New Jersey is still one of the 21 states the American Medical Association identifies as experiencing a medical liability crisis, and there is hardly evidence of premiums tumbling to where they were before jury awards proliferated and their amounts spiked, the investment market tanked, and many physicians – particularly those practicing in high-risk specialties – struggled to find affordable coverage.

But signs of a freshly competitive market may present a glimmer of hope for some physicians, while at the same time worrying others that excessive exuberance could lead to another cycle of price competition that brought carrier insolvencies and market crisis the last time around.

Evidence of Change

"We are in the throes of a very soft market again," believes Michael Bernal-Silva, president of MBS Insurance Services, Inc., a medical malpractice insurance broker representing about 2,300 physicians in New Jersey. In the last year, Bernal-Silva says he has seen a 10 to 20 percent drop in physician premiums across the board, while high-risk specialties like ob/gyn have seen a 35 to 40 percent drop.

The advent of what he calls "aggressive pricing" in the past ten months has produced a phenomenon that Bernal-Silva says he is seeing for the first time: some physicians, especially those in high-risk specialties, canceling in mid-stream a policy they had renewed for a full year, paying the penalty surcharge, then signing with a new company for a better rate.

Some malpractice insurance carriers are also once again offering occurrence policies, which include "tail" coverage for claims that might be filed in the future for an incident that happened during the term of a policy. In order to bring more predictability to their risk exposure and ability to price their product in the face of volatile spikes in claim frequency and payout amounts, many carriers had abandoned occurrence policies in favor of claims-made policies, which only cover claims during the policy term.

In 2006, Medical Protective Company again opened its New Jersey physician book of business to occurrence policies and to new physicians, after a 2005 retrenchment in which it converted all policies to claims-made and restricted new policies to physicians joining groups that were already insured by the company, says Jim Kunce, Medical Protective’s vice president of actuary. After years of double-digit premium increases – averaging 50 percent in 2003 and 15 percent in 2005 – Medical Protective had no rate increase in 2006 and anticipates a single digit increase in 2007, says Kunce. Medical Protective has also dropped a "tiered specialty structure" in its underwriting practices, by which certain specialties were preferred, and opened up to all specialties across the board the same level of underwriting, adds Kunce.

Kunce attributes the recent changes to a "longer-term approach to risk and volatility" by its new parent company since July 2005, Berkshire Hathaway, while he also says that New Jersey’s malpractice claims frequency has been stable, and claims severity has been slowly increasing, but has not spiked recently.

Princeton Insurance Company – New Jersey’s largest physician carrier with about 35 percent of the market – has also announced it will sell occurrence policies again, after three years of selling only claims-made policies, according to Bernal-Silva.

Underwriting has loosened up in most companies, Bernal-Silva says, noting that physicians a few years ago who had a few claims had difficulty getting an affordable policy. "Now, a physician with two claims is no longer getting surcharged, or is even getting a preferred rate," Bernal-Silva adds. "Claims still drive everything, but there is now a dramatic change in how they are weighted," he adds, noting that within the last year physicians with a few closed claims (entailing no indemnity payout) are no longer being penalized.

The secondary malpractice insurance market – the excess and surplus carriers that insure "distressed" physicians who have a history of multiple claims against them – has lost about a quarter of its business back to the regular market over the past two years, says Bernal-Silva, further indicating that primary market underwriting is loosening up.

"We’re seeing a lot of moderation," in medical malpractice companies that had several years of 15 to 20 percent premium increases, according to Michael De Parto, J.D., CLU, president of Mednet Financial Inc., a malpractice insurance broker representing about 500 physicians in New Jersey. Major companies such as MDAdvantage Insurance Company of New Jersey and ProMutual Group – the second and third largest physician carriers in New Jersey, respectively – have not filed for rate increases this year, and many companies are decreasing the gaps between premium rates for physicians with some claims and those with few or none, he says.

Even premiums of excess and surplus carriers are remaining flat, which De Parto says amounts to a "defacto decrease" because they are all claims-made policies, which by their nature should increase their annual premiums for the first five years in proportion to the increase in a company’s risk exposure for a given physician over time.

Compared to a few years ago, when primary and secondary market companies were imposing strict underwriting policies and premium increases across entire classes of physicians, underwriters are now looking more closely at physicians’ risk histories on a case-by-case basis when making premium decisions, says De Parto.

Bernal-Silva cautions physicians that insurance cycles such as the one that began with a market run of "low ball premiums" a decade ago can destabilize the medical malpractice insurance market, and lead to unrealistic company projections, and to insolvencies such as that suffered by MIIX, which is currently under liquidation overseen by the state.

De Parto echoes Bernal-Silva’s concern that price competition can have unintended consequences. "One carrier being irresponsible with rates can affect the whole marketplace" by forcing other companies to market artificially low rates to compete for the premium dollar, he says.

Physicians should think carefully before picking a carrier based on price, as there have been a number of high-profile medical malpractice insurance companies nationwide that have tried to compete on price and ended up insolvent or under regulatory supervision, warns Frank O’Neill, senior vice president of corporate communications and investor relations for ProAssurance Corp. – the parent company of ProNational Insurance Company, New Jersey’s fifth largest physician medical malpractice carrier.

For 2007, ProNational has filed for its first single-digit average premium increase in four years in New Jersey – 6.2 percent – which O’Neill says may be among the largest among ProAssurance’s 28 states. ProNational has never offered occurrence coverage which, because of the uncertainty of its risk, O’Neill says is the most difficult type to price correctly and exposes both physician and insurer to the risks of inadequate coverage.

Physician Impact

While premium increases may be moderating, the rates remain high, and physicians remain uneasy about the stability of insurers after the bankruptcy of MIIX a few years ago, according to Charles M. Moss, M.D., president of the Medical Society of New Jersey (MSNJ). That uneasiness is magnified by the recent entrance to New Jersey of several smaller medical malpractice companies competing for physician business, but whose track record and capitalization have not yet been tested by a history of claims, he adds. "One or two cases could wipe them out," he says.

Currently under "solvent runoff" oversight by the New Jersey Department of Banking and Insurance, MIIX had extended itself into other states while the size of jury awards escalated rapidly, outpacing actuarial projections, says Moss. While physicians are required by law to carry a minimum of $1 million per claim on the private medical malpractice insurance market, insolvency of their insurer exposes their personal assets to judgments over $300,000 – the maximum that the New Jersey Property-Liability Insurance Guaranty Association (PLIGA) will pay per claim, he notes. One of MSNJ’s prime legislative goals is to get PLIGA to cover a larger amount than it currently does, says Moss.

Most New Jersey physicians will not be able to use A.M. Best’s benchmark to assess their insurer’s financial strength and ability to meet ongoing obligations to policyholders. According to A.M. Best Assistant Vice President Joseph Roethel, neither of New Jersey’s two largest insurers – Princeton and MDAdvantage – nor several smaller firms – including Conventus Inter-Insurance Exchange and New Jersey Healthcare Providers Insurance Exchange (NJHPIX) – has an A.M. Best Company rating. During some financial difficulties in 2004, Princeton’s parent company requested A.M. Best to discontinue rating it, says Roethel. All insurers are still beholden to risk-based capital standards of solvency set by the state Insurance Department, Roethel adds.

A combination of flat reimbursement and rising practice costs continues to make physicians’ malpractice insurance premium burden high – having jumped to 10 to 20 percent of physicians’ gross revenue, from about four to five percent of gross revenue over the past few years, says Moss. While New Jersey’s Medical Malpractice Liability Insurance Premium Assistance Fund is helpful to high-risk specialists under the heaviest burden – neurosurgeons, ob/gyns and diagnostic radiologists – it has only one year to go and only applies to about 1,200 of New Jersey’s 23,000 physicians, amounting to maybe 10 to 15 percent of a practice’s total malpractice insurance bill, notes Moss.

One approach to controlling premium rate increases was taken by Donald Chervenak, M.D., a Florham Park obstetrician in solo practice, and president of PHCA, a group of 60 obstetricians insured under a single policy with MDAdvantage. While PHCA members are primarily in solo and small group practices, coverage as a single group insulates them from much of the premium instability they had experienced as individual insureds, says Chervenak. "If one or two doctors gets sued, it doesn’t affect the premium," he notes. Group members have agreed to follow a set of quality control protocols drawn from the American College of Obstetricians and Gynecologists, and the group has its own quality review management section, he adds.

Chervenak believes the state’s Premium Assistance Fund has prevented many ob/gyns from giving up obstetrics, but he says practice overhead – e.g., staff and nurse salary, and rent – has gone up 35 percent over the past seven to ten years, while malpractice premiums have tripled or quadrupled, and very few managed care companies have increased their reimbursement. If the General Assembly doesn’t renew the abatement, Chervenak believes there would be a collapse of obstetrics in the state.

Chervenak shares Moss’s concern that malpractice insurance companies appear to be offering lower rates without the commitment to stay in the state. "Over the past year – and especially over the past six months – I’ve been getting memos on my fax machine – from old and new companies – advertising that ‘We are offering coverage at a much lower rate than you’re paying now,’" says Chervenak. "It’s very scary: in the past, there have been companies temporarily lowering their premiums, then abandoning the state, creating total chaos," he adds.

Future Outlook

After emerging from a "hard" medical malpractice insurance market nationwide, there have been pockets of price softening in the latter half of 2006, driven to a great degree by a drop in claim frequency, says Roethel.

Companies are also able to moderate their premium rates, De Parto believes, because of greater underwriting and investment income. Base premium rates that carriers are now charging are much higher than they were a few years ago, while the interest rates that companies are currently earning on their investments are also significantly higher, he adds.

Tort reform impacts on premiums are difficult to appraise, and would take some time to materialize, says Roethel, noting that it takes a few years for claims to run through the system, and companies are cautious to see if reforms are supported by courts before adjusting their rates.

New Jersey’s Medical Care Access and Responsibility and Patients First Act, which went into effect in July 2004, included some provisions that could eventually impact premiums. MSNJ regards the law’s important elements as: the abatement fund for three medical specialties, an additur or remittitur provision in which a judge presiding over a malpractice trial may consider the evidence to determine whether a jury award is clearly excessive in view of the plaintiff’s injury or "passion or prejudice by the jury," and a provision forbidding insurance companies from adjusting the premiums of physicians named in suits if those physicians file an uncontested affidavit of non-involvement.

The law also:

· Provides for court referral of a malpractice case to a complementary dispute resolution mechanism.

· Establishes qualifications for expert witness, including same type of practice and credentials as the defendant, and prohibits expert witnesses from testifying on a contingency fee basis.

· Permits physicians to join together, by means of a joint contract, to form a "Medical Malpractice Liability Insurance Purchasing Alliance" for the purpose of negotiating a reduced premium.

· Allows malpractice insurers to offer discounts for policy endorsements that waive their need to obtain a policyholder’s consent to settle a claim.

· Requires malpractice carriers to offer individual or group policies with a deductible of at least $5,000 per claim.

· Establishes a 17-member "Medical Care Availability Task Force" to study the advantages and disadvantages of: establishing caps on noneconomic damages in malpractice jury awards, adopting additional statute of limitations changes, establishing additional procedures for mediation and for screening for frivolous medical malpractice lawsuits, and establishing a pre-suit procedure. The task force is also charged with studying the impact of third party reimbursement policies by insurers and HMOs on access to health care services in the context of the current affordability crisis in the state affecting health care providers in the purchase of necessary liability coverage. The task force held its first meeting in July 2005, and must present a report of its findings and recommendations to the Governor and the Legislature within two years of that date.