Policy Research Perspectives

Policy Research Perspectives Professional Liability Insurance Indemnity and Expenses, Claim Adjudication, and Policy Limits, 1999-2008 By José R. Guardado, PhD Introduction This report presents information on indemnity and expense payments for professional medical liability insurance (PLI) claims that closed between 1999 and 2008. An indemnity payment is a payment to a plaintiff in the settlement or adjudication of a claim. Expense payments are other monetary outlays incurred during the course of a claim, such as payments to defense attorneys and expert witnesses. The report also describes how claims were adjudicated and how policy limits on claims have changed over time. The information contained in this report comes from the Physician Insurers Association of America s (PIAA) Claim Trend Analysis. The PIAA is a trade association of more than 50 professional liability insurance companies owned and operated by doctors and dentists. These companies collectively insure approximately 60 percent of America's private practice physicians. One of the PIAA s founding purposes was to exchange information on PLI industry trends and operations, where each member collected loss data for its own use. Subsequently, the PIAA sought to increase claims sample size by sharing and aggregating individual member data in order to more adequately evaluate claim trends. These efforts resulted in the PIAA Data Sharing Project, whose purpose is to provide a comprehensive loss prevention resource of detailed PLI claims data and industry trends; over 20 PIAA member companies reported data to the Project. This report uses information from the 2009 edition of Claim Trend Analysis (CTA), which is a compilation of PLI claim data from the PIAA Data Sharing Project. There were 8048 closed claims reported in 2008, and a total of 239,756 since the beginning of data collection in 1985. It should be noted that the information contained within may vary by specialty and thus may not be representative of any particular specialty. We refer the interested reader to the 2009 edition of the PIAA s CTA for more detailed information. 2009 American Medical Association. All rights reserved. 515 North State Street Chicago Illinois 60654

2 Indemnity and Expense Payments on Closed Claims, 1999-2008 Indemnity Payments Table 1 presents average and median indemnity payments for claims that closed between 1999 and 2008. The claims underlying these statistics are only those involving an indemnity payment (hereafter paid claims). This same information is shown graphically in Figure 1 and is presented in both nominal and real terms. 1 The last two columns of Table 1 report the cumulative and average annual increase in each measure of payment between 1999 and 2008, respectively. The average indemnity payment was $345,498 among claims that closed in 2008. This represents an increase of 36.8% from the $252,632 reported in 1999. The corresponding increase adjusting for inflation was 9.5%. The median indemnity payment in 2008 was $200,000, representing a 60% increase from the $125,000 reported in 1999 and an annual average increase of 5.4%. In $2008, the median payment increased 28.1% between 1999 and 2008 or by an average of 2.8% per year. Figure 1 shows that, although the average and median payment trends are similar, the medians are lower than the averages. This indicates the distribution of indemnity payments is skewed, with some claims consisting of very high payments which tend to increase the average but not the median. For example, the largest indemnity payment among claims that closed in 2008 was $13,000,000. To further illustrate the distribution of indemnity payments, Table 2 presents indemnity payment categories as percentages of (1) the number of paid claims and (2) total indemnity payments across all paid claims. In 2008, 21.6% of paid claims involved payments of at least $500,000, though payments in this category accounted for 61.4% of total indemnity payments. Finally, although only 8% of paid claims involved payments of at least $1 million, such claims accounted for 33.8% of total indemnity payments. Expense Payments Table 3 reports average expense payments on claims that closed between between 1999 and 2008. Figure 2 presents this information graphically. The last two columns in Table 3 report the cumulative and average annual increase in each payment measure. The average expense payment in 2008 was $40,649 an increase of 72.4% from the $23,578 reported in 1999 and a 38% increase adjusting for inflation. There has been a large increase in average expense payments in recent years. After rising by 16.4% between 1999 and 2000, such payments fell slightly between 2000 and 2005. However, since 2005, average expense payments have increased by 37%, even after adjusting for inflation. Indemnity and Expense Payments by Claim Disposition, 2008 Indemnity Payments Focusing on claims that closed in 2008, Tables 4 and 5 present, respectively, indemnity and expense payments by adjudication status. Table 4 reports indemnity payments for settlements and claims decided at trial. As with all paid claims, average indemnity payments were higher 1 Throughout the report, dollar values reported in real terms account for inflation i.e., they have been adjusted to be comparable with $2008.

3 than median payments for both settlements and trial awards. Also, the average and median trial awards, $655,533 and $375,000, respectively, were much larger than the average and median settlement amounts of $325,075 and $200,000. The average and median for all paid claims more closely resemble those for settlements because 90.5% of paid claims are settlements, while only 1.6% of them result from plaintiff verdicts. 2 Expense Payments Table 5 reports average expenses on all claims that closed in 2008 by adjudication status. The proportion of total expense payments that fall into each status category are also reported. By far, the highest average expense was for trials that were won by the plaintiff ($193,908). These types of claims were the most expensive, both in terms of indemnity and expenses paid. The next highest average expense was for trials that resulted in a defendant verdict ($112,291), which was almost twice the average expense of $59,544 arising from settlements. Finally, although the smallest average expense payment was for claims that were dropped, dismissed or withdrawn ($22,163), because so many claims fall into this category, they accounted for 35.4% of total expense payments on all claims. Distribution of Claims by Adjudication Status and Policy Limits Adjudication Status Table 6 presents the distribution of claims that closed in 2008 by adjudication status. Notably, the vast majority of claims (71.6%) resulted in no indemnity payment. This proportion is similar to what it was in 1999 (70.1%) but has fluctuated by as much as 9 percentage points in the intervening years. The bottom panel of Table 6 shows that 64.9% of claims were dropped, dismissed or withdrawn. Just over a quarter of claims (25.7%) resulted in settlements. Relatively few claims (5%) were decided by trial verdict, and of these, the vast majority (90.8%) were won by the defendant. The smallest proportion of claims (less than 1%) resulted in plaintiff verdicts. Finally, 4.5% of claims were decided by alternate dispute resolution (ADR). Policy Limits Table 7 and Figure 3 show the change in policy limits over time on claims that closed between 2001 and 2008. 3 Notably, the percentage of claims with a policy limit of $1 million traditionally the most common policy fell from 61.1% to 36% over the period. By contrast, the percentage of claims with policy limits between $1 million and $2 million has been generally increasing. Between 2001 and 2008, the percentage of claims involving these policy limits rose from 7.7% to 21.0%. 2 There is a third category comprising paid claims: alternate dispute resolution (ADR). However, indemnity and expense data are not available for this category. 3 The data for years prior to 2008 were obtained from the 2002-2008 Editions of the PIAA s Claim Trend Analysis. Only policy limits consisting of a dollar value (e.g., < $1 million, $1 million, etc.) are reported. Another category involving "other policy limit" is not shown. The proportion of claims in this category was small, ranging from 0.4% to 3.7% of closed claims over the period.

4 Summary and Conclusion This report examined indemnity and expense payments involved in professional medical liability claims, and the distributions of those claims by adjudication status and policy limits. The information in the report was obtained from the PIAA s 2009 Claim Trend Analysis. Average and median indemnity payments generally increased between 1999 and 2008, even after adjusting for inflation. Indemnity payments in 2008 averaged $345,498, while the largest payment reached $13,000,000. Although relatively few claims involved payments of least $1 million, this category accounted for 34% of total indemnity. Average expense payments also increased during the period of analysis and on average rose faster than inflation. Importantly, there has been an upward trend in average expense payments between 2005 and 2008, a period during which they increased by 37%, even after adjusting for inflation. As in previous years, most claims (65%) that closed in 2008 were dropped, dismissed or withdrawn. Nonetheless, although their average expense of $22,163 was lower than for others, they accounted for 35% of expenses on all claims. Out of claims that were decided by trial verdict, the vast majority of them were won by the defendant. Very few claims resulted in plaintiff verdicts, though their average expenses were almost four times the average for all closed claims. In general, there was wide variation in expense payments across claim disposition. The costs of professional liability claims have generally been increasing over time, and expenses in particular have been escalating since 2005. Since the PIAA data do not include other nonmonetary expenses, such as time spent defending claims and compromised reputation, one may infer that total expenses involved in medical liability claims are even higher than these data would indicate. AMA Economic and Health Policy Research, October 2009 2009-3

5 Table 1. Indemnity Amounts for Paid Claims 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Cumulative Increase 1999-2008 Average Annual Increase 1998-2008 Average $252,632 $283,777 $295,880 $309,927 $305,760 $329,626 $314,095 $330,430 $335,299 $345,498 36.8% 3.5% Average (2007 $) $315,537 $342,802 $352,097 $360,135 $348,872 $364,237 $335,454 $344,308 $335,635 $345,498 9.5% 1.0% Median $125,000 $150,000 $158,680 $175,000 $175,000 $200,000 $190,000 $200,000 $200,000 $200,000 60.0% 5.4% Median (2007 $) $156,125 $181,200 $188,829 $203,350 $199,675 $221,000 $202,920 $208,400 $200,200 $200,000 28.1% 2.8% N 2601 2003 2244 2199 2525 2559 2659 2137 2365 2284 Note: Amounts reported pertain to closed claims involving indemnity payments.

6 Figure 1: Indemnity Amounts for Paid Claims 400,000 350,000 300,000 250,000 Dollars ($) 200,000 150,000 100,000 50,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Close Year Average ($2008) Average Median ($2008) Median Source: PIAA Claim Trend Analysis, 2009 Edition

Table 2. Indemnity Payment Categories as Percentages of Paid Claims and Total Indemnity Payments, 2008 Indemnity Payment Category Proportion of Paid Claims Proportion of Total Indemnity Payments Less than $100,000 29.4% 3.7% $100,000 < = Payment < $250,000 26.7% 12.7% $250,000 < = Payment < $500,000 22.3% 22.2% $500,000 < = Payment < $1,000,000 13.6% 27.6% $1,000,000 or more 8.0% 33.8% Total 100.0% 100.0% Notes: Paid claims are closed claims involving an indemnity payment. Total indemnity payments are the sum of such payments across all paid claims. There were 2284 paid claims that closed in 2008. 7 Table 3. Average Expense Payments on Closed Claims 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Cumulative Increase 1999-2008 Average Annual Increase 1999-2008 Average $23,578 $28,378 $28,206 $27,412 $27,109 $29,369 $27,733 $30,622 $35,102 $40,649 72.4% 6.2% Average (2007 $) $29,448 $34,281 $33,565 $31,852 $30,931 $32,452 $29,619 $31,909 $35,137 $40,649 38.0% 3.6% N 8687 6066 7018 7104 10048 10223 11045 8596 8893 8048 Source: PIAA Claim Trend Analysis, 2009 Edition.

8 Figure 2: Expense Payments for All Claims 45,000 40,000 35,000 30,000 Dollars ($) 25,000 20,000 15,000 10,000 5,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Close Year Average Average ($2008) Source: PIAA Claim Trend Analysis, 2009 Edition

9 Table 4. 2008 Indemnity Payments by Claim Disposition All Paid Claims Settlements Tried - Plaintiff Won Average $345,498 $325,075 $665,533 Median $200,000 $200,000 $375,000 N 2284 2066 37 Table 5. 2008 Average Expense Payments by Claim Disposition Claim Disposition Average Expense Payment Proportion of Total Expense Payments N Dropped, Dismissed, or Withdrawn $22,163 35.4% 5220 Settled $59,544 37.6% 2066 Tried - Defendant Won $112,291 12.6% 366 Tried - Plaintiff Won $193,908 2.2% 37 Table 6. 2008 Distribution of Claim Disposition Claim Disposition Proportion of Total Closed Claims Paid 28.4% Unpaid 71.6% Total 100.0% Dropped, Dismissed or Withdrawn 64.9% Settled 25.7% Tried - Plaintiff Won 0.5% Tried - Defendant Won 4.5% Alternate Dispute Resolution 4.5% Total 100.0% N 8048 Source: PIAA Claim Trend Analysis, 2009 Edition

10 Table 7. Distribution of Claims by Policy Limit, 2001-2008 Policy Limit 2001 2002 2003 2004 2005 2006 2007 2008 $2 million or more 20.4% 21.2% 19.0% 21.8% 27.4% 23.3% 19.9% 16.6% $1 million >limit< $2 million 7.7% 6.7% 4.3% 6.9% 8.0% 13.9% 20.5% 21.0% $1 million 61.1% 58.0% 54.7% 49.5% 46.4% 46.5% 40.3% 36.0% Less than $1 million 10.3% 13.2% 21.2% 19.5% 15.3% 12.6% 17.2% 26.0% N 5983 5331 7314 10424 10821 7624 7879 8048 Source: PIAA Claim Trend Analysis, 2002-2009 Editions Note: This table only reports policy limits consisting of a dollar value (e.g., < $1 million, $1 million, etc.). Another category involving "other policy limit" is not shown. The proportion of claims in this category range from 0.4% to 3.7% of closed claims over the period.

11 Figure 3: Distribution of Claims by Policy Limit, 2001-2008 100.0% 90.0% 80.0% 70.0% 20.4% 21.2% 19.0% 7.7% 6.7% 4.3% 21.8% 6.9% 27.4% 23.3% 8.0% 13.9% 19.9% 20.5% 16.6% 21.0% 60.0% 50.0% 40.0% 61.1% 58.0% 54.7% 49.5% 46.4% 46.5% 40.3% 36.0% 30.0% 20.0% 10.0% 0.0% 26.0% 21.2% 19.5% 10.3% 13.2% 15.3% 17.2% 12.6% 2001 2002 2003 2004 2005 2006 2007 2008 > = $2 million $1 million < limit < $2 million $1 million < $ 1 million Source: PIAA Claim Trend Analysis, 2002-2009 Editions