The Ciceronian Review blog suggests that insurance defense costs and insurance defense strategy are to blame for the rising costs of defending medical malpractice suits. "Those costs are controllable by insurers -- they should by now have a very good basis for determining meritless claims early on and making appropriate litigation decisions, including nuisance settlement. ... If insurers choose to spend a lot of money litigating, it is hard to see why anyone other than their shareholders should shoulder the burden."
This argument depends on the premise that the number of malpractice suits is static and plaintiffs' attorneys do not change their strategy in response to changes in defendants' litigation strategy.
Suffice it to say that this is false. If it costs an average of $200,000 to defend and beat back a meritless claim, can an insurance company reduce its overall expenses by offering to settle for $100,000 before much litigation gets underway? Clearly, the answer is no: if plaintiffs' attorneys learn that a particular insurer will offer a nuisance settlement when faced with a meritless case, suddenly, many meritless cases that were previously unprofitable become profitable to bring: instead of a negative expected value, they now have a nuisance settlement value, and the insurers find themselves writing out a lot more nuisance settlement checks. If, however, insurers stand firm when they have a strong case, plaintiffs respond by suing only when they have either (1) a strong case or (2) a weak case that is still profitable to bring because of a chance at a large verdict. The idea behind caps is the imperfect attempt to reduce the number of suits brought in that second category.
I hate to repeat myself, but I have to wonder: if it's really the case that medical malpractice insurers are mismanaging their business so badly that they can become more profitable by simply adopting the reforms of kibitzers, why don't insurance company critics solve the medical malpractice insurance problem by entering the market and undercharging the "gouging" "mismanaged" insurance companies?