New Medmal Study

A study by Bernard Black, Charles Silver, David A. Hyman, and William M. Sage has recently been published on SSRN.com entitled Stability, Not Crisis: Medical Malpractice Claim Outcomes in Texas, 1988-2002.  It suggests that but for two years during the time period there really is no med mal problem in Texas.  The premium spikes were caused by insurance market dynamics according to the authors.  There are many minor things to quibble about (but hey who doesn’t), but the study does appear to do a more thorough job at looking at the problem. My major problem is that of the arbitrary start and end dates which can change results. Looking at percentage changes from 1996 to 2002 makes the story much different than 1998-2002.  [In fact, Ted Frank just posted a concern about a similar issue.] I’ll read it more carefully and add to the commentary. 

However, there are two points that the paper does make that I think are interesting.  First, real defense costs are increasing.  The authors suggest real defense cost increased 4.4 percent per year (over the time period this amounts to a sixty percent increase in defense costs which led to a 14 percent increase in overall claims costs to a set of larger claims.  While not in the 100 percent -plus range of premium increase seen in some states (and in Texas), this is a non-trivial increase in costs.

The effects on the insurance market are important to note as the authors point out.  While not blaming insurers they state that

When policies have "overhangs" that extend forward many years, small changes in loss expectations or projected investment returns on "float" can exert significant (upward or downward) pressure on prices. Medical liability insurance also faces severe "developments risks," ranging from changes in medical technology to changes in public expectations, that accentuate the uncertainty of actuarial estimates.

If the tort system is not primarily responsible for the recent spikes in malpractice premiums, what is? Much of the answer likely lies in malpractice insurance  markets. One set of explanations involves insurance generally. It may not be coincidental that insurance rates soared at a time when the stock market was falling and interest rates were low. As returns on investment declined, carriers could have responded by raising rates. [especially if they premiums were under priced to begin with -mfg]

These are the types of concerns discussed before, but it is really nice to see someone else talking about these issues.  So, assuming for the moment that it is not the tort law causing the problem, and it is not purposeful action on the insurers to price gouge the poor physician, who is left?  I have a candidate--regulators who's interference in markets has led to a thinning of the insurer herd which in turn leads to more drastic price swings and availability crises.  To get to this conclusion, I didn't even have to denigrate plaintiffs lawyers.

Another possibility is that the period starting with Hurricane Andrew in 1992 and continuing through the attacks on the World Trade Center was marked by a  series of catastrophes that over time stressed insurance and reinsurance markets, leading to higher premiums across many lines of insurance. A third explanation centers on the "long-tail" nature of medical malpractice insurance, which may make this form of insurance prone to dramatic price swings.

A fourth consideration is that many malpractice insurers are undiversified, single line companies sponsored by state and local medical societies. In Texas, for example, the Texas Medical Liability Trust has a 57% market share in covering physicians. These member-owned insurers may feel pressure to estimate future losses on the low side, and then need to compensate for past underpricing when assets are depleted. Because other insurers must follow their lead to attract business, the result may be sizeable industry wide premium swings.

Comments

[Ted]

The problem is twofold:

1) If rate increases are the result of current medmal insurers having to raise rates to make up for undercapitalization, why aren't more heavily capitalized insurers coming in and stealing the business by not having to charge extra for past years' failures? Perhaps the answer is barriers to entry on the regulation front--but then why weren't insurers attempting to make supracompetitive profits previously?

2) If, on the other hand, malpractice insurance is fairly priced, then we're back to the underlying problem that doctors don't want to pay that much for insurance, creating medical shortages in some areas. That can only be solved by some sort of wealth transfer, and society has to make a value decision whether it wants doctors or lawyers and litigation-lottery-winners to have that money. Third option is for taxpayer subsidization of both classes through state funded medmal insurance, as Maryland is considering.

[Martin]

You raise an interesting question. Why don't wee see entry of new firms. We do see some companies like AIG entering through surplus lines markets and providing high priced coverage (and making tons of money too). However, these guys are just cream skimmers--they are not likely to be in the market for the long run. When prices fall they will like step out. (That is ok--I have no problem with cream skimmers—it’s just that it is a symptom of a troubled market if cream skimmers can make money.) Other new and semi-permanent entrants tend to be doctor owned companies. (I can't wait for the lawyers to form their own med mal companies. I heard that this is going to be a trend for the future.) I think the reason we don't see more permanent entrants is investors in for-profit med mal companies will demand a significant risk premium. The best and largest med mal company (the former St. Paul) quit the business completely. That, by itself, sends a strong signal to the market about the future profit aspects of med mal.