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F I S C A L I M P A C T R E P O R T

SPONSOR Barela

ORIGINAL DATE

LAST UPDATED

2/25/07

HB 1063

SHORT TITLE Malpractice Insurance Limits of Recovery

SB

ANALYST Earnest

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

NFI

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to House Memorial 25, requesting a study of revising the Medical Malpractice Act.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Public Regulation Commission (PRC)

Health Policy Commission (HPC)

Administrative Office of the Courts (AOC)

SUMMARY

Synopsis of Bill

House Bill 1063 increases from $600 thousand to $1.2 million the maximum compensation that a

medically injured patient can receive from a doctor or other health care provider who is covered

under the Medical Malpractice Act. The bill increases from $200 thousand to $400 thousand the

amount of coverage that the primary insurer must provide before the Patients Compensation

Fund begins contributing to the payment of the claim.

The new $1.2 million limit applies only to malpractice occurring after July 1, 2007.

SIGNIFICANT ISSUES

According to the PRC, the current $600,000 limit of recovery in the Medical Malpractice Act has

not changed since 1995. This bill, according to a recent projection provided by the actuarial firm

retained by the Superintendent of Insurance to evaluate the Patients Compensation Fund, is likely

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2

to increase by 7% to 14% the total malpractice losses incurred by doctors in the Fund. It would

also shift more of these claim costs to the primary insurer and reduce the amount of losses paid

by the Fund.

According to HPC, the language of the Act requires the use of occurrence coverage, which has

effectively limited the coverage under the Act to physicians. Consequently the impact of what is

proposed with HB1063 will almost entirely fall on New Mexico’s physicians.

The Medical Malpractice Act, enacted in 1976, was intended to “promote the health and welfare

of the people of New Mexico by making available professional liability insurance for health care

providers in New Mexico."

The current law contains the following benefits for qualifying health care providers:

•

$600,000 cap on damages other than medical bills and punitive damages

•

3-year statute of limitations on the filing of a claim (subject to extension for minors)

•

Mandatory review of claims by a medical/legal panel prior to the filing of lawsuits

•

State participation in malpractice insurance coverage via a “patients compensation fund"

HPC notes limited access to malpractice insurance reduces the number of practicing physicians,

and thus results in reduced access to health care. “For example, given New Mexico’s shortage of

physicians even with caps in place for thirty-two years, a modification of caps could aggravate

access to care in a primarily rural state that already has 30 of 33 counties well under the national

average of number physicians per 1000 population. Compared with much of the nation, New

Mexico is large, rural, poor and thinly populated. New Mexico is currently short between 310 to

550 physicians depending upon which ratio comparisons are used (2003 HPC data)."

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Memorial 25 mandates that the current limits of recovery in the Medical Malpractice Act

be studied by a special commission composed of the Medical Society, the Trial Bar, the

Superintendent of Insurance and a member of the House, and that the findings and

recommendations of that study be submitted to the Legislature and the Governor.

OTHER SUBSTANTIVE ISSUES

The Health Policy Commission provided the following background information.

The American Medical Association has listed New Mexico as one of only six states that,

from the viewpoint of physicians and insurers, are not in crisis. This is largely due to

physicians’ access to the Act and the amount of the caps, which is widely viewed as the

main stabilizing influence on their malpractice premiums. . . .

AP Capital is currently the primary insurer actively writing occurrence policies for

physicians in New Mexico, and the primary insurer of physician who want coverage

under the Act.

While physician liability rates in other states have soared—in some places to 500

percent—New Mexico’s average rate increases from 1994 to 2004 totaled 18.6 percent.

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3

Typical New Mexico physician annual professional liability rates in 2005 were family

physician – $16,000; emergency medicine – $26,000; general surgeon – $76,000;

orthopedic surgeon – $76,000; and Ob/Gyn – $90,000.

New Mexico has shared in the nationwide trend for doctors, particularly those in high-

risk specialties, to leave private practice and seek facility-based employment, partly to

avoid having to purchase their own malpractice insurance because of the increasing cost

of insurance.

To understand how rising insurance costs are affecting health care providers, it is

important to examine both the size of premium increases and what is happening to

provider reimbursement. If physicians can charge more when their overhead costs

increase, there will be no crisis from their perspective. If this pass-through of costs is not

possible—for example because a single payer or small number of payers (Medicare,

Medicaid, or a large HMO or a combination of the three) has a dominant market share

and refuses to negotiate on this point (or operates under rate control as is the case with

Medicare and many commercial providers who peg their reimbursement off of Medicare)

then premium increases hurt providers more.

Compared to previous malpractice crises, the current era is characterized by greater use

of non-fee-for-service reimbursement arrangements and greater payer consolidation. As a

result, it is likely much harder for providers to negotiate upward adjustments in

reimbursement. Moreover, Medicaid and Medicare reimbursement has been flat or

declining for the last several years. The combination of lower income and higher

overhead creates an economic squeeze on physicians.

As a result of the above mentioned economic squeeze on many of New Mexico’s

physicians, some higher risk medical specialist groups have chosen to be employed by

integrated health systems that self insure or hospitals that employ them and can afford to

pay the premium for the group. However, to the extent that this type of physician

employment arrangements are not covering their own practice expenses (which all most

all are not) , then they must be subsidized by other parts of the health system resulting in

higher overall costs that are paid for by increasing health insurance premiums. More

importantly, with more physicians being insured outside the Act, there may be a concern

of a diminishing pool of revenue coming into the Patient Compensation Fund because of

health system employment which could in turn impact the availability and cost of

occurrence based policies. A self-reinforcing cycle may occur of fewer physicians left in

private practice and insured under the Act due in part to their ability to afford

professional liability insurance. This may be of particular concern to rural physicians not

employed and not desiring employment but having few alternatives other than

employment or departure from the state. Also, in rural areas, citizens may end up with

fewer provider choices as a result of their employers insurance not being available

through their local health system.

A national study (Health Affairs -May 31, 2005) found that the presence of caps on non-

economic damage awards has an impact on where doctors choose to practice, particularly

in rural areas. The study finds that the “27 states with caps on non-economic damages

had 2.2% more physicians per capita than states without such caps. Rural counties in

states with non-economic damage caps had 3.2% more physicians per capita than rural

House Bill 1063 – Page

4

counties in states without caps." Obstetricians and surgeons were noted to be the most

influenced by the presence or absence of caps.

States that capped non-economic damages in malpractice cases experienced a 2.4%

increase in overall physician supply compared with states that have no such caps, holding

other factors constant, according to another study (Journal of the American Medical

Association- June 1,2005). The study says physician services increased in every state

from 1985 to 2001, but states with damage caps saw a higher than average increase in the

number of doctors than states without tort reform.

An August 2003 GAO report with “limited available data indicated that growth in

malpractice premiums and claims payments has been slower in states that enacted tort

reform laws that include certain caps on non-economic damages. For example, between

2001 and 2002, average premiums for three physician specialties—general surgery,

internal medicine, and obstetrics/gynecology—grew by about 10 percent in states with

caps on non-economic damages of $250,000, compared to about 29 percent in states with

limited reforms."

The evidence would seem to indicate that the presence of caps is associated with better

physician supply.

“Defensive medicine" refers to the widespread practice of physicians to order excessive

tests, treatments and referrals in order to reduce their exposure to potential lawsuits rather

than to medically benefit their patients. The monetary costs of defensive medicine,

however, remain difficult to measure, with estimates ranging from 5% to 9% of total

health care costs (U.S. Department of Health and Human Services) to “small"

(Congressional Budget Office).

There is considerable debate nationally over how often physicians alter their clinical

behavior because of the threat of malpractice liability, or defensive medicine, and the

consequences of those behavioral changes. The most recent study is a Journal of the

American Medical Association study published in June 2005 of Pennsylvania physicians

which suggests that “ nearly all (93%) of the surveyed physicians reported practicing

defensive medicine." Forty-two percent reported that they had taken steps to restrict their

practice in the previous three years, including eliminating procedures prone to

complications, such as trauma surgery, and avoiding patients who had complex medical

problems or were perceived as litigious. Defensive practice correlated strongly with

respondents’ lack of confidence in their liability insurance and perceived burden of

insurance premiums." Pennsylvania is one of the states characterized as “in crisis" by the

American Medical Association. Malpractice insurance for a general surgeon in

Pennsylvania more than doubled to $72,518 in 2003 from $33,684 three years earlier.

Market Conditions Nationally

(Insurance Information Institute, February 2007)

Although the cost of medical malpractice insurance has stabilized or decreased for most

specialties in most geographical areas, it is still much higher than it was five or six years

ago and doctors who reduced their coverage at the height of the crisis are not yet rushing

to raise it again, according to Medical Economics. Doctors who left the traditional market

for a captive or risk retention group are for the most part still there.

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5

Fewer medical malpractice claims are being filed, but the dollar amount of each claim is

increasing. In its Hospital Professional Liability and Physician Liability 2006 Benchmark

Analysis, which examined more than 47,700 claims representing more than $4.4 billion

of incurred losses, the insurance broker Aon found that the overall frequency of medical

malpractice claims has not increased for the second consecutive year. But while claim

frequency is stabilizing, according to the study, the average size (severity) of malpractice

claims continues to increase at a rate of 6 percent.

New Mexico’s experience in this area for 2005 was an average claims payment of

$226,974 (Source: Kaiser Family Foundation data).

The financial results of medical malpractice insurers show the crisis in medical

malpractice insurance is lessening as premiums reach acceptable levels relative to costs.

According to the National Underwriter Data Services, the medical malpractice combined

ratio, a measure of profitability, was 100.1 in 2005. This means that in 2005 for every

medical malpractice premium dollar collected, insurers paid out a little over one dollar in

claims and expenses. This represents a significant drop from 2003, when the combined

ratio was 138.8, and from the five previous years. The combined ratio does not take

account of investment income.

BE/nt