The Basics of Medical Malpractice: A Primer on Navigating the System FREE TO VIEW

As with many professions, the practical realities of the practice of medicine frequently are not covered in the medical school curriculum. Malpractice, with its associated costs consisting of premiums, impact on practice, the consequences of outcomes on career, the ability to secure insurance, and the emotional toll, is one of those realities. What follows is an overview of some of the issues that a physician will confront in this arena.

Medical malpractice litigation is commonplace in the United States. The law and the juries vary from jurisdiction to jurisdiction, but no one is immune. The exposures tend to be higher in the northeast than in other areas of the country, but there are exceptions to that rule such as Cook County, IL. In some jurisdictions, such as California and more recently Texas, tort reform has been effective. In other areas, such as Pennsylvania, reform efforts either have not been undertaken or have been largely ineffective in decreasing claim severity and premiums. As of March 2007, the American Medical Association had identified 17 states that were in “crisis.”¹ Many believe that caps on noneconomic damages are a key element of tort reform. Noneconomic damages include pain and suffering, humiliation, and the loss of the pleasures of life. As of January 2005, the National Conference of State Legislatures reported² that there were caps on noneconomic damages in place in 30 states. Among the states with caps are California ($250,000) and Maine ($400,000). Notably, of the 20 states without caps, 11 were among the 17 states identified as being in crisis.

Malpractice claims typically fall into the following two categories: negligence and informed consent. To establish negligence, a complaining party must establish a duty (which is implied in the physician-patient relationship), that the physician deviated from the standard of care, and that the deviation caused harm. Generally, qualified expert testimony rendered with the requisite degree of medical certainty is required to support a negligence claim.

For consent to be informed, the physician must advise the patient of the significant risks and the feasible alternatives to the procedure. Historically, informed consent only was required for invasive procedures. In more recent years, the scope of procedures requiring informed consent has been expanded in certain jurisdictions to include the administration of anesthesia, chemotherapy, radiation therapy, and blood transfusions. The majority of states apply a “professional standard” to determine the adequacy of the disclosure of the risks and alternatives.³ In other words, it is measured by what a reasonable medical practitioner in the community would disclose under similar circumstances. A substantial minority of states, including Pennsylvania, apply a “lay standard,” which requires a physician to disclose the risks and alternatives that a reasonably prudent patient would want to know before undergoing the procedure.⁴ If the physician fails to do so, and harm ensues, the physician is liable.

In most states, lack of informed consent gives rise to a negligence cause of action.⁵ In a minority of states, such as Pennsylvania, it is considered a battery⁶ (an offensive touching). Proof of harm is not required as the procedure itself is considered to be a battery absent informed consent. As a practical matter though, these claims will not be pursued absent patient injury. In the majority of states, including Pennsylvania, if the jury determines that the patient would have undergone the procedure even had they known the significant risks and the feasible alternatives, the physician will not be liable.⁷

So, how do physicians protect their practice and assets from these exposures? That is where insurance comes in to play. Some states, such as Pennsylvania, have mandatory coverage requirements that mandate a minimum of $1 million per occurrence and $3 million in the aggregate.⁸ Other states, like Florida, have very minimal insurance requirements. In Florida, physicians also have the option to carry no insurance provided they agree to pay the lesser of any judgment or $100,000 ($250,000 if they maintain hospital privileges) and post a sign in their offices advising patients of this fact.⁹ Given the exposure involved, the safer course is to secure insurance. Depending on the jurisdiction, the first challenge a physician may confront is securing affordable insurance. In some jurisdictions, commercial coverage is scarce, and where it is available, it is expensive. Between 2000 and 2004, malpractice insurance premiums increased by 120%.¹⁰ A recent Medical Economics survey,¹¹ however, suggested that premiums may be leveling off.

The first decision may be whether to seek coverage with a commercial carrier or via another insurance vehicle such as a risk-retention group (a liability insurance company that is owned by its members). Among the questions to be explored are how well the company is capitalized, its longevity, and whether it is covered by the state guaranty fund in the event of insolvency. Generally, risk-retention groups are not covered by guaranty funds.

The next issue to consider is the type of insurance to obtain. Basically, malpractice insurance takes the following two forms: claims made and occurrence. The most common, and affordable, form of malpractice insurance is claims made. This coverage responds to any covered claim that is reported to the insurer during the policy period where the event occurred within the policy period. For example, if the claims-made coverage commenced on January 1, 2005, and is renewed continuously through calendar year 2008, it will cover any claim reported during 2008 if the event occurred on or after the inception date of the policy (ie, on or after January 1, 2005). Inasmuch as the exposures are limited to the cases presented during the policy period, first-year claims-made coverage is more affordable than occurrence coverage, which, as discussed below, covers all exposures arising from events occurring during the policy year regardless of when the claim is filed. As demonstrated in the example discussed above, if a physician is insured with a company on a claims-made basis for multiple years, the covered exposures will extend back to events occurring on or after the inception date of the original coverage. Under these circumstances, an insurer will utilize step-level premium adjustments as an insured physician moves from first-year claims-made coverage to mature claims-made coverage over a period of 4 to 5 years. The increased exposure assumed is reflected in the step premium adjustments that typically would be 35% of the occurrence rate in year 1 and 95% of the occurrence rate in year 4 or 5. With claims-made coverage, it is essential that the physician secure “tail” coverage before transitioning to another carrier. With tail coverage in place, the prior carrier covers any claims subsequently reported with event dates during the policy period. Premiums for tail coverage vary, but generally the cost involved is significant and is frequently quoted at 150% of the premium for the last year. Thus, if the premium for the last year of coverage were $100,000, the premium for the tail coverage would be $150,000. The danger in not securing tail coverage is that the prior carrier will not cover any claim that subsequently is reported with an event date during the prior policy period leaving the physician with exposure for the cost of defending the claim and any payment made to resolve the claim. This potentially could be financially devastating for the physician. An alternative to tail coverage is prior acts coverage secured through a subsequent carrier. Under this coverage, a carrier agrees for an additional premium to cover claims involving events occurring prior to the inception date of the coverage. Generally though, carriers are reluctant to offer this coverage, and where they do offer it, it usually is prohibitively expensive.

The other form of coverage (occurrence) was more common in the past than it is currently. This coverage responds for any claim with an event date within the policy period regardless of when the claim is reported. Thus, if occurrence coverage were purchased effective January 1, 2008, for the calendar year, any claim with an event date in calendar year 2008 would be covered no matter when it was reported. Essentially, with an occurrence policy, tail coverage is included; therefore, the premiums for this coverage are significantly higher than claims-made policy premiums. Since this type of coverage can leave a carrier exposed to claims for a number of years, it generally is disfavored.

In some instances, either due to a physician's claims history and/or the market, insurance is not available commercially or only at exorbitant premiums. For these circumstances, some states (Alabama, Delaware, Florida, Kentucky, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, Ohio, Pennsylvania, Rhode Island, South Carolina, Texas, and Virginia) have established a state agency that serves as the insurer of last resort. The premiums charged for this coverage are not discounted and usually are surcharged for claims experience. These agencies, however, will not deny coverage to a physician. All 50 states have a state agency to provide some degree of coverage to insured physicians whose insurers become insolvent.^12,13 Generally though, these agencies provide a limited amount of coverage that frequently does not match the coverage amounts secured through a commercial insurer. This can complicate claims resolution and create uninsured exposure for physicians.

Once malpractice coverage is secured, the premium frequently represents a significant portion of the overhead expense for the physician's practice. The reimbursement models, however, are not designed to offset that expense in any meaningful way. One such model is the Medicare resource-based relative value scale, which was adopted in 1992 for professional fee reimbursement and serves as the touchstone for the reimbursement calculations of many private insurers. Physician work, practice expense, and professional liability relative value units (RVUs) are assigned to most of the procedure codes listed in the Current Procedural Terminology, fourth edition. The reimbursement model attempts to recognize the differentiation in operating expenses by geographic area throughout the country using an adjustment factor known as the geographic practice cost index. This factor is applied to the respective components of the RVUs to take into the account the regional variation in cost. A conversion factor then is applied to the total RVUs that will determine the amount of the reimbursement for the procedure at issue. Theoretically, the malpractice RVU is intended to help offset the physician's malpractice insurance expense. Even with the geographic adjustment, and a review of the model for adequacy approximately every 5 years, this reimbursement scheme has not been able to keep pace with the escalating cost of malpractice premiums.

The challenge does not end once the physician has secured insurance and covered the premium cost. More frequently than not, a malpractice claim will be filed against a physician at some point in their career. Upon notification of a claim, it is essential that the physician promptly report it to the insurance company to ensure compliance with policy requirements and to avoid a default judgment. Some states, like Pennsylvania, also require physicians to report malpractice complaints to the state medical board within a defined period of time.¹⁴ Inasmuch as documentation often can be the difference between winning and losing, the physician also should ensure that the medical record is secured and not modified in any way following notice of a claim or a potential claim. A physician rarely recovers from the loss of credibility with a jury where there is an alteration of the medical record.

Once the claim is reported to the insurance company, an initial determination will be made as to whether it is covered under the policy. Insurance companies generally have exclusions for intentional acts and punitive damages. Provided that some of the claims are covered under the policy, the company will assign counsel and will issue a reservation of rights or a denial of coverage for any uncovered or excluded claims. If there are uncovered claims, particularly claims for punitive damages, physicians should consider retaining personal counsel in addition to insurance counsel to protect their personal interests. Generally, depositions and written discovery are undertaken, and expert reports are exchanged; then, a decision is made as to whether to settle or try the case. If the insurance policy contains a consent-to-settle clause requiring the physician's consent to any settlement, the physician should determine whether it nonetheless can be overridden by the company. If there is no consent-to-settle clause or if it is subject to override by the company, a lawsuit may be resolved without the physician's consent.

Once the settle-vs-defend stage is reached, there are various alternatives to direct negotiation or proceeding with a jury trial. If the decision is to settle, one of the alternatives is mediation. In this setting, the parties along with counsel and an agreed-upon mediator meet in an informal setting to attempt case resolution. Frequently, a key component of mediation is the opportunity for the patient or the patient's family and the physician to communicate directly, which frequently has a “healing” effect and breaks down the barriers to case resolution. In most states, these proceedings are deemed confidential, and the statements and submissions made are inadmissible in litigation (see the Pennsylvania provision).¹⁵ Although these provisions are intended to promote more open communication, care still needs to be taken in the preparation of submissions and the statements made to avoid the disclosure of information that could negatively impact the defense should it be necessary to proceed to trial.

If the decision is to proceed to trial, there are several mechanisms available to limit the risk, which is particularly important in states without caps on noneconomic damages. One such mechanism is a high/low agreement where the parties agree to a low parameter that will be paid even if the defense prevails and a high parameter that will cap the award at an agreed-on number regardless of the verdict amount. This same mechanism can be used in the context of an arbitration proceeding to which the parties agree in lieu of proceeding to trial. Another mechanism is the purchase of a cap on the recoverable award. This involves negotiating an unconditional payment in exchange for which the plaintiff agrees to cap the award at a certain amount. By way of example, the defense agrees to pay the plaintiff $250,000 for a cap of $2.5 million. Under this scenario, if the verdict is $3.5 million, no more than $2.5 million will be paid, and the $250,000 paid for the cap will be credited against the $2.5 million payment. If the defense prevails, the $250,000 payment is retained by the plaintiff. Unlike the case with a high/low arrangement, the right to appeal generally is preserved. Regardless of the arrangement utilized, the decider of fact, whether it is a jury or an arbitrator, is not aware of the agreement or the parameters.

What are the implications of the claims resolution decision for the physician? If the case proceeds to trial and the physician prevails, there is no payment for insurance purposes and no report to the National Practitioner Databank. Since late 1990, with limited exception, all payments made in medical malpractice cases on behalf of physicians must be reported to the National Practitioner Databank and the applicable state board of medicine.¹⁶ State licensure boards and credentialing bodies have access to the National Practitioner Databank. Insurance companies and, with rare exception, plaintiffs do not. If the case proceeds to trial with a high/low agreement in place, and the physician prevails, payment of the low parameter is reported for insurance purposes but not to the National Practitioner Databank as it is deemed a risk management payment. If a case proceeds to trial without a high/low agreement, and there is a judgment against the physician, when the judgment is satisfied, the payment is reported for insurance purposes and to the National Practitioner Databank. Of course, with a high/low agreement in place in this setting, the insurance payment and the National Practitioner Databank report would be capped at the agreed-upon high parameter. If the decision is made to settle the claim, there may be a better opportunity to limit the dollar exposure than proceeding to trial, but there will be an insurance payment recorded and a National Practitioner Databank report submitted.

Frequently, physicians are concerned about the long-term impact of claims resolution on the availability of insurance, licensure application and renewal, and credentialing. Generally, licensure boards and credentialing bodies focus on patterns both in terms of the types of events at issue and the severity of the payments made to resolve claims. Although both the frequency and severity of claims will influence insurance underwriting, a favorable settlement or high/low arrangement may be weighed more favorably in the insurer's risk evaluation than a significant adverse verdict.

Most physicians do not contemplate the myriad ways that malpractice considerations will impact their practice, their finances, and their lives. Knowledge, however, is power and will assist in navigating this unfortunate reality of practicing medicine in the United States.

The author would like to acknowledge Robert F. Bacon, MHA, Director and Billing Compliance Officer for the University of Pennsylvania Health System, for his invaluable guidance on and insight into the nuances of health-care reimbursement models, and his review and comment on the “Managing Insurance Premium Costs” section of the article. The author also would like to acknowledge Kenneth M. Hoffman, former Executive Director of Risk Management and Insurance at the University of Pennsylvania, for his review and comment on the “Considerations in Securing Insurance Coverage” section of the article.