Illinois House Judiciary Committee HearingFirst, I’ll talk about the history of ISMIE and recent developments in the Illinois insurance market;
February 23, 2005
Testimony of ISMIE Mutual Insurance Company
Good morning. I’m Dr. Harold Jensen, an internal medicine physician, and chairman of the ISMIE Mutual Insurance Company. I’m here today to represent ISMIE, the state’s largest insurer of physicians for medical liability. ISMIE is owned and operated by physicians and insures almost 14,000 physicians across the state.
I thank you, Representative Fritchey and members of the House Judiciary Committee, for allowing me to testify for you today. My remarks will be separated into 5 parts:
Second, I’ll present figures on our rates and underwriting practices;
Third, I’ll speak to the misconceptions that bad doctors and stock market losses are the reasons behind rate increases;
Fourth, I’ll delve into why further regulation of the insurance industry is counterproductive to the solutions we need;
Finally, I’ll explain how caps on non-economic damage awards can lead to an improved medical liability climate.
ISMIE was born in the mid 1970s, when commercial insurance carriers were losing money and wanted to leave the state. Many doctors were about to be left without insurance. The Illinois State Medical Society responded by launching ISMIE in July of 1976. It is a measure of those desperate times when you consider that neophyte physicians entered an arena that the knowledgeable professionals were fleeing.
From the first day, ISMIE’s mission has been to provide a strong and reliable source of coverage for physicians. Our philosophy is conservative in every aspect of insurance and this approach has stood us in good stead…affording our policyholders stability and a constant support in chaotic times.
The doctors who established ISMIE, who were also policyholders, wanted the rates to be fair; consequently, we take a very methodical approach to ensure that our rates are consistent with risk exposure. Premiums are based on multiple factors: where the physicians practice; what is their specialty; what is their amount of risk. Consequently, doctors in one part of the state do not subsidize doctors in another part of the state; primary care physicians do not subsidize surgeons, and so on.
The most important trend affecting insurance rates is the frequency and the severity of claims. Here are some facts to consider:
In 1998, the average jury award in Cook County was $1.07 million. In 2003, the jury award was $4.45 million. This is a 314% increase in 5 years. Factor into this staggering figure that high verdicts drive settlements higher also. Is this not fuel for a crisis?
In the same 5 years the non-economic portion of damage awards (pain and suffering) increased 247%. That average was $3.12 million.
The number of claims reported against ISMIE policyholders climbed an alarming 46% between 2001 and 2003.
In those same 2 years ISMIE’s average indemnity payment per claim rose almost 24%..... From $474,000 in 2001 to $589,000 in 2003. Not only a skyrocketing increase in the number of suits, but a staggering increase in average payments.
Careful attention to fairness is the hallmark to our rate setting practices. We have 6 categories of Illinois counties that we refer to as “rating territories.” These identify different geographic areas of financial risk. For example, Cook and Will counties are grouped with Madison and St. Clair counties because their loss experience is similar. We use 20 different groupings of physician practices, clustered by risk. The territories and risk categories are not theoretical … they are based on almost 30 years of ISMIE underwriting and claims experience.
To illustrate how the number and severity of claims affect Illinois physicians, let’s look at an example. Let’s compare rates for an obstetrician in East Moline with those of an OB/GYN living across the river in Iowa. Both are insured by ISMIE. The OB in Rock Island County, Illinois pays $74,300; in Iowa that premium is $36,600, meaning that Illinois doctors pay more than twice as much. This story repeats itself in every specialty. And the story is even worse for physicians practicing in Cook, Madison, St. Clair, Will counties, where the difference exceeds 400%.
Another physician owned insurer that does business in Iowa, MMIC, reported in 2002 that in their company’s territory, which includes Iowa, insureds were sued at a rate of 6 claims per 100 physicians. In that same year, ISMIE’s Illinois insureds were sued almost four times as often … at 22 claims per 100 physicians. In 2002, MMIC’s average indemnity was $212,000. ISMIE’s average indemnity for the same year was $557,000. Thus, ISMIE can insure Iowa physicians and charge them less than half as much as Illinois physicians.
The liability crisis has led to a mass exodus of insurance companies from Illinois. Ten years ago the general medical liability market had 34 companies other than ISMIE. Today we have only 4 other companies which individually write at least one percent of market share. Many of them are insuring only select specialties or limiting what parts of the state they will cover. Some of these lost companies went bankrupt, and the rest found the hostile legal climate too severe to predict rates and could not make a profit. They left. ISMIE came to the rescue by providing coverage to many stranded physicians. In 2001, we took in almost 1,000 new policyholders, and the next year 1,800 more. In 2003, ISMIE had no choice but to declare a statewide moratorium on new business. While the company is financially secure, we stopped accepting new physicians in order to stop the drain on our surplus and protect our current group of policyholders. The lifeboat is full.
The decision not to accept new policyholders was a difficult one, but even more painful was the 35% across-the-board increase announced almost two years ago. The analysis, by our actuaries, of the situation produced by the combined avalanches of suits and payouts required this huge increase to preserve adequate financial strength, long term viability and fulfill the continuing obligation to our policyholders.
Those with a different agenda, who would preserve the current flawed system, have created some myths about the crisis. I want to address these myths. The earliest was that there was no “crisis,” and that the tumult was about a “statistical blip.” The trend has accelerated, disproving that story. Then, it was claimed, that “a few bad doctors” were responsible for most of the costs and hence the crisis. But is has been clearly demonstrated that difficult cases with unfavorable outcomes are often the most complex cases, which are often the ones which require help from our most competent physicians. By our figures, the “average” physician in an “average” risk specialty can expect to be sued once every 10 years. But for high risk physicians, that ratio increases dramatically. Simply put, doctors are sued all too often, and the most highly skilled physicians are the ones most likely to be sued. It is no coincidence that the flight of those physicians most often targeted, such as obstetricians and neurosurgeons, have left large areas of our state without needed care.
The third myth invented was that medical liability insurers’ rates follow the stock market … and that the current crisis was due to the recent recession. Another deviation from the truth. Our conservatism, mentioned earlier, is reflected in the care of our financial assets. About 3% of the company’s portfolio is in stocks. The vast majority of our assets are in high quality, fixed income securities … that is, bonds. ISMIE has never had a year with a loss of investment income, and averages about $49 million annually in investment income.
It’s true that investment income affects premiums – in 2003, we achieved a 4.2 % return on investments, all of which was plowed back, as usual, into keeping rates as reasonable as possible. This return was some $8 million less than our average over the last decade. This drop was anticipated, in line with decreasing interest rates. This interest rate decline produced only an approximate 3 to 4 percent impact on premiums paid by ISMIE policyholders. So, an obstetrician in Cook County would have paid about $145,000 rather than $150,000 – still more than three times greater than his or her colleagues in Wisconsin – a state with caps on non-economic damage awards. Please note that insurers in Wisconsin – or in any other state for that matter – experienced essentially the same investment results as did ISMIE in 2003.
It’s also said that, as 80% of suits filed don’t result in payment, that premiums should, therefore, be less. Yet each case, regardless of outcome, has to be defended … and they are defended at a 5-year cumulative cost to our policyholders of $150 million dollars … all to defend cases without merit, and thus driving premium costs even higher.
Another unfounded charge concerns the costs associated with the management of ISMIE. For the year 2003, the administrative expense ratio for ISMIE was less than 12%. That is, we are running this company for less than 12 cents out of each premium dollar. To put this in perspective the national average for other physician owned companies is 16%, and commercial companies higher than that.
More recent on the myth list is that ISMIE and the Illinois State Medical Society have a conflict on how to address this crisis which affects all physicians and their patients. Each organization is a physician-driven entity. Their separate boards have analyzed the problem and have taken identical actions toward a solution. They have come together in a strong cooperative effort. We are of a common mind … There is absolutely no conflict.
I have heard it said that a trial attorney dictum is: “If you don’t have the facts to win an argument, attack the opponent”. The myths I have addressed today are just such a smokescreen. I have saved the most interesting myth for last. There is a fledgling rating agency that has put out a piece called “The Weiss Report”. It was widely circulated by the myth-makers because it stated some sweeping conclusions that were at odds with nation-wide generally accepted facts.
It concluded that caps won’t reduce premiums and that the stock market was responsible for the poor performance of insurance companies. The PIAA (Physicians Insurance Association of America) strongly discredited the report on several points, as have many others. The Weiss claims are at odds with the conclusions of reputable studies by the Congressional Budget Office, U.S. Department of Health and Human Services, Standard and Poors, The American Academy of Actuaries, and a respected analyst for the industry, Tillinghast. The errors in the Weiss report are obvious and many. I want to itemize some of them, only because of this report’s undeserved popularity among opponents of tort reform.
The report used two sources for its data: The Medical Liability Monitor and the National Practitioner Data Bank. Both sources emphatically disagree with the methodology used.
19 states were listed as having caps, and 31 without caps. So this became the two groups for comparison. But all cap levels were lumped together, and we know (American Academy of Actuaries) that high caps are ineffective in reducing premium rates. Only 5 of the 19 states had the proposed $250,000 cap. The rest had $500,000 or more.
Further, of the 19 states listed with caps, 10 had not enacted cap legislation before the baseline date (1991).
Further compounding the error, two other states included in the 19 had enacted caps in 1990, so no effect of caps could be apparent in one year’s time.
Using the (corrected) Weiss data we’re down to 4 states (California, Colorado, Indiana and Kansas). Over the 10 years from 1991 to 2001, these four states with caps experienced a 28% increase in premiums. In states without caps, premiums escalated by 48%. The value of caps is further enhanced when some of the base data is examined:
Weiss used published rate tables; but actual premiums are much different.
Median values (a poor measure when examining averages) were used to compare different companies for different years … a case of comparing apples to oranges.
Only one company was compared for both measured years … and Weiss concluded their rates had gone DOWN. But checking directly shows the rates had actually gone UP.
The National Practitioner Data Bank’s data for reported claim losses was used to represent insurance company losses, but the insurer’s costs are much higher than the net figures submitted to that agency.
The Weiss conclusions blamed the recession in the equity market for poor performance by insurance companies. Yet, as a group, insurers’ average investment portfolios are 80% in bonds, less than 10% in stocks.
Let me speak to the calls for insurance regulation, even though I believe the material already covered makes a strong case that it is suits and verdicts, not insurance companies that fuel this crisis.
ISMIE is already heavily regulated by the Illinois Department of Insurance … and medical liability companies in general are more carefully regulated than other insurance entities. This is the state government agency charged with making sure that insurance companies have enough money on hand to protect policyholders and the public. ISMIE files exhaustive financial statements annually with the department, where they are open to public scrutiny. Increased regulation, and added costs and efforts required for compliance, will only further discourage insurers from entering the Illinois market. I appear before you to state that ISMIE WANTS competition, but added regulation is a deterrent. Those companies won’t come back until this hostile legal climate is changed … once burnt, twice shy.
Specifically, one regulation frequently suggested is “prior approval” of rates. Prior approval introduces politics into the rate-making process. Political pandering may hold rates artificially low over the course of a year or two, but reality catches up. There is no free lunch … the costs are what they are. Volatile rate swings would have to eventually catch up, posing even greater problems for physicians trying to cover practice expenses. Like everyone else, ISMIE would like to see the rates go down, but because of the hostile legal environment in Illinois, this is unlikely. In order to treat our physician policyholders fairly we must continue to base our rates on actuarial data, not on wishes, nor on political vagaries.
Oklahoma is a state that requires prior rate approval. Yet, in November, 2003 the leading insurer requested and was granted a rate increase of 83%. Later, a second insurer asked for, and was granted a 103% increase. Prior approval does not reduce the medical liability rates … because it doesn’t address the underlying problem … a runaway legal system. An interesting sidebar on this discussion: after these high premium rates were approved, the Oklahoma legislature did address the underlying problem, and passed legislation for a cap on non-economic awards.
This is the last part of my presentation. It is our proposal for a solution to the medical liability crisis that has brought us together today. Caps on non-economic awards stabilize insurance rates and have done so in states across the country. It is crystal clear, CAPS WORK. Let us be precise … The proposed caps DO NOT in any way limit that part of the award which provides compensation for future medical care, loss of wages, and more. Caps DO NOT limit in any way that part of the award. ISMIE firmly believes that the legal system should fairly compensate those patients injured by medical negligence, but exorbitant, non-economic awards must be controlled before more doctors leave Illinois and further affect the access of patients to health care.
In closing, I would like to thank you, on behalf of ISMIE Mutual, for hosting this important hearing. ISMIE Mutual stands ready to assist you in working toward liability cost containment. We have a strong track record of solid management, physician advocacy, and fairness in our business operations. What we sorely need now is a similar philosophy in the courts.
Please allow me to submit supplements to this report. One is entitled “The Medical Litigation Crisis”; the other is “Medical Liability Insurance Facts”. Each has substantiating data and clear charts on the subject covered today. I’m happy to answer any questions you might have. Thank you.