An informal coalition of insurance companies, drug companies, hospitals, health care corporations, physicians and the administration is touting tort reform as the way to control rapidly rising health care costs and reduce increasing medical malpractice premiums. They argue that a major reason for increasing health costs is the increasing number of suits against hospitals, health corporations and physicians together with the unreasonable awards made to complainants. It is argued that insurance companies have been forced to raise premiums leading to cost increases and huge malpractice premiums.

They are wrong about the real causes of health care increases and they are wrong about the role played by malpractice insurance premiums in those increases. A very good argument can and has been made that the current version of tort reform is a poorly disguised way for corporate leaders to reduce their own accountability. It is true that malpractice premium rates have reached the crisis point in many parts of the country. But if we hope to solve that problem, we first must understand what is going on and begin to separate the facts from self-serving smoke and mirrors.

Before continuing, a bit of personal background may explain my perspective. For the past three years, I have served as a board member of the American Psychological Association Insurance Trust, an independent, for profit corporation responsible for managing the various insurance policies offered to APA members, including malpractice insurance. The Trust reviews and endorses insurance policies to members, interviews insurance officers regarding performance, intercedes for members when necessary, and so on. With respect to malpractice insurance, we operate our own management company to send bills, receive premiums, and the like, and have established a wholly owned off-shore subsidiary to underwrite any very large losses (in contrast to the usual practice of insurance companies using a portion of your premium to purchase catastrophic loss coverage from firms such as Lloyds of London). We restrict price increases by using the insurance company only to underwrite risk while managing for ourselves many of the operations normally performed by insurance companies at greatly inflated prices. This experience has provided me with a better than average knowledge of what is going on with respect to health care costs and the role played by malpractice premiums, though I should make it clear that in this article I am speaking only for myself, not on behalf of the Trust. In addition, I am co-chair of an APA Task Force which over the past two years has reviewed the literature on the drug industry and how it is manipulating our country’s laws and policies to maintain inflated drug costs and profits to unprecedented and unconscionable levels that can be neither justified nor tolerated.

Returning to the question of the real causes of increasing health care costs, the data clearly show that the largest driver of rising costs is inpatient hospital care. Since the days of capitation of day rates by Medicare and Medicaid and the advent of managed care contracting for day rates, hospitals have looked for different ways to improve their profits by raising revenues for virtually every other types of services.

The second largest contributor to rising costs is the price of drugs. Drug companies already have a natural protection on their patents that is longer than that of any other country. In addition, they can and do obtain other government protections to further enrich themselves by such policies as: Allowing drug costs at retail in Medicare audits which prevents hospitals from bidding for bulk discounts, and allowing hospital corporate shells which can enable the seamless movement of profit between the drug company and the for profit hospital management company without passing tax and efficiency savings on to the consumer.

Despite the claims about ridiculous malpractice suits and awards, total costs from this source represent only 5% of the increases in health care cost in the U.S. and have remained so for many years. Of that 5%, one half of the amount is devoted to risk management consultation and training to reduce liability. There should be a calculated and estimated savings accrued by this focus that is then subtracted from actual malpractice settlement contribution to total health care costs. A law allowing Texas practitioners to sue managed care firms for interfering with medical decisions was violently opposed by the industry on the grounds that it would surely lead to all kinds of suits that would drive up costs. There were only two suits. The predicted deluge never happened— nor did the sky fall.

It is asserted by tort reformers that states with few regulations have the highest premiums. However, passage of such reforms do not lead to the promised premium reductions. Nevada, which saw premiums increase by 30% in one year, passed an award cap. Within weeks of the law’s enactment, the two major carriers in the state announced that they would not reduce rates for at least another year or two, and doctors are still waiting. Mississippi doctors had similar experiences. When Ohio’s cap on compensation awards for patients injured by malpractice was passed in January of 2003, all five major medical insurance companies immediately announced that they would not reduce their rates and one company even predicted that it would seek a 20 percent rate increase!

Industry observers have consistently failed to find support for the assertion that malpractice drives up health care costs. Americans for Insurance Reform presents data showing that medical malpractice paid losses as a percentage of health care costs have remained constant at less than one half of one percent since 1985! Further, malpractice premiums have remained between a half of one percent and one percent of total health care costs during that same period. In 2002, payouts from malpractice comprised .38% of U.S. health care costs. HCFA data show that while health care costs have risen by 74.7% in constant dollars since 1988, malpractice costs have increased only 5.7% over the same period. The conclusion is straightforward and simple: Medical malpractice premiums are not the cause of skyrocketing medical costs, period.

The real driver of malpractice premium increases is declining profits from insurance company investments. Insurers make the bulk of their profits not from premiums but from investments. When interest rates, stock returns, etc. are high, insurance companies aggressively seek premium dollars to invest. During such periods, insurers severely under-price policies and insure poor risks. This is the so-called “soft” insurance market.

Conversely, when investment incomes and the stock market decrease, the industry responds by sharply increasing premiums thus creating the “hard” insurance market that is associated precisely with what they then call a “liability insurance crises.” This has been exactly the case over the past 30 years. “Hard” markets happened in the mid-1970s, the mid-1980s and again in 2002.

Over the past 30 years in the U.S., there has been no real increase (adjusted for inflation) in lawsuit awards or other tort costs while the premium increases during the socalled “crises periods” are in exact sync with the economic cycles driven by interest rates and investments. The fluctuations between “soft” and “hard” markets drive the insurance premiums, not the rising costs of awards. It is the economy, stupid!

Tort reform legislation will stop frivolous suits alright, but it also will make it much harder for the corporations’ interests who are paying the bill to be sued for any reason and that is the real motive for tort reform. Corporations cannot be blamed for looking out for their own interests, but the rest of us should not assume that their interests necessarily coincide with those of consumers, or doctors, or the general public good. Big pharmacy and managed care and the health care corporations are not working in our interest no matter how fervently they claim otherwise. It is unwise to trust a dog to watch your lunch and it is unwise to trust corporations with a vested interest simply because they insist that they are working to help us. If all the “silly” suits and outrageous awards were lumped together with the real and reasonable ones, the total would still only account for about 2 and a half percent of our annual health care bill in this country. Why should we be joining the charge to reform the “2 and a half per centers” rather than the real culprits who are running away with the bank?

All of the above notwithstanding, malpractice premiums are still a very real problem. But, what we need is insurance reform not a corporate protection act. Baring reform aimed at the real problem, it behooves us to not respond to scare tactics to support illadvised legislation that claims to help the poor patient and his or her doctor but really robs them in order to give more profits to corporations who are largely responsible for the problem to begin with!

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