MICRA Reform: What It Means for California Healthcare Providers

MICRA, or the Medical Injury Compensation Reform Act of 1975, is a California statute that limits the non-economic damages portion of medical malpractice claims with the intent of reducing tort liability for healthcare providers. At the time of its passing, medical malpractice insurance rates in California were at an all-time high and threatening to spin out of control. The reform allowed for more predictable losses, resulting in decreased malpractice liability insurance premiums, and kept the medical service provider industry profitable, allowing for wide access to affordable care for patients.

While economic damages, which are not capped, are designed to restore a person’s financial condition, non-economic damages do not directly contribute to a financial loss. Examples of non-economic damages include pain and suffering, emotional distress, reduced quality of life, and loss of consortium. Under MICRA 1975, these damages were capped at $250,000, but the statute did not contain any provisions to increase the cap over time to adjust for inflationary factors.

In addition to the cap, MICRA also addressed the statute of limitations, allocation of attorney’s fees, payment plans for damages, and more.

What Is Changing and Why?

Over the past 47 years, the California plaintiffs’ bar, consumer protection groups, victim advocates, and lobbyists have fought for legislative reform to either eliminate the MICRA-established cap entirely or raise it with built-in provisions for annual increases. After numerous ballot initiatives were defeated or delayed, proponents made progress in April 2022—in advance of a November 2022 ballot initiative that would have significantly altered MICRA by substantially raising the non-economic damages cap and eliminating many important protections.

Lawmakers drafted Assembly Bill 35 (AB 35) as a compromise from both sides of the aisle to reform MICRA. The bill, which was signed into law by Governor Gavin Newsom in May of 2022 will increase the non-economic damages cap to $750,000—and $1 million for wrongful death cases—over the next 10 years, beginning January 1, 2023.

*Maximum award increased if multiple providers involved in same incident

The new 2023 caps will be $350,000 for non-death cases and $500,000 for wrongful death cases. Once the new caps are reached in 2033, a built-in inflation index will adjust the cap at 2% annually in perpetuity. Additionally, the bill created three separate categories of caps for recovery against a medical institution, a medical provider, and an unaffiliated healthcare institution or provider, which increases damages three-fold if multiple providers and facilities are involved in the same incident. It also addressed attorneys’ fees by increasing the limit on contingent fees, shifting the allocation from a basis of recovery amount to timing, and building in an allowance for higher fees if requested by motion.

What Does This Mean for Medical Professionals and the Healthcare Industry?

The clear concern from the perspective of healthcare providers is the potential for an increase in the frequency and severity of medical malpractice litigation. Increased MICRA caps compound growing issues with practicing in a highly litigious society. Healthcare providers already face difficulties operating in a business environment that is stressed by an increase in nuclear verdicts driven by social inflation and third-party litigation funding. Per Risk & Insurance, the healthcare industry is also facing a talent shortage, which creates delays in care and overworked medical professionals, leading to an increased potential for misdiagnosis, mishaps, and other various medical malpractice concerns.

Changes to the attorney fee structure, allowing for higher contingency fees after the filing of a civil complaint or arbitration demand, creates a perverse incentive for plaintiff attorneys to delay or withhold resolution and incentivizes attorneys to increase the amount of filed claims. The allowance of three separate caps incentivizes attorneys to bring more defendants into each case. These changes also dramatically increase total available attorney’s fees as a percentage of the recovery available to the injured patient. It is hard to see how the core constituency—the injured patient—“wins” with these new changes related to fees.

How Will MICRA Reform Affect the Malpractice Insurance Market?

The insurance marketplace has clearly communicated that there will not be mass rate increases driven by MICRA reform in 2023. We anticipate a gradual adjustment to rates over time before the full effect of AB 35 begins to affect litigation—both cost and settlements/verdict amounts—and eventually malpractice insurance rates and healthcare costs. However, the reform creates uncertainty, which typically leads to a hard market.

Historically, facilities and physicians have purchased primary medical malpractice insurance limits of $1 million per occurrence, with a $3 million annual aggregate. While the definition of medical negligence has not changed, increased caps could drive an increase in the frequency of severity of claims, which would erode these limits at a faster rate. In future limit-setting decisions, however, healthcare providers must consider that increased primary limits or the purchase of excess limits can make physicians and facilities a target for increased litigation. From a long-term perspective, if higher limits become standard, this could create a capacity strain on the market and even lead to the exit of medical malpractice insurers from California over time.

What Are Proactive Steps Insureds Can Take Now?

Below are some steps healthcare providers can take now to prepare for the effects of AB 35:

• Discuss AB 35 with your broker, their claims advocates, and your insurance carrier. Understanding your carrier’s expected impacts of AB 35 on your risk profile and insurance premiums is critical. Clearly communicate AB 35 changes to your staff and practice administrators.
• Review insurance carrier panel attorneys and establish a strong working relationship with your defense team. Discuss defense best practices like proper documentation and use of informed consent and/or informed refusal forms.
• Perform a comprehensive review of your medical malpractice program. Start by evaluating your program structure—including limits, retentions, and terms and conditions—then conduct a risk transfer analysis and continue to monitor rates.
• Most importantly, review and update your risk management policies and procedures for loss prevention and mitigation. Work with your broker and carrier for any risk management needs to identify key loss drivers and address any shortcomings with training for your staff.

With the passing of AB 35, the landscape for medical malpractice insurance has changed. Healthcare providers should anticipate new challenges in the placement of their malpractice insurance programs in time. As you plan your 2023 renewals and beyond, reach out to your Woodruff Sawyer representative for guidance.