As of the end of 2002, Conning has seen little or no change in those findings, while data from 2003 won’t be available until this summer, according to Geri Riley, a Conning assistant vice president. The outlook for 2004 and beyond depends on what state legislatures do, although Conning has not analyzed specific reforms, she notes.

New companies entering a market should be able to offer lower rates because they do not carry the baggage of prior years’ claims accompanied by underpriced premiums, while their solvency depends on how familiar their managers are with the market, says Riley. A 2001 Conning report that looked at risk retention groups in the mid-1980s – during the previous malpractice insurance industry crisis – said that those companies endured the crisis and appeared to have slightly better loss ratios than the standard insurance companies, Riley notes. Analysis indicated that small and regional companies were the best, says Riley, because they generally have a better understanding of the legislative and judicial climate in their operating area, giving them an "intellectual edge."

Companies have reacted to losses by implementing dramatic premium hikes. In an October 2003 report based on a national survey comprising 65 to 75 percent of the market nationwide, Medical Liability Monitor found that malpractice insurance premium increases in 2003 were commonly up to 49 percent over the previous year, with increases as high as 100 percent reported. The survey sampled rates for three specialties: internal medicine, general surgery and OB/GYN. Survey respondents reported tightened underwriting, increasing nonrenewal of physicians, a greater number of company downgrades by A.M. Best, and continued withdrawals from some states, with companies retreating to their home state of operation.

Surveyed companies remained pessimistic about the market softening in the near future and expected more rate increases to be in the offing. While large rate increases over the past years have helped, 83 percent of surveyed companies believe that additional large rate increases are still needed, with double-digit increases projected in 2004, while hopefully not at the same levels seen in recent years.

Pennsylvania’s market has been hit particularly hard. The report noted that, among states with patient compensation funds or catastrophe funds, Pennsylvania had the highest annual premiums and the highest premium increases from 2002 to 2003, with OB/GYNs seeing a 31 percent increase, general surgeons seeing a 26 percent increase, internists seeing a 30 percent increase, and internists in rural Pa. seeing a 73 percent increase.

A study by the Pa. Insurance Department last year noted that malpractice insurance underwriters in Pa. lost $18 million in 2002, paying out 31 percent less in claims than they collected in premiums from doctors, but also shouldering additional burdens of legal costs, taxes and other operating expenses, and reserves for future claims, according to the Associated Press. That financial picture represented the fourth year in a row that insurance underwriters in Pa. lost money.

Minimal Tort Reform Impacts

Tort reforms do not necessarily brighten the picture, according to the Medical Liability Monitor report. "Despite some perceived tort reform in crisis states, such as Florida and Texas," the report said, "Respondents seem to be taking little comfort that any real relief is on the immediate horizon," and companies continue to retreat from both states.

Late last year, after Texas approved a constitutional amendment to cap noneconomic damages at $250,000 in most malpractice cases, a large, physician-owned insurer announced it was cutting its rates by 12 percent for 2004, surpassing an estimate by the Texas Department of Insurance that the amendment would result in premium reductions of 8.5 percent to 11.5 percent. According to the Houston Chronicle, two other major carriers in the state – GE Medical Protective and the Joint Underwriting Association – requested rate increases for physicians of 19 percent and 35 percent, respectively, factoring in a flood of new litigation filed by plaintiff’s attorneys prior to the amendment’s passage. The Texas Insurance Commissioner rejected the JUA’s rate hike request, according to the Chronicle, saying that it "flies in the face of sound data that demonstrates future rates should be dropping" as a result of the caps amendment passing.

Caps do reduce claim payouts and slow the rate of premium increases, but that effect is mitigated by other, more important factors driving rising premiums, according to Stephanie Eakins, lead analyst for the property and casualty insurance industry of Weiss Ratings Inc. and co-author of a Weiss Ratings study on caps released in June 2003. Using data from Medical Liability Monitor surveys and the National Practitioners Data Bank from 1991 to 2002, the study found that median annual premiums increased more sharply in states with caps (48 percent) than in states without caps (36 percent), and that premiums in states with caps were more likely to exceed the national median.

The counter-intuitive finding led Weiss to conclude that other factors are a more important contributor than caps in affecting premiums, including: medical inflation rate, insurance business cycle, need to shore up reserves, decline in investment income, need to avoid downgrades, and absence of price pressures resulting from fewer companies in a market.

Eakins adds that states that have enacted caps my have been more "desperate" than other states, may already been on the path toward faster rate increases, and that the passage of caps may have merely been a symptom of this trend. Another hypothesis is that, once caps were imposed, regulators in those states may have been more liberal in allowing premium rate increases, under the assumption that caps would eventually help to correct market imbalances, she adds.

Pennsylvania was an anomaly among the 32 states without caps in the Weiss study, in that its physicians saw their median malpractice premiums increase by 523 percent between 1991 and 2002 – one of only five states with a triple-digit increase, with the next largest increase being North Carolina’s 181 percent. Even Texas, which passed a caps amendment after the Weiss study’s time frame, saw median premiums increase by only 100 percent between 1991 and 2002. Eakins does not know why Pa.’s premiums have spiked at a greater rate than other states.

A different conclusion about the effect of caps on premiums is obtained by narrowing the time frame of analysis, using average premium rates instead of median rates, and focusing on a specific cap amount. An October 2003 report issued by the General Accounting Office, analyzing factors contributing to malpractice premium rate increases and using Medical Liability Monitor data, found that average premium rates from 2001 through 2002 rose 10 percent in the four states with noneconomic damage caps of $250,000, compared to a rise of 29 percent in states with more limited tort reforms. The analysis did not determine the extent to which the differences could be attributed to tort reform laws or other factors.