Health economists and others have said medical professional liability insurance premiums are not experience rated. This led observers to conclude the system did not penalize malfeasant physicians. In that case, there would be little to lose if awards were capped. My contribution has been to point out that not only are premiums experience rated, but liability insurers take other steps to reduce practice risk. This is an important observation in a discussion over the value of caps. It is also an important observation with respect to state licensing of medical professionals.
For years, I have argued that state licensing is used by medical professionals to limit entry and does little to protect consumers. I have argued that consumers are protected by private efforts to reduce liability and that is what led me to look more closely at how the medical professional liability insurance industry works. The information presented in my paper was drawn from conversations with insurance industry professionals and a comprehensive review of state insurance filings. Physicians denied coverage by admitted carriers must seek insurance from surplus lines carriers who specialize in underwriting "hard-to-place" physicians. Few companies have those skills. And few physicians end up in that market. But those who do pay significantly more for medical professional liability insurance than their same-specialty, same-location peers.
If, as Mr. Frank suggests, once one controls for a physician's specialty, previous claims experience does not predict future claims experience, then medical professional liability underwriters are wasting a great deal of time and money evaluating individual physician's claims histories and practice risk. In pointing out that the few bogus claims are rewarded, I did not mean to suggest it is the only cost associated with the current system, my point was that the level of error in the system will never be zero or even close to zero. What we know is that the level of error in awards based on claims is relatively low. Most meritless claims do not move forward.
Whether the costs of the system are greater than the benefits is not something we have a handle on. From an economic perspective, it only makes sense to reduce costs-as caps would-if benefits do not fall more than costs. Any list of the costs and benefits of the medical malpractice system should include the benefits to consumers associated with the oversight and risk management provided by medical professional liability insurance companies. Mr. Frank asserts "the legal system is poorly situated to make judgment calls about complex medical decisions." As I mentioned before, Farber and White's evaluation of the tort system suggests it is well-situated to make judgment calls.
Mr. Frank mentions that my point is not new; he has participated in previous discussions that have addressed the negative consequences caps might have on medical practice risk. However economists and health policy analysts must not have been invited because they consistently, mistakenly, express the view that physicians are sheltered from liability by malpractice premiums that are not experience rated. It is important to clear up this mistaken impression if we are to have a fruitful discussion over whether the legal system works to deter malfeasance.
Mr. Frank is convinced that the costs of the current system outweigh the benefits and has credited me with the view that they don't. Then he writes that the conclusions of my paper are not supported by the data and the analysis. He is giving me credit for conclusions I did not draw. I do not conclude that the benefits of the tort system outweigh the costs. My paper points to a benefit of medical malpractice liability that had been overlooked in the economics and health policy literature due to the mistaken view that medical professional liability insurance premiums have not been experience rated.