Should Medical Professional Liability Insurance Be Experience Rated? Introduction In a recent article in this Journal, Nye and Hofflander (1988) corroborate earlier work by Rolph (1981) and demonstrate that the probability of incurring a medical malpractice claim is not constant for all physicians within a given specialty, but is instead highly skewed, with some physicians accounting for disproportionate numbers of such claims. Based on these findings, both articles argue in favor of experience rating based on prior claims experience for medical malpractice insurance. This study reexamines the evidence concerning experience rating of medical malpractice insurance using a similar statistical approach as in Nye and Hofflander, and Rolph, but on a larger, more complete, and more recent data set.(1) As in these previous studies, clear evidence is presented that physicians do indeed differ significantly in their probabilities of experiencing malpractice claims, and that conditional means for physicians with different numbers of claims incurred during the previous five years vary substantially. This study extends earlier research by consideration of the financial implications of experience rating from an individual physician's point of view. Doing so highlights two points important for assessing the desirability of experience rating. The first is that although rating based on prior claims experience does improve the correlation between premiums and expected claims costs, it remains a highly imperfect tool for doing so. Expected premiums for physicians with different underlying risks move only slightly towards the actuarially fair rates within five years. The second point is that using prior claims for experience rating introduces serious financial risk for many providers. The research literature to date (Nye and Hofflander, 1988; Rolph, 1981) implies that premiums should reflect Bayesian conditional means. As shown in this article, for many provider specialties, even low-risk physicians face significant risk of large premium increases if premiums are set using conditional means using Bayes' law. A single paid claim implies that premiums increase by a factor of four or more in more than half of all physician specialties examined. This introduces serious inequities in the pricing of insurance to physicians with identical underlying risks. At present, past claims experience plays a very limited role in rate setting. Medical malpractice liability insurers now set premiums on the basis of the physician specialty and in some cases, tasks performed within that specialty (such as making a distinction between major and minor surgery), and geographic location. Physicians working less than full time generally pay lower rates. None of these factors depends on the physicians' prior claims experience. In a few cases, however, malpractice liability policies include surcharges related to past instances of malpractice. Limited experience rating has emerged in New York and Massachusetts - two states where rates are heavily regulated. Data Since 1975, insurers and self-insured hospitals in New York have been required to submit data on malpractice claims to the New York State Insurance Department. As part of a larger study (New York Department of Health, 1988), the New York State Department of Health assembled a data set consisting of the 9,268 malpractice claims closed against New York physicians between 1980 and 1983. Slightly less than half of these claims resulted in payment to the patient. Table 1 contains a summary of the 4,305 paid claims in the data. Over the four years patients received a total of $343,143,671 in compensation for their injuries. Dollar awards for malpractice liability are highly skewed. Of the claims closed with payment, 11 percent resulted in awards in excess of $200,000. This 11 percent of paid claims consumed 53.8 percent of the total indemnification. …
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Jun 1, 2022
Linda M Richmond 
Open Access