.
Medical Malpractice Insurance and
Health Reform
Bernadette Fernandez
Specialist in Health Care Financing
Baird Webel
Specialist in Financial Economics
Vivian S. Chu
Legislative Attorney
February 8, 2011
Congressional Research Service
7-5700
www.crs.gov
R40862
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008
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Medical Malpractice Insurance and Health Reform
Summary
Medical malpractice liability insurance has attracted congressional attention numerous times over
the past few decades, particularly in the midst of three “crisis” periods in the mid-1970s, the mid-
1980s, and the early 2000s. These crises were marked by sharp increases in physicians’ liability
insurance premiums, difficulties in finding any insurance in some areas as insurers withdrew from
providing coverage, reports of physicians leaving areas or retiring following insurance
difficulties, and a variety of public policy measures at both the state and federal levels to address
the crises. Which public policy measures have been effective in addressing the successive
insurance crises has been a matter of debate, in part because these crises have been at the
intersection of the health care, tort, and insurance systems.
Currently, the medical liability insurance market is not exhibiting crisis symptoms. Over the past
few years, losses incurred by medical malpractice insurers have dropped dramatically and
premiums paid have fallen, albeit more modestly. Problems with the affordability and availability
of malpractice insurance persist but are less acute compared with other time periods. Even during
a non-crisis period, the current malpractice system experiences issues with equity and access. For
example, some observers have criticized the current system’s performance with respect to
compensating patients who have been harmed by malpractice, deterring substandard medical
care, and promoting patient safety. Yet there are differing opinions as to the extent that each of
these particular areas has been affected by the current malpractice system.
The latest legislative interest in medical malpractice reform differs from the past in that it is
largely driven by overall health reform, rather than an immediate crisis in medical malpractice
insurance. In terms of direct costs, medical malpractice insurance adds relatively little to the cost
of health care. According to the National Association of Insurance Commissioners (NAIC),
medical malpractice premiums written in 2009 totaled approximately $10.8 billion, while health
expenditures are estimated by the Congressional Budget Office (CBO) to total $2.6 trillion.
Indirect costs, particularly increased utilization of tests and procedures by physicians to protect
against future lawsuits (“defensive medicine”), have been estimated to be much higher than direct
premiums. These conclusions, however, are controversial, in part because synthesis studies have
claimed that national estimates of defensive medicine are unreliable.
The recently enacted Patient Protection and Affordable Care Act (P.L. 111-148) included
language that allows states to receive grants to enact and implement alternatives to tort litigation.
In the 112th Congress, H.R. 2, which would repeal P.L. 111-148, passed the House on January 19,
2011. In addition, the House Committee on the Judiciary held a hearing on medical liability
reform on January 20, 2011, and H.R. 5, the Help Efficient, Accessible, Low-cost, Timely
Healthcare (HEALTH) Act of 2011, was introduced shortly thereafter on January 24, 2011.
Among other things, the HEALTH Act would implement a cap on non-economic damages for
health care lawsuits.
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Medical Malpractice Insurance and Health Reform
Contents
Introduction ................................................................................................................................ 1
Medical Malpractice and Health Reform ..................................................................................... 2
Health Reform and Medical Malpractice Legislation ............................................................. 3
Congressional Action in the 112th Congress ........................................................................... 4
Challenges in Medical Malpractice Policymaking ....................................................................... 5
Health Care System............................................................................................................... 5
Tort System........................................................................................................................... 6
Insurance System .................................................................................................................. 7
Recent Experience in Medical Malpractice Insurance .................................................................. 7
Figures
Figure 1. Nationwide Direct Losses Incurred............................................................................... 8
Figure 2. Nationwide Loss Ratio ................................................................................................. 8
Contacts
Author Contact Information ........................................................................................................ 9
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Medical Malpractice Insurance and Health Reform
Introduction
Medical malpractice insurance has attracted congressional attention numerous times over the past
few decades, particularly in the midst of three “crisis” periods in the mid-1970s, the mid-1980s,
and the early 2000s. These crises were marked by sharp increases in physicians’ liability
insurance premiums, difficulties in finding any liability insurance in some areas as insurers
withdrew from providing coverage, reports of physicians leaving areas or retiring following
insurance difficulties, and a variety of public policy measures at both the state and federal levels
to address the crises. In each case, the crisis receded after a few years as premium increases
moderated and market conditions calmed. Over time, the availability of medical liability
insurance and premiums for such insurance has exhibited cyclical characteristics.
Which public policy measures have been effective in addressing the successive insurance crises
has been a matter of debate. Sharply drawn conclusions about the causes of the crises have also
been strongly debated. During the most recent crisis, in the early 2000s, the debate largely
focused on implementing federal limits on the tort system. The Congressional Budget Office
(CBO) has estimated that a nationwide limit on torts for medical malpractice would lower
malpractice insurance premiums by approximately 10%.1 Other studies have found both higher
effects and negligible effects from state tort reforms.2
According to the latest summary information published by the Medical Liability Monitor in 2010,
the market “remains ‘soft’ or perhaps ‘flat’ with 67 percent of all rates holding at last year’s
level.”3 Premiums for 2010 for malpractice insurance “have eased nationwide.”4 Data gathered by
the National Association of Insurance Commissioners (NAIC) indicate that total premiums for
medical malpractice liability insurance have dropped every year from 2006 to 2009. Although the
current medical liability insurance market is not exhibiting crisis symptoms, problems still exist
with affordability of malpractice insurance for certain specialties and in particular geographic
regions; such problems, however, are not as acute as compared with other crisis periods. Thus, by
extension, physicians and physician groups (primarily the American Medical Association) are not
responding to current market conditions in the same manner as during crisis periods. For
example, during a crisis period, physicians and physicians groups have engaged in more public
displays of dissatisfaction such as participating in “strikes.” However, even during a non-crisis
period, the current malpractice system experiences issues with equity and access. For example,
some observers have criticized the current system’s performance with respect to compensating
patients who have been harmed by malpractice,5 deterring substandard medical care,6 and
promoting patient safety.7
1 Congressional Budget Office (CBO), “CBO’s Analysis of the Effects of Proposals to Limit Costs Related to Medical
Malpractice (“Tort Reform”), Letter to the Honorable Orrin G. Hatch,” October 9, 2009, available at
http://www.cbo.gov/doc.cfm?index=10641.
2 See, e.g., Kenneth E. Thorpe, “The Medical Malpractice ‘Crisis’: Recent Trends and the Impact of State Tort
Reforms,” Health Affairs, Web Exclusive, January 21, 2004, and General Accounting Office, “Medical Malpractice:
Six State Case Studies Show Claims and Insurance Costs Still Rise Despite Reforms,” GAO/HRD-87-21, December
1986.
3 Chad Karls, Medical Liability Monitor, Vol. 35, No. 10, October 2010, p. 1
4 Amy Lynn Sorrel, “Liability premiums stay stable, but insurers warn this might not last,” American Medical News,
November 23, 2009, available at http://www.ama-assn.org/amednews/2009/11/23/prl21123.htm.
5 E. Thomas, et al., “Incidence and Types of Adverse Events and Negligent Care in Utah and Colorado,” Medical Care,
Vol. 38, No. 3, (March 2000); T. Brennan, et al., “Incidence of Adverse Events and Negligence in Hospitalized
(continued...)
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Medical Malpractice and Health Reform
The current legislative interest in medical malpractice reform differs from the past in that it has
been largely driven by overall health reform, rather than an immediate crisis in malpractice
liability insurance. As such, the focus of reforming medical malpractice may be broadened.
Instead of narrowly addressing what can be done to stabilize premiums for malpractice insurance,
Congress may decide to focus on how changes to the medical malpractice system might affect
overall health reform.
In terms of direct costs, medical malpractice insurance adds relatively little to the cost of health
care. Medical malpractice premiums written in 2009 totaled approximately $10.8 billion,8 while
health expenditures estimated by CBO total $2.6 trillion.9 Indirect costs, particularly increased
utilization of tests and procedures by physicians to protect against future lawsuits (“defensive
medicine”), have been estimated to be much higher than direct premiums. These conclusions,
however, are controversial, in part because synthesis studies have claimed that national estimates
of defensive medicine are unreliable.10
CBO conducted its own analysis, as well as synthesized and analyzed previous studies on the
relationship between medical malpractice and health care costs.11 The most recent CBO analysis
estimated that federal tort reforms would reduce national health care spending by about 0.5% in
2009 (equivalent to approximately $11 billion).12 This estimate is the cumulative impact of tort
reform on both lowering medical malpractice insurance premiums and reducing use of health care
services, and takes into account the fact that because some states have implemented tort reforms,
a significant proportion of potential cost savings already has been realized. Other earlier studies
have estimated the reduction of health care spending attributable to state tort reforms. These
studies compared pre- and post-reform spending within each state that implemented such reforms,
and found varying impact (e.g., a set of studies found 4%-9% reduction in hospital spending for
Medicare patients with heart disease; another study found that state tort reforms reduced personal
health care expenditures by 3%-4%).13
(...continued)
Patients,” New England Journal of Medicine, Vol. 324, No. 6, (February 7, 1991).
6 Michelle M. Mello and Troyen A. Brennan, “Deterrence of Medical Errors: Theory and Evidence for Malpractice
Reform,” 80 Tex. L. Rev. 1595 (2002).
7 L. Sato, et al., “Legal Liability and Protection of Patient Safety Data,” Harvard Risk Management Foundation, 2005.
8 NAIC, “Countrywide Summary of Medical Malpractice Insurance, Calendar Years 1991-2009,” provided to CRS on
December 16, 2010.
9 Douglas Elmendorf, “Expanding Health Insurance Coverage and Controlling Costs for Health Care,” testimony
provided to the Senate Budget Committee, February 10, 2009.
10 See, e.g., Michelle Mello, “Understanding medical malpractice insurance: A primer,” Robert Wood Johnson
Foundation, Research Synthesis Report No. 8, January 2006, and Office of Technology Assessment, “Defensive
Medicine and Medical Malpractice,” 1994.
11 See CBO, “Budget Options, Volume 1: Health Care,” December 2008.
12 CBO, “CBO’s Analysis of the Effects of Proposals to Limit Costs Related to Medical Malpractice (“Tort Reform”),
Letter to the Honorable Orrin G. Hatch,” October 9, 2009, available at http://www.cbo.gov/doc.cfm?index=10641.
13 See P. Danzon, “Liability for Medical Malpractice,” Handbook of Health Economics, Culyer and Newhouse, eds.,
2000; D. Kessler and M. McClellan: “How Liability Law Affects Medical Productivity,” Working Paper No. 7533,
National Bureau of Economic Research, Feb. 2000), and “Do Doctors Practice Defensive Medicine?,” Quarterly
Journal of Economics, Vol. 111, No. 2, May 1996; and F. Hellinger and W. Encinosa, “The Impact of State Laws
(continued...)
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CBO also estimated the effect of malpractice tort reform on the federal budget. In its latest
analysis, CBO estimated that such reforms would reduce spending under Medicare, Medicaid, the
Children’s Health Insurance Program, and the Federal Employees Health Benefits Program by
approximately $41 billion from 2010 to 2019. In addition, Congress’s Joint Committee on
Taxation (JCT) estimated that such reforms would lead to an increase in federal revenues by $13
billion over the same 10-year period.14 By combining the impact of tort reform on mandatory
health spending and tax revenues, CBO estimated that tort reforms could reduce the federal
budget deficit by approximately $54 billion over 10 years.15
Health Reform and Medical Malpractice Legislation
The Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) was signed into law on
March 23, 2010. The language of PPACA was that of H.R. 3590, which was passed by the Senate
on December 24, 2009. It includes two provisions related to medical malpractice liability reform.
As will be discussed below, it is the states that regulate or that have implemented tort reform for
medical malpractice law suits. PPACA is the first law enacted where Congress not only expresses
that it should establish state demonstration programs to evaluate alternatives to tort litigation, but
in fact establishes such an initiative, which will be in effect for five years.
Section 6801 expresses the Sense of the Senate that (1) health care reform presents an opportunity
to address issues related to medical malpractice and medical liability insurance; (2) states are
encouraged to develop and test litigation alternatives while preserving an individual’s right to
seek redress in court; and (3) Congress should consider establishing a state demonstration
program to evaluate alternatives to the existing civil litigation system with respect to medical
malpractice claims.
Section 10607 creates a new Public Health Services Act section 933V-4, which appropriates $50
million for a five-year period beginning in FY2011 for the Secretary to award demonstration
grants to states for the development, implementation, and evaluation of alternatives to current tort
litigation for resolving disputes over injuries allegedly caused by health care providers or
organizations. These grants will exist for no more than five years. States that receive a grant are
required to develop an alternative that (1) allows for the resolution of disputes caused by health
care providers or organizations, and (2) promotes a reduction of health care errors by encouraging
the collection and analysis of patient safety data related to the resolved disputes.
Prior to receiving a grant, a state will have to demonstrate that its alternative (1) increases the
availability of prompt and fair resolutions of disputes, (2) encourages the efficient resolution of
disputes, (3) encourages the disclosure of health care errors, (4) enhances patient safety by
reducing medical errors and adverse events, (5) improves access to liability, (6) informs the
patient about the differences between the alternative and tort litigation, (7) allows the patient to
(...continued)
Limiting Malpractice Damage Awards on Health Care Expenditures,” American Journal of Public Health, Aug. 2006.
14 Much of health care consumed in the private sector is provided through employer-sponsored health benefits that are
not taxed as income for the employee. The JCT assumed that implementation of tort reforms would lead to lower health
care costs, which in turn, would lead to higher wages, which are taxable. Thus, higher taxable income would result in
greater revenue.
15 CBO, “CBO’s Analysis of the Effects of Proposals to Limit Costs Related to Medical Malpractice (‘Tort Reform’),”
Letter to the Honorable Orrin G. Hatch, October 9, 2009, available at http://www.cbo.gov/doc.cfm?index=10641.
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opt out of the alternative at any time, (8) does not conflict with state law regarding tort litigation,
and (9) does not abridge a patient’s ability to file a medical malpractice claim.
Each state will have to identify the sources from and methods by which compensation will be
paid, which can include public and private funding sources. In addition, each state will have to
establish a scope of jurisdiction to whom the alternative will apply so that it is sufficient to
evaluate the effects of the alternative. The Secretary will provide to the states that are applying for
the grants technical assistance, including guidance on common definitions, non-economic
damages, avoidable injuries, and disclosure to patients of health care errors and adverse events.
When reviewing states’ grant applications, the Secretary will consult with a newly established
review panel that will be composed of relevant experts appointed by the Comptroller General.
There are various reporting requirements that must be completed. First, states that receive a grant
must submit a report to the Secretary covering the impact of the activities funded on patient safety
and on the availability and price of medical liability insurance. Second, the Secretary must submit
an annual compendium to Congress that examines any differences that may result in the areas of
quality of care, number and nature of medical errors, medical resources used, length of time for
dispute resolution, and the availability and price of liability insurance. Third, the Secretary, in
consultation with the review panel, must contract with a research organization to conduct an
overall evaluation of the effectiveness of grants awarded. This evaluation must be submitted to
Congress no later than 18 months following the date of implementation of the first funded
program. Fourth, the Medicare Payment Advisory Commission (MedPAC) and the Medicaid and
CHIP Payment and Access Commission (MACPAC) must each conduct an independent review of
the impact of state-implemented alternatives on their programs and beneficiaries. These reports
must be submitted no later than December 31, 2016. These reports may provide new and
informative data about the impact and effect of tort reform.
The section does not limit any prior, current, or future efforts of any state to establish any
alternative to tort litigation.
Congressional Action in the 112th Congress
The 112th Congress has acted quickly to address health reform generally and medical malpractice
issues specifically. H.R. 2, which would repeal P.L. 111-148 in its entirety, was introduced by
Representative Eric Cantor on January 5, 2011. This bill was passed by the House on January 19,
2011.
Medical liability reform was the topic of the first committee hearing in the House Committee on
the Judiciary, held on January 20, 2011. Shortly thereafter, H.R. 5, the Help Efficient, Accessible,
Low-cost, Timely Healthcare (HEALTH) Act of 2011, was introduced by Representative Phil
Gingrey on January 24, 2011.16 H.R. 5 would impose national medical malpractice laws, and thus
would effectively preempt existing state medical malpractice laws, with certain exceptions. A
“health care lawsuit” would encompass not only suits between a physician and patient, but also
any claim against a health care organization, manufacturer, distributor, supplier, marketer,
promoter, or seller of a medical product and any claims concerning health care goods and services
16 Notably, prior versions of this bill have been introduced in past congresses. See H.R. 4600, 107th Cong. (2d Sess.
2002); H.R. 5, 108th Cong. (1st Sess. 2003); H.R. 4280, 108th Cong. (2d Sess. 2004); H.R. 5/H.R. 534 (1st Sess. 2005);
H.R. 2580, 110th Cong. (1st Sess. 2007); H.R. 1086, 111th Cong. (1st Sess. 2009).
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or medical products affecting interstate commerce. Among other things, H.R. 5 would mandate a
uniform statute of limitations for health care lawsuits, set parameters and caps for non-economic
damages, punitive damages, and attorneys fees. However, it would also grant states flexibility in
that it would not preempt any state law that imposes greater procedural or substantive protections
for health care providers and organization from liability, loss, or damages, and it would not
preempt any state law that specifies a particular monetary amount of compensatory or punitive
damages, regardless of whether the state’s monetary amount is greater or lesser than is provided
for in the act.
Challenges in Medical Malpractice Policymaking
Addressing problems in the medical malpractice insurance markets can be challenging, as these
markets react to three different systems, each of which is complex in its own right: health care,
tort, and insurance.
Health Care System
Medical errors can lead to injury, and injury is the medical basis on which a malpractice claim is
made. Reducing errors through improved medical practices and effectuating penalties against
poorly performing physicians may benefit the overall performance of the medical malpractice
insurance system.
States have the primary authority to define the process for granting and renewing a medical
license, and regulating the medical practice. Currently, there is a lack of uniformity across states
regarding both medical licensure and the medical practice. Moreover, states face financial
challenges and many lack clinical expertise to fully implement patient safety strategies. For
example, current state initiatives vary regarding the existence, scope, and robustness of data-
collection efforts to track and analyze medical errors and possible instances of malpractice.
Federal input may be implemented through a variety of approaches, both voluntary (e.g., support
for research on evidence-based medicine, and toolkits to evaluate the adoption of patient safety
efforts) and mandatory (e.g., “conditions of participation” standards for institutional providers
under the Medicare program).
While reducing medical errors may be a worthy goal in its own right, it is unclear to what degree
medical malpractice insurance will be affected if only patient safety concerns are addressed.
Multiple studies have found that the majority of malpractice claims filed involve medical injuries
not caused by negligence.17 Moreover, only a small proportion of patients whose injuries are
caused by negligent medical care actually end up filing a malpractice claim.18 These findings
speak to the complexity of the existing medical liability system, and difficulty in designing
effective policies without consideration of the interrelated systems.
17 See, e.g., David Studdert, et al., “Negligent Care and Malpractice Claiming Behavior in Utah and Colorado,”
Medical Care, (March 2000); Paul Weiler, et al., A Measure of Malpractice (1993); T. Brennan, et al., “Incidence of
Adverse Events and Negligence in Hospitalized Patients: Results of the Harvard Medical Practice Study I,” New
England Journal of Medicine, Vol. 324, No. 6, (February 7, 1991).
18 David Studdert, et al., “Negligent Care and Malpractice Claiming Behavior in Utah and Colorado,” Medical Care,
(March 2000).
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Some observers suggest that the current malpractice system encourages the practice of “defensive
medicine,” that is, the fear of liability and the potential negative outcomes associated with
malpractice claims lead physicians to administer additional health care treatments or avoid high-
risk services primarily to reduce their liability risk. The implication is that defensive medicine
results in either an increase in overall consumption of and spending on health care services that
may not be medically necessary, or a decrease in access to certain services or for certain patients.
Multiple studies have found some evidence of defensive medicine, but even physician and other
provider groups acknowledge that it is a difficult concept to measure.19 Moreover, some evidence
suggests that factors other than defensive medicine, such as physician payment systems (e.g., fee-
for-service vs. capitation) and financial incentives, may explain the alleged over-provision of
health services.20
Tort System
The tort system acts as a mechanism through which a person suffering injury due to medical
errors is monetarily compensated when he or she establishes that a physician provided
substandard health care. Some argue that the tort system is an efficient way to both compensate
those who suffer from an injury and to deter the errors that created the injury, and that the tort
system is the primary way that the present system deals with such issues. However, there are
those who argue that, in the case of medical malpractice, the current system does neither
particularly well.21 Some observers have suggested that the medical malpractice tort system is
arbitrary in its outcome.22 As noted above, many valid claims are never filed and many filed
claims are not the result of negligence. Jury verdicts can vary significantly from case to case, with
substantial variation also occurring among states and among counties within states.
Some medical malpractice reforms also contribute to this variation. For example, in a case where
there is a permanently disabled mid-career high wage earner compared to a non-wage earner with
the same injury, a jury awarding non-economic damages 23 where there is no cap may tend to give
the working person higher non-economic damages. However, where there is a cap on non-
economic damages, this may mean that the high wage earner is prevented from being
compensated as highly for his non-economic damages. Data on tort outcomes for medical
malpractice are difficult to gather as there is no central or authoritative tracking source from the
counties where many trials occur, nor is there such a source from the states or the federal
government.24
19 General Accounting Office, “Medical Malpractice: Implications of Rising Premiums on Access to Health Care,”
GAO-03-836, August 2003.
20 Ibid.
21 See analysis presented by M. Mello and D. Studdert, “The Medical Malpractice System: Structure and Performance,”
Medical Malpractice and the U.S. Health Care System, W. Sage and R. Kersh, eds., Cambridge University Press, 2006.
22 “Addressing the New Health Care Crisis: Reforming the Medical Litigation System to Improve the Quality of Health
Care,” Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services,
March 3, 2003.
23 Non-economic damages typically compensate for intangibles such as pain and suffering and capacity to enjoy life, as
opposed to economic damages which compensate for more tangible elements such as medical expenses and loss of
earnings.
24 However, a private company, Jury Verdict Research, is a commonly cited source for information on awards from
medical malpractice cases as they collect and analyze data.
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Insurance System
Liability insurance insulates physicians from the direct cost of medical malpractice. It acts as a
buffer between the actual award for malpractice determined under the tort system and the
physician who may have committed malpractice. The vast majority of physicians have liability
insurance, although there is anecdotal evidence about some physicians practicing medicine
without malpractice insurance. By its nature, insurance spreads the costs across a wide base of
physicians in a particular specialty or geographic area, so that the actions of a relatively small
number of physicians can have a wider impact.
Specific aspects of the insurance system can arguably catalyze or magnify crises. Medical
malpractice claims tend to play out over an extended period of time, due both to the lag in
recognizing that a claim might exist and to deliberations in the court system. Insurance is based
on estimating future claims and estimating the investment returns on premium payments from the
time premiums are paid until the time claims are paid. The longer time period associated with
liability insurance losses increases uncertainty in these estimations, with such uncertainty
possibly leading to increased volatility in premiums.
Medical malpractice liability insurance is regulated by the individual states under the federal
McCarran-Ferguson Act of 1945,25 which also provides a limited exemption from federal antitrust
laws. This has resulted in variations in the structure of the markets as well as in the data
generated. NAIC aggregates some insurance data; however, much potentially useful data is either
not collected or not available. For example, data encompassing all the medical malpractice claims
closed by insurers can give a broad picture of the situation in medical malpractice insurance;
however, only a handful of states either collect such data or make it available to researchers.
Recent Experience in Medical Malpractice Insurance
The cyclical experience of medical malpractice insurers is reflected in aggregate data about the
industry compiled and analyzed by the NAIC (see Figure 1). From 1992 to 1998, direct incurred
losses26 were relatively stable, varying from a low of $3.18 billion in 1994 to a high of $4.46
billion in 1998. However, from 1998 to 2003, losses grew steadily year after year, to a high of
$8.46 billion in that last year, coinciding with the last crisis period. Since 2003, losses have fallen
every year. In 2009, losses totaled $4.01 billion, the lowest amount in more than a decade. (The
loss data is in nominal dollar amounts.)27
25 15 U.S.C. Sec. 1011 et seq.
26 Incurred losses are payments for claims during a certain time period, in this case during a calendar year. Incurred
losses for any given year include payments for claims submitted prior to that year, and account for outstanding claims
at the end of the time period. The NAIC loss data is in nominal dollar amounts.
27 The distinction between nominal vs. real dollars is significant when considered over the longer time period. For
example, while the 2008 loss of $4.09 billion does not seem much more than the 1992 loss of $4.04 billion, because
these amounts do not reflect the effects of inflation, the 2008 losses are actually much lower than those in 1992.
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Figure 1. Nationwide Direct Losses Incurred
10
8.46
8
$)
(
6
ns
4.04
4.09
4.46
io
4
3.18
4.01
ill
B
2
0
91
92
93
94
95
96
97
98
01
02
03
04
05
06
07
08
09
19
19
19
19
19
19
19
19
1999 2000 20
20
20
20
20
20
20
20
20
Calendar Year
Source: National Association of Insurance Commissioners.
The trend in malpractice insurance premiums has roughly followed losses as those amounts have
increased. However, such premiums have not fallen nearly as much as losses in recent years. The
loss ratio, which compares losses to premiums, reflects this uneven trend (see Figure 2). A high
ratio generally implies lower profits for insurers on the insurance portion of their operations. The
loss ratio for the industry rose steadily from 78.41% in 1997 to 126.83% in 2001, tracking closely
with the losses trend. Since 2001, the loss ratio has rapidly decreased. In 2008, the loss ratio of
54.62% was the lowest one in nearly two decades and 2009’s ratio was the second lowest at
55.66%, meaning that over the past two years, the industry experienced its highest profit margin
on direct premiums earned in the calendar years analyzed.
Figure 2. Nationwide Loss Ratio
126.83
) 140
%
103.18
120
78.41
100
54.62
80
atio (
60
55.66
40
s R
200
Los
1
2
3
4
95
6
7
8
9
0
1
2
3
4
05
6
7
8
9
199 199 199 199 19
199 199 199 199 200 200 200 200 200 20
200 200 200 200
Calendar Year
Source: National Association of Insurance Commissioners.
Notes: Loss Ratio = (Direct Losses + Direct Defense and Cost Containment Expenses Incurred)/Direct
Premiums Earned.
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Insurers, who are strictly regulated by state insurance regulators, may also profit, or lose, from
their investments. In general, with such low loss ratios, theory would suggest that there is an
increase in competition because insurers are entering the market in search of profits. This,
however, may not be happening as quickly as expected in medical malpractice if prospective
insurers are wary due to past variations in medical malpractice losses, or if prospective insurers’
capital has been depleted due to losses incurred during the recent financial crisis.
Author Contact Information
Bernadette Fernandez
Vivian S. Chu
Specialist in Health Care Financing
Legislative Attorney
bfernandez@crs.loc.gov, 7-0322
vchu@crs.loc.gov, 7-4576
Baird Webel
Specialist in Financial Economics
bwebel@crs.loc.gov, 7-0652
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