GAO Report Cites Losses as Primary Driver of Medical Liability Costs

July 30, 2003

A new report from the General Accounting Office (GAO) concluding that medical liability losses are the primary drivers of insurance
rates reportedly corroborates data provided to the GAO last December by the National Association of Independent Insurers (NAII).

“The GAO report reinforces insurers’ contention that loss costs, not poor investment performance, are the most significant contributor to higher premiums,” said David Golden, director of commercial lines for the NAII. “The insurance industry has always made it clear that although other factors have a marginal impact, rates are driven by losses, plain and simple. The leading cause of current market conditions was the massive increase in losses in the mid- to late 1990s. When the median judgment doubles from $500,000 to more than $1 million in just five years, this is bound to have an impact on premiums.”

The GAO prepared the report at the request of Congress and released the results this week. The primary finding states that “multiple factors have combined to increase medical malpractice premium rates over the past several years, but losses on medical malpractice claims appear to be the primary driver of increased premium rates in the long term. Such losses are by far the largest component of insurer costs, and in the long run, premium rates
are set at a level designed to cover anticipated costs.”

Other major factors for the medical liability crisis cited in the report include:

· A decrease in investment income on bonds;
· Vigorous competition among insurers during the 1990s; and
· Increases in reinsurance rates beginning in 2001.

NAII representatives met with two GAO staffers last December, providing them with information illustrating how losses drive rates and how a number of different factors converged over time to make the current hard market more pronounced than prior hard markets.

“We hope this report is a wake-up call to legislators to the urgent need for significant civil justice reform, patterned after the MICRA law in California. A federal proposal containing many MICRA provisions has passed the House but is stalled in the Senate,” added Golden.

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