Malpractice Insurance Premiums Lower In States With Caps
On Damage Awards, According To Health Affairs Analysis

But Sharp Increases In Premiums May Not Be Explained
By Lack Of Tort Reform In Many States, Article Contends

BETHESDA, MD — Medical malpractice insurance premiums are 17.1 percent lower in states that have capped court awards, although the lack of such tort reform measures in other states does not fully explain recent jumps in what physicians pay to cover the cost of malpractice suits, according to a new analysis published on the Health Affairs Web site, www.healthaffairs.org.

Kenneth E. Thorpe, chairman of the health policy and management department at the Emory University Rollins School of Public Health, examines the effects of recent sharp increases in malpractice premiums in many states and states’ efforts to keep malpractice premiums down. Malpractice premiums increased by 23.2 percent in 2002, although the increases varied by state and specialty.

Awards caps exist in 24 states and are the only malpractice reform efforts that have affected physicians’ premiums, reducing them 17.1 percent. While Thorpe says that such measures extended to other states or nationally through a federal law “would ultimately result in lower premiums,” he questions whether taking that step would accomplish the goals of the liability system.

“At issue is whether we should adopt short-term, stopgap solutions to slow the growth in premiums, or use the recent experience to more fundamentally evaluate and perhaps reform the liability system,” Thorpe says. “The results suggest that capping awards may improve the profitability of malpractice carriers and reduce premiums. Whether this is socially desirable or improves the goals of deterrence and compensation remains an open question.”

Three factors have been the principal drivers of malpractice premiums: growing awards and settlements, increased frequency of lawsuits, and declines in investment income. By 2002 every premium dollar collected resulted in $1.29 in total expenses, awards, and settlements, up from 95 cents of total expenses in 1995, Thorpe writes.

Meanwhile, investment earnings have dropped steadily, from 49 percent of premium income 1995 to 18 percent in 2002. Combined, those trends yielded an industrywide net after-tax loss of 11 percent in 2002.

Also disrupting the market has been the bankruptcy of some malpractice insurance carriers and the decisions of others to stop writing policies in some states or withdraw from the business altogether. Thorpe identifies a correlation between the reduction of competition and higher premiums in some states.

Thorpe questions whether the recent increases in malpractice premiums constitute a crisis or simply standard fluctuations in the insurance markets.

“Rising claims costs may reflect a rise in underlying negligence,” Thorpe says. “If true, the system may be functioning as designed, and the spike in premiums may provide stronger incentives to improve the quality of care provided.

“On the other hand, we may be observing a permanent rise in claims payments and costs unrelated to trends in physician negligence,” he says. “At issue is the extent to which the underlying factors generating higher premiums are following a traditional cyclical insurance pattern, or whether a structural change has occurred in severity and frequency.”

To view the article, click content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.20.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research.

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©2004 Project HOPE–The People-to-People Health Foundation, Inc.