Update: What Medical Liability Reform Means for Healthcare Providers

Almost two years ago, Governor Gavin Newsom signed Assembly Bill (AB) 35 into law, reforming California’s Medical Injury Compensation Reform Act (MICRA) of 1975. As discussed in this previous blog about MICRA reform, the legislation made two significant changes to MICRA: restructuring the limit on attorney fees and raising the cap on non-economic damages. These are changes that could drive an increase in the frequency of claims in California, result in larger jury awards, and send ripples throughout the national medical professional liability market.

The message from the medical malpractice marketplace was clear in 2023: Material rate increases weren’t expected in the short team, but long term it would be important to monitor whether AB 35 would cause a sharp rise in the frequency and severity of claims. Now that we’re nearly two years in, it’s time to ask: Has the change to MICRA and other tort reform across the United States contributed to the hardening medical malpractice market?

A Prolonged Hard Market

The medical professional liability space is in a prolonged hard market driven by several successive years of industrywide underwriting loss. Recently, A.M. Best revised its outlook on the insurance segment from “negative” to “stable.” While they cite rising claims costs and other key challenges for insurers, rate increases implemented every year since 2017 have contributed to slowing the pace of underwriting loss. 

However, we have yet to reach a point of rate adequacy, with an underwriting deficit expected again for calendar year 2023.

Contributing Factors to Rate Pressure

Expanded liability from amended tort reform laws is just one of many contributing factors in the rate pressure that remains prevalent in the industry:

• Beyond the update to MICRA, legislatures and the plaintiff bar have made a constant push for medical liability reform nationwide with the goal of increasing or eliminating caps, expanding liability, increasing statutes of limitation, and more. 
• Medical malpractice rates continue to see a great deal of variability depending on the healthcare segment, loss experience, the jurisdiction, and other underwriting characteristics. 
• Social inflation trends have also been impacting the market, similar to what we have seen in other casualty lines of business. These trends include dissatisfaction and distrust of the healthcare industry, litigation financing, advanced litigation tactics, and the severity of verdicts outpacing economic inflation with juries being overwhelmingly sympathetic to injured patients. The Doctors Company and Moore Actuarial Consulting estimate that 8 to 11 percent of all medical malpractice losses incurred by physician-focused insurers stemmed from social inflation.
• A majority of medical malpractice allegations reach a resolution before going to trial. An upward trend in these claim settlements is evidence of the effect of social inflation extending beyond the courtroom.
• Carriers are being cautious with their limit deployment. Underwriters are being judicious due to the increased cost of reinsurance and the potential for nuclear verdicts, especially in higher hazard sectors of the healthcare industry. This continues to put pressure on rates when combined with carriers exiting certain jurisdictions, or even the marketplace entirely, and reduced competition due to consolidation of markets through mergers and acquisitions.

Lastly, another consequence of AB 35 is how the reform affects the timing of case filings and dispositions. These changes could disrupt trends and create statistical uncertainty. This makes the underwriting and actuarial analysis on California-based risks more complex and could lead to a heavier weight on client-specific loss experience, increased expectations around severity, and even affecting tail—the length of time that claim exposure exists. This is because the reforms may result in claims taking longer to settle—and subsequently, exposures remain extended beyond what historical tendencies would suggest.

The Full Effects of AB 35 Are Yet to Come

Ultimately, as rising claim costs are expected to compound over time along with the annual increase built into the new MICRA cap, it is still too early to feel the full effects of AB 35 in the California Medical Malpractice marketplace and beyond. However, coupled with the many other factors affecting the industry nationwide, we expect the national medical professional liability marketplace to remain challenging throughout 2024 and into 2025. 

As you plan your 2024 medical professional liability renewals, reach out to your Woodruff Sawyer representative for guidance.