Assessing The Impact Of Medical Malpractice Awards, Tort Reform, And Investment Returns Upon Medical Malpractice Insurance Premiums

Abstract

For most doctors, obtaining medical malpractice insurance coverage each year represents a significant expense. During the past three decades, researchers have developed several competing theories to explain changes in the cost of obtaining medical malpractice insurance in the United States. This article focuses on the relationship, on a nationwide basis, between medical malpractice awards, the presence of tort reform, investment returns by insurersA spirited debate has ensued regarding which factors are most significant in explaining the changes in such premiums over time. One theory is that a decrease in an insurer's return on its investment portfolio has the effect of increasing medical malpractice insurance premiums. A second is that malpractice premiums are the direct result of medical malpractice awards and settlements. Stated alternatively, states having higher than average medical malpractice awards also tend to have higher than average malpractice insurance premiums 2 . A third theory is that an increase in passage of state-level tort reform changes the likelihood of massive settlements or judgments in malpractice cases, and thus, such legislation has the effect of decreasing such premiums by reducing insured risk.In many parts of the U.S., during certain time periods, medical costs have risen faster than the overall rate of inflation. Rising medical malpractice insurance premiums represent a cost that some doctors may decide to pass along to their patients in the form of higher prices for medical services rendered. It is also possible that the perceived threat of medical malpractice litigation may result in some doctors providing additional precautionary medical services to their patients. 2 Moreover, time periods in which higher than average medical malpractice awards occur are the same time periods in which higher than average medical malpractice insurance premiums occur. 3 A study by Dubay, Kaestner and Waidmann (1999) provides evidence that physicians are more likely to order unnecessary cesarean procedures in obstetrics to avoid litigation, but that the impact of increased cesarean sections to mitigate malpractice lawsuits on total obstetric care costs is This research focuses upon the relationship, on a nationwide basis, between medical malpractice awards, insurers' return on investments, the presence of tort reform, and the cost of medical malpractice insurance premiums. Because many insurers operate in more than a single state, it would be difficult to conclude that all of the costs associated with massive jury awards, settlements, or gains/losses accruing from insurance companies' investments would be confined to a single state, regardless of the current legislative climate involving malpractice 4 . Based on this, we estimate the cost of medical malpractice insurance premiums for the nation overall using the following independent variables: malpractice awards, insurers' return on investments, and the existence of tort reform. We focus primarily upon the results of a multivariate regre...