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Medical Malpractice Insurance Premiums: How Is My Insurance Company Determining My Premium?

Medical malpractice news, debate, and discussion are not new to Illinois. In 2010, the Illinois state supreme court struck down legislation that limited the noneconomic damages to be awarded in malpractice suits. Craig Tobin, from Tobin & Munoz, notes the following in an article:

“Without a cap on non-economic damages from 1997 to 2005, Chicago physicians saw their liability premiums increase an average of 10 to 12 percent each year,” the President of the AMA said in a statement at the time. “When the cap was reinstated in 2005, premiums for Chicago physicians stabilized and even began to shrink.”

So what goes into the calculation of premiums? Clearly, as noted above, legislation affects what physicians have to pay, but there are other factors that influence the overall premium charged. The following discussion outlines what physicians should expect to impact their premiums for malpractice insurance.

Premiums for Physician Professional Liability (PPL) coverage are influenced primarily by the following factors:

• Physician’s specialty
• Geographic location of a physician’s practice
• Limits of liability
• Claims-made year
• Other items

Physician’s Specialty

PPL insurers typically set rates for individual specialties (also known as “specialty” ratings). The Insurance Services Office (ISO) has developed over 100 different classification codes, which are intended to differentiate the various risks faced by different medical specialties. As one would expect, the highest rated classifications are those involving the most complex surgical procedures, such as thoracic, vascular, cardiovascular, or neurological. Lower ratings are assigned to the primary care classifications, which would include internal medicine, family/general practice, and pediatrics. Lower ratings are also assigned to specialists who perform minor surgery or who do not perform surgery at all. 

The ISO’s classification system is updated periodically so that the rates reflect the risks of each major medical specialty. For example, a neurosurgeon historically experiences more claims than an allergist and the costs of each claim are significantly higher for a neurosurgeon. Rates for primary care specialties (with no surgery) are typically evaluated at the “base” rate, with a specialty relativity of “1.0.” The specialty relativity is used by the industry like a beta to assist the insurer in developing the rate. The rates for other specialties are expressed in terms of their costs relative to the base rate, so the specialty relativity for neurosurgeons may be as high as an 8, which means their rate is 8 times the rate of family practice physicians. These specialty relativities may be adjusted over time. For example the rate for an anesthesiologist was approximately four times the base rate in 1985, but with advances in anesthesiology technology over the last 15 years, they can now pay as low as 1.5 times the primary care or base rate.

Geographic Location of a Physician’s Practice

The location of a physician’s practice can have a significant impact on claim likelihood and the premium level, as certain states may be more litigious than others. Additionally, there can be variations in state law (as noted above) and historical jury verdicts, which may result in differing base rates being set by insurers, even within the same specialty. Further, urban areas, such as Chicago, tend to be more litigious than rural areas. Juries in urban areas may be more likely to award higher amounts to plaintiffs than juries in rural or less populated areas. However, some states, such as Texas and California, have set caps that limit a patient’s total potential recovery amount. Additionally, caps or “limits of liability” as discussed below, have a significant impact on the policy premiums. 

Limits of Liability

Insurance companies generally apply two kinds of claim limits to their insureds, a “per claim” limit and “aggregate” limit. 

• Per claim limit is the maximum limit the insurer will pay for a single reported claim
• Aggregate limit is the maximum limit the insurer will pay for all claims made in one policy period (generally a one year period)

The base rates for a PPL policy are generally set at what might be termed relatively low limits; an example might be $100,000 per claim with a $300,000 aggregate limit. If a physician requests higher limits of liability, the basic premium rates are increased to reflect the exposure that the higher limits of liability represent to the insurance company. 

Claims-Made Year

For a PPL policy, premiums increase dramatically in the initial years of claims-made coverage origination, until the mature claims-made premium level is reached in years four and beyond.

 

In the first claims-made year, coverage is provided only for claims made against the insured in that year arising from incidents during the same year. The number of claims the first year represents only a fraction of the total number that could eventually be reported for incidents that occurred during that year. This is because it can take years for a medical malpractice claim to be reported. For example, in the state of Illinois, it can take between two and eight years, depending on the statute of limitations and other circumstances. Thus, the claims-made premium for the first year is significantly less than the premium for subsequent claims-made years — usually 20% to 40% of the mature claims-made premium (note: 35% in the example step factor table below). 

In the second year of coverage, the policy covers claims made during that year arising from incidents occurring during the first and second claims-made policy years. The second year’s claims-made premium is therefore larger than the premium for the first year of coverage.

 

This progression continues until a mature claims-made rate is reached, reflecting a more balanced matching of costs and the number of claims reported. These factors are commonly referred to as “step factors.” Step factors are used to calculate annual premiums for claims-made coverage and can be defined as the percentage of the mature claims-made rates. Note that step factors will vary among different insurance companies.

Step Factor Table:  

Years of Coverage	Percentage of Mature Claims-Made Rate	Cumulative Percentage of Mature Claims-Made Rate
1	35%	35%
2	30%	65%
3	25%	90%
4+	10%	100%

Although the items discussed above represent the largest areas that impact PPL policy premiums, there are a number of other factors that can also influence a physician’s risk of liability and level of medical malpractice premiums charged by the insurance company. These “other” factors will be discussed in a future Healthcare Edge. Stay tuned . . .

For further information, please contact Amy K. Egelston at aegelston@BlackmanKallick.com or 312-980-3346, Paul D. Smith, Jr. at psmith@BlackmanKallick.com or 312-980-2901, or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.