Blame the insurance industry: but not if you know what you're talking about

WITH President Bush's reelection in November, the medical-liability crisis was brought into sharper view. Bush had campaigned on liability reform, and in a January speech reiterated his belief that malpractice lawsuits "drive up insurance costs for all doctors . . . even for those who have never had a claim against them."

To the insurance companies burdened by the skyrocketing cost of medical-liability jury awards, Bush's stance is presumably a refreshing one. Often the industry is used as a convenient scapegoat, and it has predictably taken hits in the media for its role in the liability mess. Todd A. Smith, president of the Association of Trial Lawyers of America (ATLA), told the New York Times last year that high insurance costs have "everything to do" with greedy insurance companies. But do they?

In Smith's defense, medical-liability costs are undeniably rising. The question is whether they're rising owing to insurance-company greed, or to insurance companies' merely responding to the increasingly bad economics of liability insurance. The growing unwillingness of insurance firms even to underwrite medical-liability insurance suggests something other than greed.

Basic economics tells us that entrepreneurs and companies gravitate toward profitable opportunities, and in doing so bring down costs by offering competition for those profits. We've seen this phenomenon in all business sectors, from long-distance phone rates to computers to VCRs. We've also seen it in the corporate-insurance market--as a Wall Street Journal editorial reported last October, "the majority of businesses that are due to renew their policies in January 2005 will see decreases" in their premiums.

Competition for profits is working in the corporate-insurance markets, and perhaps unsurprisingly the same kind of competition is having a positive effect on the liability-insurance markets where reforms are occurring: As Mississippi voters began to reject candidates close to the trial bar, and as Mississippi's supreme court started to reject some of the gaudier jury awards, Mass Mutual and other insurers announced their return to the state. According to American Tort Reform Association (ATRA) president Sherman Joyce, medical-liability insurance rates have since stabilized there.

True, liability rates overall continue to rise--but it appears that they're rising because insurance companies are increasingly abandoning liability markets owing to their inability to find profit in them. The American College of Emergency Physicians reports that St. Paul Companies, which has insured 42,000 doctors, 5,800 health-care facilities, and 72,000 health-care providers, has stopped offering medical-liability insurance altogether.

Rather than painting a portrait of rampant greed, the actions of companies like St. Paul suggest that insurance companies are merely making economic decisions, avoiding business lines that are unprofitable. Patients appear to be the ultimate victims here, as doctors are understandably loath to practice without liability insurance. ATRA president Joyce wrote in the Wall Street Journal last year that in Illinois's Madison and St. Clair counties "over half [of the] doctors have been sued in the last four years, even though 85 percent of claims result in no payment to the plaintiff." Joyce went on to point out that as lawsuits have increasingly become a growth industry in those counties, hospitals have begun to eliminate high-risk practices such as on-call trauma care. The two counties have also lost 161 physicians.

A 2003 article in the Tampa Bay Business Journal reported that seven hospitals in Florida had closed their obstetrics units during that year as a result of insurance concerns. In Orlando alone, the average wait time for women seeking mammography rose from 20 days in 2000 to 150 days in 2002 as numerous radiologists left the business owing to their inability to find or afford insurance. The problems in Illinois and Florida suggest that insurance firms are quite simply unable to put a price on risk in a market badly distorted by frivolous plaintiffs goaded on by unethical trial lawyers.

And medical malpractice is not the only area in which insurance firms appear to have been unjustly demonized. Last fall, New York attorney general Eliot Spitzer kicked up a media storm with his accusations of "bid rigging" and "overcharging" on the part of insurance firms such as Marsh & McLennan in their dealings with corporate clients. Though Spitzer did not offer any explanation of why brutally price-conscious companies like Microsoft would allow themselves to be overcharged, the media were sufficiently intrigued by the concept of rigged markets and turned the story into major news. In an editorial titled "Spitzer Strikes Again," USA Today lauded Spitzer for showing "just how widespread the culture of fraud is in corporate America." What wasn't addressed was how insurance brokers such as Marsh & McLennan had acquired the power to put the squeeze on the Wal-Marts of the world, and were able to trick them into "paying too much for their insurance."