The medical malpractice landscape: What physicians need to know

Malpractice is always a major concern for physicians. Medical Economics spoke with Brad Ash, Senior Vice President, Underwriting and Sales, and Wayne de Nazarie, Executive Vice President, both with liability insurance provider ISMIE Mutual Insurance Co., to learn more about current malpractice insurance trends. The following transcript was edited for length, clarity, and style.

Medical Economics (ME): What questions should a physician or administrator be asking their broker about regarding a medical professional liability (MPL) carrier?

Brad Ash: The two things that would always be on my list are financial strength and geographic reach. Financial strength is probably the most important, because when you’re buying an insurance policy, you’re essentially buying a promise that the insurance company is going to be there to pay your claim if and when you report one. A carrier’s AM Best rating will indicate financial strength through the assignment of a letter ranging from A to D, and then they’ll add some plus or minus signs after that to further refine that financial rating. A++ is for the very strongest carriers while D is for the weakest.

Geographic reach is important because the practice of medicine today is not the practice of medicine as it was in the 1960s or 1970s. Economic realities of practicing medicine today really do reinforce consolidation pressures, and we see a ton of it within the medical professional liability industry, as practices in one state acquire practices in another state, or as physician groups in one location look to provide health care services to patients in another location. Having an MPL carrier that can ensure the totality of that practice is, I think, very important. If you’re a practice administrator or a physician leader, you’re not going to want to deal with multiple medical liability carriers. I think you want to be insured by a company that you can grow with as your practice grows.

ME: In 2019 or 2020, we started to hear the medical professional liability market characterized as a “hard market.” What does that mean, and does it continue to be true?

Wayne de Nazarie: Competition has been one of the leading factors relative to whether the conditions are soft or hard. Over the last several years, the market has become very competitive. In the past 10 years, the rate competition in particular, coupled with a market where the overall base of insured physicians has significantly declined due to consolidation, there are simply fewer physicians to insure, and corresponding premiums have declined within the MPL segment.

I think it’s fair to say that from 2012 to 2019 the MPL market conditions were quite soft. During this period, as companies competed heavily, with aggressive rates and reductions in premium. From a financial standpoint based on earned premium less expenses and losses most companies reported combined ratios well over 100% and continued underwriting losses within the segment. As the underwriting losses continued, many companies were still able to report an operating profit typically by applying investment income and reserve redundancy. During this timeframe, AM Best had placed a negative outlook on the MPL Sector.

In 2019 and 2020, we started to see indications that the MPL sector was stabilizing somewhat, with less aggressive pricing. Most companies focused on improved rates and risk selection aiming toward achieving underwriting profitability and not relying on reserve redundancy and investment income to obtain an operating profit. This led to discussions that characterized the market as moving to a hard market. However, I would not characterize the market as hard, but rather, it has been hardening. I would consider the hospital professional liability (HPL) market of having gone through a definite hard market, but overall we’re seeing a more stable MPL sector, and that’s a good thing. In 2023, AM Best upgraded the outlook on the MPL sector from negative to stable, noting both positive operational changes but also citing several remaining challenges for the industry.

ME: Many independent physicians and larger groups or clinics have been acquired by hospital systems and private equity groups. What are some of the pros and cons of this change within the market?

de Nazarie: It has changed the landscape of medical malpractice, independent physician practices, and hospital systems. Recent estimates reflect that approximately 75% of physicians nationally are now employed either mostly either by hospitals or private equity firms. As to the pros, there are obviously financial benefits for the groups that are acquired related to the sale. Being acquired potentially transfers a lot of the administration and management of practice onto the health care system. Many physicians see the opportunity to have more flexibility and family time with set schedules.

Physicians that are part of a hospital system, the alignment of interest is certainly there. Both are focused on providing the best patient care, treatments and medical advances.

With private equity acquisitions, similar to hospitals, there’s still an alignment of interest in providing the best health care possible and build upon the overall group practice but it’s a little bit different. Hospitals are there to serve the public, while private equity firms, by definition, are there to build upon revenue and profit. That’s not a negative thing — hospitals need to make a profit as well.

There are certainly cons relative to the many acquisitions over the year. Basically, many times it’s just difficult for these physicians to get used to the new process. They need to transition their current patients to the acquirer, go through a whole network of communications and such, and this can sometimes become a difficult task toward adjusting to their new environment. Further there have been potential problems or areas of disagreement, such as contract disputes, expense reductions, revenue increases or decreases, number of daily patient treatments, longer hours or overall differences as to expectations and responsibilities of both parties.

When you look at the MPL sector now and the HPL sector, there has been many changes and adjustments that both have had to adapt to.Due to the significant consolidations, many MPL companies implemented various diversification programs to supplement their core writings. These included writing in new states, diversified product offering, developing joint alliances with other companies and brokers, along with select changes in investments where appropriate. Hospitals had to adjust to all the issues that come with acquisitions, management of larger and many times more complex systems, as well as restructuring insurance programs and captives. Through it all the industry has gone through at least a 10-year cycle of acquisitions and whereas many challenges remain, the MPL sector has transitioned and adjusted to today’s healthcare marketplace.

ME: There has been an increase in large verdicts against physicians in recent years. What factors are driving this trend?

Ash: The average of the top 50 MPL verdicts for the years 2019 to 2023 has increased from just under $30 million in 2018 to just below $50 million in 2023. What’s behind this? Really good plaintiff’s attorneys are experts in being able to channel a jury’s anger and use that to the benefit of the plaintiffs. Another strategy that plaintiff’s attorneys use is what we call anchoring, and that’s basically where a plaintiff puts out a truly exorbitant value on a case, essentially to get the jury or the mediator anchored in some manner such that even if that number is cut in half, it’s still an absolutely crazy figure.

On the risk management side, a significant key would be to have an even quicker assessment of claims from the moment they’re reported in order to identify a successful claim strategy. One thing that claims adjustors have always said to me is that bad claims rarely get better with age, so they need to be settled faster when the underlying facts of the case suggests that they’re a loser. The last risk management strategy identify resides in defense counsel quality. Sometimes insurance carriers will try to rein in costs in areas they can control, and in the realm of claims, that tends to be legal fees associated with defending malpractice claims. We may save some money in our legal expenditures, but we give it all back and then some on the indemnity side. There are subtle issues that can turn a claim from a defense verdict into a plaintiff’s verdict, or that can take a case that might have resulted in a $5 million verdict to a $20 million verdict.