Order Code RL31886
CRS Report for Congress
Received through the CRS Web
Medical Malpractice Insurance: An Economic
Introduction and Review of Historical Experience
Updated May 5, 2006
Baird Webel
Analyst in Economics
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Medical Malpractice Insurance:
An Economic Introduction and
Review of Historical Experience
Summary
Insurance is a critical piece of a modern economic system, but one often
unnoticed until it becomes prohibitively expensive or its availability is curtailed.
Such problems are reportedly occurring in the medical malpractice insurance market
today. Many physicians have experienced substantial increases in insurance
premiums, and there are reports of increasing problems with availability of physician
services due to doctors retiring or relocating from areas that have seen high premium
increases. This is not the first time such a crisis has been proclaimed; similar events
occurred in the latter half of both the 1970s and 1980s.
The fundamental purpose of insurance is to transfer an indefinite risk from one
party to another for a definite premium. The pricing of this premium is critical, but
determining this price is uncertain because it depends on estimates of the chance of
a future loss, as well as the estimated value of that loss. The premium will also
depend on estimates of future investment gains or losses because an insurer also acts
as a financial intermediary and invests the capital that is held in reserve against future
losses.
Offering liability insurance for medical malpractice has proven a difficult
market for insurance companies for a variety of reasons and the market has been
unstable during the past three decades. The recurring market problems have
provoked various policy reactions in both state legislatures and in Congress.
Assessing the effectiveness of particular policy changes is, however, complex and
strong conclusions have typically been equally strongly disputed.
On July 21, 2005, the House passed a bill, H.R. 5, whose centerpiece was
limitations on tort claims for medical malpractice. In the past two Congresses, the
House passed similar bills. The Senate, however, did not act on any of these House
bills and failed to invoke cloture on the Senate bills addressing medical malpractice.
On May 4, 2006, the Senate began consideration of S. 22 and S. 23; these bills are
similar to H.R. 5, but differ in some specifics.
This report examines the economic issues and historical experience surrounding
medical malpractice insurance. It includes an explanation of the fundamentals of
insurance and how these fundamentals relate specifically to medical malpractice
insurance. It also includes a discussion of the evolution of the medical malpractice
insurance market since the 1970s and policy changes over this time, including an
assessment of these changes. It will be updated as major legislative events occur but
will not attempt to track legislation in detail. Please see CRS Report RL33358,
Medical Malpractice Insurance: An Overview, by Bernadette Fernandez and Baird
Webel, for detailed legislative information.

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Contents
Insurance Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Transfer and Financial Intermediation . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Insurance Operations and Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Market Cycles: Hard and Soft Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medical Malpractice Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Medical Malpractice’s Long “Tail” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Impact of Tort System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Risk Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Historical Experience in Medical Malpractice Insurance . . . . . . . . . . . . . . . . . . . 7
Evolution in the Insurance Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Policy Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Expanding Market Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Reducing Insurer’s Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Strengthening Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
How Effective Have Policy Changes Been? . . . . . . . . . . . . . . . . . . . . . . . . 12
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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Medical Malpractice Insurance:
An Economic Introduction and
Review of Historical Experience
Insurance is a critical piece of a modern economic system, but it often goes
unnoticed until it becomes prohibitively expensive or its availability is curtailed.
Such problems are reportedly occurring in the medical malpractice insurance market
today. Many physicians have experienced substantial increases in insurance
premiums, and there are reports of increasing problems with availability of physician
services due to doctors retiring or relocating from areas that have seen high premium
increases. There have also been protests and job actions in some locations with
hospitals finding it necessary to curtail services and send patients to more distant
facilities.1 This is not the first time such a crisis has been proclaimed; similar events
occurred in the latter half of both the 1970s and 1980s.
The recurring problems have provoked various reactions in the insurance
marketplace and in legislatures both at the state level, where insurance law and tort
law are normally shaped, and in Congress. In both the 107th (H.R. 4600) and 108th
(H.R. 5 and H.R. 4279) Congresses, the House passed bills whose central thrust was
to limit damages for medical malpractice tort claims. The Senate, however, did not
act on any of these House bills and failed to invoke cloture on the Senate bills
addressing medical malpractice (S. 11, S. 2061, and S. 2207 in the 108th Congress).
In the 109th Congress, the House again passed such legislation, H.R. 5, on July 28,
2005. The Senate began consideration of similar bills (S. 22 and S. 23) on May 4,
2006.2
Insurance Fundamentals
Risk Transfer and Financial Intermediation
The most obvious function of insurance is to allow a person or corporation
facing some risk, such as the risk that a physician will be sued for medical
malpractice, to transfer this risk to another economic entity. Typically the entity
accepting the risk will be a company, resulting in this risk then being spread across
the owners of the insurer, either the stock holders in a normal incorporated insurance
1 See, e.g., Joelle Babula, “Desert Springs Hospital: Emergency surgeons unavailable,” Las
Vegas Review-Journal, Mar. 26, 2003, sec. B, p. 1B.
2 See CRS Report RL33358, Medical Malpractice Insurance: An Overview, by Bernadette
Fernandez and Baird Webel, for detailed legislative information.

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company or other policy holders in the case of a mutual insurance company.3 Risk
is also spread from one insurer to others through reinsurance.
Transferring risk, however, is not the only role that insurance plays. In the
course of receiving payment for accepting risk, large amounts of capital are
generated. This capital is then invested, allowing for its productive use to generate
jobs and economic growth in addition to providing a reserve against future losses.
Although the risk transfer and sharing aspect of insurance is the most obvious, the
financial intermediation aspect is an equally integral part of the modern operations
of insurance companies. The gains from investment of capital typically allow an
insurer to offer lower rates to the insured than would be the case if the insured was
paying completely for the transfer of risk. This also means, however, that the insured
face some of the volatility in premium amounts inherent in relying upon investment
returns. This can be seen in the alternating market cycles that are discussed below.
Insurance Operations and Pricing
Insurance involves highly complex calculations regarding uncertain outcomes
of future events, although the basic operations can be simply explained. A company
begins with a certain amount of capital stock to allow it to credibly promise to
provide insurance in the future, as well as enough to satisfy regulators that it will be
able to fulfill this promise. It offers insurance policies against whichever risks it is
willing to assume. Money flows into an insurer primarily from two sources:
premiums from customers of insurance and investment income from the company’s
reserves. Money flows out of an insurer primarily to pay for claims made for events
for which the insurer has agreed to bear the risk, including costs such as defending
against lawsuits in the case of medical liability insurance.4
The ability of insurance to fulfill its role as a financial intermediary, as well as
the solvency of individual insurers, rests critically on keeping the inflows and
outflows balanced over time. This means estimating the future return on investments
as well as estimating future losses from claims. The accuracy of these estimates can
vary widely and insurers have relatively little direct control over what either actual
value will turn out to be. Insurers can affect their returns somewhat by varying the
mix of their investments, but this mix is subject to state regulation. In the United
States, most investments are relatively stable investments such as bonds, but even
bonds are subject to the vagaries of the marketplace. Many insurers also try to
minimize claims through sharing information with policy holders on reducing risks
and offering incentives to policy holders who take action to minimize risks.
3 A mutual insurance company is a nonprofit insurer owned by the policy holders with
ownership shares in proportion to their premium volume.
4 There are, of course, other substantial payments that an insurer makes, such as operational
expenses and profits returned to stockholders, that are critical in differentiating among
companies, but not as critical in discussing industry-wide issues.

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The one variable that an insurer does directly control, subject to the pressures
of the marketplace and sometimes state insurance regulators,5 is the price or premium
that it charges for a certain amount of insurance. This price should cover the value
in today’s dollars (the “present value”) of any future loss, multiplied by the expected
probability of this loss. If a physician wants to insure against the risk of paying a $1
million malpractice claim today, and the insurance company believes that there is a
1% chance that this claim will occur today, then it will charge approximately
$10,000 for this insurance. If the insurance extends for a length of time further into
the future, then the future amounts of money to be paid out would be adjusted based
on the expected inflation rate, or the expected rate of return, that the insurer foresees
over the period of time the insurance is in place.
Because insurance pricing is theoretically based on the risk that is being
transferred, this implies charging a different premium to people or companies with
different inherent levels of risk. Without the ability to segment different risks into
different categories, and charge these different categories different rates, the price
charged to everyone will be relatively high reflecting the possibility that the
purchaser is in a high risk category. A high price would tend to lead those who
believe their own risks are low not to buy insurance or to underinsure, whereas those
who believe their risks are high would tend to continue to buy insurance or even to
overinsure. This tendency is known as “adverse selection” and usually results from
the insured having more information regarding their own risk than the insurer.
Adverse selection results in a higher overall level of risk in the pool of those who buy
insurance and thus results in higher than expected claims. Higher claims must
ultimately be followed by higher prices, which is then followed by lower risks not
buying insurance and so on. The extreme result of this would be a situation where
an insurance market essentially ceases to exist.
Market Cycles: Hard and Soft Markets
Insurance in general, and property and casualty insurance (of which medical
malpractice is a part) in particular, has experienced alternating periods of “soft”
markets and “hard” markets. This cycle is usually ascribed to changes in the
investment climate, although it may be more accurate to think about it as due to
changes in the comparison between insurers’ financial inflows and outflows.
A soft market typically occurs when the investment climate is good and insurers
make returns on the capital that they are holding in reserve that are high relative to
expected insurance payouts. These high investment returns allow insurers to offer
lower prices on insurance, sometimes selling insurance at a premium that they know
will result in losses, and then offsetting these losses by the gains from investing the
premium. Soft markets are usually marked by increases in the number of insurers
5 Laws in many states require preapproval by the state before an insurer can change the rates
charged for insurance. The justification for this regulation is generally twofold: (1) to
prevent insurance companies from charging too much and gouging their customers, and (2)
to prevent insurance companies from charging too little and risking insolvency when their
losses are greater then their reserves.

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and by the expansion in the geographic area or types of insurance offered by existing
insurers.
A hard market typically occurs when the investment climate worsens and returns
drop. Low investment returns imply that the premium paid for insurance must cover
more of the actual loss that is expected from this insurance. This means higher
premiums and can lead to withdrawals from poorly performing lines of insurance or
from particular geographic areas that remain unprofitable. For an insurer offering
only one type of coverage in a specific geographic area, such withdrawal is not an
option. Such companies must either raise rates or eventually withdraw from the
business of insurance if the investment returns do not increase or if costs are not
somehow lowered. At the beginning of a hard market, especially when it is preceded
by a long soft market, one might expect to see very large increases in premiums as
the premium level comes closer to the value of the actual losses due to the risk that
is being transferred.
Due to high capital mobility and interdependence in financial markets, hard
markets would be expected to be a nationwide or even international phenomenon.
The experience within the United States, however, has been that periods of market
hardening have a disparate impact among the various states. This suggests that when
market problems develop, there may be more at work than simply a general hard
market due to lower investment returns.
Medical Malpractice Insurance
Different insurance markets have very different characteristics. Life insurance,
for example, tends to be very stable because the amounts that are to be paid out are
clearly known and the estimates that are used for life expectancy are generally
reliable. Insuring against hurricane damage is less stable; it is much harder to predict
how many hurricanes might hit, where they might hit, and how much damage they
might do. With enough historical and other data, however, insurance can operate
effectively even in such uncertain environments. Insuring against medical
malpractice liability offers some particular difficulties as compared to other lines of
insurance and it has proven challenging for companies to operate in this field over
time. Among the difficulties are the longer time frames inherent in malpractice
claims, high and uncertain claim amounts, and uncertainty in recognizing and
segmenting high-risk from low-risk healthcare providers.
Medical Malpractice’s Long “Tail”
Medical malpractice liability insurance has what is known in the insurance
industry as a long “tail.” Liability policies in general are often written to cover the
claims arising from a certain period of time. In fire insurance, for example, this is
relatively unproblematic; whether a fire has occurred is generally straightforward and
uncomplicated. There may be disputes arising about the extent of damage that
should be paid, but at a minimum, a company will know at the end of the insurance
period or shortly thereafter whether a claim will be made. In contrast, injuries from
medical malpractice, and thus the claims that arise from them, can take a longer time

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to manifest themselves, as many as several years in some cases. Even after injuries
are noticed, the time before a full amount an insurer must pay is known and actually
paid out is often measured in years because litigation can be complex and demand
long discovery processes with various medical experts examining the case.
To address the tail problem, many insurers have changed their policies from an
“occurrence” policy, which covers claims resulting from an action that occurred
during the period that the insurance was in effect, to a “claims made” policy, which
covers only claims actually made during the insured period. Such a shift has an
immediate impact in reducing the uncertainty for the insurer, but the effect is largely
a one time phenomenon. As a claims made policy stays in effect for several years,
the total risk to the insurer under this type of policy converges with the risk that the
insurer would bear under an occurrence policy.
Impact of Tort System
The claim amounts that medical malpractice insurers pay out are generally
determined either through the tort system, or by threats to use the tort system. The
details of tort law vary from state to state, but compensatory damages under tort law
are often separated into two types: economic damages and noneconomic damages.
Economic damages are generally intended to redress direct economic loss, such as
lost wages and costs for medical care. Noneconomic damages are not tied to direct
out-of-pocket expenses and include damages due to pain and suffering. Another
primary type of damages is punitive damages. Punitive damages are
noncompensatory damages that are intended to punish a defendant for egregious
conduct.6
Economic damages generally have the greatest impact on medical malpractice
claims through the medical cost component. Unsurprisingly, the damage from
medical malpractice usually requires additional medical treatment to repair,
sometimes an entire lifetime of medical treatment. As a result, medical costs tend
to be a higher component of medical malpractice claims than most other types of
insurance claims. Coupled with this is the experience that medical costs have
typically risen faster than the general rate of inflation,7 sometimes much faster. All
other things being equal, this implies that the rates for medical malpractice insurance
are going to rise faster than most other types of insurance.
Although the medical cost component of economic damages tends to drive
medical malpractice insurance generally higher than other insurance, noneconomic
and punitive damages add another aspect to malpractice claims: unpredictability. By
definition, noneconomic and punitive damages are more subjective and difficult to
quantify than economic damages. Different juries in the same town or city can and
6 See CRS Report RL31692, Medical Malpractice Liability Reform: Legal Issues and
Fifty-State Survey of Caps on Punitive Damages and Noneconomic Damages, by Henry
Cohen, for a more complete discussion of tort law as it relates to medical malpractice.
7 According to the Bureau of Labor Statistics at the end of the 30-year period from 1973 to
2002, medical prices were nearly seven and a half (7.4) times greater than the beginning,
while prices generally were slightly more than four (4.1) times greater.

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do come to different conclusions as to the monetary value of a plaintiff’s pain and
suffering or the amount of punitive damages warranted to punish willful misconduct,
for example. Jury awards are even more variable when comparisons are made
involving different parts of the country.8 The conclusions reached on such damages
can also be difficult to dispute in contrast to damages that are specifically related to
concrete economic factors. This unpredictability can make it very difficult to form
the accurate estimations of expected losses that are at the heart of insurance pricing.
Risk Segmentation
Risk segmentation and adverse selection in the health care field are particularly
problematic because information to accurately judge the quality of a provider, and
thus ostensibly to accurately estimate his or her risk of a malpractice claim, is sparse.
Some of this is due to past public policy choices, which have resulted in few
mechanisms to track the quality of health care, but some is also due to the inherent
difficulties in doing this tracking. It can be very difficult to distinguish a physician
with higher malpractice liability due to poor skills from one with high skills, but
sicker patients and more difficult cases. Both may have poor patient outcomes but
without a careful examination of the incoming patient population, which is rarely
practicable to undertake, an insurer is likely to charge both physicians similar rates.
Risk segmentation in medical malpractice insurance is generally based on geographic
area and specialty type, but relatively little is based on some measure of provider
quality or on malpractice claims history.
One of the particular aspects of the historical evolution of the medical
malpractice insurance market, which is discussed in greater detail below, has been
the growth in small insurers, particularly provider-owned companies. This success
runs contrary to one of the theoretical fundamentals of insurance, namely spreading
risk across as wide a base as possible. A small, provider-owned company transfers
risk away from individual physicians or other health care providers, but still leaves
the risk to the company itself more concentrated relative to a bigger, shareholder-
owned company.
Smaller companies, however, may do a better job at reducing the risk that they
choose to bear, rather than just spreading it. This risk reduction could come, for
example, if smaller insurers were more able to persuade physicians to adopt lower
risk practices or if they could better identify doctors who are at greater risk for
operating in a manner that might invite malpractice claims and either charge them a
higher premium or choose not to insure such doctors. Another advantage of mutual
insurers, particularly small ones, may be reduced moral hazard9 because the insured
are also the owners of the company. Smaller companies can also reduce the
8 See, e.g., “Malpractice crisis? Not here!,” Medical Economics, July 12, 2002, pp. 86-96.
9 Moral hazard is the term used for the increased chance of a loss actually due to the
existence of insurance. For example, those insured against loss from fire may be more
careless in fireproofing their property.

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concentration of risk that they take on by purchasing reinsurance and this device is
used often by insurers.10
Historical Experience in
Medical Malpractice Insurance
Particular problems in medical malpractice insurance have been observed for
many years. As far back as 1969, a report of a Senate subcommittee11 concluded the
following:
1.
The number of malpractice suits and claims is rising sharply in certain
regions of the country. The size of judgments and settlements is increasing
rapidly.
2.
Most malpractice suits are the direct result of injuries suffered by patients
during medical treatment or surgery. The majority have proved justifiable.
These suits are the indirect result of the deterioration of the traditional
physician-patient relationship.
3.
The publicity given to the higher malpractice judgments and settlements,
based frequently on new legal precedents, is likely to trigger increased
litigation in other States. The situation threatens to become a national
crisis.
4.
Already higher judgments and settlements are having the following direct
results:
(a) Companies providing malpractice insurance are increasing the cost of
coverage.
(b) These costs — in the form of higher charges — are being passed on to
patients, their health care insurance companies, and Federal health care
programs.
5.
The rising number of malpractice suits is forcing physicians to practice
what they call defensive medicine, viewing each patient as a potential
malpractice claimant. Physicians often order excessive diagnostic
procedures for patients, thereby increasing the cost of care. Moreover, they
are declining to perform other procedures, which in themselves, may entail
some risk of patient injury.
6.
At present, it appears no one affected by the rise in malpractice suits and
claims has been able to deal with this problem in a manner that promises
to alleviate this situation.
7.
The lion’s share of the total cost to the insurance companies of malpractice
suits and claims goes to the legal community.
8.
There is a definite Federal role in the malpractice problem.
10 The Reinsurance Association of America reports that in 2003, approximately 15% of
medical malpractice occurance policy premiums and 30% of the claims made policy
premiums were reinsured. This compares to an average for all P/C lines of approximately
21.5%, available at [http://community.reinsurance.org/ScriptContent/index_data_lobr.cfm].
11 U.S. Congress, Senate Committee on Government Operations, Subcommittee on
Executive Reorganization, Medical Malpractice: The Patient Versus The Physician, 91st
Cong., 1st sess. (Washington: GPO, 1969), pp. 1-2.

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There is certainly continuing dispute over some of these conclusions, but such
a list might very well have been prepared during the debate today rather than 34 years
ago.
Evolution in the Insurance Market
Until the mid-1970s, medical malpractice insurance coverage was dominated
by traditional insurers who offered it as one of several different lines of insurance.
A list of the top 10 companies in 1976 was composed of primarily diversified
shareholder-owned insurers with 61% of the market among them. With the market
hardening in the mid- to late 1970s, many of these diversified insurers pulled back
from offering medical malpractice insurance, leaving a void in the market. In
response to this void, numerous new companies were created specifically focusing
on insuring medical malpractice liability. Not only were these companies
specialized, they also were largely owned by small groups of medical providers or by
the entire group of their policy holders. These companies were also usually focused
on a geographic area, often serving only one state. Some were, and still are, affiliated
with a particular state’s medical society.
With addition of capacity to the market, and the aforementioned shift to claims-
made policies, the difficulties of the 1970s abated and was replaced by a soft market
for the first half of the 1980s. The shift in market structure away from larger,
diversified insurers, however, seems to have been permanent. By 1986, six of the
top 10 medical malpractice insurers were provider-owned and market concentration
was somewhat less, with the top 10 companies holding 56%. One exception to this
shift was The St. Paul Companies, Inc. The St. Paul is a diversified shareholder-
owned insurance company and grew from 11% of the nationwide market in 1976 to
21% in 1986.12 Taking this company out of the situation gives a view of a more
pronounced splintering of the market. The total market share of numbers two
through 10 on the list of top insurers dropped from 51% of the market in 1976 to only
36% of the market in 1986.
The market cycle turned again in 1985-86 and problems arose that bear many
of the hallmarks of the current situation, including reports of physician work
stoppages and problems with access to care. This situation was broader than just
physicians or healthcare liability insurance and included difficulties in access to many
other forms of liability insurance. In healthcare, larger providers, such as hospitals
and nursing homes, were more severely affected than individual physicians. The
market response was again the formation of new smaller insurance companies to
serve the market. These new companies, however, were not just more traditional
mutual insurance companies, but also a large number of captive insurers.13 Many of
these captive insurers were located offshore in such locales as the Cayman Islands
and thus operated outside of the U.S. tax and regulatory system. The offshore nature
of these entities makes it difficult to develop exact information about the size and
12 Conning & Company, Medical Malpractice Insurance: A Prescription for Chaos 2001,
pp. 82-85.
13 A captive insurer is an insurer owned by a parent company for the purpose of insuring this
parent company. Such a captive may insure other parties as well.

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scope of this market, but overall growth has been significant. One of the captives
that is not offshore, Health Care Indemnity, a captive of the HCA hospital chain,
grew over seven-fold from 1993 to 1994 to become the fourth largest medical
malpractice insurer at the time.14
The 1990s saw predominantly a soft market with high investment returns fueling
low rates and strong competition across various insurance lines. Medical malpractice
insurance followed this trend with an increase in competition in many forms. Some
traditional shareholder-owned insurers entered or reentered the market whereas some
captives and mutuals converted to stock companies or expanded their geographic
base into areas beyond their initial ones. This increased competition can be seen in
the total number of companies directly underwriting medical malpractice premiums
as reported by the National Association of Insurance Commissioners (NAIC).15
There were 398 of such companies in 1991, but by 1995, the number had jumped to
623 and it reached a high of 666 in 1997.16
This soft market began to harden in the late 1990s and this trend was
exacerbated by the losses from the September 11, 2001 attacks. Since 1999, the
malpractice insurance market has seen increasing premiums along with both general
withdrawals from the market and contractions in the geographical areas covered by
companies. The insurance rating firm A.M. Best reports that total medical
malpractice premiums increased 15.6 % in 2001,17 22.5% in 2002,18 and 13.5% in
2003.19 Perhaps the most striking occurrence in this latest hard market was the
decision in December 2001 by The St. Paul to completely withdraw from writing
medical malpractice insurance as part of an “effort to improve profitability.”20
Withdrawal typically occurs gradually through non-renewal of policies, but because
some states in The St. Paul’s market share approached 50%, the impact of even
gradual withdrawal is significant.
The hard market in medical malpractice insurance seems to have peaked in
2002. The latest figures from A.M. Best, from 2004, shows only a 5.5% increase in
premiums.21 The medical liability insurance survey in the October 2005 issue of
Medical Liability Monitor (MLM) also shows a slowing of the general rise in
14 Conning & Company, Medical Malpractice Insurance: A Prescription for Chaos 2001,
p. 88.
15 The NAIC is the national organization collectively representing the insurance
commissioners from the 50 states plus the District of Columbia.
16 Davin Cermak, “Medical Malpractice: The New Health Care Crisis or History
Repeated?,” NAIC Research Quarterly, Fall, 2002
17 “Medical Malpractice, Top Writers — 2001,” AM Best, Aug. 5, 2002, p. 1.
18 “Medical Malpractice, Top Writers — 2002,” AM Best, Nov. 17, 2003, p. 1.
19 “Medical Malpractice, Top Writers — 2003,” AM Best, Nov. 15, 2004, p. 1.
20 See The St. Paul Companies, Inc. press release “The St. Paul Announces Fourth-Quarter
Actions to Improve Profitability and Business Positioning,” Dec. 12, 2001, at
[http://www.prnewswire.co.uk/cgi/news/release?id=78106].
21 “Medical Malpractice, Top Writers — 2004,” AM Best, Aug. 22, 2005, p. 1.

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malpractice premiums. Some rate reported increases as high as 78%, but there were
no increases in the100+% range as had been reported in the past. In total, 568 of the
867 reports were of rate increases. The largest decreases were nearly 20% and total
of 91 of the 867 reports were of rate decreases. The remainder, 208, were reports of
no change in the rates.22
Policy Responses
Given the importance of insurance, when problems of availability or
affordability have arisen, the situations have been met with more than just
marketplace evolution; various policy changes have been made as well. Some of
these changes have been intended to facilitate market supply, such as the creation of
alternative sources of insurance, whereas others have addressed the problem from the
cost side through various changes in the tort system. In addition, there have been
attempts to address the problem through direct regulation of insurance, with
California’s Proposition 103 being the primary example as discussed below.
Expanding Market Supply. The basic legal structures for the mutual
insurers that arose in response to the market difficulties in the 1970s have been in
place for some time. Mutual insurers have a long history going back essentially as
long as insurance has existed. In some cases, however, states went beyond the
existing mutual framework to allow for medical malpractice insurance. For example,
in Florida, particular statutes were passed in the 1970s specifically allowing for
medical malpractice self-insurance trusts.23 This statute was amended in 1992 to
disallow its future use, but a governor’s task force recommended rescinding this
action given the difficulties in Florida’s medical malpractice market.24 States also
created nonstandard entities, such as joint underwriting associations (JUA). JUAs
are nonprofit pooling arrangements intended to provide an “insurer of last resort” for
healthcare providers who are unable to find insurance elsewhere.
The federal government, although not the primary regulator in the insurance
markets, has also taken an interest in the market supply of liability insurance. The
Liability Risk Retention Act of 198625 allows for the establishment of risk retention
groups and risk purchasing groups. Risk retention groups operate much like a mutual
insurer. They are made up of groups of entities involved in a similar business who
wish to spread the risk among group participants. Such groups can be formed under
state law, but the federal law allowed for reduced regulation because under federal
law these groups are regulated only in the state where they are chartered rather than
in every state where they write insurance. Risk purchasing groups essentially allow
22 “2005 Rate Survey Shows Rate Increases Leveling, But Not for All Physicians,” Medical
Liability Monitor, vol. 30, no. 10, Oct. 2005, p. 1.
23 Section 627.357, F.S.
24 “Report and Recommendations,” Governor’s Select Task Force on Healthcare
Professional Liability Insurance, Tallahassee, FL, Jan. 2003, p. xv. Available online at
[http://www.doh.state.fl.us/myflorida/DOH-Large-Final%20Book.pdf].
25 Formerly the Product Liability Risk Retention Act of 1981 (15 U.S.C. 3901 et seq).

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for group purchasing of insurance with the expectation that such purchase will be
lower cost than individual purchase.
The initial 1981 act was limited to manufacturers, and was not widely used
because of the soft market that prevailed at its time of passage. The 1986 law,
however, amended the availability to include nearly all types of liability insurance,
including medical malpractice. Companies offering medical malpractice liability
insurance under the act began as early as 1987 with the Ophthalmic Mutual Insurance
Company. The act’s usage has continued to the current day. For example, at the
beginning of 2003, 10 risk retention groups that had been formed in the previous year
were offering insurance in Pennsylvania,26 one of the states experiencing serious
market difficulties.
Reducing Insurer’s Costs. As detailed above, the primary outflow of
money from a medical malpractice insurer is driven by the tort system. The tort
system has thus been a primary focus of attempts to reduce insurer costs. It is beyond
the scope of this report to discuss proposed tort changes in detail,27 but it should be
noted that a cap on noneconomic damages for medical malpractice claims, which has
been the center of attention during the recent debate in Congress, is not the only
change that has been implemented at the state level. There have also been limits on
other damages, lawyers fees, and joint and several liability. Some states have
implemented patient compensation funds, which limit insurer liability to a certain
amount, or allow or encourage arbitration in place of litigation to resolve medical
malpractice disputes. There have even been states, such as Florida and Virginia,
where a very limited “no-fault” system has been installed, bypassing the question of
liability altogether.
The most cited example of tort reform, as well as the expressed model for the
current H.R. 5 and S. 354, was passed by California in 1975: the Medical Injury
Compensation Reform Act (MICRA). MICRA placed a $250,000 limit on
noneconomic damages, such as pain and suffering, forced disclosure of other sources
of payment to injured parties, limited lawyer fees, and strengthened the system that
disciplines doctors. After passage in 1975, MICRA was challenged in the courts over
several years before finally being upheld in 1984 and 1985.28
Strengthening Regulation. The first two policy responses implicitly treat
an insurance “crisis” as the result of what might be described as normal market
forces. An alternative explanation, however, is that the increasing prices and reduced
availability that have marked the medical malpractice crises are the result of improper
26 “Risk Retention Act Responds to Pennsylvania’s Health Care Crisis,” The Risk Retention
Reporter, vol. 17 no. 1, Jan. 2003.
27 See the aforementioned CRS Report RL31692, Medical Malpractice Liability Reform:
Legal Issues and Fifty-State Survey of Caps on Punitive Damages and Noneconomic
Damages, by Henry Cohen, for a more complete discussion.
28 Fein v. Permanente Medical Group, 38 Cal.3d 137 (1985), appeal dismissed, 474 U.S.
892 (1985); Roa v. Lodi Medical Group, Inc., 37 Cal.3d 920 (1985), appeal dismissed, 474
U.S. 990 (1985); Barme v. Wood, 37 Cal.3d 174 (1984); American Bank & Trust Co. v.
Community Hospital, 36 Cal.3d 359 (1984).

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market manipulation rather than a confluence of market forces. This concern has
been raised at the federal level where the McCarran-Ferguson Act29 gives a limited
antitrust exemption to the insurance industry. It is not clear what the impact of
removing this exemption might be since some observers believe the information
sharing facilitated by the exemption helps the industry operate more efficiently and
leads to lower rates.
Such federal action would be relatively indirect compared to what individual
states have done or might do. The insurance industry is highly regulated at the state
level, with many states, for example, requiring prior approval before a company can
adjust rates, change policy forms, or even withdraw from writing certain lines of
insurance. The most dramatic action taken on the insurance regulatory front since the
recurring market problems began was Proposition 103, a ballot initiative approved
by California voters in 1988. Proposition 103 was a broad change that was not
specifically aimed at medical malpractice insurance but affected all property-casualty
insurers in California. It created an elected, not appointed, insurance commissioner,
forced insurers to justify their rate increases to the insurance commissioner, required
insurance companies to open their books so regulators could determine if they needed
rate increases, and allowed citizens to challenge proposed rate increases.
How Effective Have Policy Changes Been?
Assessing the effectiveness of any of the various policy changes over the past
three decades is empirically difficult and strong conclusions are often equally
strongly disputed. For example, after the Liability Risk Retention Act of 1986, the
U.S. Department of Commerce issued a report concluding that the 1981 and 1986
Acts were effective in reducing problems with the availability of liability insurance,
citing among other things the numbers of insured then covered by risk retention
groups.30 In contrast, the NAIC saw no improvement from the formation these
groups, indicating that the market cycle would have inevitably turned and that these
insureds would have been able to find insurance in the commercial market.31 As
noted before, risk retention groups are still being formed to deal with the current
medical malpractice market situation, but this alone does not prove conclusively that
either of the previous Department of Commerce or NAIC positions were correct.
Coming to this, or any, conclusion requires assessing both what has happened and
what would have happened in the absence of the law .
The most voluminous debate has been over the effect of California’s experience.
California has experienced significantly lower medical malpractice premium growth
over the 28 years since the passage of MICRA in 1975. This is cited by some as
proof that tort reforms work and should be more widely adopted.32 Countering this,
29 15 U.S.C. Sec. 1011 et seq.
30 U.S. Department of Commerce, Liability Risk Retention Act of 1986: Operations Report,
1989, NTIS PB 90-123134, pp. 9-14.
31 Ibid, Appendix E-4.
32 See, for example, California’s MICRA Should Go National, an opinion piece written by
(continued...)

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others have argued that most of the slow growth, or even declines, in California
premiums have come since Proposition 103 in 1988, indicating that the answer
should be strengthened regulation.33
A major difficulty in economic analysis of the two arguments stems largely from
the relative closeness of the two policy changes, particularly because MICRA was not
finally upheld in court until 1985. As was discussed earlier, the pricing of insurance
is a long-term economic enterprise fraught with many uncertainties. In such an
endeavor, it would not be surprising that underwriters may wait to see what definite
effect a policy change has on their losses before making dramatic moves in insurance
pricing. Another difficulty in judging the California experience is the fact that
liability insurance in general was experiencing a hard market in the mid-1980s and
these market conditions may very well have temporarily overwhelmed the effect of
other policy changes.34
Conclusions
The recent difficulties in medical malpractice insurance are due in part to a
cyclical hard market that was experienced generally in the property/casualty
insurance industry. However, because significant differences in experiences are
observed among the various states, other factors, such as tort laws and insurance
regulations, seem also to be playing a significant role. The responsibility for these
two areas has traditionally been left to the individual states. During previous
experiences with insurance market difficulties, Congress enacted laws encroaching
to a minor degree on state insurance regulation. The current congressional focus is
largely on intervening in the tort system, although proposals have been made to alter
the insurance exemption from federal antitrust laws as well. Given the large amount
of federal spending dedicated to Medicare and Medicaid, as well as the public
sensitivities raised when health care services are curtailed, strong congressional
interest in this issue seems likely to continue
32 (...continued)
a past president of the California Medical Association, available at
[http://www.calphys.org/html/bb193.asp].
33 See, for example, Insurance Regulation, Not Malpractice Caps, Stabilize Doctors’
Premiums, a fact sheet by The Foundation for Taxpayer & Consumer Rights, available at
[http://www.consumerwatchdog.org/healthcare/fs/fs003013.php3].
34 Although the general economic analysis regarding California’s experience seems
inconclusive, there is at least one specific case where the stronger regulatory structure
introduced by Proposition 103 directly resulted in lower medical malpractice premiums. In
2002, an insurer, the SCPIE Companies, filed for a 15.6% rate increase for 2003 that was
then approved by the California Department of Insurance. Following the procedures set
forth in Proposition 103, this increase was challenged by The Foundation for Taxpayer &
Consumer Rights. On July 24, 2003, an administrative law judge reduced the increase to
9.9% in response to this challenge. See [http://www.insurance.ca.gov/ADM/DandR/
SCPIE_Decision_for_Internet.pdf] for the text of the decision. Arguments from the two
sides can be found at [http://www.scpie.com/publications/medigram/2003_special.pdf] and
[http://www.consumerwatchdog.org/insurance/pr/pr002904.php3].

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