Medical Malpractice Insurance Companies Inflated Losses By $Billions to Overcharge Doctors, Study Finds
Consumer Advocates Call for Investigation of Insurance Accounting Practices
The Foundation for Taxpayer & Consumer Rights (FTCR)
December 29, 2005
Santa Monica, California -- In official documents filed with state regulators and in statements to public officials, medical malpractice insurance companies consistently inflated the amount they estimated they would pay out in claims, according to a study released today by the nonprofit, nonpartisan Foundation for Taxpayer and Consumer Rights (FTCR). Insurers then used the overstated figures to justify enormous increases in doctors' premiums and pressure legislators to enact lawsuit restrictions, the study concludes.
Malpractice insurers inflated their losses by an average 46% each year between 1986 and 1994, the study found. During that period, insurers reported $39 billion in losses to regulators, but actually paid out only $27 billion in claims. FTCR called for an investigation of industry accounting practices that it said enable insurance companies to misrepresent their financial condition and charge potentially billions of dollars in excessive premiums.
The study reveals that inflation of insurers' losses, as reported in the Annual Statements they submit to regulators, is even greater during periodic economic downturns when insurance companies need to raise premiums in order to offset falling investment income. In 1989, for example, near the end of the previous "insurance crisis," malpractice insurers' loss estimates were overstated by 66%. A similar downturn in recent years has led to unprecedented rate increases in the price of malpractice insurance, as well as auto, home and business policies.
"By inflating their estimated 'losses' as much as 66%, medical malpractice insurance companies have misled regulators, lawmakers and the public and overcharged physicians and other health care providers," said FTCR's Harvey Rosenfield. "Because all insurance companies use the same flawed accounting practices, it is likely that the insurance industry is responsible for several billion dollars in premium overcharges over the last few years, a period during which premiums have soared. The nation's economic stability and security demands that the insurance industry's accounting practices be investigated, and reforms put in place such as those that were made after widespread financial fraud was uncovered at Enron, WorldCom, Arthur Andersen and other corporations."
Review of Claims Payments Shows Estimates Far Exceed Actual Losses
The FTCR study compares the dollar amount medical malpractice insurers initially reported they would pay out on policies in effect between 1986 and 1994 with insurers' reports made ten years later of what they actually paid out in claims under policies in effect in each of those years.
Insurance industry accounting practices presently permit insurers to treat these estimated losses (called "incurred losses" in industry jargon) as actual losses for income tax purposes and in order to justify rate increases to regulatory authorities. However, insurers do not actually pay out the "incurred losses" in the year they are reported. Each year, the insurer receives and reports more details about existing claims and adjusts its initial estimate. In medical malpractice, more than half of the claims are paid in five and one-half years, and virtually all are paid within ten years. Any "losses" not actually paid out are eventually transferred to the profit column on the insurer's books. FTCR's study examined incurred loss data reported under penalty of perjury by insurance companies to state insurance regulators and published in A.M. Best's Aggregates and Averages. Jay Angoff, a former insurance commissioner and nationally recognized insurance expert, advised FTCR on the study. "The study shows that malpractice insurance companies consistently overstate how much they expect to pay in claims and in amounts far beyond the margin of reasonable error," said FTCR's Rosenfield. "By manipulating their books to misrepresent their 'losses', the insurers have profited in two ways. First, they have used the inflated numbers to justify rate increases that were unnecessary and excessive. Second, they have invoked their exaggerated loss estimates to promote legislation allowing these insurers to limit how much compensation they have to pay out to victims of medical negligence."
Stronger Regulatory Controls Over Insurers Cited
FTCR also called for stronger disclosure and regulatory oversight of insurers. It noted that California's voter-approved insurance reform measure, Proposition 103, delivered over $70 million in malpractice insurance refunds to physicians after its passage in 1988. The California law bars insurance companies from charging excessive rates and requires insurers to open their books to public scrutiny and justify proposed rate increases before they take effect. FTCR has utilized the law to block over $66 million in proposed malpractice rate hikes in the past two years.