Alexander Tabarrok of (MR fame) and Amanda Agan have a new study on Medical Malpractice sponsored by the Manhattan Institute’s Center for Legal Policy. Read the summary here. Make sure you note footnote 9. It is important that you do so.
I like the study and it has one of those “Dang, I wish I had thought of that” sections. One of the big problems with med mal studies in the past is that there is generally only a weak link between premiums and awards. There are a number of reasons why this might be so, but it would really be nice to show this once or twice if it is, in fact, true. Tabarrok and Agan do a relatively simple statistical test called co-integration which examines how two series move together over time. In a sense it shows the times series correlation between doctors damage pay outs and insurance premiums. Many believe there is a relationship and Tabarrok and Agan find that there is indeed co-integration.
This research relates to something I have wanted to post about since Ted Frank and I wrote the AEI Liability Outlook critiquing the consumer advocate approach to med mal. One of the more recent critiques they have come up with is that the problem is the fault of the insurance cycle. Note that the Tabarrok and Agan results does not depend on the existence of a cycle. The consumer advocates believe that the med mal crisis is caused by regulatory failure. If the regulators would just keep prices from going up then we would not have this problem because it is this dang cycle that causes the problem. A problem with this is also that the regulators would have to prohibit med mal carriers from reducing prices in the good times. A have a hard time envisioning consumer ado vacates fighting price decreases.
Ted and I wrote that the cycle is not really a cycle. (Mr. Hunter then called us “flat-earthers” because everyone knows there is a cycle). The whole notion of a cycle is really the wrong word to use here. There are ups and downs in prices, but are they cyclical in the sense of a regular, predictable pattern that repeats over time? I think the question is still open for a debate. Thus, I am not a flat earther, but someone with an open mind on the issue.
In a paper I wrote with a colleague in the early 1990’s I found that there was a co-integrating relationship over time between insurance “prices”, short term interest rates and GDP. Interest rates and GDP are not something the insurance industry has control over and thus they have to react to changes in these variables. In fact, the relationship between the interest rates and the insurance rates was quite striking. Decreases in interest rates generally cause insurance prices to rise (for example). A question arises whether managers can immunize themselves to changes in the interest rate environment. Maybe, by purchasing potentially expensive derivative contracts. However, consumer advocates probably wouldn't want to allow these expenses to be considered part of the price of medical malpractice coverage either. This interest rate/pricing relationship made me think that there wasn't’t really a cycle, but a relationship to the general economy that might influence pricing movements.
At the same time others started proposing theories of market behavior that did not depend on nice regular cycles. Ralph Winter (1994) and Anne Gron (1994) separately proposed models of how insurance markets may behave which depend more on reactions to shocks. Others such as Harrington and Cagle (1995) provide some additional empirical support for this non-cyclical behavior. Thus, instead of a regular and predictable cycle, there is an unanticipated shock followed by a reaction and then a general return to equilibrium.
Recent Comments