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Join us on this insightful podcast episode as we delve into the complex issue of social inflation and its impact on the medical malpractice insurance industry. Our guest, Robert E. White, Jr., president of The Doctors Company, provides valuable expertise and insights into this little-understood trend. We discuss the concept of social inflation, the tactics used by plaintiffs’ attorneys, and the driving forces behind this phenomenon. We also explore the influence of “nuclear verdicts” on settlements, the proportion of claims affected, and the role of individual sympathy in creating system-wide imbalances. Furthermore, we examine how social inflation affects insurance rates and what the future holds for this concerning trend. Don’t miss this episode as we gain a deeper understanding of social inflation and its implications for medical professionals.
Robert E. White, Jr. is president, The Doctors Company.
He discusses his KevinMD article, “Unveiling the hidden impact of social inflation: Soaring costs for medical professionals revealed.”
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Transcript
Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast, and get CME for this episode by clicking on the CME link in the show notes. Today we welcome Robert White. He is president of The Doctors Company. The Doctors Company is a longtime sponsor of KevinMD, and his KevinMD article is titled “Unveiling the hidden impact of social inflation: Soaring costs for medical professionals revealed.” Robert, welcome back to the show.
Robert White: Thank you, Kevin. It’s a pleasure to be back. We wanted to talk to you a little bit today about social inflation. It’s a term that’s been brought back into vogue. The first time it was ever used was back in 1977, by Warren Buffett, when he wrote to his Berkshire Hathaway shareholders that social inflation, which he was defining in the letter as broadening attitudes of society and juries about what was covered by insurance policies, was affecting the results of their stock. That’s the first time it was ever used in the insurance vernacular.
Things occurred over the course of the last five or six years where publicly traded insurance companies were trying to explain to their shareholders why loss costs were going up faster than inflation, so they resurrected the term social inflation, and they are ascribing a slightly different meaning to it than Warren Buffett used. His was about having juries and society believing that insurance policies covered things that insurers didn’t intend for them to cover. Today it’s talking about changes in attitudes, and I’ll get into more of that in a minute, but it’s a way of describing the phenomenon that insurers are seeing. We’ve always seen claim severity go up more than economic inflation alone would drive it, and so it was an effort, number one, to describe that phenomenon, and that caused some folks to want to define what the impact of social inflation was.
So a couple of actuaries, Jim Lynch and Dave Moore, started to study this phenomenon to see if they could put an actuarially sound number on it. Most people were using back-of-the-envelope kinds of calculations that violated every tenet of actuarial science, so from a technical perspective, they were just estimates. They didn’t mean a whole lot. This was the first serious effort to study the impact, and they published their paper with the Casualty Actuarial Society back in February of 2022. They could only identify a cause and ascribe a value to it for commercial auto liability claims. They looked at a 10-year period and found that social inflation added $20 billion, or 14 percent, to the losses. They also were able to detect the presence of social inflation in some other lines of insurance, but they said they needed to spend more time and effort trying to isolate it.
So after they published their study, we approached them and engaged them ourselves to finish the study for medical professional liability insurance. We published their findings in August of 2022, which identified the fact that between $2.4 and $3.5 billion was added to medical professional liability losses for the 10-year period ending in 2021. Somewhere in the neighborhood of 8 to 11 percent of all losses were more than they otherwise would have been because of social inflation. So that’s the reason we wrote the article, because it is affecting loss costs. Loss costs going up impacts premiums, and we want people to understand what’s generating this.
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Kevin Pho: Exactly. So tell me some representative cases that would really illustrate that impact of social inflation.
Robert White: Well, there was just an example in April of 2023: a $183 million verdict in Philadelphia for a brain-damaged infant. When you get severely injured patients, like infants who require lifetime care, economic damages play a big role in inflating the verdict. The long and short of it is there’s a formula for how you go about determining what the economic losses are. Economists are experts called by the plaintiff and the defense in these cases. There’s a formula for measuring how you go about awarding those damages, and the juries pretty much have a road map to figure those cases. Where they don’t have a road map is for non-economic damages. There’s no formula for figuring that, so there’s a battle for the hearts and minds of jurors that has been taking place in courtrooms. Unfortunately, the plaintiff side of the house is much more adept and willing to fight that battle than the defense side has been, and that’s leading to the kinds of verdicts we’re seeing, like that $183 million verdict.
There was a case in Idaho in February of this year where our doctor failed to diagnose an evolving stroke. That verdict was the second largest in Idaho. It wasn’t big by today’s standards, $15.3 million, but it was $8 million more than it should have been, because that’s the piece of non-economic damages that the plaintiffs got into the verdict by alleging that what was otherwise simple negligence by anyone’s standard was gross negligence. That trigger in Idaho negates the cap on non-economic damages, so that verdict was twice the size that it should have been. Some expert got tricky with the way they described what was done or not done, that it amounted to negligence in the case.
All of these things are combining to the point where we’re seeing what we call nuclear verdicts occur much more frequently than we’re accustomed to seeing. Normally speaking, we see big verdicts in California, Florida, Texas, Illinois, and Pennsylvania. They don’t surprise us. But just in 2022 and 2023, we’re seeing verdicts in Iowa, Idaho, Utah, Minnesota, and Alabama, states where we wouldn’t normally see one.
In 2022 there was a verdict, a brain-damaged baby case, that resulted in, in round numbers, a $98 million verdict, 50 percent against the hospitals and 50 percent against the OBs. That made the physician portion of the verdict $49 million. In the year prior to this verdict, physicians in Iowa only paid $31 million total. The whole physician population paid $31 million for professional liability insurance, so this one verdict alone was 50 percent more than the entire physician population in the state paid in the year preceding. I know that’s no measure for how much should be awarded in this case, but it shows you the absurdity of the kinds of verdicts we’re seeing. It takes a lot to take care of a brain-damaged baby, I get that, but you can invest this money in a way that, while you may be eroding the principal because the needs and the outlay are higher than, say, your retirement, for example, you’re enriching the next five generations of this patient’s family with an award like that.
Now, I’ll be the first person to admit that it won’t take $98 million to resolve that case. It’ll get paid for less than that. But this is the insidious nature of social inflation. Those verdicts, even though they’re few and far between, influence what cases settle for. Now, you have to remember that we only try 7 percent of all the cases presented against health care providers, and we only lose 1 percent of that 7 percent. We win 80 percent of the time, in other words. But that 1 percent of cases influences the 20 to 40 percent of cases that we wind up settling. Those verdicts are the yardstick by which plaintiffs’ lawyers measure their settlements. When a case is evolving, they’ll send a demand letter requesting a certain amount in settlement of the case, and they’ll use the jury verdicts from cases like the one they’re trying to settle to support the amount they’re requesting in settlement. So they have the ability, even though the verdicts are few and far between, to influence every single case we settle, and so it’s gotten to be a problem.
When you couple that problem with real economic inflation that’s running at 5 percent, and you consider that it takes two to three years for a case to be reported and then settled, if inflation alone just runs for three years, that’s driven up the cost of your case by 15 percent. And when you have social inflation driving it up even more, then we see bad things happening as far as premiums are concerned.
Kevin Pho: So when it comes to these nuclear verdicts, one of the reasons that you say this is happening is because plaintiff attorneys are more adept in the courtroom at pulling at the heartstrings of the juries. Is that the only reason? Are there other reasons behind these nuclear verdicts?
Robert White: Well, it boils down, in my mind, to a perversion of our civil justice system. First of all, they have sympathy going for them. That’s always the big factor in these cases, especially where brain-damaged infants are concerned. In fact, we talked to that jury in the Idaho case I mentioned, and they told us after the verdict came in that the longer they sat there and had to look at the plaintiff, the sorrier they felt for him. At the end of the day, that sympathy made it difficult to overcome our logical arguments about why our doctor wasn’t negligent, and that drove not only the size of the award but the fact that there was an award.
But here is what plaintiffs’ attorneys are capitalizing on, and what I’m calling a perversion of our civil justice system. Our system is designed to make an injured person whole, to compensate them for their economic and non-economic damages. Trial lawyers, the plaintiffs’ lawyers, have perfected strategies that are designed not just to make the plaintiff whole but to induce awards that punish the defendant. Punitive damages isn’t what they’re using to punish the defendant, because punitive damages generally aren’t covered by an insurance policy, so their goal is to drive up the part of the award that is covered by the insurance policy.
There’s what’s called the reptile theory. Books have been written about it. It’s a strategy that plaintiffs’ lawyers use in the courtroom to appeal to the part of our brain that we inherited from reptiles, the thing that triggers our fight-or-flight instinct, and it’s designed to make us fear the defendant’s behavior. They demonize the defendant in the courtroom. What they did or didn’t do is a threat to the community, and that defendant needs to be punished for their behavior, not with punitive damages but with an award to the injured party that deters other people in the community from conducting themselves in the same way. That is the biggest factor in terms of tactics in the courtroom.
You have a group of jurors who have different attitudes, more liberal attitudes today than even 20 years ago, about entitlement to compensation and suing people. You have a generation of folks who have been exposed to lotto jackpots in the billions of dollars, if not hundreds of millions of dollars, to CEO salaries that will make our mouths all open up so that they hit our shoe tops, to professional athletes’ salaries, and now even college students selling their name, image, and likeness for millions of dollars a year while they’re going to school. So we’ve been desensitized about what a lot of money is. What used to be a lot of money isn’t a lot of money anymore. So that’s had a lot to do with it.
Attorney advertising is not just designed for them to grow their business and try to bring business in the front door. Some of it is designed to manipulate the attitudes that jurors have when they do get a chance to serve, about compensation, about who’s good and who’s bad. When they talk about insurance companies, when they talk about corporations in that advertising, they’re manipulating sentiments in our population that are designed to pay off in the courtroom.
Third-party litigation financing takes the sting out of losing and makes investors entitled to a cut of any payout in these cases, whether it’s a verdict or a settlement. It used to be the plaintiff lawyer was putting up their own money. Now they have people investing in the financing of the actual litigation, and it pays off. I’ve seen figures for third-party financing companies’ return on equity north of 30 percent, so it’s paying off handsomely for them, and it’s influencing what’s happening in the courtroom.
We’re seeing tort reform abolished or, in the case of California, liberalized, which in and of itself puts upward pressure on the rates. So when you combine all of these factors, the pressure on rates is tremendous, and it’s probably going to bubble over into rate increases for physicians in the not-too-distant future.
Kevin Pho: We’re talking to Robert White. He’s president of The Doctors Company. His KevinMD article is titled “Unveiling the hidden impact of social inflation: Soaring costs for medical professionals revealed.” Robert, what’s the path forward? Are there solutions individually in the courtroom? Are there policy solutions? What do you see as a path forward?
Robert White: From our perspective at The Doctors Company, we’re definitely behind the curve. One of the things we measure nationwide, not just for us but for every insurance carrier, is the number of verdicts against health care providers in excess of $25 million. Last year we set a record with 22 of those verdicts. So far this year, in 2023, we’ve already seen 15 of those verdicts. If you annualize that trend, that’s 38 for the year. The highest year before last year was 2018, when there were only 15 such verdicts. So we’re way behind the curve.
What we have to do, and what we are doing and have been for the last 18 months, is training our claims department to demand that our defense lawyers argue the damages in these cases much more aggressively than they have in the past. They’ve always done a good job with economic damages, but not so much with non-economic damages. Part of it lies in the psyche. You don’t want to tell the jury that it’s OK to award the plaintiff money when, at the end of the day, you really want them to award them nothing. So there’s been a bias for defense attorneys not to go in and counter the plaintiff’s argument about a total verdict, because at the end of the day they want to walk out of there with a zero, a goose egg. They feel like it’s not OK for them to suggest an amount to the jury, that if they do decide to award the plaintiff, don’t award the tens of millions of dollars that the plaintiff’s lawyer is asking for; it’s OK to award half a million dollars.
So we have to make sure our defense lawyers are willing to argue the overall verdict size and be more aggressive about it than we have been in the past, because we’ve ceded that. It’s what we call the anchoring technique, where the only thing the jury knows about the value of the case is what the plaintiff’s lawyers say it’s worth, and it’s very real. I mean, they’ve done research with judges where they gave a case with no cover letter on it, just the case file, to 30 judges, and they asked them to evaluate the settlement value of the case. Those 30 judges averaged $90,000 for the award of that case. The same exact file was given to another 30 judges, this time with a letter from the plaintiff’s attorney saying the case was worth $3 million, and they returned an average settlement amount of $270,000. So there’s been a lot of research done on anchoring. It’s real. If all one side hears, or if all the audience, in this case the jury, hears is the plaintiff’s number, it’s hard to get them off of that number and get them back to reality. So we have to be in there arguing that.
Kevin Pho: And my final question: Tell us some of your take-home messages that you want to leave with the KevinMD audience.
Robert White: Well, it’s not a good one, Kevin. In the short run, we can expect to see rates go up. It’s going to take a concerted action on the part of insurers in terms of defending these cases. It may even get to the point where it takes political action, reinstituting tort reform in places where it’s been abolished, to get the job done.
Kevin Pho: Robert, thank you so much for coming back on the show and sharing your time.
Robert White: My pleasure, Kevin. Good to see you.
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