Medical Malpractice Insurance: An Economic Introduction and Review of Historical Experience

Publication Date: May 2006

Publisher: Library of Congress. Congressional Research Service

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Abstract:

Insurance is a critical piece of a modern economic system, but one often unnoticed until it becomes prohibitively expensive or its availability is curtailed. Such problems are reportedly occurring in the medical malpractice insurance market today. Many physicians have experienced substantial increases in insurance premiums, and there are reports of increasing problems with availability of physician services due to doctors retiring or relocating from areas that have seen high premium increases. This is not the first time such a crisis has been proclaimed; similar events occurred in the latter half of both the 1970s and 1980s.

The fundamental purpose of insurance is to transfer an indefinite risk from one party to another for a definite premium. The pricing of this premium is critical, but determining this price is uncertain because it depends on estimates of the chance of a future loss, as well as the estimated value of that loss. The premium will also depend on estimates of future investment gains or losses because an insurer also acts as a financial intermediary and invests the capital that is held in reserve against future losses.

Offering liability insurance for medical malpractice has proven a difficult market for insurance companies for a variety of reasons and the market has been unstable during the past three decades. The recurring market problems have provoked various policy reactions in both state legislatures and in Congress. Assessing the effectiveness of particular policy changes is, however, complex and strong conclusions have typically been equally strongly disputed.

On July 21, 2005, the House passed a bill, H.R. 5, whose centerpiece was limitations on tort claims for medical malpractice. In the past two Congresses, the House passed similar bills. The Senate, however, did not act on any of these House bills and failed to invoke cloture on the Senate bills addressing medical malpractice. On May 4, 2006, the Senate began consideration of S. 22 and S. 23; these bills are similar to H.R. 5, but differ in some specifics.

This report examines the economic issues and historical experience surrounding medical malpractice insurance. It includes an explanation of the fundamentals of insurance and how these fundamentals relate specifically to medical malpractice insurance. It also includes a discussion of the evolution of the medical malpractice insurance market since the 1970s and policy changes over this time, including an assessment of these changes. It will be updated as major legislative events occur but will not attempt to track legislation in detail. Please see CRS Report RL33358, Medical Malpractice Insurance: An Overview, by Bernadette Fernandez and Baird Webel, for detailed legislative information.