No Correlation Between Malpractice Payouts and Insurance Premiums

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No Correlation Between Malpractice Payouts and Insurance Premiums 

Empirical research has found that there is little correlation between malpractice payouts and malpractice premiums. A study by researchers at the University of Texas, Columbia University and the University of Illinois based on closed claims compiled by the Texas Department of Insurance concluded that “the rapid changes in insurance premiums that sparked the crisis appear to reflect insurance market dynamics, largely disconnected from claim outcomes.”i

Researchers from the National Bureau of Economic Research came to the same conclusion, stating, “increases in malpractice payments made on behalf of physicians do not seem to be the driving force behind increases in premiums.”ii The AIR analysis likewise found no relationship between insurer payouts and premiums. AIR concluded, “Not only was there no “explosion” in lawsuits, jury awards or any tort system costs to justify the astronomical premium increases that doctors have been charged in recent years. These rate increases were rather driven by the economic cycle of the insurance industry, driven by declining interest rates and investments.”iii Instead, market dynamics, such as the fluctuation of investment income according to interest rate swings, were the sole cause of increased premiums.

The conclusion of much of the empirical research is that even if tort reform saves insurance companies money, those savings are not passed on in the form of lower physician premiums or health care costs. A study of the leading medical malpractice insurance companies’ financial statements by former Missouri Insurance Commissioner Jay Angoff found that these insurers artificially raised doctors’ premiums and misled the public about the nature of medical negligence claims.iv According to the study, the amount the leading malpractice insurers projected they would pay out in claims in the future declined; the amount they actually paid out in claims declined; and their surplus—the extra cushion they have accumulated over and above the amount they have set aside to pay claims in the future—increased to an all-time high—five times the state minimum surplus for insurer stability.

These rapid increases in premiums have led to one thing for insurance companies: massive profits. In 2008, the average profit of the 10 largest medical malpractice insurers in the U.S. was higher than 99 percent of Fortune 500 companies and 35 times higher than the Fortune 500 average for the same time period. In fact, this may actually understate insurance industry profitability, given the medical malpractice insurance industry’s practice of systematically overestimating their losses and underestimating their profits. Revised statements of actual losses typically show that insurers reaped more profits than they initially reported.v

There are politically-motivated reasons for medical malpractice insurance companies to overestimate their losses and underestimate their profits. In many cases, companies have used overblown reported losses as justification for legislation that restricts the rights of patients injured by medical negligence. Such tort reform measures have proven to be massively beneficial to insurance companies. In states with caps on damages, the average loss ratio is 24 percent better than in states without caps.vi  In states without caps, insurance companies took in just over twice what they paid out in 2008. However, in states with caps, insurance companies took in 3.5 times what they paid out. In effect, insurance companies continue taking in the same level of premiums, but pay out less in states with tort reform.vii

A Dallas Morning News investigation of Texas’ 2003 medical negligence cap found similar results. While hospitals and medical malpractice insurance companies made millions over the next few years, no hospital or doctor cut the prices they charged patients or health insurers. The cost of health care in Texas continued to rise at near-record levels.viii

*Chart from Analysis of Top 15 Medical Malpractice Insurers – “No Basis for High Insurance Rates,” Jay Angoff, May 2007

i Bernard Black, Charles Silver, David A. Hyman, and William M. Sage, Stability, Not Crisis: Medical Malpractice Claim Outcomes in Texas, 1988-2002, Journal of Empirical Legal Studies, 2005.
ii Katherine Baicker and Amitabh Chandra, The Effect of Malpractice Liability on the Delivery of Health Care, National Bureau of Economic Research, Working Paper, 10709, 2004.
iii Medical Malpractice Insurance: Stable Losses/Unstable Rates 2007, Americans for Insurance Reform, March 28, 2007.
iv Jay Angoff, No Basis for High Insurance Rates, May 2007, http://www.justice.org/resources/No_Basis_for_High_Insurance_Rates_2007.pdf.
v Ibid.
vi Eric Torbenson and Jason Roberson, Tort Reform: Debate Still Thrives Over Limit on Damages in Texas Malpractice Suits, Dallas Morning News, June 17, 2007.
vii U.S. Chamber of Commerce’s Institute for Legal Reform’s 10th Annual Legal Reform Summit, , panel discussion, It’s Economics Stupid: Exploring the Relationship Between Lawsuits and Rising Health Care Costs, U.S. Chamber of Commerce Headquarters, Washington, D.C., October 28, 2009.
viii Maxwell J. Mehlman and Dale A. Nance, Medical Injustice: The Case Against Health Courts, 66, 2007.


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