Malpractice Insurance Premium Rate Survey

The fundamental resource driving the malpractice RVU is the actual malpractice premium charged to the physician. Allocating these amounts to physician procedures would finally align malpractice RVU revenue with the costs that are intended to be offset. To put in place any such allocation system, it is necessary to collect information regarding malpractice premiums. HCFA has previously contracted with Allied Technology Group Inc. ("Allied") to collect malpractice premium data for the updating of the GPCI and has requested that KPMG apply this available information.

KPMG relied on the 1995 premium data collected through Allied’s survey. Allied used an OMB-approved survey to collect physician specialty sub-state region specific malpractice data. The questionnaire solicits information on the following:

availability of physician liability policy premiums;
specific premiums;
limits of liability;
mature liability premium rates;
geographic adjustment to premiums;
risk classifications by specialty;
alternative insurance company contacts;
the existence of a patient compensation fund or joint underwriting association; and
insurance company market share.
Overall Allied collected physician malpractice insurance premium data on a total of 55 companies across all 50 states, Puerto Rico, and Washington, D.C. Insurance companies that operated in more than one state are counted once in this total. Market share information on the top state insurance companies (i.e. >50% of the state’s physicians) was solicited as part of the survey process. In 36 states Allied collected data from at least two companies. In the remainder of the states, Allied received information from one company, but in each of these cases the insurers represented 60% or greater of the market share in that state. On average the data collected from insurance companies represented approximately 77% of the state’s insured physicians.

Although insurance companies normally set premiums according to risk class, the physician specialties included within a particular risk class are not consistent across insurance companies, nor are the numbers of risk classes consistent. Thus risk classes are defined differently across states and do not always contain the same group of physician specialties. Given this inconsistency in the data it is not possible to compare insurance premium data across companies by risk class. To eliminate this problem and to ensure data comparability and compatibility across time (i.e., with past physician malpractice insurance premium data collection efforts), Allied collected premium data based on the 20 physician specialty groups used in previous data collection efforts. Malpractice premium data collected consists of the top 20 physician specialties whose ranking reflect Medicare Part B spending in 1990. In practice there are more than 90recognized specialties. This is an acknowledged limitation of the Allied data.

In many instances, due to insurance company variation in the specialties included in their risk classes, Allied chose a specialty premium among several choices within that particular specialty. The premiums for the specialty primarily varied according to whether or not the physician performed surgery and to what degree. For these cases, Allied chose the specialty (and corresponding premium) by following decision rules for categorizing a physician specialty. Allied developed a set of general rules for categorizing an insurance company’s physician specialty nomenclature into one of the 20 physician specialty groups, as well as rules for calculating premiums. This resulted in a general physician specialty grouping consistent across malpractice insurance companies and with comparable data categories.

The decision rules Allied used for categorizing a physician specialty are as follows:

1. Choosing the correct specialty if there is a discrepancy:

First, choose the specialty with the Insurance Services Office ("ISO") code corresponding to the ISO code of that specialty as listed in the top 20 Medicare specialties.
Second, if there is no ISO code, use St. Paul’s specialty classification as the standard. (St. Paul’s is the largest malpractice insurer in the United States.)
Third, if St. Paul’s data doesn’t clarify, then choose the specialty in the highest risk class.
2. If only one specialty is listed, but is not exactly the specialty (by definition) listed in the top 20 Medicare specialties, choose it anyway.

For the majority of the data Allied collected, company specific premium rates for a specialty applied statewide. However, for fifteen states, premiums varied by sub-state regions. Each insurance company has uniquely defined sub-state regions that are used in its rating calculation. These regions were not necessarily uniform across companies within the same state.

The Allied methodology was modified to expand the list of specialty categories to include an additional 20 specialties. Including a larger number of specialties was particularly desirable as a refinement to the RBMRVU estimates due to the high degree of variation among insurance company classifications.

Eight states have legally required Patient Compensation Funds ("PCFs") funded through a surcharge on physician’s malpractice premium. The PCF pays for any claim amount beyond the statutory amount, thereby limiting an individual physician’s liability in cases of a large suit. The PCF data reflects a physician malpractice premium that is equal to the premium plus the patient compensation fund surcharge.

In three of the eight states participation in the PCF is mandatory and in the remainder participation is voluntary. The premium rates provided by each of the insurance companies in the PCF states were adjusted by the corresponding PCF surcharge to obtain the true costs of malpractice insurance coverage in these states. PCF factors were only applied to premium rates in those states that mandate a PCF contribution.

Joint Underwriting Associations ("JUAs") were created by some legislatures during the withdrawal from the market (thereby decreasing availability) of many commercial carriers during the 1970s. JUAs are typically state government administered risk pooling insurance arrangements that provide professional liability insurance to health care providers. In some states, JUAs also maintain additional premium contingency assessments, retroactively assessing policyholders in the face of deficits. Historically, JUAs carry the bulk of the physician malpractice insurance market share in a state or the JUA potentially is the insurer of last resort. JUA premiums can be lower than other state insurance company premiums since a JUA can pass the surcharge to purchasers of other lines of insurance. However, there are two circumstances when JUA premiums can be higher than commercial insurers. First, JUAs are heavily regulated and may not have the flexibility to move with the market forces. Second, because the JUA must accept all applicants regardless of litigation history, the JUA may have to charge higher premiums.

Allied was able to obtain information from the twelve states known to have operating JUAs. None of the four states in which physicians are insured primarily through JUAs (Massachusetts, New Hampshire, Rhode Island, and South Carolina) had assessed retroactive premium adjustments. Only one JUA had assessed their policyholders a retroactive premium adjustment. This JUA, Minnesota Medical Malpractice, assessed $1.2 million in 1993. No assessment was levied in 1994 or 1995. However, the market share of this JUA in Minnesota is <1% and, therefore, is not considered a top insurer for this state. Allied did not include this assessment in their data.

The rules Allied applied for adjusting benefit levels, PCFs, JUAs, and other coding/data entry are as follows:

1. If a company/state provides premium rates as occurrence rates and provides claims-made rates conversion factors, use these factors to convert. If no factors are provided, use St. Paul’s conversion factors.

2. If a company/state provides limits of liability other than $1M/$3M, and they provide adjustment factors, use these factors to convert. If no factors are provided use St. Paul’s adjustment factors.

3. In the case of PCF surcharges, if the sum of the surcharge and the required basic limitations do not equal $1M/$3M limits of liability, then use St. Paul’s conversion factor to reach $1M/$3M limits of liability.