Defense Expenses and their role in Medical Malpractice Claims

An interesting article titled “The Impact of Defense Expenses in Medical Malpractice Claims” written by Aaron E. Carroll, Parul Divya Parikh, and Jennifer L. Buddenbaum appears in the Spring 2012 issue of the The Journal of Law, Medicine & Ethics (vol. 40, issue 1, pages 135-142).

The authors state

“Multiple factors go into the determination of medical professional liability insurance premiums including return on investments, reinsurance costs, claims frequency, average amount paid out on malpractice claims, defense expenses, and administrative costs such as underwriting expense. These factors all interact with each other and, in general, evidence exists that each of these factors has played a role in the escalating cost of medical professional liability insurance.”

The authors go on to describe tort reform efforts and state

“These reform efforts include caps on damages, abolition of punitive damages, eliminating mandatory prejudgment interest, and modifications of the common law collateral source offset rule. From an insurer’s perspective, however, it is important to remember that payments related to the damages awarded are not the only factor that determines premiums; reform efforts may be missing the mark and perhaps should be focused on also controlling these other factors.”

I have discussed tort reform issues such as these over here

The authors suggest defense expense costs as a potential effort to focus on ad state that

“According to the Insurance Information Institute, approximately 61% of a medical professional liability insurers total incurred losses was spent on defense costs and cost containment expenses in 2010, compared to approximately 40% in 2000.”

The authors used data provided by the Physician Insurers Association of America’s which provides professional liability insurance for companies owned by doctors, hospitals, and other providers. Since 1985, over half of the 60 member insurance companies have participated in a data sharing project where every 6 months claims and loss data is submitted in a generic format.

Between January 1, 1985, and December 31, 2008, data for 240,033 closed claims were recorded in this database. 29% of the claims had a payout with an average payout amount of $282,843.

One should note that only 7% of all claims went to trial, and of those 7% of claims only 18% result in a verdict for the patient (~1.25% of claims overall).

It is interesting to note the allocated loss adjustment expenses (ALAE) which “… includes any expenses paid in the process of administering or adjudicating a claim including the investigative costs required during the claim resolution process. Payments generally include defense costs for attorneys provided by the carrier, expert witness fees, court costs, securing of medical records, etc.”

The data shows that the ALAE has been increasing from $13,395 (in 2008 dollars) in 1985 to $43,258 in 2008.

In this study a total of 65 closed claims resulted from oral surgery and they had a 112% ALAE to indemnity which was the highest among all specialties by a lot. If I am understanding this correctly, this means the cost to defend an oral surgery claim here exceeded the cost that was paid out to patients who sued.

The authors state

“Our data demonstrate that the cost of defending a claim has been steadily increasing over time regardless of adjudication status. Even the claims that are ultimately dropped, withdrawn, or dismissed result in defense expenses — $15,000 on average.”

The authors conclude by saying

“The reasons for rising defense costs are not entirely clear, and over the past several years a notable shift can been seen in the allocation of defense expense costs, with more money being spent on both expert witnesses and other expenses.”

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