Bill Burns

Vice President & Actuary

CLRS

September 12, 2006

Significant Risk and Uncertaintyin Medical Malpractice Loss Reserving

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General loss reserving guidance provided in several sources ASOP 36

Statement of Principles (1988)

COPLFR (P&C Practice Notes)

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ASOP 36 uses terms such as:

Material Adverse Deviation

Changing Conditions

External Conditions

Significant Risks and Uncertainty

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Section 3.3.3 of ASOP 36 addresses the issues of “Significant Risks and Uncertainty” as follows:

“When the actuary reasonably believes that there are significant risks and uncertainties that could result in material adverse deviation the actuary should include an explanatory paragraph in the SAO. The paragraph should contain…a description of the major factors or particular conditions underlying risks and uncertainties that the actuary believes could result in material adverse deviation.”

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Statement of Principles says:

Considerations — Understanding the trends and changes affecting the data base is a prerequisite to the application of actuarially sound reserving methods. A knowledge of changes…is essential to the accurate interpretation and evaluation of observed data…

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COPLFR Practice Note says:

“The opining actuary is expected to use his/her discretion as to which risk factors and issues merit discussion in the opinion.”

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COPLFR provides a (partial) list of the types of risk factors (and underlying exposures) for which comments may be appropriate

Asbestos

Construction Defect

Recently Enacted Legislation

Tobacco

Med Mal Legislative Issues

Mold

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Question 1

What significant risks and uncertainties – if any – exist in medical malpractice that actuaries might consider disclosing in their SAO’s?

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Med Mal factors that have been “considered”: Tort Reforms

Nursing Homes

Breast Implants

Pedicle Screws

Others?

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The field of medicine is changing more rapidly than almost any other:

Delivery

Drugs

Technology

Procedures

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Delivery of medicine — then…

Family Doctor

Specialists

Hospitals

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…and now

Primary Care Physicians

Specialists

Hospitals

Outpatient Surgery

Physicians’ Offices

Ambulatory Surgi-Centers (ASC)

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Facts about outpatient surgery 70% of all surgery done in U.S.

14 million done in 2005

20% in doctors’ offices

80% in ASC’s

Most ASC’s are accredited (JCAHO, AAAASF)

Most doctors’ offices are not regulated

Many doctors are not board certified in the procedures they perform

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Facts about outpatient surgery (cont’d)

Doctors are paid more for office surgery

Medicare pays $600 more for a colonoscopy

Doctors’ offices are the most dangerous place to undergo anesthesia

Outdated/Malfunctioning equipment

Doctors administering anesthesia and operating

Patients are 12x more likely to die or get injured in offices than in hospitals (Archives of Surgery, 2003)

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Some facts about (legal) drugs

Thousands of pharmaceutical companies worldwide

“Market” > 4,000 drugs (and rising)

~800,000 doctors in U.S.

> 1.5Bn prescriptions written annually in U.S.

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Drugs (cont’d)

Come in all shapes, sizes, colors and dosages

Taken 1x, 2x, 6x daily

Taken in the morning, at night or as needed

Many have similar sounding names but have completely different purposes

Is it any wonder medication errors are one of the leading causes of med mal losses?

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Drugs (cont’d)

Hospitals are using new technologies to reduce medication errors but what about those that happen outside the hospital setting?

“Medical Mixologist”

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Technologies and Procedures

Two-edged sword

Extend and improve quality of life

Introduce new errors (learning curve)

Warning label: new medical technologies and procedures may be hazardous to your health!

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Examples

Laparoscopic Cholecystectomy (“Lap Choly”)

Minimally invasive

Decreased visibility

Unfamiliar with instruments

More claims, higher awards until doctors were over the learning curve (three years)

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Bariatric Surgery

Rapid increase in number of procedures

Number of surgery related mortalities and complications

What is the mortality rate?

Where are doctors in the learning curve?

What would an obesity pandemic mean?

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Other factors to think about:

Patient safety

Electronic medical records

Tele-radiology

Use of robots

Evidenced based medicine

New specialties

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Question 2

If we agree there are significant risks and uncertainties in medical malpractice should actuaries try to quantify their impact on loss reserves or is an explanatory

paragraph sufficient?

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Consider…

Underwriters are expected to constantly use more efficient ways of evaluation and quantifying risk.

Should actuaries be content to say:

“My projections make no provision for the extraordinary future emergence of new classes of losses or types of losses not sufficiently represented in the Company’s historical database or which are not yet quantifiable.”

Or to issue a qualified opinion?

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Conclusion

The numbers do not reveal their secrets easily

“Actuaries need to be curious, sometimes even more than they need to be intelligent…What good is applying a tried-and-true theory if you don’t understand the problem or the underlying drivers involved, or if you’ve misidentified a key risk?” (Sam Gutterman, Contingencies, July/August 06)