Brookings-Wharton Papers on Financial Services 2004 (2004) 55-96
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The Crisis in Medical Malpractice Insurance
Patricia M. Danzon
Andrew J. Epstein
Scott J. Johnson
Since 1999, many states have experienced a "crisis" in medical malpractice insurance. The median premium increase for internists, general surgeons, and obstetricians-gynecologists increased from 0-2 percent in 1996-97 to 17-18 percent in 2003, climbing to 60 percent in some states in 2001-02, after adjusting for inflation. In December 2001, St. Paul Travelers, which was the largest malpractice insurer operating in forty-five states, announced its decision to withdraw from the market, citing losses of millions of dollars on its medical liability business. Two other major insurers— PHICO and Frontier Insurance Group—exited from the market entirely. Faced with insolvency, the Medical Inter-Insurance Exchange reorganized and restricted its operations to New Jersey. In some states, including Pennsylvania and New Jersey, physicians went on strike, threatened to leave the state, and discontinued high-risk services; however, a recent General Accounting Office study finds no conclusive evidence of widespread, measurable effects of the crisis on the availability of medical services.1
This most recent malpractice insurance crisis followed an unusually long period of flat or modest increases in premium rates and widespread availability of insurance, which, in turn, followed a severe crisis of affordability [End Page 55] in the 1980s and a severe crisis of affordability and availability in the mid-1970s. In response to these earlier crises, many states adopted reforms of tort law that were intended to reduce the level and unpredictability of claims, including caps on awards for noneconomic damages, collateral source offset, and shorter statutes of limitations. At the same time, some states adopted measures to assure the availability of insurance and reduce its cost to physicians. Joint underwriting associations serve as residual market mechanisms for physicians who are unable to obtain coverage in the voluntary market. Patient compensation funds limit the physician's liability at some threshold (for example, $200,000 per claim); additional compensation to the patient up to a higher threshold (for example, $1 million) is financed through assessments on all physicians practicing in the state. By shifting costs from individual defendants to all practicing physicians, with assessments levied on a pay-as-you-go basis, these funds produced short-term relief for physicians facing the highest premiums, particularly specialists in urban areas.
In addition to these statutory changes, malpractice insurance markets adopted voluntary changes to reduce insurer risk and establish more robust sources of coverage. Most insurers replaced the occurrence policy form with the claims-made policy form, thereby shifting from insurer to policyholder the risk related to losses incurred, but not reported, during the policy period.2 In addition, in many states physicians established their own physician-owned mutuals, reciprocals, and risk retention groups. These physician-directed companies replaced the traditional commercial stock companies, many of which either withdrew or sharply curtailed their malpractice exposure during the crises of the 1970s and 1980s. In theory, physician-owned companies may have informational or risk-sharing advantages over stock companies in writing a line such as medical malpractice insurance.3
The most recent malpractice insurance crisis raises the question of whether these tort and insurance market reforms have achieved their goals of moderating premium increases. A General Accounting Office report on the current crisis concludes that, although physicians in most states have [End Page 56] experienced some increase in premium rates since 1999, the between-state variation has been significant.4 From 1999 to 2002, the largest writer of medical malpractice premiums for general surgeons in Dade County, Florida, increased premiums 75 percent, while Minnesota's largest insurer for general surgeons increased premiums only 2 percent for a similar level of coverage. Moreover, the rate of premium increase was significantly lower in states that enacted tort reforms, specifically, the placement of caps on awards for noneconomic damages (see figure 1). Although this evidence suggests that caps on awards for noneconomic damages slowed the growth in premiums, such...