account for 50 percent of the malpractice payouts," he says. "The primary failing is at disciplining doctors. A lot could be remedied by taking bad doctors out of practice."

Meanwhile, CEO Richard Anderson and President Manuel Puebla of the Doctors' Company, a so-called physician-owned mutual, each earn approximately $2 million per year. Wolfe declares that doctors are "being used as a human shield by the malpractice insurance companies" who want tort reform to protect only themselves. After all, in many states where caps have been enacted, insurance premiums have continued to rise. Nevada, Missouri and Ohio all have some form of cap, but all three figure prominently on the AMA's "crisis states" map. Instead of turning their backs on the real causes, Wolfe says, doctors "should be marching for discipline reform and insurance reform."

Dr. Marcia Angell, former editor of The New England Journal of Medicine and now a professor at Harvard Medical School, is not surprised. "[Doctors] are not economists. They don't think in terms of how a business makes up for a loss of profits. They have been at loggerheads with the trial lawyers for so long that it's always a knee-jerk reaction." Moreover, she observes, many lawsuits arise due to the lack of a social safety net. "As long as we have a system based on avoiding sick people and not taking care of them, you leave sick and injured people with very little alternative other than to sue and to get some care that way," says Angell.

Remarkably enough, insurance companies don't even promise that a cap on lawsuits will solve the problem. In 2002, the American Insurance Association noted, "The insurance industry never promised that tort reform would achieve specific premium savings." And American Tort Reform Association President Sherman Joyce told Liability Week in 1999, "We wouldn't tell you or anyone that the reason to pass tort reform would be to reduce insurance rates." If doctors are genuinely concerned about reducing the cost of malpractice premiums and not simply shielding themselves from liability, it would only be logical to demand that for every dollar an insurance company saves as a result of tort reform, doctors should save a dollar on their premiums.

Ironically, Bush boasted about just such a policy during the 2000 campaign, when he proudly credited a Texas law with saving consumers billions of dollars. But these days the White House won't give its blessing to any such reform. Enticed by the prospect of passing widespread tort reform, Rove and Senate Majority Leader Bill Frist (R-Tenn.) have other things in mind. In early April, a far-reaching bill cracking down on class-action lawsuits was approved by the Senate Committee on the Judiciary, bringing it to the floor even before malpractice reform.

AMA President-elect Dr. Donald Palmisano concedes that other remedies are available. In Massachusetts, Indiana and Louisiana, malpractice lawsuits undergo a pre-screening process, substantially reducing the number of questionable lawsuits without restricting the rights of patients to sue. Other top AMA officials admit that the caps for which they are lobbying hard may not even bring premiums down. "Dropping premiums would be great, but stabilizing is what we want," says an AMA spokeswoman. But stabilizing rates at levels that are already driving neurosurgeons and obstetricians out of business is no solution. While a cap on pain and suffering damages may result in marginal savings for general practitioners, there is no evidence that it would provide relief to those who perform the riskiest procedures. If the AMA succeeds in passing a $250,000 cap without a provision forcing insurance companies to pass their savings on to doctors, rates may well continue to climb, in which case growing numbers of obstetricians will stop delivering babies, more neurosurgeons will retire early or shy away from risky procedures, and more mutilated patients will be denied compensation.

And in the end, Karl Rove and his buddies in the insurance industry will be laughing all the way to the bank.