Modest slowdown in premium growth distinguishes second-quarter financial results for MPL specialty insurers
We look at the financial results for medical professional liability (MPL) insurers for the second quarter of 2022.
The potential passage of California Assembly Bill 35 (AB 35), amending key provisions of the state’s Medical Injury Compensation Reform Act (MICRA), will have reverberations for years to come.1
A product of the mid-1970s—when “… the inability of doctors to obtain such insurance at reasonable rates is endangering the health of the people of this State, and threatens the closing of many hospitals…”2 —California’s MICRA was passed as a means to control costs and lower medical professional liability (MPL) insurance premiums. The centerpiece of MICRA is a cap on noneconomic damages of $250,000 per plaintiff (note there are no restrictions on awards for economic damages such as medical costs or loss of wages due to medical negligence).
It is no secret that California is a high-cost state when it comes to most liability insurance costs.3,4 However, medical professional liability is a different story, with California costs ranking in the lower third of states in losses paid per capita5 and average manual rate.6 While opinions on the magnitude of impact will differ, the lower costs for MPL in California is undoubtedly related to MICRA and the $250,000 noneconomic damage cap that has remained in place since 1975.
AB 35 is the result of compromise and sponsored by both the Consumer Attorneys of California and Californians Allied for Patient Protection. These groups were on distinctly opposite sides of the $70 million spent on Proposition 46 in 2014,7 which would have significantly altered the provisions of MICRA.8 Another initiative, already qualified for the 2022 California ballot, was setting up for another costly fight. However, the proponents of the 2022 ballot initiative, the Fairness for Injured Patients Act, have agreed to remove its circulation if AB 35 is passed.
AB 35, as currently written, would change several key parameters of MICRA, calling for:
The increase in potential noneconomic damages is significant, from the current $250,000 cap per claimant in MICRA to an immediate potential for wrongful death claims of $1,500,000 ($500,000 stacked three times) or $1,050,000 (i.e., $350,000 stacked three times) for other claims filed January 1, 2023, or later.
The AB 35 noneconomic damage cap also increases annually, with the year in which the claim is resolved determining the applicable cap rather than when the claim is reported. This distinction is important as MPL cases, particularly more complex cases that may have larger damages involved, can take years to resolve after being reported. The initial $500,000/$350,000 noneconomic damage cap per stacked defendant as written in AB 35 will apply to very few claims; the majority of claims resolved during 2023 will relate to claims filed prior to 2023 that will still be subject to the current MICRA $250,000 cap. With an average time to resolution of approximately two to three years, the most typical noneconomic damage cap applicable for claims reported in 2023 (e.g., a claims-made insurance policy effective January 1, 2023) will be the cap in effect during 2025 or 2026. The table in Figure 1 shows the schedule of noneconomic damage caps implied by AB 35 versus claims that will still be subject to current MICRA limits.
|CLAIM REPORTED 2023+ (AMOUNT PER STACKED DEFENDANT)|
|YEAR CLAIM RESOLVED||CLAIM REPORTED PRIOR TO 2023||WRONGFUL DEATH||OTHER|
|2034+||250,000||+2.0% per year||+2.0% per year|
The changes in noneconomic damage cap per AB 35 is written in a way that it may influence the behavior of parties to a claim. Instead of implementation based on the date of the underlying event, claims are subject to AB 35 noneconomic damage caps based on being reported on January 1, 2023, or later. As a result, we’re likely to see a decrease in the number of cases filed or arbitrations demanded for the remainder of 2022, other than those that may be up against a statute of limitations. However, this is likely to be followed by a dramatic increase in allegations during 2023 due to both the backlog (i.e., claims that would have otherwise been reported in 2022) and the increased incentive to file a claim subject to the new caps (i.e., claims that absent AB 35 would not have been filed or followed through with). Figure 2 shows the inverse of this reaction when Texas implemented its 2003 House Bill 4 tort reform based on the date a claim was reported; a significant spike in claims filed leading up to the tort reform effective date and then a precipitous decrease afterward.
Texas House Bill 4, Introduced February 2003; Signed by Governor June 2003; Effective September 2003.
Data from multiple versions of the Texas Department of Insurance Closed Claim Surveys (https://www.tdi.texas.gov/reports/report4.html#closed)
Includes Medical Professional Liability claims closed between 2000 and 2012
Further, there may be incentive to potentially delay resolution of claims with 1) the dollar amount of the noneconomic damage cap applying to a given action “… at the time of judgment, arbitration award, or settlement…” and increasing each January 1, and/or 2) attorney contingency fee limits being greater for claims resolved after civil complaint or demand for arbitration is filed. The potential influence of these human factors will impact claim frequency, severity, payout pattern, and other claim metrics that actuaries and other insurance professionals rely on to track trends and project future costs.
The impact of AB 35 on any given entity in the healthcare or medical professional liability insurance space will depend on various factors. As most cases are settled, it may take years to develop new case law if there are disagreements on the application of various provisions of AB 35. Regardless, there is a clear expectation of an increase in costs due to the potential for increased costs on any given claim (i.e., claim severity) but also the increased incentive to file or follow through with a claim (i.e., claim frequency).
The impacts of AB 35 will likely be far reaching for those in the healthcare space in California. In addition to expected direct impacts of increased claim severity and claim frequency discussed above, potential indirect impacts could include:
How AB 35 will play out in the market is still a matter of much conjecture, but there is little question that, as written, it will expand insurers’ and healthcare providers’ liability, and may also result in increased healthcare costs across the board. If passed, a keen understanding of the dynamics of AB 35 will be critical as healthcare entities prepare for its implementation during 2022 and deal with its impacts in 2023 and beyond.
1 The full text of AB 35 is available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB35.
3 Judicial Hellholes. 2021-2022 Executive Summary. Retrieved May 12, 2022, from https://www.judicialhellholes.org/reports/2021-2022-executive-summary/.
4 Oregon.gov. 2020 Workers’ compensation premium index rates. Oregon Workers' Compensation Costs. Retrieved May 12, 2022, from https://www.oregon.gov/dcbs/cost/Pages/premium-index-rates.aspx.
5 Koca, S.J. et al. (June 2021). Independent Actuarial Analysis of Maryland’s Hospital Medical Liability Climate, Figure 6. Retrieved May 12, 2022, from http://dlslibrary.state.md.us/publications/JCR/2020/2020_121-122.pdf.
6 Medical Liability Monitor Annual Rate Survey, 2021 version: https://medicalliabilitymonitor.com/rate-survey/.
7 Results of that initiative, including arguments for and against it, are available at https://ballotpedia.org/California_Proposition_46,_Medical_Malpractice_Lawsuit_Cap_and_Drug_Testing_of_Doctors_Initiative_(2014).
8 Koca, S.J. et al. (July 2014). Undoing Tort Reform? Best’s Review Retrieved May 12, 2022, from https://www.milliman.com/-/media/milliman/importedfiles/uploadedfiles/insight/2014/undoing-tort-reform.ashx.