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Malpractice Premiums And Physicians’ Income: Perceptions Of A Crisis Conflict With Empirical Evidence

Abstract

 
The conventional wisdom is that malpractice premiums have steadily risen and now constitute a crisis for medical practice. The best available data suggest otherwise. American Medical Association (AMA) surveys of self-employed physicians from 1970 to 2000 indicate that premiums rose until 1986, then declined until 1996, rose thereafter, but were lower in 2000 than in 1986. Other items represented a much greater share of total practice expenses in 1970 yet increased rapidly until 1996 and moderately thereafter, while spending on premiums fell during 1986–2000. National trends were reflected with variations in obstetrics/gynecology, surgery, and anesthesiology and in nine regions surveyed.

The American Medical Association (AMA) joined with other groups to advocate enacting such legislation. Its Web site includes a map indicating states in crisis, testimonials, and articles.² Two quotations capture the conventional wisdom:

Illinois’s out-of-control legal system has driven insurance premiums sky-high and forced high-risk specialists, including neurosurgeons and obstetrician-gynecologists, to restrict services, retire early and leave the state.³

Natick [Massachusetts] obstetrician Michael Robertson, MD, was forced to move to a smaller home and office just to pay his $91,000 insurance bill.⁴

News articles on the "malpractice crisis" typically report what individual practitioners say they pay. The source for nearly all data in scholarly articles and reports by government agencies, such as the U.S. Government Accountability Office (GAO), are from the Medical Liability Monitor Reporter (MLMR), which tracks insurance industry pricing trends. The MLMR reports that insurance companies’ advertised premiums in rate sheets increased on average 10–20 percent per year from 2000 to 2002 and more than 20 percent in 2003.⁵ However, what physicians pay for premiums differs from advertised rates. Advertised premiums are typically adjusted based on risk factors or discounted to make sales, and physicians can choose different levels of coverage. The MLMR surveys of advertised rates do not reveal the number of policies purchased at different prices. Thus, studies based on MLMR data do not provide sound information on real malpractice premiums.

Understanding premiums’ effect on medical practice requires comparing actual premiums paid with total practice expenses and net practice income. Net practice income equals total practice revenue minus total practice expenses, before payment of taxes. Total practice expenses include all costs that physicians incur in practicing medicine: premiums, office rent or mortgage payments, medical equipment and medical supplies, nonphysicians’ salaries, office expenses, utilities, and so on. We are aware of no statistical study that has analyzed these relationships. Tracing the relation between these variables over several years provides a context in which to understand short-term changes.

Study Data And Methods

Top Study Data And Methods Study Findings Regional Variations Conclusion NOTES

 
This paper analyzes surveys conducted from 1970 to 2000 by the AMA Center for Health Services Research and its successor, the Center for Health Policy Research. These surveys were national samples of all self-employed physicians regarding their income, practice expenses, and practice characteristics.⁶ Self-employed physicians include all physicians in group and solo practice who are not employees. In 2000 this represented 61.5 percent of all practicing physicians.⁷

The data in these AMA surveys are widely cited by health policy scholars. They have also been used by the Physician Payment Review Commission (PPRC) and its successor, the Medicare Payment Advisory Commission (MedPAC), in recommending adjustments in Medicare physician payment based on changing costs of premiums and other practice expenses. However, we are aware of no study that analyzed the annual AMA surveys over a thirty-year period regarding malpractice premiums.

The AMA surveys yielded data nationally, for nine regions, by practice specialty nationally, but not for individual states. Because averages can mask differences in subpopulations, we analyzed data for each region and three specialties with high malpractice risks (obstetrics/gynecology (OB/GYN), surgery, and anesthesiology) as well as nationally. The AMA identified no practice specialty with higher premiums. We also examined relations between variables at the median and seventy-fifth percentile to determine how they differed from the mean. To control for inflation, all data were adjusted by the Consumer Price Index (CPI) into constant 2000 dollars. Unless otherwise indicated, all averages are mean values. The AMA samples were consistently large with small standard deviations. In 2000, the survey was based on 1,900 completed questionnaires. Notes to the exhibits provide further details regarding standard deviation and response rates.

Study Findings

Top Study Data And Methods Study Findings Regional Variations Conclusion NOTES

 
Changes in premiums. For physicians nationally, premiums increased from 1970 to 2000 at an average of $416 per year (Exhibits 1–3). The national rate of increase was the highest during the period 1970–1986, rising $866 per year. Premiums decreased $122 per year between 1986 and 1996 and increased $731 per year from 1996 until 2000, but they were still lower in 2000 than they were in 1986. Within the specialties, the highest rates of premium growth also occurred from 1970 to 1986, and premiums were also lower in 2000 than in 1986. Premiums decreased in all specialties between 1986 and 1996 and then rose between 1996 and 2000 for anesthesiology and OB/GYN, but not for surgery.

View larger version (22K): [in this window] [in a new window] EXHIBIT 1 Self-Employed Physicians: Changes In Mean Medical Malpractice Premiums, Total Expenses, And Net Income, Selected Years 1970–2000

View larger version (23K): [in this window] [in a new window] EXHIBIT 4 Self-Employed Physicians: Mean Medical Malpractice Premiums And Nonpremium Expenses, Selected Years 1970–2000

We reviewed data for the seventy-fifth percentile to see if premiums were a greater share of total expenses for physicians within the top quartile than for the mean. In 2000, premiums represented either the same percentage of total expenses at the seventy-fifth percentile as at the mean or a lower percentage, both nationally and for the specialties. In 1986 and 1996, the relation among these variables was similar, with one exception. In 1986, anesthesiology premiums were 30 percent of total expenses at the seventy-fifth percentile level but only 21 percent for the mean. Median values were within two points of the mean for all physicians and for surgeons and within three points for OB/GYNs. In anesthesiology, median values were higher than the mean by seventeen points in 1986, by seven points in 1996, and by six points in 2000 (data not shown). Anesthesiology is unusual in having very low nonpremium expenses compared with most physicians.⁹

Physicians paying higher than mean premiums might also have had higher nonpremium expenses or revenue, or both. In 2000, median premiums were $11,000; however, 25 percent of physicians paid $20,000 or more. Similarly, 25 percent of physicians had net income at or above $300,000. However, physicians who paid higher-than-mean premiums while also having other expenses and net revenue at the mean level would have had lower-than-mean net income.

Consider a physician who in 2000 generated median revenue and had median nonpremium practice expenses while paying premiums at the seventy-fifth percentile for self-employed physicians ($20,000). This physician would pay $9,000 more in premiums than the median ($11,000). As a result, this physician’s net income would decrease from the median of $200,000 to $191,000. This physician’s income would have decreased by $1,750 per year from 1996 to 2000, and his or her median premiums would constitute 12.5 percent of total median expenses.

Impact of declining revenue and rising nonpremium expenses. From 1996 to 2000, net practice income decreased both for physicians nationally and for practice specialties. This was primarily attributable to decreases in practice revenue, which fell nationally and for all specialties except for OB/GYN. For physicians nationally, yearly revenue decreased $2,859, a figure between three and four times greater than premium increases of $731. The relations among variables in each specialty were more complex but had negligible impact on income in all three specialties (Exhibit 5).

View larger version (24K): [in this window] [in a new window] EXHIBIT 5 Self-Employed Physicians: Annual Change In Mean Malpractice Premiums, Nonpremium Expenses, Net Income, And Total Revenue, 1996–2000

Top Study Data And Methods Study Findings Regional Variations Conclusion NOTES

Accounting for perceptions of a crisis. What accounts for the common perception that premiums have steadily increased and caused large decreases in practice income? Medical malpractice is among the most emotional health policy issues. Calls for protection from liability unite physicians as few other proposals do. Frustrations with contemporary medical practice might focus on malpractice as a source of problems caused by other factors. Furthermore, the data lend support for the common perception if the data are viewed partially and uncritically. The surveys show that although premiums have increased since 1996, income declined for many physicians. Observing these trends alone can lead to the conclusion that premium increases caused incomes to decline.

When other data are examined, however, a different picture emerges. Although premiums rose from 1996 to 2000, practice revenue declined nationally and for specialties (except for OB/GYN). It was revenue decline and increases in nonpremium expenses, not premium increases, that account for the overwhelming share of falling income. For OB/GYN, revenue increased slightly, but income declined because of large increases in practice expenses. However, increases in premiums were less than one-twentieth the size of increases in nonpremium expenses.

Our data do not provide information regarding why physician revenue declined. Possible causes include reduction in physician payment rates as a result of the policies of third-party payers; decreased physician revenue as a result of physicians’ financial risk sharing; reduction in the volume of services provided as a result of utilization review; and decreases in the number of services provided by each physician, as a result of an increase in the number of physicians practicing.

Limitations of the study. Our study has certain limitations. National and even regional data might not reveal a premium crisis if it existed in only a few states. Certain states have enacted legislation that cap the amount of damage awards, and their premiums might be lower than states without caps. National data averaged across states with and without caps and regional data might mask a state specific premium crisis.

A review of the literature by the GAO in 2003 concluded that there is disagreement as to whether caps on damages lead to lower premiums and that "a lack of comprehensive data on losses at the insurance company level makes measuring the precise impact of [state caps] impossible."¹¹ However, Kenneth Thorpe recently estimated that in the twenty-five states with caps on damage awards, "earned premium[s] per physician...were associated with a 12 percent reduction in premiums" compared with noncap states.¹² The surveys we used did not provide individual state data or compare the twenty-five states with caps to those without them.

Nevertheless, Thorpe’s estimated differences among states with and without caps are unlikely to affect our main findings. If we extrapolate from Thorpe’s conclusion and assume that premiums are 6 percent higher in states with caps than the AMA data indicate (because it averages between states with and without caps), premiums in these states would still be a very small percentage of total practice expenses and would not be large enough to greatly affect net practice income. For example, premiums constituted only 2 percent of total practice expenses in 2000. If the reported mean dollar values for premiums for physicians nationally are increased 6 percent, with other expenses and revenue held constant, premiums would be 8 percent of total expenses. Net income would be reduced $1,104.

Conclusion

Top Study Data And Methods Study Findings Regional Variations Conclusion NOTES

 
To paraphrase Mark Twain’s comment on reading his obituary in a newspaper, the reported recent demise of medical practice as a result of rising malpractice premiums has been greatly exaggerated. The perception that increased malpractice premiums cause a crisis is at odds with evidence from the AMA surveys. These surveys indicate that premiums have consistently been a small percentage of total practice expenses except within anesthesiology, which is a result of its having much lower than average nonpremium expenses. When premium increases occurred between 1970 and 1986, and from 1996 to 2000, they had only a small effect on net income.

From 1970 to 2000, malpractice premiums increased only slightly, and there was a sizable decline in premiums for self-employed physicians in the fourteen years from 1986 to 2000. This should be taken into account as one is interpreting reported premium increases reported by the MLMR since 2000.

Although premiums for self-employed physicians declined from 1986 to 1996, other practice expenses increased substantially. Premiums increased between 1996 and 2000 but had little impact on total practice expenses or net practice income nationally, within regions, or within practice specialties. Physician income fell from 1996 to 2000, but this was driven by declining revenue except for OB/GYNs, for whom increases in expenses other than premiums were the main cause of declining income. For surgeons, premiums decreased.

Since the AMA ended its surveys in 2000, the MLMR has reported increases in advertising rate-sheet listing for premiums between 10 and 20 percent per year from 2000 to 2002 and more than 20 percent in 2003. We do not know if premiums actually paid rose by this amount for any physicians. In the absence of real data on spending for premiums and practice costs and income, our understanding of the current situation is imperfect. However, our analysis suggests that even if premiums rose by as high a rate of growth as the 2003 MLMR estimate based on rate sheets, premiums in 2003 would still have been a small percentage of total practice costs and thus have had a negligible effect on mean practice income.

CLAIMS THAT THE LEVEL of malpractice premiums justify a tax credit to prevent physicians from leaving the practice of medicine are hyperbole, especially when physicians’ income is viewed compared with that of others. Average physician income in 2003 was between the ninety-fifth and ninety-ninth percentiles for all Americans.¹³

Editor's Notes

 
Marc Rodwin (mrodwin{at}suffolk.edu) is a professor of law at Suffolk University Law School in Boston, Massachusetts. Hak Chang and Jeffrey Clausen are juris doctor candidates there.

The work of Marc Rodwin was supported by a summer research grant from Suffolk University Law School. Thanks are due for research assistance to Sarah Averson, Melissa Romero, Ellen Beckworth, Susan Vaughn, and Rick Buckingham. The authors also thank Peter Jacobson, Joel Weissman, and anonymous peer reviewers for helpful comments.

NOTES

Top Study Data And Methods Study Findings Regional Variations Conclusion NOTES

 

1. In the 108th Congress, the bills were H.R. 1116, H.R. 1124, H.R. 1129, H.R. 1158, H.R. 321, S. 1374, H.R. 1178, H.R. 4124, H.R. 446., H.R. 447, H.R. 485, H.R. 1044, H.R. 1249, S. 352, and H.R. 1287. In the 109th Congress, they were H.R. 2657, H.R. 2400, H.R. 2291, H.R. 2399, S. 354, S. 367, S. 366, H.R. 2731, and S. 1012.
2. American Medical Association, "Medical Liability Crisis Map," 16 June 2005, http://www.ama-assn.org/ama/noindex/category/11871.html (accessed 13 February 2006).
3. AMA, "AMA Applauds President’s Call for Medical Liability Reform," 5 January 2005, http://www.ama-assn.org/ama/pub/category/14482.html (13 February 2006).
4. T. Sullivan and H M. Ginsburg, "Local View: Insurance Costs Put Physicians on Critical List," Milford (Massachusetts) Daily News, 27 July 2003.
5. Medical Liability Monitor Reporter 27, no. 1 (August 2002); and Medical Liability Monitor Reporter 28, no. 10 (October 2003).
6. Surveys were conducted by the AMA Center for Health Services Research (1970–1992); SocioEconomic Monitoring System (1992–1999); and Patient Center Physician Survey (2000). Data for 1970 are from S.G. Vahovich, ed., Profile of Medical Practice (Chicago: AMA, 1973). Data for 1986 are from M.L. Gonzalez and P. Zhang, eds., Physician Marketplace Statistics 1978–1998 (Chicago: AMA, 1999); and M.L. Gonzalez, ed., Physician Marketplace Statistics (Chicago: AMA, 1988). Data for 1996 are from M.L. Gonzalez and P. Zhang, eds., Physician Socioeconomic Statistics 1997–1998 (Chicago: AMA, 1998). Data for 2000 are from J.D. Wassenaar and S.L. Thran, eds., Physician Socioeconomic Statistics 2000–2002 (Chicago: AMA, 2003).
7. Among self-employed physicians, 25.3 percent worked in group practices with eight or more physicians, and 41.4 percent worked in smaller group practices. Solo practitioners made up 33 percent of self-employed physicians. J.D. Wassenaar and S.L. Thran, eds., Physician Socioeconomic Statistics 2003: Overview of the Physician Market (Chicago: AMA, 2003), 91–96.
8. Gonzalez, Physician Marketplace Statistics; and Gonzalez and Zhang, Physician Socioeconomic Statistics 1997/1998.
9. Low nonpremium expenses are probably attributable to cost shifting for tax and other business purposes. Anesthesiologists typically have exclusive contracts with hospitals through a corporation that allows shifting practice expenses among the hospital, the corporation, and the anesthesiologists’ practices.
10. New England region: Massachusetts, New Hampshire, Vermont, Maine. Pacific region: California, Oregon and Washington. Mountain region: Montana, Idaho, Colorado, Wyoming. Middle Atlantic region: New Jersey, New York, Pennsylvania, Delaware. East North Central region: Illinois, Michigan, Ohio, Wisconsin. West North Central region: Minnesota. South Atlantic region: Florida. East South Central region: Louisiana, Mississippi. West South Central region: Texas.
11. U.S. Government Accountability Office, Medical Malpractice Insurance: Multiple Factors Have Contributed to Increased Premium Rates, Pub. no. GAO-03-702 (Washington: GAO, 2003), 42.
12. K.E. Thorpe, "The Medical Malpractice ‘Crisis’: Recent Trends and the Impact of State Tort Reforms," Health Affairs 23 (2004): w26–w27 (published online 21 January 2004; 10.1377/hlthaff.w4.20).[Abstract/Free Full Text]
13. "The Wealthiest Benefit More from Recent Tax Cuts," New York Times, 5 June 2005.

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