Did the Doctors' Prescription for Curing California's Medical Malpractice Insurance Crisis of 1975 Work?

Published in Insurance Journal/West - November 13, 1995

Two decades is a long time to look back. To most of the 20,000 or so California physicians who have received their licenses to practice since 1975, it is ancient history.

Life was very different back then. Prior to the 1970's, we looked upon our physicians with a sense of reverence and often treated them as extended members of our families. It seldom occurred to us to sue them if they did not cure our ills or if their treatment harmed us in some way.

All of that began to change in the 60's and early 70's. The business of medicine had begun to transform itself with the creation of HMO's and PPO's. Doctors started leaving private practice to join provider groups for many reasons: so they would not have to make house calls, work weekends, or deal with the business side of medicine. And, in the process, a large part of the physicians immunity afforded by their personal touch was overcome by that insidious social malignancy called litigation. No longer was it sacrilege to sue our doctors for malpractice.

Prior to 1975, physicians could choose to purchase their insurance from a number of competing carriers. Those who were members of the California Medical Association could purchase their professional liability insurance from the Travelers Insurance Company for less than $1,500 a year for primary care specialties. In 1975, it was estimated that over 70% of the State's medical doctors were insured by the Travelers. Then Travelers announced that due to decreased profits caused by the unexpected rapid rise in the number of malpractice claims, and the amounts paid to claimants, premiums would have to be increased sharply. Depending upon medical specialty, premiums were increased by between 300% and 500%. Other underwriters either followed Travelers' lead, increasing premiums or discontinuing such policies altogether. It appeared the doctors had only two options: pay the price, or go bare. In an unanticipated move, they protested by going on strike.

The California legislature responded by promptly passing the Medical Injury Compensation Reform Act (MICRA). In addition to tightening the rules governing the flood of malpractice litigation, MICRA placed a cap of $250,000 on awards for pain and suffering. (Incidentally, 20 years later, the US Congress is considering enacting similar legislation on a national basis.) Passage of MICRA was only part of the doctors' solution to the problems which caused the crisis. Many physicians felt the commercial insurance industry treated them unfairly by its sudden market departure or, in the case of carriers who stayed, by severely increasing premiums.

The doctors decided to take control of this problem by forming five insurance companies and one risk sharing cooperative. Referred to as "bed pan mutuals" by some commercial underwriters, these entities were capitalized through loans known as Surplus Contribution Certificates which physicians paid in addition to their premiums. The initial capitalization totaled less the $20 million dollars. Despite prognostications of failure by the commercial insurance market, four of the five companies and the cooperative are still active and have collectively accumulated in excess of $625 million of policyholders' surplus. In 1985, the fifth company's policyholders were acquired by a (capital) stock company which continues to compete for a share of the health care provider market.

The affordability problem was solved by replacing the "occurrence" type policies with "claims made" agreements. Interestingly, St. Paul Fire & Marine, the countries largest medical malpractice underwriter, (then and now), converted to claims made two years early. Because occurrence policies provide coverage for services rendered while they are in effect and respond to claims brought against insureds after the policies expire, it is virtually impossible for underwriters t accurately predict how much premium should be collected for future liabilities. Claims made policies minimize the uncertainty by limiting coverage to claims filed against insureds for services rendered after an agreed retroactive date and before their policies expire. Only an additional premium and an extended reporting endorsement or policy can extend the claims made policy to cover claims that were not reported yet which occurred during the claims made policy period, a.k.a. tail policy.

However, as the period of claims made coverage is extended by policy renewals, the amount of premium required to pay losses approaches the amount required to provide occurrence coverage. This is just one of many reasons that, for the first time in nearly 20 years, the base rates which determine the premiums for California's physicians and surgeons are on the rise. Many claims made policies are nearly 20 years old. Further, as doctors near retirement age and the no cost tail benefit offered by many claims made underwriters is exercised, the carriers are left with occurrence policies without the benefit of the additional premium. Good news for retiring physicians, bad news for younger physicians who may be freed to pay more premium to make up for shortfalls these underwriters may experience.

The good news is that the financial success of California's doctor owned companies and their pool of at least $450 million of medical malpractice (physicians and surgeons) insurance premiums have grabbed the attention of a host of additional insurance companies, two trusts, and several risk retention and risk purchasing groups. California's health care providers can expect the increased competition to minimize the premium increases for the foreseeable future. However, cost of risk is still predicted to increase in Californias burgeoning managed care environment, the subject of my next article. Accordingly, insurance premiums will have to increase to keep pace.

While the entrance of new players in the market (see illustration 1) is a positive, the emergence of new theories of tort liability are placing a different kind of pressure on health care providers operating incorporated group practices, HMO's and PPO's. Claims for sexual harassment, discrimination, wrongful termination, pollution, hazardous waste disposal, and failure to credential, along with corporate directors and officers liabilities, are creating a need for additional funding and/or insurance thus exacerbating the already burgeoning cost of protection for many large groups and integrated systems medial professional liability risk.

It will be interesting to look back again in another 20 years.

Rick Mortimer is the Executive Vice President of HealthCare Professionals' Insurance Services of Brea, California. Mortimer is a licensed broker specializing in medical malpractice insurance and alternative risk funding mechanisms for risk pooling programs, large group practices and integrated health care delivery systems throughout the United States and abroad.