Tort Reform

Last week while I was visiting my parents, I came across this article in the Kansas City Star. Doctors in Missouri have been facing tremendous malpractice insurance premium increases and are arguing that the state's cap on non-economic damages should be lowered. They point to Kansas' $250,000 cap per malpractice event as a model, and claim that the cap leads to a difference in premiums.

[T]he average cost for malpractice insurance in Kansas for a general surgeon in 2004 was $31,150. By comparison, general surgeons in Missouri paid $105,563 or more for private malpractice insurance in 2004.

Insurance industry executive Bill Turley says the cap is not the reason for the difference in insurance rates charged in the two states.

Kansas has a Health Care Stabilization Fund, which assumes the major risk of liability for doctors.

It works like this. Private insurers cover the first $200,000 of a doctor's malpractice liability. The Kansas fund assumes up to $800,000 in additional liability. In return, the doctor pays a premium to the private insurer and a surcharge — a percentage of the premium — to the fund...
Part of the reason the stabilization fund can charge less is that its operating costs are only 3 percent of the total it collects annually. It does not have the legal, clerical and marketing costs a for-profit insurance company does, nor does it answer to shareholders. Because all Kansas doctors belong to the fund, they did not face the hassles and higher rates that pummeled Missouri doctors the past two years when some malpractice insurers became insolvent or left the state.

And because private insurers are responsible only for up to $200,000, they can better predict their losses, creating a more stable market that deflects the premium fluctuations that buffet Missouri doctors.

Kansas, being a rural state, only has half the number of med-mal lawsuits as Missouri, but it has stronger regulations for the insurance industry. Before raising rates, an insurance company has to justify the hikes before the state insurance commissioner, while in Missouri the insurance director has no involvement in setting of rates. Like all states, Missouri experiences an "insurance crisis" on a periodic basis. Rates soar when insurance companies lose money in the stock market, insurers claim that caps on awards are the best solution, and when the stock market improves, the crisis goes away.

Turley said reformers look only at short-term fixes and lose interest in more permanent reforms when cyclical malpractice crises wane.

He said Missouri in 1985 considered a joint underwriting association to cover doctors who could not find alternative coverage. The idea was shelved after insurer profits rose and rates fell. There followed a period of price wars that Turley said contributed to the current crisis.

Over the past few years, investments made by insurance companies have not covered their costs. Not only do these companies need to raise their rates to cover their investment losses, but they need to make up for undercharging doctors during the stock market boom of the 1990's. The current crisis provides an opportunity to look at real reform instead of "short-term" fixes.