In the next few weeks, hospitals and health care systems will learn whether their costs will again be on the rise due to a significant expansion in their liability for medical professional liability claims. Voters will weigh in on Proposition 46 on November 4, a ballot initiative that, among other things, would increase the cap on noneconomic damages in medical professional liability claims to $1.1 million.
The outcome of this initiative is critical not only because it will impact future health care costs but also because, upon passage, it will immediately increase the liability that health care systems face on pending claims. If Prop 46 passes, it will become effective on January 1, 2015.
A look back
The Medical Injury Compensation Reform Act (MICRA) was signed in 1975 by Governor Jerry Brown. Its purpose was to improve the affordability and availability of health care by limiting tort liability for health care providers, thereby reducing defensive medicine and the associated health care cost. Following the passage of MICRA, health care providers benefited from many years of greater stability in their medical professional liability costs. The stability was a welcome relief after years of escalating medical professional liability court awards.
One of the main provisions of MICRA is a cap on noneconomic damages. There are no limits on economic damages such as future medical care and lost wages, but there is a $250,000 cap on noneconomic damages such as pain and suffering, and a loss of consortium (the loss of a family relationship due to injury or death). That cap hasn’t changed since the law’s inception.
Proposition 46 would not affect MICRA’s guidance on economic damages, but would change how the law treats noneconomic damages. The initiative was launched by Bob Pack late last year, received the requisite number of signatures to put it on the ballot and was certified by the California Secretary of State in May 2014. Press reports detail how Pack’s efforts were prompted by the deaths of his two children caused by a drunk and drugged driver who had procured pills from multiple doctors. The proposition would curb such activity as one of its many provisions.
How things would change
In addition to requiring that doctors check a patient’s record in California’s prescription drug database before signing off on a prescription, the proposition would apply the Consumer Price Index to the noneconomic cap from its establishment in 1975, effectively increasing it from $250,000 to $1.1 million, over a fourfold increase. The cap would then be increased annually to reflect inflation.
Proposition 46 would also require random drug and alcohol testing for physicians in hospitals, and require that action be taken if tests come back positive.
Healthcare costs will increase
Hospitals and health care systems will see their medical professional liability costs (which they self-insure to a large degree) increase substantially. The California Legislative Analyst’s Office issued a report in July estimating that the cap’s increase could cost state and local governments anywhere from tens of millions of dollars to several hundred million dollars annually. The report cites an increase in direct malpractice costs as well as a change in the amount and types of health care services provided by encouraging defensive medicine that prescribes care and services that would not have otherwise been provided. The factors that would have a fiscal impact on state and local governments are much the same for health care systems.
Here’s why hospitals and health care systems face sizable increases in costs:
• Higher settlement values. Although the vast majority of cases in California are settled before a jury verdict, particularly because of the option for arbitration, settlement values will now be higher because of the higher cap. This will also make it harder to agree on settlement values, because there is now more money at stake.
• More lawsuits. With a significant increase in the cap, the plaintiff bar will be more apt to pursue claims that previously were considered unprofitable. A $250,000 cap can make it unprofitable for an attorney to litigate a case since, typically, the attorney receives a percentage of any award, ranging from 15% on large cases to 40% on small cases. This fee may not be enough to cover the costs of research, expert witnesses and other expenses needed to win a judgment. A cap of $1.1 million would eliminate that obstacle. Health care systems should prepare for a substantial increase in the number of lawsuits predominantly coming from cases with low or limited economic value.
• Increased liability. The potential increase in both the number and size of claims will make it likely that self-insured health care systems will see a significant expansion in their liability. Because this would impact both future and currently pending matters, the impact on health care costs would be immediate and significant. This increase for hospitals would be due in part to delayed claim settlements that previously would have settled earlier, with the possibility of litigation eliminated.
What to Expect
There is much speculation about what will happen if Proposition 46 becomes law. Will it encourage physicians to leave the state? Will it make medicine more defensive by prompting physicians to protect themselves and require additional testing for their patients? These are difficult questions to answer definitively. But what is clear is that California will see an immediate increase in health care costs. Based on a Towers Watson review of claim data, we expect most health care systems to see their medical professional liability costs increase by more than 25%, and many will see much larger increases. The ripple effect of these cost increases could have far-reaching implications for Californians.
Jeremy Brigham FCAS, MAAA, Director at Towers Watson. Since joining Towers Watson, Jeremy has specialized in providing consulting services to the health care industry. His consulting experience includes extensive work in the medical professional liability arena, providing ratemaking, reserving, strategic and financial planning services to captive insurers, risk retention groups and self-insured trust programs.