Damages Caps, Insurability, and the Performance of Medical Malpractice Insurance
Viscusi, W. Kip, Born, Patricia H., Journal of Risk and Insurance
This article uses the complete property-casualty insurance files of the National Association of Insurance Commissioners from 1984 to 1991 to assess the effect of medical malpractice reforms pertaining to damages levels and the degree to which these damages are insurable. Limits on noneconomic damages were most influential in affecting insurance market outcomes. Several punitive damages variables specifically affected the medical malpractice insurance market, including limits on punitive damage levels, prohibitions of the insurability of punitive damages, and prohibition of punitive damages awards. Estimates for insurance losses, premiums, and loss ratios indicate effects of reform in the expected directions, where the greatest constraining effects were for losses. The quantile regression analysis of losses indicates that punitive damages reforms and limits were most consequential for firms at the high end of the loss spectrum. Tort reforms also enhanced insurer profitability during this time period.
The tort liability crisis of the mid 1980s generated a continuing interest in tort reform. One of the principal lines of insurance affected by the tort crisis was medical malpractice. Within a 2-year period from 1984 to 1986 medical malpractice premiums nationally doubled. (1) Premiums for some other lines of insurance, such as those for product liability, were also volatile, whereas lines such as automobile insurance and homeowners' insurance were less affected. (2)
Rising medical malpractice premium costs stimulated substantial policy interest. Higher premiums raised the cost of providing medical care, and influenced physician behavior in a variety of ways, including attempts to reduce risk exposure by practicing defensive medicine. (3) Higher insurance costs imply greater payments to injured patients and their families as well, so that an increase in losses may not be undesirable unless the previous payment levels were already optimal. Insurance market volatility is more problematic to the extent that it implies ratemaking.
In response to the rising costs and insurance market volatility, many states enacted reforms to limit the level and variability of insurance company losses. (4) While some of these measures were broad, in many instances states adopted legislation targeted specifically at medical malpractice insurance.
That tort liability reforms can influence the general performance of medical insurance is well established in numerous studies. (5) This article uses the same data set and general approach in Born and Viscusi (1998). However, that analysis did not address the effect of limits on noneconomic damages and limits on punitive damages, which are the two most prominent reform components. In contrast, compensatory damages have been almost entirely unaffected by the wave of tort reform measures. The second novel aspect of this article is that it explicitly addresses the role of whether damages are insurable. To the extent that states have stipulated that punitive damages are not insurable, a damages component should be eliminated as a cost concern to insurance companies. Whether the expected ramifications of those limits actually affect insurance company losses and premiums has never been answered empirically.
One category of damages reforms that continues to play a prominent role in tort reform debates is punitive damages reforms. Punitive damages are often associated with the largest and most highly publicized awards. Whereas million dollar awards used to merit headlines, there have been at least 63 punitive damages awards of at least $100 million, and in some cases punitive damages awards have been in the billions of dollars. (6) Some observers, however, might question whether punitive damages reforms will have any effect at all on medical malpractice insurance. Medical malpractice cases are responsible for a much smaller proportion of punitive awards than are cases involving product liability, fraud, and intentional torts. …