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Joanne Doroshow Headshot

Time to Reform That Other Insurance Industry

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We all depend on reasonably-priced insurance to function and I'm not talking just about heath insurance. Without affordable property-casualty insurance, we couldn't drive cars or own homes, doctors wouldn't be able to practice medicine, small businesses like day care centers wouldn't exist and local governments couldn't function. Having insurance is not an option. For better or worse, the property-casualty insurance industry is a critical sector of the U.S. economy.

It's also one of the least regulated, and most influential, profitable and unaccountable industries in the nation, answering to no federal agency and regulated by a nation of mostly weak state agencies. It is exempt from federal anti-trust laws. Most state insurance departments have little ability to control insurance rates. With few exceptions, these departments have neither the funding nor political will to exercise proper control over this industry, save its main regulatory job - to prevent a company's insolvency. Policyholders have very little protection otherwise. The result is an industry that can make extraordinary claims and demands on lawmakers that go nearly unchallenged.

Indeed, it is an industry capable of threatening major damage to a state's economy. It usually gets what it wants. I recall that back in 1986, all five West Virginia medical malpractice insurance companies threatened to pull out of the state unless insurance industry regulatory laws were repealed. The state Supreme Court stopped them but the legislature capitulated anyway and repealed these laws.

This kind of power has made states incredibly slow to act when it comes to regulating insurers. The one big regulatory success story - Prop. 103 in California - came about in 1988 when voters, tired of inaction by the legislature, rose up in the face of massive insurance industry spending and voted in strong regulation. (See the Consumer Federation of America's report finding years later that California was the top-performing state for keeping rates down and providing comprehensive consumer protection.)

But then look at Illinois, one of the least regulated insurance markets in the nation. When Illinois lawmakers passed their clearly unconstitutional "cap" on compensation for medical malpractice victims a few years ago, they also passed insurance reform with strong rate oversight and new transparency requirements. Suspecting the "cap" would be invalidated (almost guaranteed since two prior "caps" had been struck down), the industry demanded, apparently with the backing of the medical lobbies, that a "non-severability" clause be added. That meant that if the cap were struck down, the industry regulatory laws would be thrown out as well. This happened last month.

The real tragedy is that the Illinois Division of Insurance believes that these new insurance reforms (and not the cap) so greatly improved the medical malpractice insurance environment with expanded coverage and lower premiums for doctors, that it is now practically begging lawmakers to repass it.

Why don't doctors get this? They complain, correctly, that they are being price-gouged by their medical malpractice insurers, but refuse to join with consumer groups to push for strong insurance industry regulation. I once asked the then head of the American Medical Association, Dr. Donald Palmisano, about this - on live television. I said politely, "I do not know why people like Dr. Palmisano and the rest of the AMA do not join with consumer groups like ours to advocate for strong reforms of the insurance industry." He responded by attacking us and complaining about the U.S. legal system - as usual. Medical societies do a tremendous disservice to their members by taking such a view.

Unfortunately, this attitude continues to pop up. In Kansas, for example, there is a case right now before the state Supreme Court challenging a broad and brutal "cap" on compensation that has been in effect since the 1980s. No one really knows what will happen but the Kansas Medical Society is getting ready - and not in a good way. Instead of reacting like the Illinois Division of Insurance and focusing on insurance reforms that could actually increase competition and stabilize rates for doctors, the medical society announced they will work to change the state's constitution. Perhaps this shouldn't be surprising since a Kansas Medical Society affiliate insures most Kansas doctors.

It might be a good idea for doctors in Kansas to listen to a few insiders, though. In 2002, Senator Ted Kennedy (D-MA) repeated some illuminating industry quotes on the Senate floor, like one from the American Insurance Association: "[T]he insurance industry never promised that tort reform would achieve specific premium savings." These quotes reminded us of an even earlier remark from the Assistant Vice President for State Farm, who in 1986 sent a letter to the Kansas Insurance Department warning that premiums won't drop because, "[W]e believe the effect of tort reform on our book of business would be small. ... [T]he loss savings resulting from the non-economic cap will not exceed 1% of our total indemnity losses." Didn't matter. The "cap" passed.

The property-casualty insurance industry exercises political clout with impunity because of its dominant position in the economy and because lawmakers are intimidated by its power. It is going to take strong political leadership to rein this industry in. We hope someone tries.