Center for Legal & Responsible Commerce

Be Careful What You Lobby For

Businesses Should Think Twice Before Spending Millions to Change the Law

In 2005 the insurance industry managed to push through the Illinois legislature medical malpractice liability reform. The new law caps non-economic damages at $500,000 when the defendant is an individual, or $1 million when the defendant is a hospital. A less publicized provision of the law grants significant regulatory power to the Illinois Division of Insurance. On March 14, 2006, the regulators exercised their new power, and many of Illinois’s doctors and patients will benefit.

The March 14, 2006, order directed ISMIE Mutual Insurance Co., which has 60-70% of Illinois’s medical malpractice insurance market, to cut rates for the 2006-2007 policy year by 3.5%. The Illinois Division of Insurance’s order also directs ISMIE to:

-Establish a program for returning excess premiums to doctors if the cost to     ISMIE of defending claims is less than projected.
-Offer "deep discounts" to physicians who participate in education programs     designed to improve the quality of their care.
-Provide data explaining how it establishes its rates and determines its risks. The     data will be available to the public and to other malpractice insurers considering     doing business in Illinois.

The last mandate of the order is perhaps the most important for driving down rates. First, it will expose that the insurance industry inflates claims expenses. A reduction in rates without a corresponding decrease in claims paid will also demonstrate that it was the greed of insurance company executives that was driving up malpractice insurance rates, not trial lawyers and their injured clients. Second, the release of claims data and rating information will potentially lead other insurers to enter the Illinois market. Added competition will force ISMIE and other existing malpractice insurers to reduce premiums or lose market share.

The chairman of ISMIE’s board responded to the order by stating, “This insurer will continue to determine rates based on loss experience because we will not jeopardize the company's financial viability.” While ISMIE could ask for a rehearing by the regulators or challenge the order in court, ISMIE has suggested that the company might ignore the order altogether and continue to conduct business as usual. The question then will be, does the Illinois Department of Insurance have the determination to enforce their order?

ISMIE’s response creates some interesting questions. Will a 3.5% rate decrease cause ISMIE to become insolvent? Who are we to believe, the chairman of ISMIE’s board or the Illinois Department of Insurance? Each has an interest in seeing ISMIE remain solvent and even profitable,1 but only the former has an interest is seeing excessive profits. Given ISMIE’s market share, and the fact that there are only a few other malpractice insurers writing policies in Illinois (i.e., a noncompetitive market), what is the likelihood that ISMIE has been pricing their policies to remain solvent and make a reasonable profit? The order should also lead to an end to the practice of “over-reserving.”2

Once the dust has settled on medical malpractice reform in Illinois, doctors will be the big winners, malpractice reform may not harm patients,3 and the insurance industry will have harmed itself in its unjustified and reckless lobbying efforts.

1 The Illinois Department of Insurance’s interest in making sure the malpractice insurance business is profitable stems from the department’s interest in attracting additional companies into the market and allowing market forces to drive down prices. A competitive marketplace will result in lower premiums, greater innovation and less work for the department.

2 Currently, many malpractice insurers claim to be insolvent because they do not have sufficient reserves to pay all of the claims pending against their insureds. However, if that were the measure of solvency, no insurer would be “solvent.” The reality is that only ten to twenty percent of malpractice claims result in a verdict for the plaintiff, a fact that is widely known and that insurers wilfully ignore.

3 Medical malpractice reform might not harm patients for two reasons: 1) non-economic damages rarely exceed $500,000 dollars and the major portion of medical malpractice judgments are for future medical expenses and other economic damages; and 2) the Illinois Supreme Court could always strike down the damage caps while leaving the Department of Insurance’s new regulatory powers intact.