In the last several years, we have seen an industrywide decline in medical malpractice claims frequency, helping to usher in the current softening market.

This phenomenon has resulted in unexpectedly profitable results for medical malpractice insurance companies, and is worth highlighting precisely because it features no clear explanation. Unless we know what causes it, we can't know what effect it will have and for how long.

No single factor seems to be responsible for this decline. Instead, there appear to be four potential drivers that may be contributing to the drop in medical malpractice claims.

Only time will tell which of these are actually responsible.

o "I'm Sorry" Laws:

For years, doctors have shied away from apologizing when their patients suffer misfortune, fearing that an apology might be construed as an admission of guilt. This has created a real Catch-22, because it leads to an adverse service experience with patients--a situation that makes them more likely to file claims.

Consequently, about 30 states have enacted so-called "I'm sorry" laws, which prohibit apologies made by health care providers for adverse medical events from being used in court as an admission of liability. Legislation is pending in other states.

Although the final impact of these laws is uncertain, there is enough evidence that they may reduce costs by deterring claims in some instances and encouraging early settlements in others.

Some malpractice insurance companies now teach doctors to be open with patients.

o Tort Reform:

Because traditional tort reform measures (such as limitations to punitive and non-economic damage awards, and regulation of attorney fees) can make it not worth filing certain lawsuits, tort reform accounts for some of the decline in claims frequency.

Texas is an excellent example of successful tort reform. In 2003, the Texas legislature passed the most comprehensive package of tort reform laws of that time. Those laws capped non-economic damages in most medical malpractice cases at $250,000, curtailed class actions, created a safe harbor for drugs and other products that meet government standards, barred punitive damages unless the jury is unanimous, and adopted fee-shifting rules.

Since the enforcement of the legislation, there has been a significant decline in claims frequency. In addition, 10 new insurance carriers are attempting to enter the Texas market and numerous insurers have dramatically lowered their rates.

The impact of tort reforms on loss costs must be weighed against the possibility of the reforms being overturned or weakened. As an example, a judge recently threw out an Illinois law placing caps on some medical malpractice lawsuit awards. A December 2007 Supreme Court ruling overturning caps in Oregon has similar implications.

The Illinois Cook County Circuit Court ruling came in the case of Lebron vs. Gottlieb Memorial Hospital, which had been designated as the first "test case" challenge of the 2005 law that put caps on some medical malpractice lawsuit awards. Notably, Illinois is home to Madison County, which was called the "judicial hellhole" of the nation by the American Tort Reform Association last year because of its reputation for huge awards won by plaintiffs.

Tort reforms and "I'm sorry" laws are significant drivers of the drop in claim frequency, but clearly not the only ones. California, often cited as the model for tort reform, passed the Medical Injury Compensation Reform Act (MICRA) in 1975. Among other things, this legislation capped non-economic damages at $250,000.

So, how do we then account for California experiencing a similar drop in claims frequency when there has been no new tort reform? In this instance, at least, it seems that the decrease must be due to other factors.

o Fewer Mistakes:

Taking the lead from the Institute for Healthcare Improvement, hospitals are committing themselves to the goal of fewer medical mistakes. In 2006, IHI expanded its successful "100,000 Lives Campaign"--a national effort to reduce preventable deaths in U.S. hospitals--to a "Five Million Lives Campaign."

If better quality control is leading to fewer claims, it can be attributed to more than just good intentions. During the last 10 years, health care practitioners have emphasized transparency, evidence-based medicine and better quality metrics. Many of these efforts are focused on cost-containment, but there may also be an unintended consequence: reducing claims, which would also have cost-containment implications.

As health care organizations move toward electronic recordkeeping and better information, it creates a culture of accountability that may be reducing the number of claims.

o Media Attention:

Media attention to medical malpractice issues may have influenced the public to think negatively about large settlements. Although its impact is unclear, few would disagree with the notion that widespread media coverage raises public consciousness.

Yet there is no doubt that this is the hardest causal factor to prove, and votes on recent tort reform initiatives--such as the measure that passed in Washington state that allows for triple damages--show that the public is not necessarily adverse to larger settlements.

o Frequency & Loss Ratios:

Of particular interest is the correlation between claim frequency and loss ratio.

As shown in the accompany chart, claim frequency has dropped, resulting in increased profitability and a softening market. Insurers are now discounting their rates industrywide by as much as 20 percent, fueled by a more competitive market.

Will the large declines in claim frequency be offset by an increasingly competitive market?

The soft market has driven premiums down, but the loss ratios through 2006 continue to decline, and preliminary indications are that 2007 will continue this trend.

Time will tell, and perhaps with some increased perspective we can determine the causal connection between the legal, medical and social environments and the decline in claims frequency.

Chart Information