California’s New MICRA Will Negatively Impact Med-Mal Premiums

On May 23, 2022, California’s Governor Newsom signed into law modifications to the Medical Injury Compensation Reform Act (MICRA) – a tort reform law passed in 1975 that is widely believed to have stabilized access to healthcare in California by reducing medical injury related litigation and stabilizing medical malpractice premiums. These changes to MICRA were made in return for the removal of the Fairness for Injured Patients Act (FIPA) from the November ballot, an initiative designed to much more dramatically alter MICRA.

Many in and around the healthcare industry believe the recent modifications to MICRA are a good thing. I wonder if they will feel the same when physicians and other medical providers in California experience what I believe will be the impact of these changes on medical malpractice pricing and availability in the state.

So, What’s Changed?

The most commonly cited modifications to MICRA involve the increases to the long static cap on non-economic damages. Details are as follows:

• The cap on non-economic damages not involving the death of a patient will increase from $250,000 to $350,000 on 1/1/23.
• This cap will then increase by $40,000 annually until it reaches $750,000 in 10 years.
• The cap will increase by 2% annually thereafter.

• The cap on non-economic damages involving the death of a patient will increase from $250,000 to $500,000 on 1/1/23.
• This cap will then increase by $50,000 annually until it reaches $1,000,000 in 10 years.
• The cap will increase by 2% annually thereafter.

These cap increases alone would have a meaningful impact on medical malpractice pricing in the state, but it doesn’t stop there. There are other lesser-known modifications to the new law that will likely take that negative impact to a whole new level. These include:

• Three separate categories for non-economic damages caps will be created when the changes to MICRA go into effect on 1/1/23. This will allow for as many as three of the now higher and increasingly larger-cap limits to be applied in each case.

• Contingent attorney fees, previously allowed under an increasingly restrictive “stair-step” approach applicable to the amount recovered are now allowed on a flat percentage basis. According to McCormick Barstow LLP Attorneys at Law, those fees are “… 25% for settlements executed prior to the filing of a civil complaint or demand for arbitration, and 33% for recovery under settlements, arbitrations, or judgements after the civil complaint or demand for arbitration is filed.”
  
  The result is starting on 1/1/23 attorneys will make more money on any claim resulting in a recovery of $650,000 or more. The larger a recovery is above that amount; the more attorneys will collect.

• The cap limit applied to a claim is no longer the limit in place when a claim is initiated, but rather the cap limit in place when it is adjudicated or otherwise settled. This means the longer it takes a claim to close out the larger the applicable cap (or caps) could be.
  
  
• Previously, MICRA allowed for periodic recovery payments by insurance companies on any judgement exceeding $50,000. The modifications to MICRA bump that minimum to $250,000. This means insurance companies will be required to make much larger lump sum payments up front in many claim situations rather than pay the recoverable over time.

Taken as a whole, these changes will likely result in increased frequency and severity of medical malpractice claims. This in turn will result in higher med-mal premiums. But that’s not all.

The Rest of the Story

Although the MICRA modifications don’t take effect until 1/1/23 the impact of this new legislation will affect insurance companies writing medical malpractice immediately. This is because the changes will impact policies that are already in force and paid for. Medical malpractice policies are typically written on an annual basis, and so any in-force policy with an expiration date beyond 1/1/23 will be subject to the elevated exposure associated with the changes to MICRA – exposure that insurance companies never received premium for.  

One might think that insurance companies could just increase their rates in response to the elevated exposure, and in so doing ensure healthy and stable books of business. However, for insurance companies utilizing the admitted medical malpractice policies that insure most physicians in California, it just doesn’t work that way. Admitted products are regulated by a state’s Department of Insurance (DOI). In the state of California, the DOI has historically taken a dim view of medical malpractice rate increases and, even when approved, taking a very long time to do so.

Mitigating the DOI’s likely stance against medical malpractice rate increases in California is the fact that insurance companies typically do have the ability to increase premiums for their admitted medical malpractice policies and still comply with their current DOI filings. For insureds whose premiums are calculated in a traditional fashion, they need only reduce currently applied credits at renewal. However, I suspect at this point in the firming market cycle that credit application has been restricted to the point where there is not much credit left to reduce.

So just apply some debits, right? Not so fast. The ability to apply debits to increase premium once all credits have been repealed is difficult to do in your typical filing because the DOI recognizes debits for what they are – a premium penalty insurance companies apply to manual/base rates to the detriment of insureds. For this reason, the ability to apply debits is much more restricted than the ability to apply credits. For that percentage of an insurance company’s admitted medical malpractice book whose premiums are calculated in a traditional fashion (these days probably somewhere between 40% and 60%) it is not clear they can increase premiums enough to offset the increased exposure associated with the MICRA changes detailed above.

What about the ability of insurance companies to increase premiums in compliance with their current filings for insureds who have had their premiums calculated in a non-traditional way? These insureds likely had their premiums determined by what is generally referred to as an experience rating model – an approach reserved for very large risks. Basically, this means an insurance company’s actuarial people assess the overall cost of an insured’s claim history and then apply their own administrative expense load as well as the desired profit margin. In this way, they determine what premium they should charge for the risk.

Experience rating provides insurance companies a great deal of flexibility to charge a premium they feel is appropriate for larger risks. The problem is the competition for these large risks is typically fierce, in large part because they generate an inordinate amount of premium volume. In the face of such competition, it is not clear whether insurance companies will be able to charge a premium for these large risks that compensates them for the elevated exposures associated with the new MICRA.

What Happens Now?

So, what happens when exposures go up significantly but insurance companies are disallowed in one way or another from raising their premiums in response? My guess is insurance companies writing medical malpractice in the state of California will do the following:

• Impose stricter underwriting guidelines such that marginal risks (either in a solo practitioner or group setting) will no longer qualify for admitted/standard risk medical malpractice products. Many of these risks will instead be written in the E&S market, the result being significantly higher premiums and scaled-back coverage.

• Reduce the number of high-risk physician specialties they will write. These specialties include Neurosurgery, OB/GYN, Plastic/Cosmetic Surgery, General Surgery, Thoracic Surgery, and Radiology.

• Restrict writing business in difficult legal venues such as the counties of Los Angeles, Orange, Riverside, and San Bernadino.

• Pull back on the limits they are willing to put up, especially in difficult legal venues.

In addition to the above, some insurance companies just might pull out of the state altogether, or at least stop writing medical malpractice on an admitted basis.

Rolling the Dice

All things considered, I believe the modifications to MICRA will lead to a significant increase in the frequency and severity of medical malpractice claims in California. Ironically, for the reasons laid out above this may well lead to lesser access to healthcare in California despite the new MICRA supporters’ claims to the contrary.

Given the extent of the concessions made by the proponents of MICRA to avoid FIFA going to a vote in November, they must have felt there was a good chance the initiative would pass this time around. However, the changes to MICRA they agreed to represent a pretty big gamble too. Only time will tell if it pays off.

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