In documents filed with state regulators and in statements to public officials,
medical malpractice insurance companies consistently inflated the amount they
estimated they would pay out in claims, according to a study by the nonprofit
Foundation for Taxpayer and Consumer Rights.
The report maintains that insurers then used the overstated figures to justify
increases in doctors' premiums and pressure legislators to enact lawsuit restrictions.
The group charges that malpractice insurers inflated their losses by an average
46 percent each year between 1986 and 1994. During that period, insurers reported
$39 billion in losses to regulators, but actually paid out only $27 billion
in claims, according to the report.
FTCR called for an investigation of industry accounting practices that it said
enable insurance companies to misrepresent their financial condition and charge
potentially billions of dollars in excessive premiums.
The study, first reported Friday in the Washington Post, is available at: http://www.consumerwatchdog.org/malpractice/rp/5714.pdf
The study suggests that the alleged inflation of insurers' losses, as reported
in the annual statements they submit to regulators, is greater during periodic
economic downturns when insurers' investment income falls.
"By inflating their estimated 'losses' as much as 66 percent, medical
malpractice insurance companies have misled regulators, lawmakers and the public
and overcharged physicians and other health care providers," said FTCR's
Harvey Rosenfield. "Because all insurance companies use the same flawed
accounting practices, it is likely that the insurance industry is responsible
for several billion dollars in premium overcharges over the last few years,
a period during which premiums have soared. The nation's economic stability
and security demands that the insurance industry's accounting practices be investigated,
and reforms put in place such as those that were made after widespread financial
fraud was uncovered at Enron, WorldCom, Arthur Andersen and other corporations."
The FTCR compares the dollar amount medical malpractice insurers initially
reported they would pay out on policies in effect between 1986 and 1994 with
insurers' reports made ten years later of what they actually paid out in claims
under policies in effect in each of those years.
FTCR said it examined incurred loss data reported by insurance companies to
state insurance regulators and published in A.M. Best's Aggregates and Averages.
Jay Angoff, a former insurance commissioner and nationally recognized insurance
expert, advised FTCR on the study.
"The study shows that malpractice insurance companies consistently overstate
how much they expect to pay in claims and in amounts far beyond the margin of
reasonable error," said FTCR's Rosenfield. "By manipulating their
books to misrepresent their 'losses,' the insurers have profited in two ways.
First, they have used the inflated numbers to justify rate increases that were
unnecessary and excessive. Second, they have invoked their exaggerated loss
estimates to promote legislation allowing these insurers to limit how much compensation
they have to pay out to victims of medical negligence."
FTCR also called for stronger disclosure and regulatory oversight of insurers.