Illinois Business Journal - Unpredictability fuels continued medical liability insurance

With those who argue that "greedy" insurance companies are to blame for soaring physician malpractice insurance premiums, the Illinois Hospital Association begs to differ. Unpredictable verdicts and pre-trial settlements are driving these insurance agencies - many of them nonprofit co-ops funded by the very physicians who are insured by them.

As senior vice-president and general counsel for the Illinois Hospital Association, Mark Deaton knows well the crisis the IHA's members face. The organization represents more than 200 hospitals and health systems statewide.

"There are those who will tell you that this crisis has been caused by greedy insurance companies that are gouging customers to make up for losses in the stock market, and that the solution is more regulation of insurance companies," Deaton said in a recent presentation before the Health Care Subcommittee of the (U.S.) Senate Committee on Health & Human Services. "Let me tell you: that is not the problem, and that is not the solution."

Of the 200-plus hospitals across Illinois, 75 to 80 of them are self-insured, Deaton said. Another 45 hospitals are insured by the Illinois Provider Trust, a charitable, risk-pooling trust that the IHA created in 1979. It is owned and governed by the hospitals it insures.

"The IPT is nonprofit, it has no shareholders and it does not invest in the stock market," he said. "It sets its (insurance) rates based on what it predicts its payouts will be."

Over the years, he said, the IPT's payouts have been pretty steady. In the first 20 years of its existence, the trust had only two claims that were more than $1 million.

"But just in the past two to three years, we've had 13 to 15 claims in excess of $1 million," Deaton said. "What that does is this: Our actuaries reserve money for the anticipated claim amount�they have to collect money today for something they are not going to be paying out for five to seven years in the future."

This requires actuaries to know the answers today to two questions, he said: First, how much will they need to pay out five to seven years from now? And second, how much will that money earn in the meantime?

Other Illinois hospitals are insured by similar charitable risk pooling trusts, according to Deaton.

"Insurance companies really do only one thing: they make predictions," he said. "The entire business of insurance amounts to them predicting how much they'll have to pay out and charging enough to make that payout."

Making accurate predictions comes from studying history and trends, according to the IHA.

"If something is not predictable, it is not insurable," said Deaton in an exclusive interview with the Illinois Business Journal. "When an insurance company can't rely on history and trends, it is lost. Medical malpractice cases are simply settling for double, triple and quadruple the amount they were reserved for. Cases in Illinois that were reserved for $500,000 are settling for $3 million to $4 million. In today's world of medical liability, history no longer means anything.

Predictability - once the foundation of insurance - has disappeared."

Deaton said although the IHA is not opposed to regulation of medical liability insurance rates across Illinois, the organization's concern is more of a practical one.

"At the moment, insurance companies are falling over each other to leave Illinois," he said. "Imposing rate control won't help�They're fleeing the state because in their judgment, they can't make money or succeed in Illinois anymore."

In certain pockets of the state, Madison and St. Clair counties included, Deaton said the IHA is trying to come up with ways to buy time, even to keep as many physicians as possible from leaving.

"We're open to talking about how we can help subsidize those physicians' malpractice premiums," he said. "Doctors across the state, in the Metro East in particular, are asking hospitals in some way to help them�but there are some barriers to that. There are federal regulations that limit ways for hospitals to make payments to doctors. It takes some lawyering and some thought, but it is possible."

A good number of Illinois hospitals are exploring the potential of bringing the doctors under their own self-insurance programs.

State Sen. William R. Haine, a Democrat from District 56 in Alton, said Illinois' relative weakness in terms of regulatory control does not help the situation.

"Illinois is definitely a weak regulatory state," Haine said. "The questions we have to ask are: What's the risk? What's the profit margin? And, how do we reduce that risk? Our hospitals are our economic engines for the entire region. If we lose our doctors, we lose our hospitals. It's that simple."

Haine said he is on a quest to procure specifics on all medical malpractice loss payout rates in Madison and St. Clair counties since 1998. The state senator said just hearing the statistic that "in eight out of 10 cases, the doctor was absolved" doesn't give an accurate financial picture of what has transpired.

"I am looking for the facts of all these cases - not only how many went to trial, but how many more were settled out of court in Madison and St. Clair county, and for how much," he said.

Haine said the annual malpractice premium for an obstetrician-gynecologist working in St. Louis is approximately $65,000; for the same ob-gyn working in Madison County, that price tag is nearly $200,000.

"That is not a prescription for long-term sustainability of a medical practice in our communities," he said.

The topic of the Illinois Assembly establishing a cap to limit the maximum amount of a malpractice judgment is also part of discussions.

Deaton said Indiana and Wisconsin both have caps.

"And that's what we're hearing a lot of: physicians picking up and moving to Wisconsin and seeing their premiums decrease by tens of thousands of dollars a year," he said. "And that (savings) goes directly to their bottom line. Any rational physician in Madison County will say, 'Why shouldn't I have that extra money to run my practice?'"

Those who assert that a cap would have no effect on Illinois' burgeoning premium crisis, Deaton said, aren't being honest about the real problem and a cap as a possible deterrent.

"The thing that mystifies me is when trial lawyers say, 'Caps won't really solve the problem.' We can point to what's happening right in our own neighborhood. We know that in the long run, a reasonable cap on non-economic damages is a reasonable solution. But with the politics in Illinois, that's not likely."

Federal legislation suggests putting a $250,000 cap on non-economic damages, those that are not tied to actual expenses such as medical bills and lost wages. Deaton said that limit is not reasonable.

"If there were a (federal) cap much higher than that - even a million dollars - it would bring some predictability to the market," he said.