California Dreamin'
Texas Looks to Golden State's Liability Insurance Reforms  

BY WALT BORGES

With many Texas physicians and medical practices foundering in the swell of medical liability insurance premiums, doctors and their liability insurers are looking for a legislative lifeline through tort reform.

To preserve their practices in the face of shrinking compensation and rising costs, and to ensure that patients have access to doctors in the specialties and locations where the increases in premiums are greatest, physicians across the nation are turning to a package of reforms enacted more than a quarter century ago in California. Passed in 1975 as the Medical Injury Compensation Reform Act (MICRA), the reforms have staved off legal and legislative challenges to emerge as the model for medical liability reform favored by physicians and liability insurers.

The Quality-of-Care Issue Another often-overlooked component of medical liability reform is the effectiveness of the disciplinary system for doctors. The Texas State Board of Medical Examiners (TSBME) has been subjected to public and legislative scrutiny in past months, highlighting its shortage of resources to pursue complex cases against medical professionals. Some doctors believe the flip side of liability reform is the need to weed out "bad-apple" physicians with frequent medical liability claims. Whether the legislature will provide adequate funds to do the job is a concern for the medical community, says Robert Sloane, MD, chair of TMA's Professional Liability Committee. The Medical Injury Compensation Reform Act (MICRA) was passed on similar assurances that California's medical board would be revamped and provided adequate resources, says Julianne Tangelo Fellmeth, JD, administrative director of the Center of Public Interest Law at the University of San Diego. Professor Fellmeth says the Medical Board of California has not done enough to discipline incompetent doctors, partly due to inadequate resources. Still, some students of MICRA believe that the California experience resulted not just from the reform legislation, but also from insurer requirements imposed to make physicians eliminate medical errors and address other quality issues. In a recent article, David S. Rubsamen, MD, LLB, editor of Professional Liability Newsletter, argued that MICRA's advantages were combined with external pressure from medical liability insurers to reverse the California crisis. Dr. Rubsamen wrote in Physician's Financial News that California's most severe malpractice cases in the early 1970s resulted from anesthesia "disasters." The situation was so severe that there was some speculation that anesthesiologists might become uninsurable. But in a 1973 malpractice case, the jury established that the standard of care for pulse monitoring was continuous, rather than intermittent, monitoring. Prompted by a series of similar verdicts and awards, two physician-owned insurers mandated that their insured physicians use constant monitoring and keep an anesthesiologist or a competent substitute in the operating room. Despite protests from the specialists, the carriers did not budge, Dr. Rubsamen wrote, and within a few years, the anesthesiology losses and their medical liability rates had come down. Dr. Sloane says patient protection initiatives are a part of solving the liability problem, even if public perception is being a bit harsh on the TSBME. "The Board of Medical Examiners has been exposed for being more focused on behavioral issues than on its oversight of quality issues," Dr. Sloane said. "They should have the will to take action and the resources to do so. Maybe we can sell the governor and the legislature on seeing that medical license fees go to the BME instead of the state's general fund."

MICRA is the basis for medical liability reform initiatives submitted to Congress by President George W. Bush. It also will be the model for reforms sought from the Texas Legislature in 2003 by the Texas Medical Association and the Texas Alliance for Patient Access (TAPA), a group of health and medical organizations and insurance companies that counts TMA among its members.

"When you look at what's going on with medical liability insurance [premium] increases, it's the severity of judgments and settlements that is driving the increases," said Robert Sloane, MD, chair of TMA's Professional Liability Committee. "MICRA addresses the severity through caps on non-economic damages and its other features. It's held down medical liability premiums in California by holding down the cost of judgments and settlements."

"MICRA has a 26-year track record of premium reduction in California, a state where you would intuitively expect premium increases," said Howard Marcus, MD, TAPA chair. "There is no question of its success in California."

In comments to a U.S. House of Representatives committee in June, AMA President-Elect Donald Palmisano, MD, JD, pointed out that higher medical liability premiums "are being driven primarily by increases in lawsuit awards and secondarily by increases in litigation expenses. The most troubling aspect of the current medical liability litigation system is the effect on patients. As insurance becomes unaffordable or unavailable, physicians are being forced to leave their practices, stop performing high-risk procedures, or drop vital services -- all of which seriously impede patient access to care."

MICRAmanaging Liability Insurance
The California medical community was facing a medical liability crisis in 1975 with rapid rises in malpractice claims, but the state legislature was doing nothing to reform the litigation system. When The Travelers Insurance Company, which insured more than 70 percent of the state's physicians, announced premium increases of between 300 and 500 percent, northern California physicians went on strike, a move that swung public opinion behind reform efforts.

In response, the California Legislature enacted MICRA, which includes four major provisions:

1. Non-economic damages -- damages for pain and suffering, mental anguish, disfigurement, and loss of aid and companionship of a spouse or child -- against each defendant in a medical liability suit are capped at $250,000.

2. Physicians and their lawyers are allowed to mention to juries that the patient had recovered part of the total damages from an insurer, family member, or other source, thereby encouraging jurors to eliminate what some doctors believe is "double-dipping" by plaintiffs who recover twice for the same injury.

3. Defendants found liable for future damages, such as income losses of more than $50,000, are allowed to pay periodically, rather than in a lump sum. This lets insurers purchase discounted annuities to cover the costs of the judgment and clear their books of liabilities that needed to be covered by reserves.

4. Contingency fees paid to patients' lawyers are limited. Under MICRA, plaintiffs' lawyers are entitled to a maximum of 40 percent of the first $50,000 awarded, 33.33 percent of the next $50,000, 25 percent of the next $500,000, and 15 percent of any amount over $600,000. Californians Allied for Patient Protection, a group of physicians, medical organizations, and insurers formed to protect MICRA from modification, estimates that injured patients retain 17 percent more of their awards under MICRA than under pre-MICRA contingency fee contracts.

MICRA has other reforms. These include requirements for filing medical liability suits by patients within one year of discovering an injury and no more than three years after the occurrence of the injury, filing a delayed request for punitive damages after showing that a patient will probably prevail, better reporting and record keeping of legal action relating to medical liability judgments and settlements, and regulation of medical liability insurance rates by the California insurance commissioner.

MICRA's success has been supported over the past 27 years by more than a dozen rulings of the California Supreme Court that upheld the constitutionality of the caps and defined when MICRA could be implemented. The law has been stoutly defended in the legislature as well.

MICRA Accomplishments
There is no question that MICRA has helped control liability insurance premiums for California physicians.

"In 1976, when California's MICRA law went into effect, the average medical malpractice premium was $24,000, in 2001 dollars," said U.S. Rep. Bob Barr (R-Ga.), chair of the House Judiciary Subcommittee on Commercial and Administrative Laws, in a statement to the committee. "In 2001, the average premium was only $14,000. Premiums in California, adjusted for inflation, are lower than they were before that state implemented its health care litigation reforms, and insofar as those premiums have risen at all since then, they are rising at much smaller rates than elsewhere in the nation."

Representative Barr's figures suggest that physicians' premiums are 42 percent cheaper in 2001 than in 1976, a figure that comports with most insurer estimates when inflation is factored in. California premiums are roughly 40 percent cheaper now than when MICRA was passed, with inflation figured in.

One of California's leading medical liability insurers, NORCAL Mutual Insurance Co., says U.S. medical liability premiums have risen 400 percent, from $1.2 billion in 1976 to $6 billion in 2002. By comparison, California premiums have risen 167 percent, from $228 million to $609 million in the same period.

"Certainly the premiums have increased in California, but they have gone up at more modest rates than the increases in other states," said Carol Brierly Golin of Medical Liability Monitor, an insurance industry newsletter.

Lower premiums are not the only benefit. A Medical Economics magazine analysis of National Practitioner Data Bank (NPDB) data shows that California's median malpractice payment of $41,500 was the smallest in the nation during 1990!!-2000. Its physicians and insurers paid medical liability claims at a rate of 1.9 per 100 physicians, well below the national average of 2.3, the magazine found.

NPDB reported that California had an average payment of $142,637 per successful claim, 49th in the nation. Texas ranked 41st with an average claim of $194,039. NPDB data also showed that injured patients received payment in 3.03 years from occurrence of the injury, 50th in the nation. Texas ranked 37th with an average payment time of 3.66 years.

Richard Anderson, MD, a California oncologist who chairs The Doctors Company, a physician-owned medical liability insurer, told Congressman Barr's committee that settlements are speeded up under MICRA. For The Doctors Company, settlements are reached on the average in 1.8 years, one-third faster than the national average of 2.4 years. Dr. Anderson pointed out that such time savings reduces the cost of defending accused doctors and provides injured patients with their payments more quickly.

Can MICRA Work in Texas?
With outstanding results in California's medical liability market, Texas physicians are understandably enamored with the prospect of passing similar reforms.

Proposals for legislative action in 2003 being studied by TMA and TAPA include all major MICRA provisions.

Dr. Sloane says the TMA Professional Liability Committee and TAPA are leaning toward seeking a cap of $250,000 on non-economic damages. The proposed cap would not be adjusted for inflation.

In California, the failure to adjust the cap in the 27 years since enactment of MICRA is one of the major flash points for conflict between physicians and consumer organizations and trial lawyers. While physicians point to a 40-percent drop in medical liability premiums as adjusted for inflation, patients' advocates argue that injured patients who win maximum non-economic damages in 2002 actually receive 70 percent less than they would have in 1975. Using the Consumer Price Index, a measure of urban price changes that adjusts for inflation, an injured Californian who received $250,000 in non-economic damages in 1975 would have to receive $839,086 to purchase as much in 2002.

"The amount of non-economic damages associated with an injury is often speculative, and jurors are instructed that they should not speculate, so they often low-ball the amount of non-economic damages," said Robert Fellmeth, JD, a public interest law professor at the University of San Diego. "What's happened is that attorneys won't take a medical liability case in California unless it is a slam dunk."

Professor Fellmeth said the caps themselves are not a problem, "but the cap shouldn't be shrinking arbitrarily each year."

Dr. Sloane says non-economic damages for pain and suffering "are hard to value. Left on their own, without caps, they will accelerate out of sight."

Texas Department of Insurance (TDI) data support that conclusion. In the past 10 years, typical non-economic damages have increased from 30!!-40 percent of each award to 60!!-70 percent, the TDI figures show.

Dr. Anderson, the California oncologist, estimates that a $250,000 cap is worth a 40-percent reduction in premiums, while a $500,000 cap would lower premiums by 20 percent. A $1 million cap would not result in a premium savings, Dr. Anderson told a meeting of the TAPA board.

Maury Magids, president of the American Physicians Insurance Exchange, is more cautious.

"We are reaching a point where the rates appear to be adequate" and are offsetting payouts attributed to claims, he said, recounting comments he made to TMA's Professional Liability Committee in August. "We indicated to the committee that if Texas were to enact a $250,000 cap on non-economic damages, our rates would most likely be held flat for 2003," as long as claims-related payouts don't increase.

Mr. Magids also cautioned that different insurers would see varying results should MICRA-style reforms be enacted. He said caps make injured patients more willing to settle claims before lengthy and expensive trials. More settlements help insurers control losses and ultimately lead to stable rates and premiums, he added.

"Other [insurers] who have been more aggressive in going to trial will see more of an impact on their losses," Mr. Magids said.

While physicians have achieved lower medical liability insurance rates under MICRA, critics lay down a barrage of complaints that the reforms cut off access to the legal system by injured patients.

Dr. Anderson says criticism that the static $250,000 caps hinder access to the legal system is wrong. He notes that under MICRA, economic damages are not capped, and increases in economic awards mean average payments under MICRA outstripped inflation. Since 1984, inflation of consumer prices averaged 3 percent per year, while health care costs rose 5.4 percent a year, according to data from The Doctors Company. By comparison, payments to injured patients in California rose an average of 5.6 percent annually.

Access to the legal system was not reduced, the insurer found, since Californians are sued 50 percent more often than physicians in the rest of the country.

In the TMA and TAPA proposals, Dr. Sloane said, "the intent isn't to limit economic damages.

"We are likely to seek a hard cap of $250,000 without indexing," he added. "A non-economic cap of $1 million? Most people would say it wouldn't help one bit."

A Stumbling Block?
To bring down the size of Texas awards, TAPA may seek a cap to cover all defendants as a group, rather than capping each individual defendant at $250,000 as California did. In California, for example, four defendant physicians could pay up to $1 million toward a damage award for pain and suffering. By capping the amount due to each claimant for an incident, the patient would only receive $250,000, no matter how many physicians participated.

In trying to establish MICRA-style caps, Texas physicians must overcome a 1988 Texas Supreme Court ruling in Lucas v. United States in which the court struck down medical liability caps passed by the Texas Legislature in 1977. The legislation limited economic damages not attributable to medical and custodial care to $500,000 and capped non-economic damages at $150,000, with a cost-of-living adjustment.

In Lucas, the court held that the caps violated Texas constitutional provisions that guarantee that every person shall have a remedy for injury through the legal process.

Courts will sometimes allow laws to impinge on the right to redress in return for another benefit to society, but in 1988 the court found that catastrophically injured patients had no other avenue for adequate redress of their injuries, that the benefit of lower insurance premiums was not a rational trade-off for seriously injured patients, and that the caps were arbitrary because the only studies completed at the time showed no link between damage caps and insurance rate increases.

The proposals under study by TMA and TAPA seek to establish a legitimate trade-off by requiring physicians, hospitals, and other medical professionals to purchase adequate levels of insurance or provide some evidence of financial responsibility.

Should the legislature pass a cap, a constitutional challenge may be resolved more favorably in today's Texas Supreme Court. In 1988, the court was primarily composed of judges who favored expanding the rights of plaintiffs. In 2002, the court is exclusively conservative, thus a cap may be viewed more favorably. The court may be prompted to look favorably on the caps if something is provided injured patients in return. TAPA's current proposals call for policy limits to set a minimum of $500,000 per claim with an annual total indemnity of $1.5 million.

With some physicians currently carrying policies that have $200,000 per claim limits and $600,000 annual limits, those doctors would face premium increases if caps were implemented in return for higher policy limits, giving rise to the fear that the MICRA solution may prove more costly than the current unstable insurance market, says TAPA Chair Dr. Marcus, who also chairs the Texas Medical Liability Trust.

"Research conducted by TAPA shows that higher policy limits with MICRA caps are better than lower policy limits without MICRA," Dr. Marcus said.

MICRA's provision that allows juries to be told of other payments to injured patients -- the collateral source rule -- is another provision that may be hard to sell to legislators.

Under current Texas law, patients who receive benefits from health insurers and then win a settlement or judgment against the doctor are subject to "subrogation," the repayment of the benefits to the insurance company. Under MICRA, medical liability insurers prompt the jury to prevent double-dipping by deducting the other payments from the damages assessed against the doctor and paid by the liability insurer. Critics say that the patients and their employers paid for the health insurance and should get the benefit, not the physicians and their liability insurers. Under MICRA, health insurers are asked to take a financial hit while the medical liability insurer gets an offset on its costs.

Although MICRA limits subrogation for private insurers, federal law allows Medicaid and Medicare insurers to recover the cost of the benefits they provide, and a state law would not limit that recovery.

The Texas proposals under consideration would allow the injured patient to tell the jury about the cost of health insurance premiums.

"Society has to make a policy decision," Dr. Sloane pointed out. "Should the defendant make everyone whole, or should the plaintiff and health insurer pay part of the cost?"

Payment Plans
Any Texas version of MICRA is likely to contain a periodic payment provision, but with differences.

Under MICRA, periodic payments can be used when future damages -- the amount to be paid in medical bills and lost income -- exceed $50,000, and such payments terminate when the patient dies. Proposals being studied by TAPA include periodic payments when future damages total more than $100,000, with only medical, hospital, and custodial payments terminating when the patient dies. Payments for lost earnings would keep coming.

TMA General Counsel Donald P. Wilcox, JD, says the payment plans are cost-saving devices. Insurers can purchase a discounted annuity to make sure all the patient's damages are covered, and they reap an additional benefit of clearing the claim from their books, reducing the need to build reserves to cover the amount.

TAPA and TMA also are considering a sliding scale of attorneys' fees identical to MICRA's. By enabling an injured patient to recover more of each award, the effects of a cap on non-economic damages would be minimized. Another effect would be to make plaintiffs' attorneys less willing to take risky cases.

Should the Texas Legislature be willing to adopt a MICRA-style reform package, clear definitions of certain terms would need to be included, Dr. Sloane says. "We need to define what economic damages are, what non-economic damages are, and what punitive damages are."

The concern echoes the California experience, where defining "professional negligence" and other terms in MICRA has proven the grist for thousands of billable hours for lawyers. For example, some California patients argue that their injuries were caused by ordinary negligence (such as a pressure stocking left on too long or a hospital fall) or that they can bring a cap-exempt claim because a hospital or managed care organization advertised the superiority of its doctors.

Walt Borges is the Associate Editor of Texas Medicine. This article originally appeared in the October 2002 issue of Texas Medicine and was reprinted with permission. © 2002 Texas Medical Association