The Effect of Damage Cap Reforms on Medical Malpractice Insurance Market Conditions During Periods of Crises

Abstract

This article evaluates whether and how tort reform, specifically damage caps, stabilizes medical malpractice insurance markets. We examine statelevel medical malpractice insurance market performance in the United States for the period 1994-2010, a period characterized by a significant variation across states in their legal environments. First, we find that states with damage caps are less likely to have a crisis. Second, we find that the magnitude of crisis events is attenuated in states with damage caps, while the volatility of performance is not significantly different across states with and without damages caps. Finally, conditional on a state entering a crisis, we find that states with damage caps improve more quickly following the crisis than states without damage caps. Overall, our results suggest that damage caps stabilize medical malpractice insurance markets.

Medicaid expansion, tort reforms, and medical liability costs

“…Many studies have shown that following the enactment of tort reforms, medical malpractice insurers incur lower losses with improved profitability (Born et al, 2009; Grace & Leverty, 2013; Kessler & McClellan, 2002a; Viscusi & Born, 1995, 2005). Born et al (2018) further demonstrate that the presence of a damage cap alleviates the severity of market conditions during periods of crises.…”

“…In this equation, we define a set of dummy variables indicating the periods before and after the ACA Medicaid expansion was adopted in each state. For Medicaid expansion states, 18 State-specific time trends have been used by many studies investigating the impact of a policy change on the insurance industry (e.g., Born et al, 2018;Karl & Nyce, 2019). We choose to include state-specific time trends for a few reasons.…”

“…While we expect that Medicaid expansion increased medical liability costs because it caused an increase in Medicaid enrollment, tort reforms, in contrast, are designed to limit the liability or censor the right tail of the award distribution. Evidence exists that some reforms, such as caps on noneconomic damages, have reduced medical malpractice claim losses and pressures (e.g., Bertoli & Grembi, 2019;Born & Viscusi, 1994;Born et al, 2009Born et al, , 2018Grace & Leverty, 2013;Paik et al, 2012;Viscusi & Born, 1995, 2005. In this paper, we investigate whether insurers in expansion states with a specific tort reform experienced lower medical liability costs than their counterparties in states without reforms.…”

Availability of the seat belt defense: Implications for auto liability insurance

“…A variety of changes in the legal environment have worked their way toward affecting liability insurance claim costs. Tort reform measures, such as caps on noneconomic damages, are shown to reduce losses paid by medical malpractice insurers (e.g., Born et al, 2009, 2018; Grace & Leverty, 2013; Viscusi & Born, 2005) and curb the frequency of medical malpractice claims (Danzon, 1986; Paik et al, 2013). Similarly, the repeal of auto no‐fault laws is shown to reduce auto insurance expenditures (Heaton, 2017).…”