No 685 October 20 2011 Could Mandatory Caps on Medical Malpractice Damages Harm Consumers by Shirley Svorny Executive Summary Supporters of capping court awards for medical malpractice argue that caps will make health care more affordable It may not be that simple First caps on awards may result in some patients not receiving adequate compensation for injuries they suffer as a result of physician negligence Second because caps limit physician liability they can also mute incentives for physicians to reduce the risk of negligent injuries Supporters of caps counter that this deterrent function of medical malpractice liability is not working anyway that awards do not track actual damages and medical malpractice insurance carriers do not translate the threat of liability into incentives that reward high quality care or penalize errant physicians This paper reviews an existing body of work that shows that medical malpractice awards do track actual damages Furthermore this paper provides evidence that medical malpractice insurance carriers use various tools to reduce the risk of patient injury including experience rating of physicians malpractice premiums High risk physicians face higher malpractice insurance premiums than their less risky peers In addition carriers offer other incentives for physicians to reduce the risk of negligent care they disseminate information to guide riskmanagement efforts oversee high risk practitioners and monitor providers who offer new procedures where experience is not sufficient to assess risk On rare occasions carriers will even deny coverage which cuts the physician off from an affiliation with most hospitals and health maintenance organizations and precludes practice entirely in some states If the medical malpractice liability insurance industry does indeed protect consumers then policies that reduce liability or shield physicians from oversight by carriers may harm consumers In particular caps on damages would reduce physicians and carriers incentives to keep track of and reduce practice risk Laws that shield government employed physicians from malpractice liability eliminate insurance company oversight of physicians working for government agencies State run insurance pools that insure risky practitioners at subsidized prices protect substandard physicians from the discipline that medical malpractice insurers otherwise would impose Shirley Svorny is an adjunct scholar at the Cato Institute and professor of economics at California State University Northridge If caps on damages reduce insurance industry incentives to minimize the risk of patient injury then consumers could lose important protections risk physicians via state joint underwriting associations and state licensing of medical professionals Introduction Supporters of capping court awards for medical malpractice argue that caps will make health care more affordable It may not be that simple First caps on awards may result in some patients not receiving adequate compensation for injuries they suffer due to physician negligence Second because caps limit physician liability they can also mute incentives for physicians to reduce the risk of negligent injuries Supporters of caps counter that this deterrent function of medical malpractice liability is not working anyway that awards do not track actual damages and medical malpractice insurance premiums do not reward high quality care or penalize errant physicians with higher premiums This paper proceeds as follows I begin with a review of the structure and regulation of the medical professional liability insurance industry Next for those unfamiliar with studies of the tort system and concerned that it fails to identify malfeasant physicians I review the empirical literature that has found malpractice awards generally track injuries resulting from negligence The next section reviews the conventional wisdom that says medical malpractice insurance companies do not experience rate i e charge higher premiums to physicians who are more likely to injure patients Drawing on interviews with underwriters and brokers published sources and an extensive review of state insurance company rate filings in California and elsewhere I explain how the malpractice insurance industry uses underwriting and other tools to provide oversight and reduce adverse medical events I conclude that important consumer protections could be lost were caps on economic and noneconomic damages to reduce insurance industry incentives to evaluate and minimize risk associated with the practice of medicine The findings in this paper have implications for several other public policies including laws that shield government employed physicians from malpractice claims state malpractice insurance subsidies for high The Medical Malpractice Insurance Industry Medical professional liability insurance is commonly referred to as malpractice insurance State governments regulate medical malpractice insurance Companies approved by state insurance departments are called admitted carriers Admitted carriers must demonstrate financial stability and adhere to state regulations They must seek state department of insurance approval for rates and forms State guarantee programs protect injured patients against insurer insolvency Since the mid 1970s the share of the medical professional liability insurance market held by traditional for profit commercial insurers has declined as not for profit physicianowned insurers share has grown Other risktransfer entities provide insurance to medical societies or physician groups 1 Physicians denied coverage or dropped by admitted carriers turn to surplus lines carriers This includes physicians who have lost hospital privileges those with a history of medical malpractice claims or drug or alcohol abuse and physicians sanctioned by state medical boards Medicare or Medicaid fraud can also be a ticket to the surplus lines market 2 Doctors with clean clinical records may be in the surplus lines market because they practice in more than one state have gone without insurance coverage for a time or are using a new procedure not yet widely in use For the most part surplus lines carriers are not as heavily regulated as admitted carriers nor backed by a state guarantee fund 3 Because they are not required to file forms and rates they may change rates or policy terms as conditions warrant This allows them to design insurance products for nonstandard risks 4 The number of physicians in