December 2007

Grant Results

National Program

Changes in Health Care Financing and Organization

SUMMARY

Researchers at the Lister Hill Center for Health Policy at the University of Alabama at Birmingham examined state medical malpractice reform legislation from 1975 to 2004 to evaluate the effects of:

  • Malpractice reforms on physician malpractice insurance premiums.
  • General economic conditions on malpractice insurance premiums.
  • Malpractice reforms on employer-sponsored health insurance premiums.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO) (for more information see Grant Results).

A Findings Brief on the project is available online on the HCFO Web site.

Key Findings

  • In states that introduced caps on noneconomic damages (i.e., compensation for physical pain, mental distress or other nonmonetary losses) malpractice insurance premiums decreased for:
    • Internal medicine by 17.3 percent.
    • General surgery by 20.7 percent.
    • Obstetrics/gynecology by 25.5 percent.
  • If a cap of $250,000 on noneconomic damages were introduced in all states that did not have a cap as of 2005 (13 states and the District of Columbia) and reduced to $250,000 in states that had higher caps, there could be an annual savings of $1.4 billion, or 8 percent of total malpractice premium costs.
  • Malpractice premiums vary, in part, on the performance of investments made by insurance companies. When investment returns were higher for stocks in the Dow Jones Industrial Average, growth in malpractice insurance premiums was reduced.
  • Implementation of "statutes of repose," which establish an absolute time period in which to file a malpractice suit, have some effect on reducing growth in malpractice premiums.
  • The growing empirical literature has now established that damage caps have reduced medical malpractice premiums, but the evidence with respect to defensive medicine and physician location decisions is less clear cut.
  • In deciding the constitutionality of malpractice reform statutes, state supreme courts do use the findings of empirical health services research but have difficulty distinguishing strong studies from weaker ones.
  • Malpractice reforms over 1991–2004 had no effect on the health insurance premiums paid by employers.

Key Conclusions

  • Of the many types of malpractice reforms, only caps on noneconomic damages have had a meaningful effect on reducing the growth of malpractice premiums.
  • Since financial investments by malpractice insurance companies affect premium rates, the state of the economy must be considered when examining a medical malpractice "crisis."

Funding
RWJF supported the project from February 2004 to July 2005 with a grant of $204,220.

 See Grant Detail & Contact Information
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THE PROJECT

In response to rapid increases in medical malpractice insurance premiums (10 to 49 percent in 2003 and 7 to 25 percent in 2004, depending upon specialty), states have introduced a variety of laws aimed at stabilizing malpractice premiums.

Most widely known are caps on noneconomic damages. Noneconomic damages are compensation to patients for physical pain, mental distress, disfigurement or other nonmonetary losses. (Economic damages compensate monetary losses, such as medical expenses or loss of income.)

Michael A. Morrisey, Ph.D., and colleagues Meredith Kilgore, M.S.P.H., Ph.D., and Leonard J. Nelson, J.D., L.L.M., at the Lister Hill Center for Health Policy at the University of Alabama at Birmingham, reviewed all medical malpractice reform legislation and related state supreme court decisions from 1975 through 2004.

The researchers evaluated the effects of:

  • Malpractice reforms on physician malpractice insurance premiums.
  • General economic conditions on malpractice insurance premiums.
  • Malpractice reforms on employer sponsored health insurance premiums.

Methodology

Researchers analyzed the following data:

  • Malpractice premium data from the Medical Liability Monitor (a monthly newsletter on medical professional liability insurance and risk management) for 1991 to 2003.
  • The return on insurance company investments, as represented by the performance of:
  • Data on employer health insurance premiums from the Health Research & Educational Trust (HRET)/Kaiser Family Foundation Employer Health Benefits Annual Survey, 1991 to 2004.

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FINDINGS

Researchers reported their findings on malpractice premiums in an article, "Tort Law and Medical Malpractice Insurance Premiums," published in 2006 in Inquiry (abstract available online) and in a Findings Brief available online at the HCFO Web site. (See the Bibliography.)

  • In states that introduced caps on noneconomic damages, malpractice insurance premiums decreased for:
    • Internal medicine by 17.3 percent.
    • General surgery by 20.7 percent.
    • Obstetrics/gynecology by 25.5 percent.
  • The impact of a cap on noneconomic damages can vary depending on the size of the cap. The researchers estimated that for internal medicine, for example:
    • A cap on damages of $250,000 or less would reduce premiums for internal medicine by 25 percent.
    • However, a cap between $500,000 and $750,000 would increase premiums by 7.9 percent, with even higher premium increases for caps above $750,000. Plaintiffs in malpractice cases may use the cap as a minimum for which they try to settle, the principal investigator speculated. Larger caps would increase the minimum and could lead to inflated settlements, pushing malpractice insurance premiums upward.
  • If a cap of $250,000 on noneconomic damages were introduced in all states that did not have a cap in 2005 (13 states and the District of Columbia) and reduced to $250,000 in states that had higher caps, there could be an annual savings of $1.4 billion, or 8 percent of total malpractice premium costs.
  • Implementation of "statutes of repose," which establish an absolute time period in which to file a malpractice suit, had some effect on reducing growth in malpractice premiums.
  • Malpractice premiums vary, in part, on the performance of investments made by insurance companies. When investment returns were higher for the higher quality stocks represented in the Dow Jones Industrial Average, growth in malpractice insurance premiums was reduced. However, there was no statistically significant link between the performance of riskier stocks in the NASDAQ index and malpractice premiums.

In their article "Damages Caps in Medical Malpractice Cases," published in the Summer 2007 issue of the Milbank Quarterly, the authors report their review of the empirical literature on the effects of malpractice damage caps and the use of the empirical literature in state supreme court decisions. (See the Bibliography.)

  • The empirical literature has established that damage caps do reduce medical malpractice premiums. However, the literature on the effects on defensive medicine and physician location decisions is less extensive and the effects can only be described as small to modest with more research needed.
  • State supreme courts have used the empirical research on the effects of damage caps in reaching conclusions on the constitutionality of state reform efforts. However, the courts have difficulty distinguishing strong studies from weaker ones.

Researchers reported findings about the effect of malpractice reforms on employer paid health insurance premiums in a report to RWJF.

  • Malpractice reforms over 1991–2004 had no effect on the health insurance premiums paid by employers. Since malpractice premiums are only about 1 percent of total health care costs, changes in malpractice laws would be expected to have very minor effects on health insurance premiums, the researchers say.

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CONCLUSIONS

  • Of many types of malpractice reforms, only caps on noneconomic damages have had a meaningful effect on reducing the growth of malpractice premiums. Lower-level caps are most effective; high-level caps may produce the counterproductive result of raising malpractice premiums.
  • Since financial investments by malpractice insurance companies affect premium rates, the state of the economy must be considered when examining a medical malpractice "crisis."

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GRANT DETAILS & CONTACT INFORMATION

Project

Examining the Effect of Medical Malpractice Reform on Malpractice Premiums and on Consumer Costs of Health Care

Grantee

University of Alabama at Birmingham (Birmingham,  AL)

Lister Hill Center for Health Policy

  • Amount: $ 204,220
    Dates: February 2004 to July 2005
    ID#:  050298

Contact

Michael A. Morrisey, Ph.D.
(205) 975-8966
morrisey@uab.edu

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BIBLIOGRAPHY

(Current as of date of this report; as provided by grantee organization; not verified by RWJF; items not available from RWJF.)

Articles

Kilgore ML, Morrisey MA and Leonard NJ. "Tort Law and Medical Malpractice Insurance Premiums." Inquiry, 43(3): 255–270. 2006. Abstract available online. Full text requires subscription or fee.

Nelson LJ, Morrisey MA and Kilgore ML. "Damages Caps in Medical Malpractice Cases," Milbank Quarterly, 85(2): 259–286, 2007. Abstract available online.

Reports

Annotated Listing of State Malpractice Damage Cap Laws. Birmingham, AL: University of Alabama at Birmingham, Lister Hill Center for Health Policy, 2005. Available online.

Stone C. Investment Returns and Size of Damage Caps Impact Rising Cost of Malpractice Premiums. Washington: AcademyHealth (Changes in Health Care Financing & Organization National Program Office), 2007. Available online.

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Report prepared by: Mary B. Geisz
Reviewed by: Richard Camer
Reviewed by: Molly McKaughan
Program Officer: Nancy L. Barrand

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