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Caps on noneconomic damages may not hold down doctors' insurance costs, but they have boosted insurers' profits. In states with caps, the Weiss study found, claims payments grew only 38%, compared with 71% in states without them. By raising premiums, insurers have improved their ratio of claims to premiums, a key measure of profitability, from 110% in 2000 to 89% in 2002. "The caps are great for insurers," Weiss says. "Their payouts will be lower. In a perfect world, they would pass that savings on." But the industry's losses have been so large that lower claims will not reverse them; insurers are likely to keep raising premiums.
Raising rates is exactly what malpractice insurers failed to do in the 1990s, even as claims were rising. Zuk concedes that the industry has to accept some blame. "No one wanted to be the first guy to say, 'We've got to start charging the right premium,'" he says. The insurers feared losing market share, and as long as investment income held up, they could ignore rising claims.
The malpractice-insurance industry went through similar cycles of low rates, squeezed profits and price hikes in the mid-1970s and again in the mid-'80s. Zuk, who enrolled in law school in the '70s just to learn torts, says ballooning malpractice claims make the current crisis worse than previous ones. From 1997 to 2001, the median malpractice jury award doubled, to $1 million, but that counts results only in the 1% of lawsuits that are won by plaintiffs. The number of malpractice suits has remained stable, and although some states have seen sharp jumps, the average claim payment has grown about 8% a year, close to the rate of medical inflation.
Industry analysts say insurers' investment losses, not just jury awards, are behind the crisis. In bull markets, insurers count on investment income to offset underwriting losses; that ended when the 1990s' stock bubble burst. Although malpractice insurers make only about 20% of their investment income from stocks, the losses were steep and came in tandem with low bond yields.
Insurance firms, Zuk says, must stabilize the disruptive cycle of cutting rates and then raising them when losses grow too big. Regulators could stop an insurer from underpricing premiums and "protect it from its own stupidity," as Zuk puts it. "The industry has to say, 'Forget investment income. Let's just write to an underwriting profit.'"
Some industry experts suggest national standards for acceptable outcomes in medical procedures. Zuk says a separate malpractice torts system would be a better solution. New standards, he argues, would only put doctors on the defensive. He recalls his own knee replacement in 2001. His doctors, he says, focused on treating him, not providing disclaimers or ordering tests. Zuk is convinced he knows why: "They don't have to worry about me suing them." --By Jyoti Thottam