The Effect of Tort Reform on Medical Malpractice Insurance Market Trends

• DOI: http://doi.org/10.1111/jels.12131
• Date: 01 December 2016
• Published date: 01 December 2016

The Effect of Tort Reform on Medical

Malpractice Insurance Market Trends

Patricia H. Born and J. Bradley Karl*

In this article, we examinethe extent to which the timingof reforms to the tortliability system

coincides with changes in medical malpractice insurance market conditions. Our research is

motivated by the fact that, while policy discussions and academic research pertaining to the

merits of tortreform often center on ex post effects, it is unclear whetherreforms to the tort

liability system are responsible for softening conditions in a medical malpractice insurance

market that was previously deteriorating. Our analysis of tort reforms in the mid-2000s finds

little evidence that state-level medical malpractice insurance losses incurred, premiums

earned, or incurred loss ratios were increasing in the years immediately prior to the

enactmentof various tort reforms, making itdifficult to attributethe observed softening of the

medical malpractice insurance market that occurred in the mid to late 2000s to the enactment

of tort reforms. Our conclusion is that, while tort reforms are effective policy tools for

lowering levels of medical malpractice insurance losses incurred and improving insurer

profitability, there is little evidence to suggest that reforms are an effective method for

softeninga medical malpractice insurancemarketplace thatis otherwise steadilydeteriorating.

I. INTRODUCTION

Medical malpractice insurance markets have experienced several hard markets over the

past 40 years, characterized by rapid declines in insurer profits, increases in the cost of

medical malpractice insurance premiums, and decreases in the availability of profession-

al liability coverage for medical providers. During this same time period, medical mal-

practice insurance markets experienced significant regulatory interventions, the most

notable of which were several “rounds” of tort liability reform measures enacted between

the mid-1970s through the mid-2000s. Policymakers argued that these reforms were nec-

essary to soften the hardening medical malpractice insurance market.

1

For example,

Texas Governor Rick Perry advocated that tort reform was necessary because physicians

needed “relief from spiraling malpractice insurance premiums as soon as possible”

(Texas Medical Association 2003).

Address correspondence to Patricia Born, Department of Risk Management and Insurance, College of Business,

Florida State University, 821 Academic Way, Tallahassee, FL 32306-1110; email: pborn@business.fsu.edu.

1

“Hard” and “soft” markets are common terms used among members of the insurance industry and insurance

economists. A hard market refers to a market where the price of insurance is high and the supply of insurance is

low while a soft market refers to a market characterized by low prices and high supply of insurance.

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Journal of Empirical Legal Studies

Volume 13, Issue 4, 718–755, December 2016

In support of their assertion that reform measures—including, for example, caps

on noneconomic damages—are responsible for turning around an otherwise deteriorat-

ing medical malpractice insurance market, policymakers in favor of tort reforms often

point to ex post effects of the reforms. Governor Perry, for example, stated that as a

result of the Texas reform efforts “doctors are getting immediate relief because the

Texas Medical Liability Trust has already announced a 12-percent rate reduction”

(Texas Medical Association 2003). Governor Perry’s and other tort reform proponents’

assertion that medical malpractice insurance market conditions become more favorable

following the enactment of tort reforms is consistent with many academic studies find-

ing that following the enactment of tort reforms, medical malpractice insurers incur

fewer losses and charge lower premiums (e.g., Viscusi & Born 2005; Born et al. 2009;

Grace & Leverty 2013).

A deteriorating insurance market can be characterized by increasing losses

incurred, relative to premiums earned, such that profitability is adversely affected in the

short run, and long-run prospects are tempered by the insurer’s ability to adjust premi-

ums or control losses accordingly. The causes of such deterioration are many, and may

include inadequate underwriting, regulatory constraints on premium adjustments, or

poor investment performance. With regard to medical malpractice liability, deterioration

is largely attributed to unanticipated outcomes in the legal environment—for example,

a rising number of claims and increasing severity of awards.

2

It is important to note that improved conditions in the medical malpractice insur-

ance marketplace following tort reforms do not necessarily indicate that reforms caused

a deteriorating marketplace to start improving. This is a subtle but important point that

is often overlooked in policy debates on the merits of tort reform. The assertion, which

follows from the avowed purpose of the reforms, is that reform measures such as caps

on noneconomic damages awards would reduce insurer losses. Insurer losses before the

reform could have been stagnant or could have been declining before the reform and

the rate of decline in losses may have simply increased due to the reform. Thus, ex post

improvements in the insurance marketplace do not necessarily justify certain policy-

makers’ assertions that tort reforms are the reason that a hardening medical malpractice

insurance market is turned soft. Rather, ex ante evidence of insurer loss trends is neces-

sary to provide a complete picture on the merits of reform.

Our article therefore explores medical malpractice insurance marketplace condi-

tions before and after the enactment of various tort reform measures in order to under-

stand whether improvements in medical malpractice insurance marketplace trends

coincide with the enactment of reforms. The particular sample for our study is the med-

ical malpractice insurance market in states that enacted tort liability reforms during the

most recent round of reform activity that occurred in the mid-2000s, but had no previ-

ous reform activity. These “late-adopter” states are particularly interesting because they

2

Nye et al. (1988) evaluate four potential causes of the increases in cost of medical malpractice insurance during

the early 1980s: increased loss payments, excessive insurance company profits, the underwriting cycle, and insur-

ers’ underwriting systems. They conclude that the primary cause of increased malpractice premiums between

1975 and 1986 was primarily due to the substantial increase in loss payments to claimants.

719Medical Malpractice Tort Reform and Insurance Markets

would have had the opportunity to reflect on the experience of states that had enacted

reforms in prior years, beginning with California in 1975 and a host of states in the

mid-1980s. For whatever reason, these states chose not to “jump on the bandwagon”

until more recently, suggesting, perhaps, that market conditions had finally warranted

consideration of reform or that the evidence from other states, particularly in regard to

the effects of reform on the legal environment, were compelling.

Using state-level data from the National Association of Insurance Commissioners

(NAIC) from 1997–2010, we examine the extent to which trends in medical malpractice

losses incurred, premiums earned, and incurred loss ratios changed in these late-adopter

states following the enactment of tort reforms. Our most robust finding is that in the

time period just prior to the enactment of caps on noneconomic damages, medical mal-

practice insurance losses and premiums were not steadily increasing. In fact, we find weak

evidence that marketplace conditions had already begun to improve in the time period

before caps on noneconomic damages were enacted by late adopters.

3

We also find that

state-wide losses incurred (incurred loss ratios) declined by an average of approximately 7

percent (4 percent) in each year following the enactment of caps on noneconomic dam-

ages. Our evidence that conditions were relatively stable, if not already improving, in the

time period immediately preceding the enactment of caps on noneconomic damages

therefore makes it difficult to identify the reform as the reason that otherwise deteriorat-

ing medical malpractice insurance markets begin to improve in the late-adopter states we

study.

Our analysis does find weaker evidence that joint and several liability reforms

were helpful in controlling premium levels, which were increasing at a rate of approxi-

mately 7 percent per year, on average, before the reform and stopped increasing after

the reform. However, we find no evidence that joint and several liability reforms fixed

an otherwise deteriorating medical malpractice insurance market. Further, we find little

evidence that medical malpractice insurance markets were deteriorating prior to late-

adopter states enacting caps on punitive damages and reforming collateral source rules.

The importance of our research is highlighted by the fact that many policy

debates on the merits of tort reforms are based on theoretical and empirical evidence

regarding the ex post effects of these reforms on medical malpractice insurance mar-

kets. Far fewer of these policy debates, however, address whether the markets that

enacted reforms were in need of stabilizing in the first place. Our results suggest that in

the late-adopter states we studied, market conditions in medical malpractice insurance

markets were already relatively stable during the time period surrounding the enactment

of tort liability reforms and, in fact, may have already begun improving. Thus, while tort

reforms likely have a variety of beneficial economic effects, our analysis is unable to

empirically verify that reforms provide policymakers with an effective method for staving

off deteriorating market conditions and turning the market soft.

3

Of note is that Born et al. (2009) find evidence that insurers do not benefit from these reforms, in terms of

reducing losses and improving profitability, until after the reform is in effect. This suggests that the prereform

turn in the medical malpractice insurance market we observe in our study is not the result of insurers anticipat-

ing reforms.

720 Born and Karl