Question

What is the need for hospital and physician professional liability coverage (malpractice insurance) in American health care today. Why is malpractice coverage so extremely expensive today? Do you think the need for liability insurance adds to or detracts from the patient care that is provided?

Answer 1

There have been several crises in the medical malpractice insurance market over recent decades. These have translated to dramatic increases in malpractice premiums, anywhere from 30% to 300%, which patients typically make up for through increased hospitalization fees (Feldstein, 2015). Why have there been such extreme jumps in premiums? Is this due to more medical negligence? More lawsuits? Or is it something else?

With nearly 37 million hospitalizations in the US every year, there are about 1 million malpractice incidents. Of those 1 million incidents, less than 2% of patients file a claim for malpractice, and less than half of that 2% receives compensation. One explanation for this very low rate is that patients lack the medical knowledge to recognize when malpractice has occurred. Another is that they lack any incentive to file actual lawsuits, due to high lawyer fees and slow court procedures (Feldstein, 2015). Because such a small proportion of patients receive malpractice payouts each year, it seems that claims payments alone do not explain recent crises in the medical malpractice insurance market.

These crises are, in fact, mostly attributable to the structure of that market, combined with changes in general financial conditions. Since there are so few medical malpractice payouts each year, insurers tend to invest a considerable portion of premiums into the bond and stock market. When the return on these investments increases, more firms join the market, and the increased competition drives down premiums. However, economic recessions can cause sharp declines in investment returns, causing some insurers to leave the market and the remaining firms to increase their premiums. The result of this fluctuation is a malpractice insurance crisis.

There are two proposed solutions to this: set damage caps on the amount of malpractice payouts, and regulate the amount diverted to attorneys (Thorpe, 2004). Unfortunately, these strategies focus too much on deterring patients from filing lawsuits, and they neglect the problem post by insurers’ risky investments. Other proposals, such as no-fault malpractice systems, take aim at the insurance market itself (Mello and Kachalia, 2010). For instance, by foregoing lengthy lawsuits and allowing patients to be compensated at the time of their injury, the demand for malpractice insurance will decrease. Fewer firms will have an incentive to join the market, and the market can stabilize.

There are no perfect solutions yet, and no consensus on what approach to take. But perhaps the next malpractice insurance crisis – which may be inevitable given the current market structure – will lead to more conclusive policy decisions.