This morning, the Manhattan Institute Center for Legal Policy has released a new study in our Civil Justice Report series, Medical Malpractice Awards, Insurance, and Negligence: Which Are Related?. Written by our friend Alex Tabarrok and his assistant Amanda Agan, the study considers the underlying causes of variations in medical malpractice insurance premiums, over time and across the states.
Our regular readers are well aware that trial lawyers and their allied consumer groups, politicians, and journalists typically claim that increases in med-mal premiums are caused by the "insurance cycle" or insurer "price gouging". We've rebutted those claims often (see, e.g., here, here, here, here, here, and here; see also Ted Frank and Martin Grace's thorough debunking of the Center for Justice and Democracy's studies here), but the claims continue to find their way into the public debate.
Enter Alex and Amanda. Their new study makes four findings of interest (taken from the Executive Summary):
- They show that medical malpractice premiums are closely related to medical malpractice tort awards. Over the long run, premiums closely track awards, and premiums adjust to short-run award variation as well. Indeed, insurance companies' short-run reaction to award levels is the primary driver of the so-called insurance cycle. In addition, med-mal premiums are closely related to tort awards across states. The correlation in premiums and awards across the states suggests strongly that tort award levels, not investment returns, are the primary explanatory factor for changes in insurance premiums, since investment returns are unlikely to vary markedly across states.
- They show that medical malpractice premiums are not explained by insurance industry price gouging. For the price-gouging hypothesis to make sense, insurance industries must be exercising monopoly power. Looking at insurance industry 4-firm concentration ratios�a measure of market power�we find that states with more concentrated insurance industries actually have lower premiums, even when controlling for other explanatory factors.
- They show that medical malpractice tort awards are related to some factors not rationally related to injuries. For instance, states� judicial electoral systems have predictive value on the expected level of tort award.
- They show that malpractice tort awards and thus insurance premiums can vary dramatically for reasons having little or nothing to do with negligence. They reach this conclusion through a novel test of the tort system, in which we compare awards and rates of determination of negligence in the tort system with rates determined by the independent medical board review system. Although board review outcomes are imperfect, they are biased, if at all, against findings of negligence, because physicians will not allow frivolous complaints to result in disciplinary actions. The tort system shows no or even a slight negative correlation with the board review system�s negligence determinations, suggesting that the system is influenced by factors not related to negligence.