Incurred losses are the largest component of medical malpractice insurers’  costs. Comprehensive Data on the Composition and Causes of Increased Losses Were Lacking

A lack of comprehensive data at the national and state levels on insurers’  medical malpractice claims and the associated losses prevented us from  fully analyzing both the composition and causes of those losses at the  insurer level. This declining profitability has caused some large insurers either to stop  selling medical malpractice policies altogether or to reduce the number  they sell. Reinsurance Premium Rates Have Increased

A further reason for recent increases in medical malpractice premium rates  in our seven sample states was that the cost of reinsurance for these  insurers has also increased, increasing the total expenses that premium  and other income must cover. So while insurers in other markets that do not have protracted  claims resolutions can adjust loss estimates and premium rates more  quickly to account for a change in an underlying factor, medical  malpractice insurers may not be able to make adjustments for several  years. The Medical Malpractice Insurance Market Has Changed since Previous Hard Markets

The medical malpractice insurance market as a whole has changed  considerably since the hard markets of the mid-1970s and mid-1980s. For example, insurers have moved from  occurrence-based to claims-made policies, physicians have formed mutual  nonprofit insurance companies that have come to dominate the market,  hospitals and groups of hospitals or physicians have increasingly chosen to  self-insure, and states have passed laws designed to slow the increase in  medical malpractice premium rates. As a result of this continuing change in the  composition of the medical malpractice insurance market, changes in  premium rates in the next soft market may be different from previous  markets, when commercial carriers dominated the market. And the threshold for excess loss  insurance is rising in a number of states. Because many states have made  changes to these laws, it is difficult to predict the extent to which premium  rates might change in future markets. Conclusions

Multiple factors have combined to increase medical malpractice premium  rates over the past several years, but losses on medical malpractice claims  appear to be the primary driver of increased premium rates in the long  term. At the same time, because of the long lag  between collecting premium income and paying on claims, premium rates  for the next year must be high enough to cover claims that will be reported  that year, the majority of which will be paid over the next 3 to 5 years. However, factors other than losses--such as changes in investment income  or the competitive environment--can also affect premium rate decisions in  the short run. For example, high expected returns on  investment may legitimately permit insurers to price insurance below the  expected cost of paying claims. To analyze the factors contributing to the premium rate increases in our  sample states and other states, we examined data from state insurance  regulators, the National Association of Insurance Commissioners (NAIC),  A.M. Best, the Securities and Exchange Commission, and the Physician  Insurers Association of America on insurers in our sample states as well as  the medical malpractice insurance market as a whole.
Why GAO Did This Study

Over the past several years, large increases in medical malpractice insurance premium rates have raised concerns that physicians will no longer be able to afford malpractice insurance and will be forced to curtail or discontinue providing certain services. Additionally, a lack of profitability has led some large insurers to stop selling medical malpractice insurance, furthering concerns that physicians will not be able to obtain coverage. To help Congress better understand the reasons behind the rate increases, GAO undertook a study to (1) describe the extent of the increases in medical malpractice insurance rates, (2) analyze the factors that contributed to those increases, and (3) identify changes in the medical malpractice insurance market that might make this period of rising premium rates different from previous such periods.

What GAO Found

Since 1999, medical malpractice premium rates have increased dramatically for physicians in some specialties in a number of states. However, among larger insurers in the seven states GAO analyzed, both the premium rates and the extent to which these rates have increased varied greatly. Multiple factors, including falling investment income and rising reinsurance costs, have contributed to recent increases in premium rates in our sample states. However, GAO found that losses on medical malpractice claims--which make up the largest part of insurers' costs--appear to be the primary driver of rate increases in the long run. And while losses for the entire industry have shown a persistent upward trend, insurers' loss experiences have varied dramatically across our sample states, resulting in wide variations in premium rates. In addition, factors other than losses can affect premium rates in the short run, exacerbating cycles within the medical malpractice market. For example, high investment income or adjustments to account for lower than expected losses may legitimately permit insurers to price insurance below the expected cost of paying claims. However, because of the long lag between collecting premiums and paying claims, underlying losses may be increasing while insurers are holding premium rates down, requiring large premium rate hikes when the increasing trend in losses is recognized. While these factors may explain some events in the medical malpractice market, GAO could not fully analyze the composition and causes of losses at the insurer level owing to a lack of comprehensive data. GAO's analysis also showed that the medical malpractice market has changed considerably since previous hard markets. Physician-owned and/or operated insurers now cover around 60 percent of the market, self-insurance has become more widespread, and states have passed laws designed to reduce premium rates. As a result, it is not clear how premium rates might behave during future soft or hard markets.