Friday, June 21, 2002 | 4:51 a.m.
WEEKEND EDITION: June 23, 2002
What medical malpractice insurance companies want in Nevada is a marketplace where the costs of doing business are predictable and the profits are reasonable.
It's getting there that is the problem, they say.
Like physicians, insurers want Nevada to adopt a California tort reform law they say has stabilized insurance rates and kept doctors in that state from leaving.
But tort reform alone may not get medical liability insurers out of their malaise. Insurers and their lobbyists say there are other factors that may determine whether they can survive in Nevada, such as:
Insurers say tort reform that includes caps on noneconomic damages such as for pain and suffering, as well as limits on attorney contingency fees, is the place to start.
Ron Neupauer, vice president of the physician-owned insurer Medical Insurance Exchange of California, said that state's tort reform law has made it easy for insurers to know how much to charge doctors for coverage. One reason is they know they won't have to pay more than $250,000 for noneconomic damages, whereas Nevada has no such cap.
"The law hasn't stopped malpractice, but it put predictability in the system," Neupauer said. "The problem in Nevada is there is no predictability, and jury verdicts come out of the clear blue sky."
For a policy that covers up to $3 million in liability, his company charges Las Vegas obstetricians $48,328 for the first year of coverage and up to $141,760 in their fifth year. The charge for similar obstetricians in Los Angeles is $17,984 for their first year and $52,748 in their fifth year.
"The difference is the utter lack of tort reform in Nevada," Neupauer said. "What else could it be ascribed to? I don't think doctors in Nevada are any less competent than they are in California. And you can't say the lawyers in Nevada are more skilled than they are in California."
Lawyers, of course, vigorously oppose California's law. They say it does not fairly compensate injured plaintiffs and has not caused insurance rates to decrease. And they say that the law makes it difficult for attorneys to recover their own costs, which average $100,000 per case in California, according to the organization that represents that state's trial attorneys.
Insurers concede that even if Nevada adopts California's law, attorneys are likely to challenge the constitutionality of the reforms in court. That means it could take years before Las Vegas doctors see stable or declining insurance rates.
Although California passed its law in 1975, some trial courts ruled that the reforms were unconstitutional and therefore couldn't be enforced. It wasn't until the California Supreme Court rejected the last of the legal challenges in 1985 that the law was fully implemented.
Pete Gorman, vice president of the 325-member Alliance of American Insurers in San Francisco, a trade group, said medical liability insurers nationwide consider reasonable profits from premiums to be roughly 7 percent. But he said undisclosed Nevada companies that are members of the alliance claim to be losing money in this state, partly because they have had to increase their cash reserves to pay court verdicts and settlements.
"It sucks up all your spare cash and then you can't write new premiums because you have no more money to manage against claims," Gorman said.
Nevada trial lawyers say insurers could spend much less money in many cases by settling with plaintiffs rather than by going to trial, where they could lose millions of dollars more. But Gorman said he disagrees.
"In a normal, rational environment where there are rules of law that are predictable we can take plaintiffs to court and beat them," Gorman said. "But in Nevada we've been blind-sided where junk science is admitted at trial and the juries go out of their way to give high awards."
Reno attorney Bill Bradley, past president of the Nevada Trial Lawyers Association and one of its lobbyists, said in response that insurers have no respect for the state's Medical Dental Legal Screening Panel, which attempts to weed out frivolous lawsuits.
"They have no respect for the judges who make decisions in settlement conferences following findings of medical malpractice," Bradley said of insurers. "They have no respect for the hard work the Nevada Legislature does. And they are obviously callous and disrespectful of Nevada citizens who serve on our juries. That callousness and arrogance is exactly what created this crisis."
Las Vegas attorney Jim Wadhams, a lobbyist for Nevada's insurance industry, said insurers often agree to a trial because they have legitimate disagreements about the damages sought by the plaintiff and not just for pain and suffering.
"It could also be a dispute over the value of the economic loss," Wadhams said. "To suggest that an insurance company is going to consistently make stupid decisions to spend more money than they have to doesn't make sense."
The ongoing dilemma has been traced to St. Paul Cos. decision in December to leave the medical malpractice insurance business, although it continues to provide "tail" policies covering prior medical acts for doctors who have since bought premiums elsewhere.
St. Paul cornered a lion's share of Nevada's market by acquiring an insurer owned by local physicians and then slashing prices at a time when competitors were raising rates. Consequently, insurance rates in the late 1990s were lower in the state than they should have been, said Rich Bray, executive vice president of physician-owned Nevada Mutual Insurance Co., formed in April.
Although malpractice insurance rates are regulated by the Nevada Insurance Division, Bray said it would not have been practical for regulators to force rates higher.
"It's very difficult for a state regulatory agency to tell you that you need to increase rates," he said. "That doesn't fly well so there's a lot of political pressure on them not to raise rates."
Rates did begin to rise last year, but St. Paul's pullout created havoc in the market because it left a majority of physicians without insurance. The company, which had become the nation's second largest provider of medical liability coverage, said it pulled out because of losses incurred by the Sept. 11 attacks and the additional cash reserves it needed to pay for malpractice damages. Three other companies also pulled out of Nevada's market.
Local doctors, particularly those in high-risk medical disciplines such as obstetrics and neurosurgery, were left scrambling to get coverage from remaining companies. In some cases, physicians said they are being forced to pay insurance costs as much as 300 percent higher than before St. Paul dropped out.
Nevada lawyers have said the real reason for the existing medical malpractice dilemma is that insurers had to raise their rates to make up for steep losses in the stock market.
But insurers and their lobbyists say that assessment is incorrect because Nevada and other states require insurers to keep most of their investments in low-risk holdings such as government and corporate-backed bonds that carry at least an "A" rating.
The reason bond investments have been tepid in recent years is that their rates of return are tied heavily to the nation's prime lending rates, which have been driven to historic lows by the Federal Reserve.
"We take no greater risks than any other industry," Gorman said. "We're perhaps the most conservative investors you can imagine because we cannot afford not to pay claims."
Terrorist attacks
The Sept. 11 attacks had a direct effect on large insurers, such as St. Paul, that had to pay massive claims against other, nonmalpractice, insurance lines. That affected their bottom lines. But the attacks also had an indirect effect on smaller companies that write only medical malpractice premiums.
That's because smaller companies normally contract for "reinsurance" from other companies such as Lloyds of London, which is akin to umbrella coverage for large damages they cannot afford to pay on their own.
Because of Sept. 11, however, many reinsurance companies also suffered heavy losses and no longer sell their services to medical liability insurers. That has forced some such insurers to beef up their reserves to cover higher damage awards, which cuts into profits.
One problem Nevada has in keeping a lid on insurance prices is that it is a relatively small state.
"The problem with a small state like Nevada is that companies that are big enough can say, 'We don't want to play here,' " Bruce Heffner, chief insurance assistant for the state insurance division, said. "In Florida there are enough players in the industry that the state can be fairly dictatorial. If Nevada became dictatorial in what it required a company to do, the company would say, 'you're not worth dealing with.' So we have to make the state attractive to do business."
Insurers say another drawback of being a small state is that it means Nevada has a much smaller pool of doctors than a state such as California. When insurers are faced with rising costs, as from jury awards and settlements, they try whenever possible to spread those costs to all doctors. With a smaller pool of doctors, the price hikes are often more acute because there are fewer physicians to absorb the costs.
Another problem facing Nevada is that the state's six active medical malpractice insurance companies have been purposely ambiguous about the extent to which they can take on new business. So says Gorman, who explained that companies aren't willing to publicize their ability to take new clients because that could attract large numbers of physicians in high-risk specialties. That could cause those companies to take on more risk than they could afford, he said.
"Companies are lying low right now, and I can't blame them," Gorman said.
Gorman said most companies that continue to do business in Nevada are concentrating on low-risk physicians such as family doctors with clean records. That leaves the high-risk practitioners scrambling for alternatives.
One is the Medical Liability Association of Nevada, formed by the state this spring as an emergency measure. Another alternative, though less preferable, is to go with unregulated "surplus line" insurers who charge rates that are typically far higher than market averages.
Physician-owned insurer
Bray said one advantage of his company, which has signed up more than 100 doctors, is that it is owned by local physicians who understand Southern Nevada's medical industry. His company has been willing to sign up high-risk practitioners, though he said it has rejected some physicians who have been linked to large damage settlements.
His nonprofit company has also been willing to hire Nevada attorneys to defend its doctors. The advantage, he said, is that local attorneys understand Nevada courts better than do the out-of-state attorneys often hired by national insurers. Bray said his company also is willing to negotiate with the state to absorb the Medical Liability Association.
"We're also finding support from reinsurance companies because they like the idea of a company run by local doctors that is not recruiting for business out of state," Bray said. "Reinsurers are aligning themselves with specialty companies that are concentrated geographically."
Wadhams said one idea that could promote competition and lower malpractice insurance prices is for the state to deregulate medical liability rates, currently set by the state insurance division.
"The problem seems to have been that insurance companies have not been making a profit and have met resistance when they tried to do so," Wadhams said. "As long as they can charge an adequate rate to make a little profit they'll be here. But at the present time they don't feel they can make a profit here.
"If you deregulate rates, the insurance companies can make adjustments when they feel they need to and competition would discourage them from raising rates too much. Doctors want affordable insurance. If one company raises rates too much, the doctors will go to other companies."
Brad Wimmer, assistant economics professor at the University of Nevada, Las Vegas, agreed that the state might be wise to consider rate deregulation.
"I would take a good look at it," Wimmer said. "If you have free entry and exit from the market for companies, market forces will move rates toward costs. The market would respond much more quickly than regulators would."
Wimmer, a former Federal Communications Commission economist, also said it isn't necessarily bad to have one insurer dominate the market as long as other companies are free to compete.
"If a company has a cost advantage, that's fine but they shouldn't do anything to impede entry into the market if someone else can provide a product cheaper," he said.
But Keith Schwer, director of UNLV's Center for Business and Economics Research and a fellow economics professor, cautioned that a company that dominates the market could also signify that competition isn't working. He speculated that St. Paul would have eventually run into problems had the company not bowed out of the medical malpractice market.
"Monopolies in the long run become inefficient," Schwer said. "They get to be fat, dumb and happy."
In hindsight, Heffner said he doesn't think there is anything the insurance division could have done to prevent St. Paul from pulling out of the market and sparking the malpractice insurance dilemma that is gripping the state.
"It wouldn't have made a difference what the division did because this is a national problem," Heffner said. "Everyone can play Monday morning quarterback, but at what point do you say to someone that they are not charging enough and that they have to raise their rates in order to have a lower percentage of the market."
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