“Whatever is measured is managed” is the fundamental principle in management science. Nowhere is this better exemplified than in a small, obscure reciprocal insurance company in Washington, D.C., once the provider of choice for two-thirds of all doctors in Washington, D.C.
For it, the writing is on the wall in 2001. It is rated “AMB3” by AM Best. This corresponds to an “adequate ability to pay short-term financial obligations.” In 2004, it is gone.
In 2001, data show that it litigates 20 cases and settles two others. The 10:1 ratio suggests an internal predisposition not to settle cases. Of the 20 cases litigated, five (25 percent) result in plaintiff verdicts; 13 (65 percent) are defense verdicts, and two are mistrials. The total cost of claims is $6.7 million. Undoubtedly because of a predisposition not to settle, these costs include excessive and futile legal transaction costs, which are avoidable costs.
Its claim experience of $6.7 million would have greater significance if it is accompanied by the “claims-to-premium ratio.” In general, the critical success factor for the medical malpractice insurance industry is the “claims-to-premium ratio.” This particular company discloses claims but not the ratio. Even so, the claims-to-premium ratio is a day-to-day operation for management in any medical malpractice insurance company.
AM Best must have known. That is why it grades this small reciprocal as “adequate.” The nationwide trend is not very different, and if not for a much larger consumer base, they too may also be at the verge of disaster.
In 2015, there are 15 top-rated medical professional liability companies out of a total of 25 other traditional liability companies. Their claims experience and ratios are known.
They report a total of $5.3 billion in premiums and an average “claims-to-premium ratio” of 1.6. Therefore, there are $8.8 billion in claims. If this is what success looks like, no wonder a small, obscure reciprocal in the nation’s capital closes its doors. This also opens speculation that, perhaps, the “claims-to-premium ratio” is not an adequate critical success factor. The ratio is the final measurement and has nothing to do with management.
If this ratio is to be managed, the cost of claims needs to be managed. There must be a “cost-driver.” The cost-driver is the one variable specifically identified with cost. It is expressed as “dollars per that variable.”
This crisis begins in 1975. In 1975, researchers in the School of Health Policy and Management at the University of California publish a statistical analysis of “proximate cause” in medical malpractice cases. It reveals that departures from standards of care, which are called “fault,” correlate with injury. However, correlation and causation are different because of bias. The sources of bias are expert witness testimony and the judicial threshold of preponderance of the evidence. Both confuse random chance and causation.
Researchers find that proving or disproving causation in medical malpractice claims with such bias is scientifically ineffectual. Threats to validity in these variables are greater factors in influencing outcomes than is fault. Their recommendation is to bypass litigation entirely with “no-fault medical liability insurance.”
Nevertheless, they discuss the “coefficient of causality.” It is a statistical metric determining how variables in the performance of a medical intervention can be scientifically proven, with 95 percent confidence, to be the proximate cause of a specific effect. This is what is regarded as “scientifically effectual.”
Not only does this 1975 study completely vindicate my decision-making model, but it also identifies the cost-driver. Researchers unequivocally affirm that the one specific variable is error in an expert witness’s opinion.
Indeed, departures from standards of care are the proximate causes of injuries; however, until now, there are too many idiosyncrasies discouraging proof with scientific confidence. The “coefficient of causality” neutralizes this and identifies “dollars per error-prone opinion” as the cost-driver. Now, a departure from the standard of care and proximate cause can be proved or disproved with 95 percent confidence. Accordingly, an error-prone opinion is measured; the cost of a claim is managed, and so is the “claims-to-premium ratio.”
My decision-making model does the same thing. It differentiates an argument having 95 percent confidence from one having 50 percent probability plus a scintilla. The cost of ignoring the study by these researchers for 50 years is $2.5 trillion—$1,550 from every man, woman, and child in the country per year. Now, there is a second chance. Dismissing it costs more—the loss of health care as we know it today.
If you are a physician, you have insurance, and you will be, or have already been, sued. This should get your attention.
Howard Smith is an obstetrics-gynecology physician.
