Medical Malpractice Insurance Studies
About This Event

Claims of a medical malpractice crisis stem in large part from recent increases in malpractice insurance rates, with premiums for some individual doctors set in the hundreds of thousands of dollars a year. Most doctors, actuaries, and insurance officials attribute these costs to the lack of caps on liability awards. Some trial lawyer organizations and politicians claim that the rise in insurance rates are unrelated to the expenses of defending and paying malpractice claims, and that caps will not affect insurance prices. Many states have instituted various types of liability reform. What effect have these reforms had on medical malpractice insurance premiums? Are rising defense costs for malpractice cases part of the problem, and, if so, how have insurance companies responded?

Three recent studies on these questions will be presented at this event: “Tort Law and Medical Malpractice Insurance Premiums” coauthored by Meredith Kilgore and Michael Morrisey, “An Economic Assessment of Damage Caps in Medical Malpractice Litigation Imposed by State Laws and the Implications for Federal Policy and Law” coauthored by H. E. Frech III, and “Defense Costs in Medical Malpractice and Other Personal Injury Cases: Evidence from Texas, 1988-2004” coauthored by David Hyman. Following the presentations, panelists Randall Bovbjerg and Jonathan Klick will discuss the public policy implications of those studies. Ted Frank, director of AEI’s Liability Project, will moderate.

Agenda
8:45 a.m.
Registration and Breakfast
9:00
Presenters:
H. E. Frech III, University of California at Santa Barbara
David Hyman, University of Illinois College of Law
Meredith Kilgore, University of Alabama at Birmingham
Panelists:
Randall Bovbjerg, Urban Institute
Jonathan Klick, Florida State University College of Law
Moderator:
Ted Frank, AEI
12:15 p.m.
Adjournment
Event Summary

June 2007

Medical Malpractice Insurance Studies

 

Claims of a medical malpractice crisis stem in large part from recent increases in malpractice insurance rates, with premiums for some individual doctors set in the hundreds of thousands of dollars a year. Most doctors, actuaries, and insurance officials attribute these costs to the lack of caps on liability awards. Some trial lawyer organizations and politicians claim that the rise in insurance rates are unrelated to the expenses of defending and paying malpractice claims, and that caps will not affect insurance prices. Many states have instituted various types of liability reform. What effect have these reforms had on medical malpractice insurance premiums? Are rising defense costs for malpractice cases part of the problem, and, if so, how have insurance companies responded?

Three recent studies on these questions were presented at an event held on June 29 at AEI: "Tort Law and Medical Malpractice Insurance Premiums," coauthored by Meredith Kilgore and Michael Morrisey, "An Economic Assessment of Damage Caps in Medical Malpractice Litigation Imposed by State Laws and the Implications for Federal Policy and Law," coauthored by H. E. Frech III, and "Defense Costs in Medical Malpractice and Other Personal Injury Cases: Evidence from Texas, 1988-2004," coauthored by David Hyman. Following the presentations, panelists Randall Bovbjerg and Jonathan Klick discussed the public policy implications of those studies. Ted Frank, director of AEI's Liability Project, moderated.

Meredith Kilgore
University of Alabama at Birmingham

This study attempts to analyze the relationship between damage caps and other medical liability reforms and malpractice insurance premiums. It is difficult to quantify tort reform because it encompasses a variety of measures, many of which are governed by unclear statutes, and some of which were struck down by the courts. Law students prepared summaries of all the state medical malpractice tort reform laws, which were then classified by a policy analyst, an economist, and a lawyer. Relevant laws included caps of varying magnitudes on non-economic damages, allowing awards to be offset by collateral sources, statutes of limitations, statutes of repose, joint and severable liability, periodic payments, attorney fee limits, expert witness qualifications, limits on res ipsa, pre-trial screening, and arbitration provisions. The data on malpractice premiums comes from the Medical Liability Monitor and the Medicare Resource-Based Relative Value Scale (RBRVS).

The study concludes that a cap on non-economic damages reduces medical malpractice premiums by 17.3 percent to 25.5 percent, and that lowering the cap amount by $100,000 reduces premiums by 3.9 percent. Statutes of repose limit premiums, but there is no convincing evidence of effects on other tort reforms.

H. E. Frech III
University of California, Santa Barbara

There is a proposal afoot to double the value of California's cap on non-economic damages. The current California law, in addition to capping non-economic damages, allows evidence of addition payments and limits contingent fees.

One of the chief values of the damage cap is that it lowers the expected payoff from a malpractice claim, so that the expected payoff is negative for weak claims but still positive for strong claims. One criticism of these caps is that they reduce access to the courts, which is hard to assess. There was no dramatic drop in claims after the reforms were passed, and even after the reforms, Californians still sue more than people in other states. The caps do lower the payment per claim, to the point where wealthy, urban states with caps have lower payoffs than poor, rural states without them. One study, which sampled individual cases, found that the caps were imposed in 45 percent of the malpractice claims paid out in California.

There are different ways to think about the effect of damage caps on premiums. One method is econometrics. Another is to study the economics of the insurance industry, an approach that suggests that damage caps do have a serious impact. Economic theory proves that some of the cost savings from damage caps must be passed on to the consumers--the patients. Medical malpractice insurance is highly competitive. It includes several mutuals owned by the physicians, who do not profit from high premiums, and it earns a low rate of return. Insurance companies are clearly not pocketing all the gains from these reforms. Physicians are not as competitive as insurance, but they are highly mobile. If doctors in one state are making higher profits because of the malpractice caps, then doctors will move in from other states, bringing the economic profits back down to zero. This does not mean that without damage caps all the doctors will disappear, but such caps can have a strong effect in some areas. It is very difficult for an OB/GYN to survive in a low-income area without damage caps. This can be observed empirically by comparing parts of Los Angeles with socioeconomically similar parts of Dade County, Florida, which does not have damage caps.

The proponents of raising the California caps claim that these benefits actually come from direct rate regulation, which California imposed around the same time as the caps, but this is implausible because those regulations exempt the most popular insurance company structures, and malpractice premiums have grown more slowly than more heavily regulated forms of insurance.

David Hyman
University of Illinois College of Law

This paper focuses on defense costs in Texas. Defense costs are an understudied element of tort reform, and Texas is a large state with serious tort problems and, more importantly, a detailed public database. Defense costs have historically increased by 4.6 percent per year and now constitute about 18 percent of payouts. The most obvious explanations, such as changes in hourly rates and the duration of cases, can be ruled out. Defense costs grow with increases in payouts, policy limits, and numbers of defendants, which is essentially rational behavior from the insurance companies. The initial reserves do not correlate with the actual costs incurred. Defense costs for other types of insurance have increased by only 2.2 percent each year, and medical malpractice has the highest defense costs, suggesting that there is a problem with malpractice insurance in particular. Having an inside counsel may influence defense costs, but if it were a solution to the problem then almost everyone would not have abandoned the practice. Forty-three to fifty percent of tort expenses are legal fees. This is an extremely inefficient way to redistribute income and resolve grievances.

Jonathan Klick
Florida State University College of Law

The real question is the link between the tort system and health outcomes. Relatively few studies have addressed this, although more are showing a link between torts and medical procedures and practices. One of the problems is that the heavy regulation of the insurance industry means that there is a long lag between the adoption of tort reform and changes in rates and behavior. The actual behavior of these regulators does not always match their statutes. Businesses may also respond to the possibility of reforms spreading from one state to another, making state-to-state comparisons difficult.

One problem with the Texas study is that the insurance industry in Texas is highly concentrated. Consequently, Texas does not have many independent data values. Also, Mean attorney fees may not be a useful measure of industry practice when a single outlying insurance company is large enough to have a major impact. These papers should be using a health consumer price index (CPI) and a regional CPI to adjust for inflation.

Randall Bovbjerg
Urban Institute

The big picture is that tort reform works. It shifts money from the plaintiffs to the defense, eventually lowering premiums. The tort system works terribly--the rate of claims, for example, is far lower than the rate of medical accidents.

Insurance actuaries are famous for driving the car by looking in the rear view mirror, while perhaps also looking sideways at the other insurers. One of the problems with this is that the insurance industry tends to be cyclical, and it is very difficult for a study to separate cyclical effects from the variables of interest. The weakness of the Texas paper is that it is about Texas, not the whole nation. It is also difficult to study the effect on liability premiums because the data comes from a dubious survey. Some of these numbers are not plausible.

The legal system theoretically improves health by forcing physicians to work more carefully, but there is little data to support this claim. What data exists comes from too many different, incompatible sources.

AEI research assistant Harriet McConnell prepared this summary.

View complete summary.
Also Visit
AEIdeas Blog The American Magazine

What's new on AEI

Rebuilding American defense: A speech by Governor Bobby Jindal
image Smelling liberal, thinking conservative
image Stopping Ebola before it turns into a pandemic
image All too many reasons for pessimism about Europe
AEI Participants

 

Ted
Frank
  • Ted Frank is a former resident fellow at AEI. He specialized in product liability, class actions, and civil procedure while at AEI. Before joining AEI, Mr. Frank was a litigator from 1995 to 2005 and clerked for the Honorable Frank H. Easterbrook on the Seventh Circuit Court of Appeals. Mr. Frank has written for law reviews, the Wall Street Journal, the Washington Post, and The American Spectator and has testified before Congress multiple times on legal issues. He writes for the award-winning legal blogs PointOfLaw.com and Overlawyered, and the Wall Street Journal has called him a "leading tort-reform advocate."  Mr. Frank was recently elected to membership in the American Law Institute.
AEI on Facebook