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Malpractice Insurance Caps

January 13, 2012 in Malpractice | 3 comments

Many people support malpractice insurance caps.  They believe that malpractice insurance award caps will reduce medical costs in two ways: i) by decreasing malpractice premiums and ii) by decreasing the amount of defensive medicine physicians practice to avoid lawsuits.  An article by Shirley Svorny, however, argues that malpractice awards are bad medicine.  Physicians who are more careless will have higher malpractice premiums; instituting malpractice caps dulls the incentive to practice safe medicine.

Physicians make a number of arguments of why this logic doesn’t fly. The first is that malpractice awards are haphazard and that few victims of actual negligence sue.  Svorny cites some research (see below) which finds a correlations between the presence of negligence and the amount of the award; demonstrating that there is some relationship between physician performance and court awards.  Other critics claim that the malpractice system has high administrative costs.  This is true.  Svorny accurately points out, however, that most of the administrative costs occur in the limited number of cases that go to court.  Further, there is open debate of whether malpractice lawsuits keep doctors from reporting errors.  Although the article cites some research that states that lawsuits start discussions about improving care quality, I believe that self-reporting of errors will decrease in a non-linear fashion as malpractice awards increase.

Svorny’s research also identifies that conventional wisdom that physician malpractice premiums are not experience rated is not entirely correct.  Additional information is below.

Malpractice Insurance Market, Premiums and Risk

Physicians who are higher risk do end up paying higher malpractice premiums. This occurs through a number of mechanisms.

  • Underwriting: When applying for malpractice insurance, physicians describe their practice profile, whether they perform surgery, number of patients treated, educational background, whether their license has been suspended, whether they are board-certified and other information.
  • Experience Rating.  Although base premiums often do not very within a specialty by state, carriers often “impose premium surcharges on physicianswhose claims histories do not meet the company’s standards, or offer discounts to physicians with clean histories.”  Some carriers also give physician longevity credits to physicians with good claims experience.
  • Experience Rating across carriers.  “…most experience rating takes place across carriers. Insurance carriers specialize in serving physicians with similar risk profiles. Physicians who do not meet one carrier’s risk profile must seek insurance elsewhere. This allows insurance carriers to specialize in underwriting certain risks.”  Specifically, surplus-line carriers offer malpractice coverage to physicians who cannot secure coverage through more standard market.  As expected, premiums are much higher in this market.

Other Malpractice Insurer’s Risk Management Tools

  • Practice Constraints.  Some insurers limit the scope of the physicians practice which they will cover.  “For example, California rate filings include forms to exclude performing surgery, administering anesthesia, treating pregnancy, and practicing over the Internet…Underwriters verify that physicians adhere to the restrictions in their policies when the policies are renewed each year and by looking at the doctor’s website or advertisements aimed at consumers.”
  • State Medical Board Sanctions.  Although State Medical Board sanctions of physicians is somewhat rare, those who are sanctioned generally must gain malpractice coverage in the more expensive surplus lines.
  • New Treatments. Malpractice insurers often do not cover more novel and riskier procedures.
  • Direct Risk Management Practices. “A 1989 Institute of Medicine survey of 20 commercial and physician-owned carriers found four types of risk-management strategies to be prevalent: (1) data gathering and analysis,(2) development of clinical standards and protocols, (3) educational programs, and (4)premium discounts for risk-management activities.

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Finding evidence of Adverse Selection

February 10, 2010 in Economics - General, Health Insurance | No comments

Cohen and Siegelman (2009) document empirical research on adverse selection in 5 markets: i) automobile insurance, ii) annuities and life insurance, iii) long term care, iv) crop insurance, and v) health insurance.  The presence of adverse selection varies not only across markets, but also within markets depending on the product sold and the type of individuals who buy the product.

Detailed Summary

Adverse selection occurs when high risk individuals are the ones more likely to purchase insurance.  However, measuring adverse selection may not be asstraightforward empirically as it seems.  Typically, economists conclude that there is adverse selection in a market if a correlation exists between risk levels and whether or not the individual buys insurance.

If adverse selection is at work, however, this correlation may not necessarily show up in the data.  For instance, high risk individuals may be risk loving while low risk individuals are risk averse.  Thus, adverse selection may be occurring, but due to the correlation of risk preferences, this may not be born out in the data.  Further, a correlation between risk and insurance status does not necessarily imply the existence of adverse selection.  In health insurance markets, insured individuals may incur more cost due to moral hazard.  If the insured and uninsured have equal risk levels, the person with health insurance may still incur more medical costs, because these services are generally free to them.

Further, detecting adverse selection econometrically, is not simple as well.  The researcher must have full access to the insurer’s information to reliably estimate the level of private information in a market.  Further, all accidents do not result in claims.  Individuals with high deductible health insurance may fall ill, but not go to the doctor.  Drivers who get in fender benders may not report the incident.  There may also be unobservable differences among policyholders.  Finally, one may use a variety of econometric techniques to estimate the presence of adverse selection.  Many researchers use a simple OLS structures as follows:
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Medicare more likely to deny claims than commerical health insurers

June 30, 2008 in Health Insurance, Medicaid/Medicare | 11 comments

According to an article on TheHill.com, Medicare denies more claims than commercial insurers.

“Medicare was the most likely to deny any part of a claim, with a 6.9 percent rate. Aetna was a close second at 6.8 percent while the others ranged from 2.7 percent to 4.6 percent.

Coventry Health had the fastest median turnaround between receiving a claim and responding, at four days, according to the AMA. Medicare and CIGNA took a median 14 days; Humana and Aetna, 13 days; Health Net, 11; United Healthcare, 10 and Anthem, seven.”

Why is this? It could be the case that commercial health insurers have more efficient claims processing centers. While economists generally believe that the private sector is more efficient, in the case of health insurance claims firms make more money when they deny more claims. Thus, I am not sure that the profit motive is leading to more private-sector claims approvals.

Competition between insurers may increase claims approvals. Most physicians and hospitals must take Medicare because it represents so large a share of the helathcare spending. On the other hand, physicians may only accept patients whose insurance companies have prompt payment with fewer denials. This leads to some incentive for insurance companies to decrease claims denials.

Another reason for the differential claims denial rates is the demographics of Medicare and commercial insurance enrollees. Almost all Medicare enrollees are over 65, while commercial insurers have enrollees who are of varying ages. Since older individuals are more likely to demand high cost medical procedures, if high cost medical procedures are the ones that are more likely to be denied then Medicare’s higher denial rate may simply be due to the composition of its enrollees.

Whatever the reason, the fact that Medicare denies more claims than commercial insurers should dispel the myth that the government is simply a benevolent entity, while commercial insurers are ruthless, profit-hungry wolves. The truth–as always–lies not in the black nor the white but in the gray.

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