Bill Burns Vice President & Actuary CLRS September 12, 2006 Significant Risk and Uncertainty in Medical Malpractice Loss Reserving

September 12, 2006 HC06_MedMal_091206_WEB 1 General loss reserving guidance provided in several sources ASOP 36 Statement of Principles (1988) COPLFR (P&C Practice Notes)

September 12, 2006 HC06_MedMal_091206_WEB 2 ASOP 36 uses terms such as: Material Adverse Deviation Changing Conditions External Conditions Significant Risks and Uncertainty

September 12, 2006 HC06_MedMal_091206_WEB 3 Section of ASOP 36 addresses the issues of “Significant Risks and Uncertainty” as follows: “When the actuary reasonably believes that there are significant risks and uncertainties that could result in material adverse deviation the actuary should include an explanatory paragraph in the SAO. The paragraph should contain…a description of the major factors or particular conditions underlying risks and uncertainties that the actuary believes could result in material adverse deviation.”

September 12, 2006 HC06_MedMal_091206_WEB 4 Statement of Principles says: Considerations — Understanding the trends and changes affecting the data base is a prerequisite to the application of actuarially sound reserving methods. A knowledge of changes…is essential to the accurate interpretation and evaluation of observed data…

September 12, 2006 HC06_MedMal_091206_WEB 5 COPLFR Practice Note says: “The opining actuary is expected to use his/her discretion as to which risk factors and issues merit discussion in the opinion.”

September 12, 2006 HC06_MedMal_091206_WEB 6 COPLFR provides a (partial) list of the types of risk factors (and underlying exposures) for which comments may be appropriate Asbestos Construction Defect Recently Enacted Legislation Tobacco Med Mal Legislative Issues Mold

September 12, 2006 HC06_MedMal_091206_WEB 7 Question 1 What significant risks and uncertainties – if any – exist in medical malpractice that actuaries might consider disclosing in their SAO’s?

September 12, 2006 HC06_MedMal_091206_WEB 8 Med Mal factors that have been “considered”: Tort Reforms Nursing Homes Breast Implants Pedicle Screws Others?

September 12, 2006 HC06_MedMal_091206_WEB 9 The field of medicine is changing more rapidly than almost any other: Delivery Drugs Technology Procedures

September 12, 2006 HC06_MedMal_091206_WEB 10 Delivery of medicine — then… Family Doctor Specialists Hospitals

September 12, 2006 HC06_MedMal_091206_WEB 11 …and now Primary Care Physicians Specialists Hospitals Outpatient Surgery  Physicians’ Offices  Ambulatory Surgi-Centers (ASC)

September 12, 2006 HC06_MedMal_091206_WEB 12 Facts about outpatient surgery 70% of all surgery done in U.S. 14 million done in 2005  20% in doctors’ offices  80% in ASC’s Most ASC’s are accredited (JCAHO, AAAASF) Most doctors’ offices are not regulated Many doctors are not board certified in the procedures they perform

September 12, 2006 HC06_MedMal_091206_WEB 13 Facts about outpatient surgery (cont’d) Doctors are paid more for office surgery  Medicare pays $600 more for a colonoscopy Doctors’ offices are the most dangerous place to undergo anesthesia  Outdated/Malfunctioning equipment  Doctors administering anesthesia and operating Patients are 12x more likely to die or get injured in offices than in hospitals (Archives of Surgery, 2003)

September 12, 2006 HC06_MedMal_091206_WEB 14 Some facts about (legal) drugs Thousands of pharmaceutical companies worldwide “Market” > 4,000 drugs (and rising) ~800,000 doctors in U.S. > 1.5Bn prescriptions written annually in U.S.

September 12, 2006 HC06_MedMal_091206_WEB 15 Drugs (cont’d) Come in all shapes, sizes, colors and dosages Taken 1x, 2x, 6x daily Taken in the morning, at night or as needed Many have similar sounding names but have completely different purposes Is it any wonder medication errors are one of the leading causes of med mal losses?

September 12, 2006 HC06_MedMal_091206_WEB 16 Drugs (cont’d) Hospitals are using new technologies to reduce medication errors but what about those that happen outside the hospital setting? “Medical Mixologist”

September 12, 2006 HC06_MedMal_091206_WEB 17 Technologies and Procedures Two-edged sword Extend and improve quality of life Introduce new errors (learning curve) Warning label: new medical technologies and procedures may be hazardous to your health!

September 12, 2006 HC06_MedMal_091206_WEB 18 Examples Laparoscopic Cholecystectomy (“Lap Choly”) Minimally invasive Decreased visibility Unfamiliar with instruments More claims, higher awards until doctors were over the learning curve (three years)

September 12, 2006 HC06_MedMal_091206_WEB 19 Bariatric Surgery Rapid increase in number of procedures Number of surgery related mortalities and complications What is the mortality rate? Where are doctors in the learning curve? What would an obesity pandemic mean?

September 12, 2006 HC06_MedMal_091206_WEB 20 Other factors to think about: Patient safety Electronic medical records Tele-radiology Use of robots Evidenced based medicine New specialties

September 12, 2006 HC06_MedMal_091206_WEB 21 Question 2 If we agree there are significant risks and uncertainties in medical malpractice should actuaries try to quantify their impact on loss reserves or is an explanatory paragraph sufficient?

September 12, 2006 HC06_MedMal_091206_WEB 22 Consider… Underwriters are expected to constantly use more efficient ways of evaluation and quantifying risk. Should actuaries be content to say: “My projections make no provision for the extraordinary future emergence of new classes of losses or types of losses not sufficiently represented in the Company’s historical database or which are not yet quantifiable.” Or to issue a qualified opinion?

September 12, 2006 HC06_MedMal_091206_WEB 23 Conclusion The numbers do not reveal their secrets easily “Actuaries need to be curious, sometimes even more than they need to be intelligent…What good is applying a tried-and-true theory if you don’t understand the problem or the underlying drivers involved, or if you’ve misidentified a key risk?” (Sam Gutterman, Contingencies, July/August 06)