The Effect of Damage Cap Reforms on Medical Malpractice Insurance Market Conditions During Periods of Crises

• Author: Patricia H. Born,Hugo Montesinos‐Yufa,J. Bradley Karl
• Published date: 01 December 2019
• DOI: http://doi.org/10.1111/jori.12261
• Date: 01 December 2019

THE EFFECT OF DAMAGE CAP REFORMS ON MEDICAL

MALPRACTICE INSURANCE MARKET CONDITIONS DURING

PERIODS OF CRISES

Patricia H. Born

J. Bradley Karl

Hugo Montesinos-Yufa

ABSTRACT

This article evaluates whether and how tort reform, specifically damage

caps, stabilizes medical malpractice insurance markets. We examine state-

level medical malpractice insurance market performance in the United States

for the period 1994–2010, a period characterized by a significant variation

across states in their legal environments. First, we find that states with

damage caps are less likely to have a crisis. Second, we find that the

magnitude of crisis events is attenuated in states with damage caps, while the

volatility of performance is not significantly different across states with and

without damages caps. Finally, conditional on a state entering a crisis, we

find that states with damage caps improve more quickly following the crisis

than states without damage caps. Overall, our results suggest that damage

caps stabilize medical malpractice insurance markets.

INTRODUCTION

A “hard” insurance market refers to a period characterized by decreasing insurer

profits, increasing premiums, and decreasing availability of coverage. Such periods

have been particularly evident in medical malpractice insurance markets and have

motivated significant public policy attention. Between the mid 1970s through the mid

2000s, states enacted tort liability reform measures in attempts to restore stability to

the market. Proponents of reform assert that the measures, which have direct

influence on court outcomes, indirectly reduce underwriting uncertainty. This

assertion is supported by many studies that find that, following the enactment of tort

reforms, medical malpractice insurers incur lower losses and improved underwriting

profitability (see, e.g., Viscusi and Born, 2005; Born, Viscusi, and Baker, 2009; Grace

and Leverty, 2013).

Patricia H. Born is at the Florida State University. Born can be contacted via e-mail:

pborn@cob.fsu.edu. J. Bradley Karl is at the East Carolina University. Karl can be contacted via

e-mail: karlj@ecu.edu. Hugo Montesinos-Yufa is at the Florida State University. Montesinos-

Yufa can be contacted via e-mail: hugomoises@gmail.com.

©2018 The Journal of Risk and Insurance. Vol. 9999, No. 9999, 1–27 (2018).

DOI: 10.1111/jori.12261

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Vol. 86, No. 4, 1045–1071 (2019).

Improved conditions in the medical malpractice insurance marketplace in the

period following reform are not too surprising, given the nature of the reforms.

Caps on noneconomic damages, by design, reduce the potential size of awards

and have been shown to reduce the number of claims as well (see Browne and

Puelz, 1999). Improvement in the insurance market would be expected given that

insurers are the primary payers of the malpractice awards. Empirical studies of

the effects on insurers have largely focused on evaluating postreform losses,

premiums, and loss ratios in establishing the benefits to the insurance market.

Whether these reforms have any mitigating effect during a crisis is less clear,

since the period of interest in these studies is after the enactment of reform

measures, which may or may not coincide with an actual crisis in the insurance

market. In fact, legislative delays might result in reforms being enacted sometime

after a crisis has been noted, or even after a crisis has ended. Postreform

improvements in the insurance marketplace do not necessarily prove that medical

malpractice insurance markets experiencing a crisis benefit from the presence of

tort reforms.

In this article, we evaluate the effects of one particular medical malpractice tort

reform measure: caps on damage awards. Our focus on damage cap reforms is

motivated by evidence in the literature that attests to the economic and policy

significance of damage caps.

1

The goal of our article is to investigate the effect of this

reform during an actual medical malpractice crisis period. Our study therefore

represents a significant departure from prior studies that largely fail to explicitly

evaluate the potential crisis-mitigating effects of tort reform. If reform measures

have mitigating effects during times of crises, then we expect to observe better

market performance in states with reforms than in those without reforms when

performance is evaluated pre and postcrisis, rather than pre- and postreform.

Similarly, damage caps may mitigate crises by helping to prevent their onset

altogether; thus, we also consider the extent to which these reforms prevent a

medical malpractice crisis.

We examine the potential mitigating effects of damage caps during crisis periods by

using state-level medical malpractice insurance market data from the National

Association of Insurance Commissioners (NAIC) for the years 1994–2010. We first

evaluate whether damage caps reduce the probability of a state entering a crisis. We

find states with damage caps are less likely to enter a medical malpractice crisis,

suggesting that damage caps play a key role in preventing the onset of a medical

malpractice crisis. We then use a modified differences–indifferences approach to

examine differences in state-level medical malpractice insurance market conditions

between reformed and nonreformed states before, during, and after a medical

malpractice crisis.

Our main analysis suggests that during the time period preceding a medical

malpractice crisis, reformed and nonreformed crisis states experience similar

1

For example, the literature suggests that caps on noneconomic damages awards have had the

most significant and sizable effects on medical malpractice insurers (e.g., Viscusi et al., 1993;

Viscusi and Born, 2005; Grace and Leverty, 2013).

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