1. Final Exam Options 1.In class exam Tuesday, May 3, 20051:00-2:20 pm 134 Temple Hoyne Buell Hall 2.Normal final exam time Friday, May 13, 2005 1:30-3:30 pm 134 Temple Hoyne Buell Hall You may take either or both exams. If you take both exams, you will be given the higher grade as your final exam grade.

2. Finance 431 Medical Malpractice Insurance: A System in Crisis

3. Medical Malpractice Insurance Crisis: Round Three Current developments Rounds one and two Tort reform proposals Impact of interest rates on cost of insurance Why round three is occurring now Who are the major players in Illinois on this issue? What are their positions?

4. Current Developments Rapidly rising premiums for medical care providers Inability to pass along the costs Restricted market for coverage President Bush’s State of the Union address called for tort reform for medical liability – Jan. 2003 Doctor strikes around the country Indications that crisis conditions exist in many states

5. Round One: Mid 1970s Availability crisis Commercial insurers withdrew from market Solutions –State level tort reform –Medical provider owned insurance companies, known as “bedpan mutuals” –Claims made policies introduced

6. Round Two: Mid 1980s Affordability crisis Causes –State courts overturned tort reforms –Resurgence of claim costs –Adverse loss reserve development –Interest rate declines –Reinsurance market failures

7. Round Two: “Solutions” More state tort reform Leveling of claim costs Stabilization of interest rates Recovery of reinsurance markets

8. Tort Reform Specifics Modification in statute of limitations Elimination of “ad damnum” clause Pretrial screening panels Contingency fee limitations Modify collateral source rule Caps on liability awards Require periodic payments of damages Require itemization of awards Eliminate special damage needs in countersuits Eliminate punitive damages Apply expert witness standards Require affidavit in support of claim

9. Impact of Interest Rates Medical malpractice claims are paid out over more than twenty years Assume average claim is paid 6 years after policy year At 7% interest rate, present value of $1 million in losses is $666,342 At 3% interest rate, the present value is $837,484 Decline in interest rates from 7% to 3% increases the present value of losses by 26% Conversely, if interest rates increase from 3% to 7%, then the present value of losses declines by 20%

11. Why Round Three is Occurring Now Impact of 9/11 on insurers –Reduced capital led to a tightened insurance market –Insurers are leaving less profitable markets Companies leaving medical malpractice market –St. Paul stopped writing medical malpractice Previously was the largest writer with 20% of the market –Other medical malpractice insurers in financial distress Remaining companies restricting new business Interest rates have declined again

13. Physicians and Surgeons Medical Liability Insurance How bad is the problem?

14. Who are the Major Players in Illinois? Health care providers –Doctors –Hospitals –Nursing Homes Plaintiff’s Attorneys Consumer Advocates Insurance Companies –Illinois State Medical Inter-Insurance Exchange (ISMIE) –Illinois Providers Trust (insures hospitals) –American Insurance Association Regulators Legislators

15. What are their Positions? Health care providers want lower premiums –State tort reform has been unsuccessful Caps on damages declared unconstitutional 3 times in Illinois –Federal tort reform Caps on non economic damages Proportionate liability Three year statute of limitations Limitations on legal fees Plaintiffs’ attorneys oppose tort reforms –Argue caps would hurt seriously injured plaintiffs –Seek to eliminate confidential investigations of medical errors

16. What are their Positions? (2) Consumer advocates want: –To reduce medical errors Investigate problem doctors Take away licenses of incompetent doctors –To prevent insurers from gouging policyholders Regulate insurance company rates Restrict insurers from leaving state Insurance companies want predictable losses –Reduce level of uncertainty in lawsuits –Continue to allow rate freedom

17. What are their Positions? (3) Regulators want to focus on key responsibilities –Solvency –Market conduct –Competition Legislators want to solve the problem –Difficult issue to deal with –Competing interests –No easy solution

18. Caps on Noneconomic Damages Many states have caps on noneconomic damages –5 states in the 1970s (CA, IN, LA, MN, VA) –15 states in 1986-87 –Recent developments Ohio and Texas – adopted in 2003 Viscusi and Born study –Caps reduce losses by 16-17% Caps are being considered in Illinois –$250,000 for physicians, $500,000 for hospitals Are caps constitutional? –Illinois experience – no –Workers Compensation comparison

19. Conclusion Medical malpractice crisis will affect the public Reduced access to non routine care –Specialists in rural areas –High risk treatments Higher cost of medical care Legislation is likely –Federal level –State level Caps may be imposed Legislation may be overturned in court Debate over medical malpractice is a precursor to liability reform in general