by Al Anthony Mercado, Esq., managing attorney of the downstate region of the law firm Mercado May-Skinner (MMS) and an employee of MLMIC Insurance Company
In a recently published Market Segment Outlook, the global credit ratings agency AM Best cited the ongoing pressures of rising loss cost trends, an increase in high-severity claims, social inflation and diminishing reserve redundancies as justification for continued concern in the medical liability industry.
The healthcare industry nationwide is increasingly facing more frequent and severe claims while, simultaneously, the medical liability insurance industry is facing increased costs in defending and paying out on these claims. All these factors contribute to what is called “social inflation,” an economic phenomenon that has been shown to result in increased risk for insurers and increased insurance premiums for healthcare providers.
What Is Social Inflation?
Generally, social Inflation refers to the increased cost of defending and resolving claims. A component of social inflation also includes shifts in societal preferences of who is best to absorb risk.
More specifically to the medical liability arena, social inflation refers to malpractice costs and indemnity payments growing faster than the overall inflation rate. To illustrate, between 2014-2020 the U.S. inflation rate rose about 15%, whereas the average medical liability indemnity payment reported by the National Practitioner Data Bank rose by 42%. A deeper analysis of National Practitioner Data Bank data shows an increase in indemnity payments exceeding $1 million against physicians since 2014.
Unlike general economic inflation, where medical liability carriers can mitigate with adjustments in loss reserves, social Inflation poses a unique problem for insurers due to the unpredictability of its key drivers.
What Are Some Key Drivers of Social Inflation?
- Shifts in Societal Perception: At its core, society’s willingness to pursue litigation against healthcare heroes, desensitization to large awards from “insurance companies” and expectations regarding reasonable compensation drive social inflation.
- Nuclear Verdicts: A nuclear verdict is defined as a sustained jury award after trial of $10 million or over. Nuclear verdicts also impact plaintiff’s expectations in settlement negotiations. Plaintiff attorneys use these types of verdicts to value cases, make settlement demands and instill “fear” in defendants of a verdict more than their available insurance coverage.
- Reptile Theory: Plaintiff attorneys often attempt to tap into jurors’ primal emotions, such as anger, sorry, sympathy and fear. In doing so, they try to persuade the jury to award a higher award based on emotions, not medicine or fact.
- Anchoring: Anchoring is a summation tactic that asks juries to return unreasonably excessive verdicts for pain and suffering.
- Third-Party Financing: The development and increased use of third-party financing of malpractice lawsuits ensure that more can be filed and sustained over a longer period.
- Delays in Legal Proceedings: When there is a delay in the prosecution of a malpractice case, it results in increased defense costs through attorney fees and other litigation costs such as expert fees and court costs.
- Legislation and Legislative Rollbacks: The lack of legislation mitigating non-economic damages, such as caps, can make it difficult for an insurance carrier to assess risk and reserve for losses. Similarly, legislative rollbacks and/or changes in malpractice-related laws also contribute to the uncertainty of increased risks and losses.
The Impact of Social Inflation on the Medical Liability Insurance Market
To keep pace with volatile spikes in defense costs and indemnity payments, medical professional liability insurers must consider whether to request rate increases from the State Insurance Department or limit coverages. In New York, rates are set by the Department of Financial Services. Accordingly, social inflation potentially impacts the price and affordability of malpractice insurance for healthcare providers.
What Can Be Done to Address Social Inflation?
While there are aspects of social inflation that are out of the control of the healthcare community, there are some proactive measures to consider:
- Partner with a medical liability insurer that is admitted in your state, advocates for tort reform and is financially stable.
- Advocate for legislation that limits non-economic damages and against legislative rollbacks/changes that can result in greater jury awards.
- Perform proactive risk management assessments to identify deficiencies that could lead to malpractice liability.
For advice on patient communication, you may contact the attorneys at Mercado May-Skinner Law at any time.
Photo by Anna Nekrashevich
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