What do the Federal Reserve and the prime interest rate have to do with a pending crisis with medical malpractice insurance? It has been reported that there are a series of events lining up to potentially make life miserable for doctors, their patients, and the medical world in general. In order to explain this situation properly, we have to begin eight years ago when the United States was plunged into a deep, deep recession.
Medical Malpractice Insurance Affected By The Great Recession
In 2008, the world experienced a global financial crisis that it was named the Great Recession in memory of the Great Depression that this financial catastrophe mirrored. People lost their jobs, banks went under, and panic ensued.
The Federal Reserve, as it does during a crisis, lowered the prime interest rate regularly for several months until the prime interest rate bottomed out at zero percent. It was a great business decision for spurring investment in business, but it was a horrible business decision for the companies that relied on investment returns as part of their income.
One of the industries that were hit the hardest was the insurance industry. One of the ways that the insurance industry generates revenue is by making various investments and then generating a profit from those investments. With interest rates at zero percent, investment profits were hard to come by and the insurance industry struggled to keep up. In 2016, some experts think that a new crisis is upon us and the core of this crisis will have everything to do with insurance.
Life Insurance Leading The Cause Of The Crisis
In September 2016, the Wall Street Journal reported that several major life insurance carriers have informed customers that there will be significant increases in premiums in the coming months. Some of these increases are drastic. For example, a retired manufacturing executive has calculated that the increases proposed to him by his insurer Transamerica could cost him an extra $300,000 per year on his $11 million policy. Not many people can afford an $11 million whole life policy, but increases like that are at the core of why so many insured people are upset.
Lawsuits have started to pop up all over the country and the people starting these suits are trying to get them to turn into class action suits against the insurance companies for such massive premium increases. The insurance companies claim that all of the premium increases are outlined in the life insurance policies that are affected, but the insured claim that these increases go above and beyond what is outlined in the policies.
A Background In Malpractice Insurance
The Civil Justice Resource Group estimates that anywhere from 25,000 to 120,000 people die from medical malpractice issues every year. But malpractice is not as prevalent as you may think. It is estimated that less than three percent of actual malpractice victims file claims each year, and only 1/3 of one percent of those cases actually go to trial.
Some states, such as Florida, limit the amount of money a victim can get in a malpractice award from anywhere to $250,000 to $500,000 per case. These limits are referred to as caps. Some states, such as New York, have no cap and juries can award victims as much as they deem is appropriate.
Despite the low number of medical malpractice cases that go to court, the average amount insurance companies pay out to victims each year is staggering. In 2013, insurance companies paid out nearly $4 billion in settlements for malpractice cases. That represents a nearly five percent increase over 2012, which is no small chunk of change.
According to Chron.com, seven states require malpractice insurance to be mandatory, while seven other states (including New York) require physicians to carry malpractice insurance if they want to take part in the state supplemental malpractice insurance program. For doctors in other states, there are usually provisions in the by-laws of hospitals or the requirements of health insurance providers that make medical malpractice insurance mandatory. This means that most doctors throughout the United States are forced to pay for medical malpractice insurance.
The Pending Malpractice Insurance Crisis
For eight years now, the prime interest rate has been at zero which has put a tremendous strain on insurance companies. Insurance industry observers point out that insurance carriers usually start by raising whole life insurance rates, and then move out to other types of insurance such as medical malpractice. With around $4 billion in potential claims that have to be paid out every year, insurers are going to make a case that medical malpractice insurance premiums should go up again in 2016 and 2017.
The problem is that many medical professionals already cite medical malpractice costs as one of the reasons why it is difficult to make a living as a doctor in the United States. An increase in malpractice insurance premiums could force some doctors out of business, and it could also affect the quality of care. Doctors will be much more hesitant to handle certain types of cases if they feel that it could cause their malpractice insurance premiums to go up any higher.
Is A Stalemate Coming?
It is not a coincidence that these types of issues come up in election years. Traditionally, Republicans have been in favor of more caps on malpractice payouts to victims, while Democrats have shown a resistance to capping payouts. As the presidential elections move on, insurance companies are watching closely, and they could be prepared to make premium cost decisions based on who wins the presidential and congressional elections.
Economists say that the Federal Reserve will start to raise interest rates as the economy continues to improve. However, the rate of increase will not be nearly enough to offset the losses the insurance companies are experiencing. If insurance companies start to lose premium cases in court, then these companies will need to look elsewhere for more revenue, and that elsewhere could be with malpractice insurance premiums.
Is This Going To Be A Crisis Or A Minor Issue?
Are we looking at a medical malpractice insurance crisis or just a bump in the road? Insurance companies are indicating that eight years of zero percent interest rates and paying out $4 billion per year in malpractice settlements has caused a serious problem that has to be addressed. With many medical professionals already indicating that their medical malpractice premiums are a financial burden, raising those premiums could trigger a medical crisis in the United States.
Medical professionals have been complaining about the high cost of medical malpractice insurance for years, but things could get really ugly in the coming months. If there are no caps put on malpractice settlements in the nearly 25 states that do not have caps, then insurance companies may feel forced to raise their malpractice insurance premiums. If that happens, then we may start to see a lot of doctors retire and move out of the medical field.
With the number of medical professionals dropping and the population getting older, this medical malpractice insurance problem could wind up being very significant for everyone. Even if there are caps put on malpractice settlements in other states, there is no guarantee that insurance companies will not raise malpractice premiums. The next few months will be very anxious times for the entire medical industry, and it could change the way you get medical treatment in the not too distant future.