December 1998 Bulletin

Are you ready for a $6 million bill?

Are you ready to pay $6 million to $7 million for malpractice insurance? That's the cost a young orthopaedic surgeon entering practice in 1998 at age 32 and practicing until age 65 could pay, according to a new analysis of malpractice insurance costs.

No less startling is the finding that the total malpractice insurance costs for the 14,100 members of the Academy during that 33-year span could range from $83 billion to $109 billion, according to the analysis by Jack C. Childers Jr., MD, and Daniel Q. Naiman, PhD.

Despite publicity over malpractice risk and cost, beginning with the malpractice "crisis" in the late 1960s and early 1970s, there has been very little hard data regarding actual costs, said Dr. Childers, consultant and former member of the Academy's Committee on Professional Liability; and Naiman, professor, department of mathmatical sciences, Johns Hopkins University.

There is an abundance of anecdotal evidence of sudden premium increases, high jury awards, increasing litigiousness of patients and even financial failure of supposedly well-regulated insurance companies, Childers and Naiman said, but real figures based on national state, specialty or per physician data have not been available.

"For any given segment of physicians we define the cost of insurance as the sum of indemnity payments, defense expenditures, and insurance company administration and profit," Dr. Childers said. "Dividing this by the number of practitioners yields a figure equivalent to the average premium each must pay for coverage annually."

In an attempt to obtain reliable cost figures for orthopaedic surgeons, the investigators asked a number of malpractice insurance companies for data on actual costs for the years 1982-1992, the latter, they said, being the latest year for which they can be reasonably sure that most claims will have been filed. Nine companies provided statistics that represent the basis for their report. In 1982, these companies insured 10 percent of all orthopaedists practicing in the United States and in 1992, 12.5 percent.

In interpreting the data, a number of assumptions were necessary. The first was that the reporting companies were typical of the nation as a whole with regard to geographic diversity, overhead and socioeconomic status of claimants and insureds. Dr. Childers and Naiman were unable to statistically validate this, in part, because most of the companies precluded them from divulging their names or even the state where they were located as a precondition to sharing data. However, all major regions of the country were represented, as well as both large and small states, and urban, suburban and rural areas.

Further assumptions are that indemnity payments and legal defense costs will continue to rise at the same rate they did for the decade 1982-1992, and the companies' percentage of overhead and profit (or rebate if a mutual company) will remain constant. Dr. Childers and Naiman also assumed that there will be no significant national tort reform and that the number of practicing orthopaedists is approximately equal to the number of active fellows in the Academy.

Statistical analysis was carried out in two steps. At the 95 percent confidence level:

During the decade, the decline in probability of incurring an indemnity loss was much more than compensated by the increase in the amount of loss, the investigators said. Their analysis found the cost of insurance per orthopaedist as defined above, was $17,773 in 1982 and $34,761 in 1992. This represents an average annual increase for the decade of approximately 6.94 percent.

"If one projects this increase to subsequent years (the actual figure was carried out to 9 decimals so that rounding effects would not impair accuracy)," the investigators said, "the annual cost in the year 2000 comes out to $61,784; in 2010, $130,831; and in 2020, $283,282.

"This analysis predicts that for a young orthopaedist entering practice in 1998 at age 32 and practicing until age 65, the total cost of professional liability insurance for his career will be $7,647,961. This figure makes no correction for assumed inflation, and presumes that the inflation of the data period (3.95 percent per annum and only one factor in the observed increase of 6.94 percent) will continue for the foreseeable future.

"Different presuppositions regarding future inflation produce slightly different predictions. Taking the long view, if one assumes that the 'normal' inflation is equal to the average for the last 50 years (1948-1997) and that this will be the prevailing rate from 1998 onward, then the career cost for our hypothetical orthopaedist entering practice rises slightly to $7,793,891. If a more recent period (1992-1997) is assumed to represent the 'normal' inflation rate then his cost decreases to $5,954,978."

Their analysis found that if the number of actively practicing orthopaedists remains at the present level of approximately 14,100, "the low prediction for the orthopaedic profession as a whole during the career of our young practitioner is $83,965,190,000; the high prediction is $109,893,860,000."

They observed that "no one knows what societal or economic factors will affect the malpractice climate over the next few decades. Malthus and others have demonstrated the folly of long-term predictions based on human behavior.

"However, we have attempted to make this projection as neutral as possible, assuming that the factors affecting malpractice cost increases will neither improve nor worsen. Since these are, to our knowledge, the only hard figures published on this subject, we believe they deserve serious consideration."

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