Spring 2013 HEALTHCARE PRACTICE GROUP MEDICAL RECORD A bi-annual report covering the Medical Professional Liability sector Welcome to the fourth issue of the Medical Record, Willis Re s bi-annual publication covering a range of topics relevant to the Medical Professional Liability (re)insurance industry. The Willis Re Healthcare Practice Group is committed to keeping our clients at the forefront of emerging issues and trends. The Medical Record is one of the many ways in which we do so. In this issue you will find articles covering a wide range of topics including: A look at the increasing defense costs in MPL Current trends taking place in the Hospital Professional Liability (HPL) segment A recap of recent Tort Reform activity by state We trust you will find this issue to be timely and informative. Should you have any questions, or would like to discuss any of issues covered in this publication or otherwise, please contact your Client Advocate or a member of your Willis Re broking team. We look forward to hearing from you. A Perspective on the Elevation of Defense Costs As a Medical Professional Liability insurer, a key aspect of your product offering is the defense of claims. As experts in this area, your policyholders look to you to provide assistance and guidance during some of the more difficult periods of their professional careers. In the face of a complex claim environment, medical specialty insurers have risen to the challenge and continue to operate extremely efficiently compared to the overall P&C Industry. The chart on the following page demonstrates this efficiency and stability as medical specialty insurers have maintained internal claims costs below 7% of the total costs of claims, consistently lower than the overall Property & Casualty industry. (continued on next page) Copyright 2013 Willis Limited / Willis Re Inc. All rights reserved: No part of this publication may be reproduced, disseminated, distributed, stored in a retrieval system, transmitted or otherwise transferred in any form or by any means, whether electronic, mechanical, photocopying, recording, or otherwise, without the permission of Willis Limited / Willis Re Inc. Some information contained in this document may be compiled from third party sources and we do not guarantee and are not responsible for the accuracy of such. This document is for general guidance only and is not intended to be relied upon. Any action based on or in connection with anything contained herein should be taken only after obtaining specific advice from independent professional advisors of your choice. The views expressed in this document are not necessarily those of Willis Limited / Willis Re Inc., its parent companies, sister companies, subsidiaries or affiliates (hereinafter Willis ). Willis is not responsible for the accuracy or completeness of the contents herein and expressly disclaims any responsibility or liability for the reader's application of any of the contents herein to any analysis or other matter, or for any results or conclusions based upon, arising from or in connection with the contents herein, nor do the contents herein guarantee, and should not be construed to guarantee, any particular result or outcome. Willis accepts no responsibility for the content or quality of any third party websites to which we refer. Willis Re Inc. Spring 2013
A&O as a % of Total Claim Costs 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Internal Claim Costs MPL Specialty vs. P&C Industry 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year P&C Industry Medical Specialty Companies Medical Professional Liability insurers dedication to expert claims handling has had a positive impact on the overall MPL claim environment and is further evidenced by the stability in the total Paid Loss & LAE per Closed Claim. You can see from the adjacent chart that Paid Loss & LAE per Closed Claim has remained very consistent throughout the early and mid-2000s. Light blue years set apart to reflect the groups 3.8 year mean time to payment, further development is expected. Paid Indemnity & LAE per Closed Claim ($000) 100 90 80 70 60 50 40 30 20 10 0 MPL Specialty Paid Loss & LAE per Closed Claim 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year As a result of this claim expertise, medical specialty insurers are well positioned for the challenging claims environment that is inherent to this specialized line of insurance. While the frequency of claims has greatly diminished across the country, when a claim does arise they are increasingly more complex and are expensive to defend. In fact, when you look back over the past ten years, during the period from 2002 to 2006, approximately 30% of the total cost of a claim was attributable to defense costs. However, looking at the most recent five-year period (2007 to 2011) the portion of loss attributable to defense costs increased to 33%, a 10% increase. Looking at even shorter and more recent periods of time the portion of total claim costs attributable to defense costs increases even further to nearly 35% (2009 to 2011) and 36% during calendar year 2011. Page 2 of 8 (continued on next page)
From 2007 to 2011, costs increased by 3% From 2002 to 2006, 30% of the total cost of a claim was attributable to defense costs. 80% 75% LAE as a % of Total Claim Costs Recent period shows costs increasing ever further to nearly 35% and to 36% for 2011. % of Total Loss & LAE 70% 65% 60% 30.2% 69.8% 33.6% 66.4% 34.9% 65.1% 36.0% 64.0% 55% 2002-2006 2007-2011 2009-2011 2011 LAE as a % of Loss & LAE Loss as a % of Loss & LAE Medical Specialty Insurers (>80% of DWP is from MPL) While there appears to be a clear movement on a nationwide basis, when you look at each individual state, there is a very wide range of defense costs relative to the total cost of a claim. Furthermore, on an individual state basis there are additional variables that can significantly impact the overall cost of defending claims (as well as the amount of indemnity payments). If you would like any additional information 90% LAE as a % of Loss and LAE by State (2007-2011) related to this 80% discussion please feel free to contact a Willis Re associate. LAE as a % of Loss & LAE 70% 60% 50% 40% 30% 20% 10% 0% VT HI CT MN NY NJ OR SC ME PA NH DC WY RI MA MDWV DE AZ AK WA OK MT VA NE NM IN OH FL MO SD ID MS GA IA CO ND IL KY UT AR KS CA NC WI TX NV TN AL MI LA LAE as a % of Loss & LAE All States LAE as a % of Loss & LAE Page 3 of 8
The U.S. HPL Environment: Current Trends Nationwide trends As with the broader MPL industry, the HPL segment has seen declining levels of statutory written premium on a nationwide basis. From a high water mark of $2.36 billion in 2004, U.S. DWP has decreased 19.4% to $1.9 billion in 2011. Taking inflation into account, the premium decrease has been even greater. Additionally, because of the consolidation and integration of physician groups and practices, traditional physician exposures are becoming more intertwined with HPL exposure. The decrease in premium, as with broader MPL, is due to several correlated reasons: chief among them are softening rates, and more specifically to HPL, an increasing use of captives and higher self-insured retentions among hospitals. Much of the working layer business is now self-insured thereby reflecting a disproportionate share of excess layer premium in the statutorily reported figures. In addition, the rise of Bermuda insurers (who in certain cases do not file annual statements with the NAIC) has driven a not insignificant portion of this premium off-shore. On the profitability side, however, the picture has been brighter. Calendar Year incurred loss ratios have been under 50% since 2006, with some states/markets performing markedly better than the nationwide average. This is due to both lower amounts of paid losses as well as decreasing case and IBNR reserves since 2006, even in the face of declining earned premium. The chart at right, HPL Incurred Loss Components, shows the make-up of total HPL incurred loss (paid and reserve changes) for the top ten largest writers of U.S. HPL between 2003 and 2011. This chart illustrates the point that both paid loss has been decreasing and that negative reserve changes have contributed to lower total incurred loss in the HPL segment. A significant driver behind this trend is the substantially lower loss severity results than initially contemplated in the original rate making process. It should be noted that the amount of reserve redundancy for this group of writers has decreased markedly since 2007. The proxy group includes commercial carriers and specialty MPL writers. HPL DWP ($billions) HPL Direct Incurred Loss Ratio Tot CY HPL Incurred Loss ($millions) 2.5 2.0 1.5 1.0 0.5 0.0 140% 120% 100% 80% 60% 40% 20% 0% 1,400 1,200 1,000 800 600 400 200 0-200 -400-600 HPL Direct Written Premium ($billions) Nationwide, CY2002-2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Calendar Year HPL Direct Incurred Loss Ratio Nationwide, CY2002-2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Calendar Year Source: Annual Statement Data, SNL Financial HPL Incurred Loss Components HPL Proxy Group*, Nationwide, CY 2003-2011 Paid Loss Change in Reserves 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Annual Statement Data, SNL Financial, *Proxy Groups composed of Top 10 writers, CY2003-2011 (continued on next page) Page 4 of 8
Hospital Incurred Loss Ratio: 9-Year Average (CY2003-2011) 9-Year Incurred Loss Ratios 0% - 34% 35% - 42% 43% - 53% 54% - 65% 66% - 171% Source: Annual Statement Data, SNL Financial While the nationwide HPL segment has performed well in the aggregate since 2006, the variation among states has been quite dramatic. The map above shows 9-year average incurred loss ratios for the HPL industry by state. Some large markets such as Texas, Michigan, and California have performed very well, while other markets such as Illinois, New York and Pennsylvania have been quite challenging for underwriters. On a regional basis, the southern United States has performed the best while the New England / mid-atlantic states have fared the worst. If you have any specific questions, please contact your Willis Re Client Advocate. We look forward to hearing from you soon! While the nationwide HPL segment has performed well in the aggregate since 2006, the variation among states has been quite dramatic. Page 5 of 8
State Tort Reform Tort reform remains a hot-button issue for many in the political realm. As of 2006, 32 states have established some type of medical malpractice award cap; however, their constitutionality has been challenged time and time again in state supreme courts. The following summarizes recent state legal activity related to medical malpractice tort reform. Caps overturned since 2010 Georgia: (2010) Nestlehutt v. Atlanta Oculoplastic Surgery: The Georgia Supreme Court ruled the cap on non-economic damages of $350,000 unconstitutional because it violated the right of trial by jury, the separation of powers doctrine, and the right of equal protection of the laws. (2013) The General Assembly is currently evaluating Senate Bill 141 a proposal that argues defensive medicine has increased the cost of medical care and suggests that an administrative compensation system, an alternative to medical malpractice ligation, would help to drive down healthcare costs. Illinois: (2010) Lebron v. Gottlieb Memorial Hospital: The Illinois Supreme Court struck down the two-tiered cap on non-economic damages passed by the Illinois legislature on grounds that the non-economic damages provision was arbitrary and violated the special legislation clause of the Illinois Constitution. Washington: (2010) Waples v. Yi: The Washington Supreme Court ruled that the legislation requiring a certificate of merit from a medical expert and 90 days advance notice to the defendant before filing the lawsuit was unconstitutional as it violated the doctrine of separation of powers. Missouri: (2012) The Missouri Supreme Court struck down a $350,000 limit on jury awards for pain and suffering in medical malpractice cases, saying the law violates a patient s right to a jury trial. In a 4 to 3 decision, the court said the cap infringes on the jury s constitutionally protected purpose of determining the amount of damages sustained by an injured party, in cases involving medical errors. Recently upheld cap restrictions Kansas (2012) Miller v. Johnson: The Kansas Supreme Court upheld the $250,000 cap on non-economic damages. Louisiana:(2012) Oliver v. Magnolia Clinic: The Louisiana Supreme Court gave their opinion that this case upheld the constitutionality of the $500,000 cap on total damages. Mississippi: (2012) Learmonth v. Sears: The Mississippi Supreme Court upheld that the $1 million cap on noneconomic damages was constitutional. North Carolina: (2011) Senate Bill 33 was passed in July of 2011 which caps non-economic damages in medical malpractice cases at $500,000 against all defendants. The cap does not apply, however, if the plaintiff suffered disfigurement, loss of use of part of the body, permanent injury or death, and the defendant s acts were committed with reckless disregard, gross negligence, fraud, intent, or malice. West Virginia: (2011) MacDonald v. City Hospital Inc.: The West Virginia Supreme Court upheld a recently enacted law limiting non-economic damages in actions brought against health care providers to $500,000. Ohio: (2012) The Ohio Supreme Court recently upheld the constitutionality of the statute of limitations which prevents medical liability cases from being filed more than four years after the date of an alleged incident. Page 6 of 8
Pending Cases California: Non-economic damages: Stinnett v Tam MD: The California Supreme Court upheld the $250,000 cap on non-economic damages. A new case, Gavello v. Millman, follows the same lines as the Stinnett v Tam case and is currently in the early stages of the appeals process. Indiana: Non-economic damages: Plank v. Community Hospitals of Indiana Inc.: This case challenges Indiana s $1.25 million cap on non-economic damages and is pending before the Indiana Court of Appeals. Louisiana: Cap on Total Damages: Arrington v. Galen-Med Inc.: This case is challenging the constitutionality of Louisiana s $500,000 cap on total damages. Mississippi: Non-economic damages: APAC v. Bryant: This case is challenging the constitutionality of Mississippi s $1 million cap on noneconomic damages. Nevada: Non-economic damages: Villegas v. 8th Judicial District Court: The Nevada Supreme Court is deciding if the states statutory cap on non-economic damages of $350,000 applies to the entire case or to each plaintiff and defendant separately. Florida: Non-economic damages: Evette McAll v. United States of America: The case challenges the law that was enacted in Florida in 2003 which caps non-economic damages for a malpractice claim at $500,000 (with the exception of catastrophic injury or death, which has a limit to $1 million) Newly Passed Laws on Tort Reform Oklahoma: (2011) On April 5, 2011, the Governor of Oklahoma signed into new law, tort reform that caps non-economic damages at $350,000 and eliminates joint liability. Texas: (2011) New legislation requires the Texas Supreme Court to draft a new rule of civil procedure to promote an efficient and cost-effective resolution of civil actions that involve claims not exceeding $100,000. Alabama: (2011) The new legislation precludes non-recognized science from being introduced into courtrooms. The law also limits where you can file the lawsuit. Attorneys will no longer be able to file suits in favorable counties, but must file suits in the county where the plaintiff resides. Tennessee: (2011) The Tennessee Civil Justice Act, which went into effect on October 1, 2011, limits awards for noneconomic damages to $750,000 per each injured plaintiff. The cap can be increased to $1 million for a catastrophic loss or injury. References For all states http://www.mcandl.com/states.html http://www.atra.org/issues/medical-liability-reform For Missouri: http://www.stltoday.com/news/state-and-regional/missouri/medical-malpractice-cap-is-struck-down-by-missouri-supremecourt/article_7bb71afd-add3-5cde-a253-07faaade808c.html For Florida: http://www.diederichhealthcare.com/medical-malpractice-insurance/tort-reform-and-non-economic-damages-in-florida/ Page 7 of 8
For questions on this issue of the Medical Record, please contact: Scott Strenge Executive Vice President +1 952 841 6703 Scott.Strenge@willis.com Dan Brandt Vice President +1 952 841 6716 Dan.Brandt@Willis.com Joe Reitzel Vice President +1 952 841 6712 Joseph.Reitzel@Willis.com How can we help? To find out how we can offer you an extra depth of service combined with extra flexibility, simply contact us. Email us at: healthcarepractice@willisre.com or call us at: 952-841-6614 The contents herein are provided for informational purposes only and do not constitute and should not be construed as professional advice. Any and all examples used herein are for illustrative purposes only, are purely hypothetical in nature, and offered merely to describe concepts or ideas. They are not offered as solutions to produce specific results and are not to be relied upon. The reader is cautioned to consult independent professional advisors of his/her choice and formulate independent conclusions and opinions regarding the subject matter discussed herein. Willis is not responsible for the accuracy or completeness of the contents herein and expressly disclaims any responsibility or liability for the reader's application of any of the contents herein to any analysis or other matter, nor do the contents herein guarantee, and should not be construed to guarantee, any particular result or outcome. Page 8 of 8