Policy Documents

Medical Malpractice Awards, Insurance, and Negligence: Which Are Related?

Alexander Tabarrok and Amanda Agan –
May 10, 2006

In this paper from the Center for Legal Policy at the Manhattan Institute, the authors write that doctors’ medical malpractice liability insurance premiums are at an all-time high. As has been widely reported in the press, escalating med-mal premiums have driven doctors to retire early, shut down their businesses, or reduce the scope of their practices. In areas of the country with particularly high premiums, there is concern that patients’ access to care has been compromised. Insurance companies and most doctors conclude that the root cause of higher insurance costs is higher tort awards. The American Medical Association, for example, says that medical liability reform is their top priority because “rapidly increasing medical liability insurance premiums caused by escalating jury awards are seriously threatening patient access to care.” 

On the other side of this debate are plaintiffs’ attorneys and their allied consumer groups who attribute the boom and bust “insurance cycle” to investment returns and, alternatively, accuse insurance companies of “price gouging.” Such claims are often picked up, uncritically, by the mainstream press.

This study makes four contributions to this debate:

We show that medical malpractice premiums are closely related to medical malpractice tort awards. Over the long run, premiums closely track awards, and premiums adjust to short-run award variation as well. Indeed, insurance companies’ short-run reaction to award levels is the primary driver of the so-called insurance cycle. In addition, med-malpractice premiums are closely related to tort awards across states. The correlation in premiums and awards across the states suggests strongly that tort award levels, not investment returns, are the primary explanatory factor for changes in insurance premiums, since investment returns are unlikely to vary markedly across states.

  1. We show that medical malpractice premiums are not explained by insurance industry price gouging. For the price-gouging hypothesis to make sense, insurance industries must be exercising monopoly power. Looking at insurance industry 4-firm concentration ratios—a measure of market power—we find that states with more concentrated insurance industries actually have lower premiums, even when controlling for other explanatory factors.
  2. We show that medical malpractice tort awards are related to some factors not rationally related to injuries. For instance, states’ judicial electoral systems have predictive value on the expected level of tort award.
  3. We show that malpractice tort awards and thus insurance premiums can vary dramatically for reasons having little or nothing to do with negligence. We reach this conclusion through a novel test of the tort system, in which we compare awards and rates of determination of negligence in the tort system with rates determined by the independent medical board review system. Although board review outcomes are imperfect, they are biased, if at all, against findings of negligence, because physicians will not allow frivolous complaints to result in disciplinary actions. The tort system shows no or even a slight negative correlation with the board review system’s negligence determinations, suggesting that the system is influenced by factors not related to negligence.

 


Alexander Tabarrok, Department of Economics, George Mason University and Amanda Agan, Department of Economics, George Mason University