Estimating the EffectOf Tort Reform

On Medical Malpractice Costs

Kevin M. Bingham – Deloitte.kbingham@deloitte.com

Casualty Actuarial Society Spring MeetingMay 16, 20051:30 PM – 3:00 PMPhoenix, Arizona

INTRODUCTION

• Cap on Non-economic Damages• Effective Date and Phase In• Reporting Speed up• Changes in the Statute of Limitations/Repose• Joint & Several Liability• Understanding Closed Claim Databases

Cap on Non-economic Damages

Cap on Non-Economic Damages

• Economic damages° Lost wages° Medical expense° Funeral expense

• Non-economic damages (a/k/a pain and suffering)° Loss of consortium° Loss of companionship° Disfigurement° Mental anguish

Quantifiable from a ratemaking and reserving perspective.

Highly subjective and difficult to quantify from a ratemaking and reserving perspective.

Cap on Non-Economic Damages

• Free email alerts at www.verdictsearch.com ° Medical Malpractice cases

• Facts (case information, venue, judge, insurer, etc.)

• Plaintiff and Defense

Attorneys

Experts

• Verdict information

Economic (e.g., funeral costs, loss of earnings, etc.)

Non-Economic

• Top 100 verdicts of 2004

Numerous Medical Malpractice cases

GreatLearningTool

Cap on Non-economic Damages

• Type of cap and reserving impact° Hard cap (e.g., $250,000 MICRA cap)

° Soft cap• Florida

• Texas

° “Cap busters”• Florida

• Massachusetts

• Emergency room vs non-emergency room• Practitioner vs non-practitioner• Per defendant caps• Per claimant caps• Piercing

• Disfigurement• Death• Vegetative state• Unanimous verdict

Cap on Non-economic Damages

• Type of cap and reserving impact (continued)° Massachusetts

• McCullough, Campbell & Lane - Damage Caps (www.mcandl.com/massachusetts.html)

“In a medical malpractice case, the jury is instructed that if it finds the defendant liable, it is not to award the plaintiff more than $500,000 for pain and suffering, loss of companionship, embarrassment, and other items of general damages, unless it determines that there is:

a substantial or permanent loss or impairment of a bodily function or substantial disfigurement, or other special circumstances in the case which warrant a finding that imposition of such a limitation would deprive the plaintiff of just compensation for the injuries sustained.

Mass. Ann. Laws ch. 231, § 60H (Law. Co-op. Supp. 1997). Since this standard can often be met, the cap should not be relied on.”

Makes reserving assumptions easier (i.e., little impact)

Cap on Non-economic Damages

• “The Big Picture”

NoneconomicDamages

NoneconomicDamages

EconomicDamages

EconomicDamages

PolicyLimitsPolicyLimits

ReservingImpact

ALAEIncluded?Excluded?

Impact ofDoctors

Going Bare?

Cap on Non-economic Damages

• Shift towards lower policy limits

Cap on Non-economic Damages

• Ratio of NE/[NE + E] = 50%

Cap on Non-economic Damages

• Ratio of NE/[NE + E] = 98.8%

Cap on Non-economic Damages

• Pricing and Reserving Considerations° Constitutionality

• Texas – Passed Proposition 12, Nevada - ballot initiative passed

• Oregon and Wyoming – Constitutional amendments defeated

• Florida – TBD

° Policy limits

° Number of claimants/defendants

° Severity of injuries faced by company

° ALAE

° Phase-in effect

Issues:• Is the data captured?• If captured, is it accurate?• Are more co-defendants going bare?• Credibility for use in pricing/reserving?

Issues:• Chiropractor vs. OBGYN?• Credibility for use in pricing/reserving?• Impact of other law changes (e.g., limit on attorney fees)

Effective Date and Phase In

Effective Date and Phase-In

• Does the law apply on an accident date or report date basis?° Apply to accidents that occur on or after the effective

date of the law• Impacts future claims only (reserving and pricing)

° Apply to occurrences that are reported after the effective date of the law

• Impacts current reserving for IBNR claims (i.e., tail claims)• Impacts future reserving considerations• Immediately impacts pricing (i.e., no phase-in)

See the September/October 2003 Contingencies Magazine article titled “Measuring the Impact of Medical Liability Tort Reform” for a detailed illustration of the “phase-in” effect

Reporting Speed-Up

Reporting Speed-Up

• Often times observed immediately before the passage of tort reform bills° Uncertainty regarding constitutionality

° Uncertainty regarding “phase-in”

° Precautionary measure by plaintiff attorneys

• Pricing/Reserving considerations° Adjusting actuarial methods for “speed up” in reporting

° Monitoring of results going forward (e.g., adjustment may be required if constitutional issues emerge)

° Proper application of the cap based on the effective date

Changes in the Statute of Limitations/Repose

Changes in the Statute of Limitations/Repose• Statute of Limitation

° A statute of limitations is a law which places a time limit on pursuing a legal remedy in relation to wrongful conduct. After the expiration of the statutory period, unless a legal exception applies, the injured person loses the right to file a lawsuit seeking money damages or other relief.

• Statute of Repose° A statute of repose is a law which defines when, in no

event, can a claim ever be made after a pre-defined time limit from the date of the alleged malpractice.

Changes in the Statute of Limitations/Repose• Statute of Limitation Examples

° Medical malpractice actions must be filed • within X (e.g., one, two, three, etc.) years of the date of the act or

omission resulting in injury• X years from the date the injury was or reasonably should have been

discovered• tolls the statute of limitations for individuals who are minors or who

are mentally incapacitated• a wrongful death action must be brought within X years (e.g., two,

three, etc.) after the decedent's death• etc.

• Pricing/Reserving considerations° Impact on filing of future claims° Requires legal expertise www.mcandl.com/states.html

Information by state

Joint & Several Liability

Joint & Several Liability

• The theory of Joint and Several Liability allows that each defendant in a legal action is responsible for the entire amount of damages that a plaintiff is seeking, regardless of their relative degree of responsibility for the damages involved.

• Reform° “Severally” liable (i.e., proportional liability)

• All damages (economic and non-economic)• Non-economic damages only• % at fault criteria (e.g., def < 51% at fault)• Defendant uncollectible - reapportion after 1 yr

° Reduces the search for “deep pockets” (e.g., hospital 1% at fault pays 100% of a $10 million award)

Defendant pays theirfair share of damages

Joint & Several Liability

• Pricing/Reserving considerations° Impact on filing of future claims when J&S abolished° Impact on plaintiff attorney strategies going forward

• Spread “comparative fault” to maximize recovery• Consider impact of caps (spread versus telescope)

• National Association of Mutual Insurance Companies (www.namic.org/reports/tortReform/JointAndSeveralLiability.asp)° Information on 37 states with J&S liability reform

• Brief description of current law• Statutory link• Other provisions (e.g., may impact non-economic damages only, no

impact if plaintiff not at fault, etc.)

• American Tort Reform Association (www.atra.org)

RequiresLegalExpertise

Understanding Closed Claim Databases

Understanding Closed Claim Databases• AAA Comment Letter (www.actuary.org/pdf/casualty/medmal_042005.pdf )

1. Exclusion of Claims Closed Without Indemnity Payment2. Exclusion of Open Claims3. Relationship of Closed Claim Data and Ratemaking4. Impacts of Tort Reform5. Changes in The Structure of the CCD Over Time6. Changes in The Entities Reporting to the CCD7. Time Period Considered For Analysis8. Integrity of CCDs9. Handling of Policy Attributes10. CCD versus Company Trends11. Consideration of Policy Limits Purchased by Insureds 12. Adjustments to CCD Data