In 2004, there were a total of six medical malpractice judgments, totaling $1.9 million. In that time, the insurers collected $327 million in premiums, and 444 claims were settled by insurance companies totaling $108 million. According to the report, 81% of malpractice claims in Tennessee resulted in no payment. (This per the Tennessean‘s recital of data from the Tennessee Department of Commerce and Insurance.) The TMA actually says the failure ratio for claimants is closer to 88%, and claims that there were 1,534 lawsuits with defense costs totalling “more than $16 million.” These numbers vary with the official reports from the state government, so I will use the state government’s statistics when there is a conflict.
A little math: 444 claims were settled in 2004. 6 resulted in plaintiff’s verdicts. That was 19% of all cases resolved in 2004, since the other 81% resulted in no recovery for the plaintiff. 444 plus 6 divided by 19% is 2,818 malpractice cases resolved a year. (Note, the TMA says there were 1,534 lawsuits, and the state’s data is that there were 2,818 claims. That suggests that nearly half the claims tendered to insurers never were abandonded based on insufficient merit or insufficient damages. This seems about right to me based on my own experience.)
The Tennessee Department of Health Services states that in 2004 the population of Tennessee was 5,897,306. In July of 2005, there were 18,137 valid licenses to practice medicine in Tennessee outstanding, and 13,562 doctors actually did practice in Tennessee.
So first, we see that there is only one doctor for every 435 Tennesseans. The number seems low at first glance, but consider: if a doctor takes two weeks of vacation a year and doesn’t work weekends, she works about 250 days. Her “fair share” of patients is 435, meaning an average of less than two patients a day. Not so bad from the doctor’s point of view.
By way of comparison, let’s look at California. There were 92,852 California-licensed doctors working in California in 2004, serving a state population of 36,591,000, for a ratio of one doctor for every 394 Californians. Tennessee has fewer doctors, but not by much.
Second, we see that there are .208 claims made against the average doctor per year. I can attest from personal experience that virtually every doctor I worked with, sued, or deposed in just under a year working for The Law Office of the Great Man had not been the subject of a malpractice complaint in fifteen, twenty, or more years of practice. It seems that most of these complaints are going to a smaller segment of the medical profession. However, this is not evidence that I can readily verify with statistics. But, we do know that 81% of all claims result in zero recovery to the claimant. So that means that there is slightly less than a 4% chance that any malpractice claim will produce any money.
On that subject, the third point is that the total amount of money paid out for all this activity seems both quite low and quite high, depending on how you look at it. Verdicts in 2004 were $1.9 million and settlements were $108 million. Rounding up, that gives us $110 million paid out on 4% of the 2,818 claims in 2004 — an average of $39,000 per claim, or put another way, $975,000 per successful claim. That’s claims, not verdicts. There were only six verdicts, and they averaged $316,666.67 each — less than a third of the average pre-verdict settlement. This math looks pretty scary to a plaintiff’s attorney, let me tell you. Then add to that the fact that before filing a medical malpractice lawsuit, the attorney needs to have an expert witness lined up already, so that’s effectively a five thousand dollar filing fee which the attorney personally risks — in pursuit of that one-in-twenty-five case that will actually produce money.
Fourth, subtracting “claims paid” from “premiums collected” gives us total gross revenue for the insurance companies of over $217 million in 2004. From that, of course, we must also take away defense costs. According to TMA, insurers incurred “more than $16 million in defense costs” in 2004. Let’s give them the benefit of the doubt and say it’s an even $17 million — that’s still a bulk profit of $200,000,000, a fifth of a billion dollars, representing a profit margin of more than 61%. So even after the cost of defending against all these “frivolous lawsuits” is taken into account, sixty-one cents of every dollar paid in premiums by doctors in Tennessee end up in the insurance company’s coffers — not paid out to defense lawyers, not paid out to settle claims, but put in the insurance company’s operating and investment accounts.
Insurance companies need to make profits. And doctors paying those premiums have a right to demand that the insurance companies do their jobs, and do them well, when they are sued. But doctors also have a right to pay reasonable premiums, not extortionate ones.
I tell my business law students that an insurance company is an animal with four legs. First is sales — the people who go out and deal face-to-face with the insureds, finding customers. Second is underwriting — the people who assess the risks that the customers represent and set the premiums at the rate necessary to make it worth the company’s while to absorb that risk. Third is claims — the people who deal with first- and third-party claims and pay out the reasonable value of losses resulting from the risks that the company has agreed to assume. Fourth is asset management — between the time that premiums are collected and losses are paid, the money does not sit idly in a bank, gathering 1.2% interest. The money is invested in real estate, stocks, bonds, and business ventures.
When one of these legs weakens, the others have to become stronger to hold the animal up. Three of them are interrelated. Sales’ success is driven largely by the willingness of underwriting to accept low premiums. Underwriting’s success is dependent on claims’ ability to keep the magnitude of risks down. Claims’ success is related directly to the ability of underwriting to carve out unacceptable risks and deny coverage whenever possible, which in turn is affected by the promises made by sales. Asset management’s performance depends, however, largely on how well the stock market and real estate market do. Lately, both have been doing quite well.
Now, it’s true that the insurance industry has had a real bad run of it for the past fifteen years or so on the claims side. Big earthquakes in California, floods all over the midwest, hurricanes in the south, terrorists in the northeast, fires all over the west. And for a while, asset management couldn’t help much when the market was in the tank. But that’s not the case anymore. The animal can stand on its own quite nicely, thank you very much; asset management is no longer weak, so underwriting no longer needs to overcompensate for the run of bad luck claims has been experiencing. Sales would sure appreciate it if you lowered the premiums, guys; ever hear of “market share?”
Fifth, two out of every thousand claims filed results in a successful verdict. There is only one way to interpret this, and that is that Tennessee juries are reluctant indeed to find against a doctor under all but the most egregious of circumstances. Tennessee is a very conservative state with a lot of rural areas; most people know the defendant doctors socially at one level or another, and simply cannot be relied upon to be objective in weighing the evidence no matter how much they assure the court and the attorneys to the contrary. And that’s the way it is.
So. Will the TMA’s suggested reform — similar to California’s MICRA, a $250,000 limit on general damages and a structured attorney’s fee schedule mandated by statute — produce the results they claim to be going for, namely, lower premiums? Doctors in California are entering their tenth straight year of dramatic malpractice insurance premium hikes, and MICRA has been around there since the eighties. A look at the revenue and expenditures shows you why — litigation defense costs account for 3-4% of premiums, and claims payments account for 33-34%. The rest goes to the insurance companies themselves.
Yes, doctors are paying too much for malpractice insurance. But it isn’t the lawyers’ fault; it isn’t because doctors are being sued too much. Lawyers know the odds, and they are only going to push a case to trial if they think they have a realistic shot at a big verdict. Even then, they lose much more often than not. The odds clearly favor the doctors; the TMA admits as much. The reason premiums are high is because the insurance companies are funnelling the premiums to other areas of operation. Maybe they’re making up for revenue shortfall resulting from higher than expected claims. Maybe they’re trying to re-seed the investment pools. But whatever they’re doing, they’re keeping sixty cents on the premium dollar — so maybe they’re just greedy, which is an indisputable truth to a point; the question is whether the desire for profit (which is not necessarily bad) has gone beyond a point where broader social utility is being realized. Finding that balancing point where insureds, claimants, stockholders, and society as a whole all have their interests realized to an acceptable degree is why insurance companies are regulated in the first place.
When I sat down to start writing this piece ninety minutes ago, I hadn’t intended to write so much. But there it is — and I’m pretty confident in this. Doctors are free to rally against lawyers politically if they think it is to their advantage to do so. But it’s not. They should be lobbying for meaningful insurance premium regulation, at least as significant corrolary to their desire for tort reform.
I guess the last piece in the puzzle to check out is — where does the TMA get its funding? Is it all member-supported? Or do insurance companies themselves provide money to make the TMA’s lobbying and political efforts work? That, I don’t have the answer to and don’t care to research at the moment, since it is rather late at night.