More carriers fighting over a shrinking pool of premium can be a problematic scenario, unless you're a physician practicing medicine in Texas.
Pockets of industry data show how a 2003 tort reform measure has reshaped the once-troubled medical professional liability market in the Lone Star State.
Since 2003, medical professional liability direct premium written in the state has dropped 48% to $329.8 million in 2008, according to BestLink, which provides online access to A.M. Best's Global Insurance & Banking Database.
The number of carriers actively writing coverage in the state as of September 2003 has increased from four to more than 13 at the end of 2009, according to the Texas Department of Insurance. Rates on average have declined 27.5%, according to Texas DOI.
Nearly 4,100 physicians applied for licenses in 2009, up 60% from six years earlier, according to the Texas Medical Board.
"For proponents of tort reform, people are looking to Texas as the poster child," said Chad C. Karls, a principal and consulting actuary at Milliman.
Karls said the downward cost shift in providing medical professional liability coverage in Texas didn't result from lower severity, as one might expect from a cap on noneconomic damages.
"The number of claims per physician fell off quite significantly post tort reform," he said.
The measure that Texas voters authorized the state's legislature to limit noneconomic damages for plaintiffs, a move designed to add constitutional layer of protection against challenges to the law. On Feb. 4, the Illinois Supreme Court overturned a state law in which the legislature established a $500,000 cap on noneconomic damages that could be sought from physicians ($1 million against hospitals), deeming such limits unconstitutional.
In Texas, it's believed its $250,000 cap has taken what can be an emotionally charged and subjective decision off jurors' hands, and also eliminated uncertainty surrounding runaway verdicts.
Bob Fields, chief executive of Texas Medical Liability Trust, the largest writer of medical professional liability coverage in Texas, said tort reform has forced plaintiffs' attorneys to be more selective and judicious when bringing legal claims. As a result, he estimates that non-meritorious legal claims have trailed off by 50%.
Fields said competition has also intensified as more carriers have entered the Texas market.
TMLT is a self-insured trust formed under state law in 1979 to cover its physician-owners who are members of the Texas Medical Association. Last year, the trust announced a 1% rate reduction for 2010, marking the seventh consecutive year that its policyholder premium rates have fallen. Renewals will receive a 24% dividend this year.
"I can't speak for other companies, but if you take into consideration our rate reductions since 2003, and the dividends that we give off renewing premiums, it's reduced the cost of insurance by about one half," Fields said.
TMLT held a 40% market share in 2008, according to the National Association of Insurance Commissioners. While not regulated by Texas DOI, TMLT voluntarily reports financial information to the state but that data is not included in BestLink.
Some of TMLT's chief competition has come from Austin, Texas-based American Physicians Insurance Co., which has more than doubled its market share since tort reform took effect to nearly 18.5% in 2008, according to BestLink.
The company started as a reciprocal exchange in 1975, but converted to a stock company in 2007 upon its merger with its publicly held attorney-in-fact -- American Physicians Service Group, Inc. (NASDAQ: AMPH). The company, which remains a wholly owned subsidiary, increased its policyholder count 113% between 2003 and the third quarter of 2009. Reported claims have dropped 58% during that same time-frame, and rates have dropped 42%, according to company data.
Marc Zimmermann, API's chief financial officer, said tort reform has accelerated gains the company has delivered since the mid-1980s in an effort to strengthen its capital structure.
Zimmermann said at one point in the mid-1980s the company had $30 million in refundable deposits owed to its policyholders and a negative $23 million of unassigned surplus. Discounting reserves was a permitted practice at the time, but Zimmermann said through disciplined underwriting and solid claims management the company was able to transition to $15 million in surplus prior to tort-reform.
"That's a significant capital improvement prior to tort reform," Zimmermann said.
As tort reform took hold, Zimmermann said there was an expectation for fewer claims, but that those filed might have more merit. That hasn't been the case.
"The percentage of claims we're paying indemnity on is similar to pre-tort," he said.
An increase in policy limits is another factor that has not rebounded as premiums grew more affordable. Zimmermann said physicians buying coverage limits in the range of $1 million per incident ($3 million in the aggregate) scaled back as pre-tort rates in Texas climbed. Seventy percent of API's medical professional liability book has a coverage limit of $500,000 or less per incident.
"With affordability of premium we anticipated a shift upward in policy limits but it hasn't necessarily played out that way," he said.
Favorable market conditions have made Texas and other tort reform states such as California and Ohio an attractive destination for young physicians starting out, according to Michael Kornett, president of the Medical Society of New Jersey.
Kornett's organization represents half of the Garden State's 18,000 practicing physicians. He said the combined financial pressures from medical school debt and high medical professional liability premiums are fueling an out-migration problem.
He cited the case of a young orthopedic surgeon who practiced two years in New Jersey and was paying $135,000 a year in premium. Kornett said that individual accepted an offer in Sacramento, Calif. and cut his premium rate to $27,000.
The New Jersey Council of Teaching Hospitals predicts that by 2020 the state will be short 2,800 physicians, which includes 1,800 specialists. It will represent a potential 12% gap in likely population demand for medical services.
Kornett said that in the past five years just one resident graduate from the University of Medicine and Dentistry of New Jersey has opted to stay in state.
"We graduate six a year," he said.
American Physicians Insurance Co. currently has a Best's Financial Strength Rating of A- (Excellent).
(By Al Slavin, senior associate editor, BestWeek)
