The Committee for Justice for All: The Profit Motive

LAUGHING ALL THE WAY TO THE
BANK: Insurance companies bear most of
the responsibility for rising malpractice
premiums, but have remained conspicu-
ously absent from the debate over the
malpractice "crisis."

If you look back at the newspaper headlines from the mid-1970s and the mid-1980s, you'll get a bad case of deja vu: "Doctors Threaten To Close," "Doctors March on Capitol," "Doctors Demand Caps on Damages." Three times in the past 30 years, we've had malpractice "crises" and guess what? They all coincided with a downturn in investment markets. (See "Been There, Done That")

Like the "crises" of the mid-1970s and mid-1980s, today's "crisis" has been caused by an economic phenomenon known as the "insurance cycle." In a nutshell, when the investment market drops, as it did in the late 1990s, insurance companies - which rely

on investment income to make money - are forced to raise rates. You've probably noticed that your own insurance premiums - homeowner's, health care, etc. - have been going up. (For a thorough discussion of insurance industry factors that contributed to the malpractice "crisis," see Michael J. Foley's essay)

In the 1990s, when the stock market was roaring along, malpractice insurers competed aggressively for market share in Pennsylvania by grossly underpricing premiums. When the bottom dropped out of the market, they were left without enough money to pay claims, causing a number of major malpractice insurers to become insolvent, some amid allegations of criminal wrongdoing. (For highlights, click here)

Larry Rogers, president and CEO of PIE Insurance, went to jail for defrauding his company into bankruptcy.
The Pennsylvania Insurance Department has accused Reliance Insurance and its president and board members of mismanaging the company into insolvency.
The Pennsylvania Insurance Commissioner sued PHICO (Pennsylvania Hospital Insurance Company) for “fundamentally unsound” practices and accused several board members of self-dealing in handing out dividends in the face of falling reserves.

In June 2002, The Wall Street Journal, in an article titled, "Insurers' Price Wars Contributed to Doctors Facing Soaring Costs," detailed how industry practices were responsible for premium increases. In the story, Donald J. Zuk, chief executive of Scpie Holdings, was quoted as saying, "I don’t like to hear insurance company executives say it’s the tort [injury law] system – it’s self-inflicted.”

In a groundbreaking study released in January 2003, "Medical Malpractice Insurance: Stable Losses/Unstable Rates in Pennsylvania," J. Robert Hunter, a former Federal Insurance Administrator and Texas Insurance Commissioner, shows unequivocally that:

Insurance executives stuffing their pockets

PIGS AT THE TROUGH: At the
same time they are trying to
rob victims of just compensa-
tion, insurance executives
collect some of the heftiest
salaries in America.

Malpractice insurers in Pa. aren't losing money
Rising premiums are NOT being caused by claims, which have gone down nearly 40 percent since 2002
AND, over the past 30 years, premiums have risen and fallen in concert with the economy

In testimony to the U.S. House Committee on Energy and Commerce's Subcommittee on Health, Travis Plunkett, legislative director for the Consumer Federation of America, detailed the insurance industry trends that have given rise to the malpractice "crisis." Plunkett told Congress: "It is the 'hard' insurance market and the insurance industry's own business practices that are largely to blame for the rate shock that physicians have experienced ..." (See testimony)

The International Risk Management Institute, an insurance industry group, has admitted that "the insurance industry's own business practices are responsible for its financial losses from medical malpractice coverage." (See statement)

Meanwhile, as doctors continue to lobby for tort reform and politicians consider limiting victims' access to justice, insurance companies are posting staggering profits (See story) and executives continue to rake in some of the fattest salaries in corporate America. (See chart) Here are just a few examples:

Eli Broad, SunAmerica (of American International Group), $48,174,739
Sanford I. Weill, Citigroup, $26,694,959
Jacques E. Dubois Jr., Swiss Re, $19,739,137

The only way to solve today's malpractice "crisis" and prevent future problems is for Pennsylvania and the nation to institute stringent regulation and oversight of the insurance industry. Among other things, the industry's investment strategies should be regulated to avoid wild premium fluctuations resulting from market factors, and insurers should be required to open their books to justify rate increases.

"The Ten Worst Insurance Companies In America: How They Raise Premiums, Deny Claims, and Refuse Insurance to Those Who Need It Most" - July 2008
"Pattern of Greed 2007: How Insurance Companies Put Profits Over Policyholders" - American Association for Justice (Adobe PDF Format)
"New Data Confirms That Doctors Were Price-Gouged by the Insurance Industry During This Decade" - Americans for Insurance Reform, March 29, 2007 - Press Release | Full Report
"Earnings for Insurers Are Soaring" - NY Times, Oct. 16, 2006
"Medical malpractice: The truth behind N.J.'s crisis" - Courier Post, Aug. 14, 2005
"Two Reciprocal executives sentenced in insurance scandal" - Hampton Roads (Va.) Daily Press, June 28, 2005
"Insurance Profits Reveal Gouging, Need for Reforms" - The Foundation for Taxpayer and Consumer Rights, April 26, 2005
"Premium Deceit: The Failure of 'Tort Reform' to Cut Insurance Prices" - Center for Justice and Democracy
"Stable Losses / Unstable Rates in Pa." - Americans for Insurance Reform explain why doctors' rates are going up, Jan. 16, 2003
AP: "Pa. insurers reporting lower med-mal payouts last year" - April 22, 2004
"HMOs nearly double profits in 2003" - Jacksonville Business Journal, August 30, 2004