According to a study done by the Kentucky Medical Association, from January 2000 until December 2002 approximately 2,020 physicians retired or left the state. Many of the vacancies were filled by new doctors who just received their licenses; but even after accounting for the replacements, the state still lost 819 doctors. Thirty-one percent of these doctors went to neighboring states like Indiana, Ohio, and Tennessee, where insurance premiums are lower.

Newly elected Governor Ernie Fletcher, a doctor himself, has said Kentucky’s healthcare system is in a state of crisis as doctors continue to leave the state.

Several of the better-known stories of the exodus are even alluded to in a campaign statement on the issue by Gov. Fletcher before the election:

• Dr. Susan Coleman, a Danville obstetrician-gynecologist, testified that she will stop delivering babies in April because she would have to pay $300,000 for coverage — as opposed to $49,000 if she limited her practice to gynecology. She has never lost a claim or paid a settlement, but her rates have increased simply because she was sued once.
• Nine obstetricians from Louisville and 11 from Eastern Kentucky have either limited their practice to gynecology or moved out of state because of high malpractice insurance rates.
• A nine-doctor family practice with offices in Corbin and Barbourville shut down for a month because of high premiums. The doctors don’t know what they are going to do next year.
• The only neurosurgeon in Henderson left for another state because of malpractice premiums.

The explosion in medical malpractice insurance rates was even the target of a constitutional amendment proposed by Senate President David Williams that would allow the General Assembly to cap non-economic and punitive damages in malpractice cases. The amendment was voted down and leaves Kentucky still considering the options. It has proven to be a contentious and confusing issue to many, mainly because of the often contradictory studies and information currently available on the issue.

How do we sort through it all? By considering the three primary solutions currently offered to the problem: tort reform, improving regulation on malpractice insurers, and self-insurance by the physicians.

Tort reform
Tort reform is essentially a legislator’s way of saying we need to change the rules a bit so that cases can be settled for more ‘reasonable amounts.’ The idea is to put caps on the amount of damages that can be recovered during law suits in various categories such as lost wages, medical expenses, and “pain and suffering.”

Governor Fletcher has said that as part of his medical malpractice reform plan he would favor capping non-economic damages – the amount patients could recover for pain and suffering. He also favors establishing a medical review panel to sift through malpractice lawsuits, but would not limit economic and punitive damages.

“My prescription for the problem is to call for a constitutional amendment that will grant the governor and legislature the authority to tackle the medical malpractice issue,” Fletcher said.

Fletcher believes ‘…there is strong evidence of the effectiveness of caps. According to a report from the Health and Human Services Cabinet, over the last two years, states with limits… on non-economic damages have seen premium increases of 18 percent but states without limits… have seen increases of 45 percent.’”

This is the approach many states have followed around the country, with California and Colorado as the most-often cited examples of success.

Nineteen states currently have caps in place. And yes, they have reduced the burden on insurers in those states. In these states, the median payout on claims between 1991 and 2000 was 15.7 percent lower than the average payout in states without caps. Payouts have also increased at a slower pace in states with caps (at a rate of 87.3 percent) versus those without caps (a rate of increase of 127.9 percent). This is obviously good for the insurance companies, but are these savings passed on to doctors (and patients) in those states?

Apparently not, since most insurers continued to raise premiums in those states by 48.2 percent on average. Odder still, a recent study by Weiss Rating, Inc., an independent provider of ratings and analyses for financial service companies , mutual funds, and stocks, recently provided data showing that in states without caps the rates only increased 35.9 percent.

So other, more important factors must be driving the rate increase, right? Especially when you consider that during that same time period, medical costs rose by 75 percent.

Another factor experts point to is something called the insurance business cycle (which basically says that the rise in insurance rates is based on cyclical economic factors). Another is the decline in income insurance companies earn on their investments (usually bonds and mutual funds, which are providing historically low returns at the moment). Perhaps the most important consideration is the need for these companies to shore up available reserves to pay off claims. When adding all these factors in, it is easy to see why the rates are increasing. The question raised by all of this though, is whether the burden for these factors is being properly placed.

Have the number of claims been increasing along with all the other factors? Not actually. However the amount paid per claim has grown steadily over time. This was recently pointed to as a primary cause of rate hikes in a Government Accounting Office (GAO) report released in August. The same study also said there was no national crisis and that potential lawsuits did not in any way limit the public’s access to healthcare. But the doctors continue to move away. Simple supply versus demand dictates that healthcare will be harder to get if there are fewer doctors to provide it. So what’s next?

Improved regulation
The second solution being considered comes to us from consumer groups, who contend that we should examine the relationship between rising rates and the lower returns insurance companies have been making on their investments in recent years. Insurance companies are in the business of making a profit, and shareholders want their shares to grow and show a return. Sensible and capitalistic. So what’s the problem you ask? Those who espouse increased regulation are basically saying insurance companies need to curb their appetites for profit and if they won’t, then we need to press the government to step in to control it for them.

We’ve already seen this to a degree through the recent requirements placed on insurers by the Kentucky Department of Insurance. In January, the department announced that all companies selling medical liability insurance in the state have to file their rates for review and that all rate increases also must be reviewed before they can be instituted. This has had some effect. According to reports from the Department of Insurance, only 10 carriers have filed for rate hikes. Most of these were for increases of less than 25 percent.

This shows that state oversight is a possibility that might work, right? As you might expect, this conclusion has produced… wait for it… another bill. Essentially, the bill supported by State Representative Stephen Nunn and Senate Democrats would create a state-run mutual insurance authority to provide malpractice coverage for Kentucky physicians. Its selling point is that it could be up and running by mid-year, while the constitutional amendment wouldn’t provide relief for at least two years.

Physicians’ self-insurance
So what else is there to consider? The last major solution currently under consideration involves the doctors themselves and the idea of a physician-owned insurance company. According to Steven L. Salman, CEO and founder of Healthcare Underwriters Group of Kentucky and president of its affiliate, Global Insurance Management Company, LCC, this idea is nothing new. Approximately 60 percent of doctors nationwide are already covered by physician-owned companies. Kentucky doctors have never had this as an option.

Salman says, “It’s a pretty obvious solution actually. Priorities for the medical malpractice industry are seriously out of sync with the real goal of medical liability insurance.” Salman advocates doctor-owned companies because they focus on covering the insured, rather than working for a profit for shareholders. The coverage is called ‘reciprocal’ or ‘mutual’ insurance and is completely governed by the doctors themselves. They decide who they cover, how and when they settle claims or challenge them in court. It’s a model that works for doctors on a number of levels, according to Salman, because the doctors and those helping them manage the insurance are more knowledgeable about the people and legal environment the doctors are serving.

Salman also points out several pitfalls these organizations need to avoid to be successful and solvent. “These types of insurance arrangements need to resist the urge to expand. Knowledge, experience and focus are the keys to success here.” He boils it down to three essential factors:

• Coverage for one state only. This limits the need to meet the requirements (and the associated overhead) of operating across state lines.
• Offering one line of coverage only. This prevents dilution of focus on the primary duty of the organization; in this case, covering the medical liability needs of Kentucky doctors.
• Local control. This ensures the coverage is organic to the community it serves, avoiding the potential service problems associated with using out-of-state insurers.

The approach obviously has some merit, especially if we consider how physicians seem to readily accept the concept. The potential for this solution is important to consumers for a variety of reasons as well.

It is a move toward removing insurance companies from the care equation, addressing the issue of insurance companies practicing medicine by what it allows doctors to do for their patients.

It gives the medical profession a way to police itself more effectively. Now doctors can more closely monitor how they are performing, or at least better identify those doctors who aren’t competent.

It allows patients to get the care they need and create a more direct and honest relationship with their doctors because they can appeal to an group that better understands the claims made and has the direct knowledge and ability to resolve the patients’ problems/claims.

There are other benefits to consider as well. Currently malpractice insurers pay out approximately $1.53 in claim settlement expenses for every dollar in premiums they collect. Of this amount, only 38 percent of the dollars that are paid out actually end up with the claimant. When you add this all up, this equals a gap between collected premiums and underwriting losses of $4,033 per doctor on average, revealing a very real example of just how inefficient the current system is at resolving claims. If doctors self-insure, more of the settlement actually ends up with the patient rather than with those involved on both sides with pursuing claims.

This issue is sure to continue to be hotly and emotionally debated considering the impact healthcare has on our quality of life. Ultimately, the answer to this problem will probably end up as a combination of all the proposed solutions described here and more. But as this debate progresses, we as consumers of doctor’s services need to make sure the resolution doesn’t cause us to lose the ability to protect ourselves from malpractice or for our doctors to provide us with the best medical care their knowledge and experience can provide.

Ed G. Lane is chief executive of Lane Consultants, Inc. and publisher of The Lane Report.
editorial@lanereport.com