This Date in UCSF History: Malpractice Insurance Slows Healthcare

Originally published in Synapse on Jan. 8, 1976. The full effect of the most recent increases in the cost of malpractice insurance (ranging from about 350 to 400 per cent) on California health care is as yet unclear, but most observers predict that the Southern California doctor slowdown could easily spread through the state.

By Tuesday, more than 70 hospitals in the south had been affected by the walkout. Some hospitals were as much as 75 per cent below the normal occupancy rate.

Dr. Joseph F. Boyle, speaker of the house of delegates for the California Medical Association, predicted that up to 45 per cent of the state’s physicians will retire or modify their practices unless the cost of malpractice insurance is reigned in.

He said his estimate was based on surveys in various parts of the state by local medical societies, hospital staffs, and similar groups.

Large numbers of doctors throughout northern California are curtailing their practices, according to local medical society polls.

General practitioners who in the past provided some obstetrics services and did some surgery have curtailed these “specialty” services in order to avoid the high malpractice insurance costs which accompany them.

Retirement attrition rates for older doctors in northern California were higher last year than ever before. Many doctors have given up their private practices for jobs in large institutions or the military, which bear the brunt of the insurance burden for staff physicians.

In the Sacramento area, for example, almost all of Kaiser’s staff positions are filled.

Here in San Francisco, at Mt. Zion Hospital, doctors led by Dr. Sanford Marcus are picketing to protest layoffs of doctors not carrying their own insurance.

And doctors in both the northern and southern portions of the state reacted coolly to the Brown administration proposal to affect a state takeover of malpractice insurance at much lower rates on the condition that all doctors would have to serve in a Medical Peace Corps for the poor.

Under the proposed plan, every California doctor would be required to devote ten per cent of his practice to Medi-Cal patients or to provide 20 days of free medical care a year.

Observers of the situation generally agree that the recently-enacted legislative reforms designed to curb the cost of spiraling malpractice insurance costs will have little or no noticeable effect on the cost of insurance for several years.

Even then, some critics have said, the reforms may be inadequate.

Legislators, medical groups and others are considering other possible solutions to the problem. Some groups favor the use of binding arbitration to cut court costs and delays.

(The use of arbitration would not necessarily limit the amounts of awards to claimants.)

Others would like to see legislation like that introduced in the state of Indiana. In that system, a worker’s compensation-style limitation is set on payments, doctors must be insured for $100,000. which is near to minimum coverage.

A $500,000 limit is set on all awards, and the difference between the $100,000 coverage and the $500,000 limit is paid by a statewide pool financed by a 10 per cent surcharge on doctors’ premiums.

The American Insurance Association and the American Medical Association (AMA) favor the establishment of some worker’s compensation-style program which would limit payments.

Critics of such programs contend that aggrieved workers in such programs must argue their cases before insurance company lawyers and state “referees” who challenge every claim, dictate how long treatment may continue, and fix compensation levels at woefully inadequate levels.

Other groups favor changing the nature of malpractice insurance policies. At present, the main type of policies in use are called “occurrence policies.”

Such policies commit the doctor’s insurance company to pay claims arising out of all incidents that occurred while the policy was in force, no matter how long afterwards the claim is filed.

Unlike auto insurance, where claims are usually presented soon after an accident, malpractice cases often arise as much as ten years after the incident occurs, in a much higher cost environment.

Insurance companies call this aspect of malpractice insurance the “long tail” and claim it has forced them to increase the cost of policies so drastically.

The insurance companies favor the establishment of “claims-made policies,” a sort of “pay-as-you-go” coverage in which whatever company is providing coverage in the year the injury is discovered is liable for the settlement.

Doctors oppose the establishment of such policies as it would mean that they would have to continue to pay for coverage for at least ten years after retirement, and that their estates might have to continue the coverage after their deaths.

Another approach to the problem favored by some doctors is hospital cost sharing. Since 74 per cent of all malpractice suits result from hospital rather than office procedures, many physicians like those now picketing at Mt. Zion here in San Francisco hope they can force hospitals to let them practice.

The hospital-bought insurance would cover staff members, and plaintiffs would sue the hospital rather than the individual physician.

Hospital administrators have said that such a situation would result in the escalation of hospital rates and withdrawal of policies by insurance carriers.

The insurance company for the California Hospital Association generally requires doctors in member hospitals to be covered, but it recently offered special coverage for some hospitals with uninsured doctors at a 20 per cent surcharge.

Although these ideas and others have been discussed at length by all the groups concerned with the problem, the roots of the matter have remained obscure.

The complexity of the problem has defied its analysis by many observers, and groups whose own economic interests lie in one or more “solution” to the problem have, of course, been content to lobby for that “solution” while letting the problem remain mysterious.

After a study of the situation, however, some causes and trends begin to appear. One undeniable factor in the upswing of malpractice suits is the passing of the family doctor. A patient injured in the course of the operation is much more likely to sue a neurosurgeon met once before the surgery in a brief interview than the G.P. down the street he knows and respects.

But economic incentives as well as the increasing scientific sophistication of medicine, have given rise to trends toward specialization and in hospital care.

Specialization itself often requires the increased technology of the hospital environment (and its built-in risks).

Government programs such as Medicaid and Medicare have contributed to the in-hospital care phenomenon, too: doctors who find the fixed fees of Medicare office visits inadequate often send the patients to hospitals for work that could be more easily and more personally done in the office.

In spite of the fact noted earlier that about 74 per cent of the incidents that become malpractice claims occur in hospitals (57 per cent of such incidents involve surgery), the upswing of malpractice insurance rates has stepped up the trend toward in-hospital care.

Of course, for many patients, advanced methods with their sometimes unforeseeable consequences, are the only hope. This fact should not have to spell the demise of the general practitioner.

Yet doctors across the country, as well as those in northern California, are curtailing their private practices and swarming to institutions to avoid the high cost of insurance for self-employed physicians.

An advertisement in the August 24, 1975 New York Times tells the story: “Free Malpractice” says the ad for Saffer Medical Consultants, in type twice as large as the note below.

A March 22, 1975 New York Times article echoes the story with the headline, “Doctors Are Joining Services to Avoid Malpractice Insurance Costs.”

And a South Dakota insurance carrier contributes to the institutionalization trend by requiring all doctors to join an established group practice in order to be eligible for insurance.

But if past statistics indicate anything, they warn that such a depersonalized, higher technology setting will surely increase the number of future malpractice suits. Even if the individual doctors don’t have to pay, somebody will.

And in the end, as in the past, it will be the health care consumer. Even the few patients who do win malpractice suits or receive settlements receive only about 16 per cent of the money paid into the malpractice sector. (Nationwide. 80 per cent of all malpractice cases are won by doctors.)

Last year $500 million entered that sector. Malpractice lawyers and the ten malpractice insurance companies claimed a good deal of it.

Although most insurance companies attribute the increases in malpractice insurance rates to their underestimation of future claims in “occurrence policies,” a large portion of their losses in recent years ($6 billion worth) have resulted from the plummeting stock market.

Teledyne, the parent company of Argonaut Insurance, one of the major malpractice insurers, claims it made the “long-tail” underestimate mistake, and should never have let Argonaut write malpractice insurance.

But in the last six months of its New York coverage prior to a 200 per cent rate increase, its actual payments included only a few out-of-court settlements amounting to a few thousand dollars.

Spokespersons for the company defended the increase by calling it a means of protecting the company against future losses.

Another interesting aspect of the situation is that a small number of incompetents are responsible for a large part of the problem.

A study in the Detroit area from 1970-74 showed that 2.1 per cent of the area’s doctors (those sued more than once) were responsible for 46.2 per cent of the suits.

In California, the single notorious case of Dr. John Nork of Sacramento (who later confessed to performing hundreds of unnecessary high-risk operations) accounted for 12 per cent of California losses of the American Mutual Liability Company.

One observer of the situation noted that the medical profession, by refusing to agree to government or outside control in the past, had been “hoist by its own petard.”

Beyond any purely legislative remedy then, it seems that the passing of the malpractice crisis will come only when and if the American health care system can work on the basis of personalized and ethical care, rather than gross economic incentives.