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

Prepared for Members and Committees of Congress

Insurance is a critical piece of a modern economic system, but it often goes unnoticed until it
becomes prohibitively expensive or its availability is curtailed. Such problems reportedly
occurred recently in the medical malpractice insurance market. Many physicians experienced
substantial increases in insurance premiums, and there have been reports of problems with
availability of physician services due to doctors retiring or relocating from areas that have seen
high premium increases. This was 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.
In the 109th Congress, the House passed a bill, H.R. 5, whose centerpiece was a limitation on tort
claims for medical malpractice; similar bills passed the House in the previous two Congresses.
The Senate, however, did not act on any of these House bills, and failed to invoke cloture on the
Senate bills addressing medical malpractice. There has been no floor or committee action on bills th
addressing medical malpractice issues in the 110 Congress.
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.

Introduc tion ..................................................................................................................................... 1
Insurance Fundamentals..................................................................................................................1
Risk Transfer and Financial Intermediation..............................................................................1
Insurance Operations and Pricing.............................................................................................2
Market Cycles: Hard and Soft Markets.....................................................................................3
Medical Malpractice Insurance.......................................................................................................3
Medical Malpractice’s Long “Tail”...........................................................................................4
Impact of Tort System...............................................................................................................4
Risk Segmentation....................................................................................................................5
Historical Experience in Medical Malpractice Insurance................................................................6
Evolution in the Insurance Market............................................................................................7
Policy Responses.......................................................................................................................9
Expanding Market Supply..................................................................................................9
Reducing Insurer’s Costs..................................................................................................10
Strengthening Regulation..................................................................................................10
How Effective Have Policy Changes Been?............................................................................11
Conclusions ................................................................................................................................... 12
Author Contact Information..........................................................................................................12

Insurance is a critical piece of a modern economic system, but it often goes unnoticed until it
becomes prohibitively expensive or its availability is curtailed. Such problems have reportedly
occurring in the medical malpractice insurance market recently. Many physicians experienced
substantial increases in insurance premiums, and there have been reports of problems with the
availability of physician services due to doctors retiring or relocating from areas that have seen
high premium increases. There have also been protests and job actions in some locations with 1
hospitals finding it necessary to curtail services and send patients to more distant facilities. Such
a crisis has been proclaimed in the past as well; similar events occurred in the latter half of both
the 1970s and 1980s.
These recurring problems have provoked various reactions in the insurance marketplace and in
legislatures both at the state level, where insurance law and tort law are normally shaped, and in ththth
Congress. In the 107 (H.R. 4600), the 108 (H.R. 5 and H.R. 4279), and 109 (H.R. 5)
Congresses, the House passed bills whose central thrust was to limit damages for medical
malpractice tort claims. The Senate, however, did not act on any of these House bills and failed to
invoke cloture on the Senate bills addressing medical malpractice (S. 11, S. 2061, and S. 2207 in thth2
the 108 Congress; S. 22 and S. 23 in the 109 Congress).

The most obvious function of insurance is to allow a person or corporation facing some risk, such
as the risk that a physician will be sued for medical malpractice, to transfer this risk to another
economic entity. Typically the entity accepting the risk will be a company, resulting in this risk
then being spread across the owners of the insurer, either the stock holders in a normal
incorporated insurance company or other policy holders in the case of a mutual insurance 3
company. Risk is also spread from one insurer to others through reinsurance.
Transferring risk, however, is not the only role that insurance plays. In the course of receiving
payment for accepting risk, large amounts of capital are generated. This capital is then invested,
allowing for its productive use to generate jobs and economic growth in addition to providing a
reserve against future losses. Although the risk transfer and sharing aspect of insurance is the
most obvious, the financial intermediation aspect is an equally integral part of the modern
operations of insurance companies. The gains from investment of capital typically allow an
insurer to offer lower rates to the insured than would be the case if the insured was paying
completely for the transfer of risk. This also means, however, that the insured face some of the

1 See, e.g., Joelle Babula, “Desert Springs Hospital: Emergency surgeons unavailable,Las Vegas Review-Journal,
March 26, 2003, sec. B, p. 1B.
2 See CRS Report RL33358, Medical Malpractice: An Overview, by Bernadette Fernandez and Baird Webel for
detailed legislative information.
3 A mutual insurance company is a nonprofit insurer owned by the policy holders with ownership shares in proportion
to their premium volume.

volatility in premium amounts inherent in relying upon investment returns. This can be seen in
the alternating market cycles that are discussed below.
Insurance involves highly complex calculations regarding uncertain outcomes of future events,
although the basic operations can be simply explained. A company begins with a certain amount
of capital stock to allow it to credibly promise to provide insurance in the future, as well as
enough to satisfy regulators that it will be able to fulfill this promise. It offers insurance policies
against whichever risks it is willing to assume. Money flows into an insurer primarily from two
sources: premiums from customers of insurance and investment income from the company’s
reserves. Money flows out of an insurer primarily to pay for claims made for events for which the
insurer has agreed to bear the risk, including costs such as defending against lawsuits in the case 4
of medical liability insurance.
The ability of insurance to fulfill its role as a financial intermediary, as well as the solvency of
individual insurers, rests critically on keeping the inflows and outflows balanced over time. This
means estimating the future return on investments as well as estimating future losses from claims.
The accuracy of these estimates can vary widely and insurers have relatively little direct control
over what either actual value will turn out to be. Insurers can affect their returns somewhat by
varying the mix of their investments, but this mix is subject to state regulation. In the United
States, most investments are relatively stable investments such as bonds, but even bonds are
subject to the vagaries of the marketplace. Many insurers also try to minimize claims through
sharing information with policy holders on reducing risks and offering incentives to policy
holders who take action to minimize risks.
The one variable that an insurer does directly control, subject to the pressures of the marketplace 5
and sometimes state insurance regulators, is the price or premium that it charges for a certain
amount of insurance. This price should cover the value in today’s dollars (the “present value”) of
any future loss, multiplied by the expected probability of this loss. If a physician wants to insure
against the risk of paying a $1 million malpractice claim today, and the insurance company
believes that there is a 1% chance that this claim will occur today, then it will charge
approximately $10,000 for this insurance. If the insurance extends for a length of time further into
the future, then the future amounts of money to be paid out would be adjusted based on the
expected inflation rate, or the expected rate of return, that the insurer foresees over the period of
time the insurance is in place.
Because insurance pricing is theoretically based on the risk that is being transferred, this implies
charging a different premium to people or companies with different inherent levels of risk.
Without the ability to segment different risks into different categories, and charge these different
categories different rates, the price charged to everyone will be relatively high reflecting the

4 There are, of course, other substantial payments that an insurer makes, such as operational expenses and profits
returned to stockholders, that are critical in differentiating among companies, but not as critical in discussing industry-
wide issues.
5 Laws in many states require preapproval by the state before an insurer can change the rates charged for insurance. The
justification for this regulation is generally twofold: (1) to prevent insurance companies from charging too much and
gouging their customers, and (2) to prevent insurance companies from charging too little and risking insolvency when
their losses are greater then their reserves.

possibility that the purchaser is in a high risk category. A high price would tend to lead those who
believe their own risks are low not to buy insurance or to underinsure, whereas those who believe
their risks are high would tend to continue to buy insurance or even to overinsure. This tendency
is known as “adverse selection” and usually results from the insured having more information
regarding their own risk than the insurer. Adverse selection results in a higher overall level of risk
in the pool of those who buy insurance and thus results in higher than expected claims. Higher
claims must ultimately be followed by higher prices, which is then followed by lower risks not
buying insurance and so on. The extreme result of this would be a situation where an insurance
market essentially ceases to exist.
Insurance in general, and property and casualty insurance (of which medical malpractice is a part)
in particular, has experienced alternating periods of “soft” markets and “hard” markets. This cycle
is usually ascribed to changes in the investment climate, although it may be more accurate to
think about it as due to changes in the comparison between insurers’ financial inflows and
A soft market typically occurs when the investment climate is good and insurers make returns on
the capital that they are holding in reserve that are high relative to expected insurance payouts.
These high investment returns allow insurers to offer lower prices on insurance, sometimes
selling insurance at a premium that they know will result in losses, and then offsetting these
losses by the gains from investing the premium. Soft markets are usually marked by increases in
the number of insurers and by the expansion in the geographic area or types of insurance offered
by existing insurers.
A hard market typically occurs when the investment climate worsens and returns drop. Low
investment returns imply that the premium paid for insurance must cover more of the actual loss
that is expected from this insurance. This means higher premiums and can lead to withdrawals
from poorly performing lines of insurance or from particular geographic areas that remain
unprofitable. For an insurer offering only one type of coverage in a specific geographic area, such
withdrawal is not an option. Such companies must either raise rates or eventually withdraw from
the business of insurance if the investment returns do not increase or if costs are not somehow
lowered. At the beginning of a hard market, especially when it is preceded by a long soft market,
very large increases in premiums might be expected as the premium level comes closer to the
value of the actual losses due to the risk that is being transferred.
Because of high capital mobility and interdependence in financial markets, hard markets would
be expected to be a nationwide or even international phenomenon. The experience within the
United States, however, has been that periods of market hardening have a disparate impact among
the various states. This suggests that when market problems develop, there may be more at work
than simply a general hard market due to lower investment returns.

Different insurance markets have very different characteristics. Life insurance, for example, tends
to be very stable because the amounts that are to be paid out are clearly known and the estimates
that are used for life expectancy are generally reliable. Insuring against hurricane damage is less

stable; it is much harder to predict how many hurricanes might hit, where they might hit, and how
much damage they might do. With enough historical and other data, however, insurance can
operate effectively even in such uncertain environments. Insuring against medical malpractice
liability offers some particular difficulties as compared to other lines of insurance and it has
proven challenging for companies to operate in this field over time. Among the difficulties are the
longer time frames inherent in malpractice claims, high and uncertain claim amounts, and
uncertainty in recognizing and segmenting high-risk from low-risk healthcare providers.
Medical malpractice liability insurance has what is known in the insurance industry as a long
“tail.” Liability policies in general are often written to cover the claims arising from a certain
period of time. In fire insurance, for example, this is relatively unproblematic; whether a fire has
occurred is generally straightforward and uncomplicated. There may be disputes arising about the
extent of damage that should be paid, but at a minimum, a company will know at the end of the
insurance period or shortly thereafter whether a claim will be made. In contrast, injuries from
medical malpractice, and thus the claims that arise from them, can take a longer time to manifest
themselves, as many as several years in some cases. Even after injuries are noticed, the time
before a full amount an insurer must pay is known and actually paid out is often measured in
years because litigation can be complex and demand long discovery processes with various
medical experts examining the case.
To address the tail problem, many insurers have changed their policies from an “occurrence”
policy, which covers claims resulting from an action that occurred during the period that the
insurance was in effect, to a “claims made” policy, which covers only claims actually made
during the insured period. Such a shift has an immediate impact in reducing the uncertainty for
the insurer, but the effect is largely a one time phenomenon. As a claims made policy stays in
effect for several years, the total risk to the insurer under this type of policy converges with the
risk that the insurer would bear under an occurrence policy.
The claim amounts that medical malpractice insurers pay out are generally determined either
through the tort system, or by threats to use the tort system. The details of tort law vary from state
to state, but compensatory damages under tort law are often separated into two types: economic
damages and noneconomic damages. Economic damages are generally intended to redress direct
economic loss, such as lost wages and costs for medical care. Noneconomic damages are not tied
to direct out-of-pocket expenses and include damages due to pain and suffering. Another primary
type of damages is punitive damages. Punitive damages are noncompensatory damages that are 6
intended to punish a defendant for egregious conduct.
Economic damages generally have the greatest impact on medical malpractice claims through the
medical cost component. Unsurprisingly, the damage from medical malpractice usually requires

6 See CRS Report RL31692, Medical Malpractice Liability Reform: Legal Issues and Fifty-State Survey of Caps on
Punitive Damages and Noneconomic Damages, by Henry Cohen; and CRS Report RL31721, Punitive Damages in
Medical Malpractice Actions: Burden of Proof and Standards For Awards in the Fifty States, by Henry Cohen and
Tara Alexandra Rainson, for additional discussion of tort law as it relates to medical malpractice.

additional medical treatment to repair, sometimes an entire lifetime of medical treatment. As a
result, medical costs tend to be a higher component of medical malpractice claims than most other
types of insurance claims. Coupled with this is the experience that medical costs have typically 7
risen faster than the general rate of inflation, sometimes much faster. All other things being
equal, this implies that the rates for medical malpractice insurance are going to rise faster than
most other types of insurance.
Although the medical cost component of economic damages tends to drive medical malpractice
insurance generally higher than other insurance, noneconomic and punitive damages add another
aspect to malpractice claims: unpredictability. By definition, noneconomic and punitive damages
are more subjective and difficult to quantify than economic damages. Different juries in the same
town or city can and do come to different conclusions as to the monetary value of a plaintiff’s
pain and suffering or the amount of punitive damages warranted to punish willful misconduct, for
example. Jury awards are even more variable when comparisons are made involving different 8
parts of the country. The conclusions reached on such damages can also be difficult to dispute in
contrast to damages that are specifically related to concrete economic factors. This
unpredictability can make it very difficult to form the accurate estimations of expected losses that
are at the heart of insurance pricing.
Risk segmentation and adverse selection in the health care field are particularly problematic
because information to accurately judge the quality of a provider, and thus ostensibly to
accurately estimate his or her risk of a malpractice claim, is sparse. Some of this is due to past
public policy choices, which have resulted in few mechanisms to track the quality of health care,
but some is also due to the inherent difficulties in doing this tracking. It can be very difficult to
distinguish a physician with higher malpractice liability due to poor skills from one with high
skills, but sicker patients and more difficult cases. Both may have poor patient outcomes but
without a careful examination of the incoming patient population, which is rarely practicable to
undertake, an insurer is likely to charge both physicians similar rates. Risk segmentation in
medical malpractice insurance is generally based on geographic area and specialty type, but
relatively little is based on some measure of provider quality or on malpractice claims history.
One of the particular aspects of the historical evolution of the medical malpractice insurance
market, which is discussed in greater detail below, has been the growth in small insurers,
particularly provider-owned companies. This success runs contrary to one of the theoretical
fundamentals of insurance, namely spreading risk across as wide a base as possible. A small,
provider-owned company transfers risk away from individual physicians or other health care
providers, but still leaves the risk to the company itself more concentrated relative to a bigger,
shareholder-owned company.
Smaller companies, however, may do a better job at reducing the risk that they choose to bear,
rather than just spreading it. This risk reduction could come, for example, if smaller insurers were
more able to persuade physicians to adopt lower risk practices or if they could better identify

7 According to the Bureau of Labor Statistics at the end of the 30-year period from 1973 to 2002, medical prices were
nearly seven and a half (7.4) times greater than the beginning, while prices generally were slightly more than four (4.1)
times greater.
8 See, e.g., “Malpractice crisis? Not here!,Medical Economics, July 12, 2002, pp. 86-96.

doctors who are at greater risk for operating in a manner that might invite malpractice claims and
either charge them a higher premium or choose not to insure such doctors. Another advantage of 9
mutual insurers, particularly small ones, may be reduced moral hazard because the insured are
also the owners of the company. Smaller companies can also reduce the concentration of risk that 10
they take on by purchasing reinsurance and this device is used often by insurers.

Particular problems in medical malpractice insurance have been observed for many years. As far 11
back as 1969, a report of a Senate subcommittee concluded the following:
1. The number of malpractice suits and claims is rising sharply in certain regions of the
country. The size of judgments and settlements is increasing rapidly.
2. Most malpractice suits are the direct result of injuries suffered by patients during medical
treatment or surgery. The majority have proved justifiable. These suits are the indirect
result of the deterioration of the traditional physician-patient relationship.
3. The publicity given to the higher malpractice judgments and settlements, based frequently
on new legal precedents, is likely to trigger increased litigation in other States. The
situation threatens to become a national crisis.
4. Already higher judgments and settlements are having the following direct results:
(a) Companies providing malpractice insurance are increasing the cost of coverage.
(b) These costsin the form of higher chargesare being passed on to patients, their health
care insurance companies, and Federal health care programs.
5. The rising number of malpractice suits is forcing physicians to practice what they call
defensive medicine, viewing each patient as a potential malpractice claimant. Physicians
often order excessive diagnostic procedures for patients, thereby increasing the cost of
care. Moreover, they are declining to perform other procedures, which in themselves, may
entail some risk of patient injury.
6. At present, it appears no one affected by the rise in malpractice suits and claims has been
able to deal with this problem in a manner that promises to alleviate this situation.
7. The lions share of the total cost to the insurance companies of malpractice suits and
claims goes to the legal community.

9 Moral hazard is the term used for the increased chance of a loss actually due to the existence of insurance. For
example, those insured against loss from fire may be more careless in fireproofing their property.
10 The Reinsurance Association of America reports that in 2003, approximately 15% of medical malpractice occurrence
policy premiums and 30% of the claims made policy premiums were reinsured. This compares to an average for all P/C
lines of approximately 21.5%, available at
11 U.S. Congress, Senate Committee on Government Operations, Subcommittee on Executive Reorganization, Medical
Malpractice: The Patient Versus The Physician, 91st Cong., 1st sess. (Washington: GPO, 1969), pp. 1-2.

8. There is a definite Federal role in the malpractice problem.
There is certainly continuing dispute over some of these conclusions, but such a list might very
well have been prepared during the recent debate rather than over 35 years ago.
Until the mid-1970s, medical malpractice insurance coverage was dominated by traditional
insurers who offered it as one of several different lines of insurance. A list of the top 10
companies in 1976 was composed of primarily diversified shareholder-owned insurers with 61%
of the market among them. With the market hardening in the mid- to late 1970s, many of these
diversified insurers pulled back from offering medical malpractice insurance, leaving a void in
the market. In response to this void, numerous new companies were created specifically focusing
on insuring medical malpractice liability. Not only were these companies specialized, they also
were largely owned by small groups of medical providers or by the entire group of their policy
holders. These companies were also usually focused on a geographic area, often serving only one
state. Some were, and still are, affiliated with a particular state’s medical society.
With addition of capacity to the market, and the aforementioned shift to claims-made policies, the
difficulties of the 1970s abated and was replaced by a soft market for the first half of the 1980s.
The shift in market structure away from larger, diversified insurers, however, seems to have been
permanent. By 1986, six of the top 10 medical malpractice insurers were provider-owned and
market concentration was somewhat less, with the top 10 companies holding 56%. One exception
to this shift was The St. Paul Companies, Inc. The St. Paul is a diversified shareholder-owned 12
insurance company and grew from 11% of the nationwide market in 1976 to 21% in 1986.
Taking this company out of the situation gives a view of a more pronounced splintering of the
market. The total market share of numbers two through 10 on the list of top insurers dropped
from 51% of the market in 1976 to only 36% of the market in 1986.
The market cycle turned again in 1985-1986 and problems arose that bear many of the hallmarks
of the current situation, including reports of physician work stoppages and problems with access
to care. This situation was broader than just physicians or healthcare liability insurance and
included difficulties in access to many other forms of liability insurance. In healthcare, larger
providers, such as hospitals and nursing homes, were more severely affected than individual
physicians. The market response was again the formation of new smaller insurance companies to
serve the market. These new companies, however, were not just more traditional mutual insurance 13
companies, but also a large number of captive insurers. Many of these captive insurers were
located offshore in such locales as the Cayman Islands and thus operated outside of the U.S. tax
and regulatory system. The offshore nature of these entities makes it difficult to develop exact
information about the size and scope of this market, but overall growth has been significant. One
of the captives that is not offshore, Health Care Indemnity, a captive of the HCA hospital chain,
grew over seven-fold from 1993 to 1994 to become the fourth largest medical malpractice insurer 14
at the time.

12 Conning & Company, Medical Malpractice Insurance: A Prescription for Chaos 2001, pp. 82-85.
13 A captive insurer is an insurer owned by a parent company for the purpose of insuring this parent company. Such a
captive may insure other parties as well.
14 Conning & Company, Medical Malpractice Insurance: A Prescription for Chaos 2001, p. 88.

The 1990s saw predominantly a soft market with high investment returns fueling low rates and
strong competition across various insurance lines. Medical malpractice insurance followed this
trend with an increase in competition in many forms. Some traditional shareholder-owned
insurers entered or reentered the market whereas some captives and mutuals converted to stock
companies or expanded their geographic base into areas beyond their initial ones. This increased
competition can be seen in the total number of companies directly underwriting medical
malpractice premiums as reported by the National Association of Insurance Commissioners 15
(NAIC). There were 398 of such companies in 1991, but by 1995, the number had jumped to 16

623 and it reached a high of 666 in 1997.

This soft market began to harden in the late 1990s and this trend was exacerbated by the losses
from the September 11, 2001 attacks. Since 1999, the malpractice insurance market has seen
increasing premiums along with both general withdrawals from the market and contractions in the
geographical areas covered by companies. The insurance rating firm A.M. Best reports that total 1718
medical malpractice premiums increased 15.6 % in 2001, 22.5% in 2002, and 13.5% in 19
2003. Perhaps the most striking occurrence in this latest hard market was the decision in
December 2001 by The St. Paul to completely withdraw from writing medical malpractice 20
insurance as part of an “effort to improve profitability.” Withdrawal typically occurs gradually
through non-renewal of policies, but because some states in The St. Paul’s market share
approached 50%, the impact of even gradual withdrawal is significant.
The hard market in medical malpractice insurance seems to have peaked in 2002. Statistics from 21
A.M. Best show a 5.5% increase in premiums in 2004 and only 0.5% in 2005. A medical
liability insurance survey in the October 2006 issue of Medical Liability Monitor (MLM) also
shows a slowing of the general rise in malpractice premiums. The highest reported rate increase
in a state without a patient compensation fund was 47.8%, compared with increases in the100+%
range reported in the past. In states with a patient compensation fund, the highest rate increase
was 60.8%. In total, 255 of the 837 reports from non-compensation fund states were of rate
increases, while of 192 of the 837 were of rate decreases. The remainder, 390, were reports of no 22
change in the rates. The largest decrease in rates was over 50%.

15 The NAIC is the national organization collectively representing the insurance commissioners from the 50 states plus
the District of Columbia.
16 Davin Cermak, “Medical Malpractice: The New Health Care Crisis or History Repeated?,NAIC Research
Quarterly, Fall, 2002.
17 “Medical Malpractice, Top Writers—2001,A.M. Best Statistical Study, August 5, 2002, p. 1.
18 “Medical Malpractice, Top Writers—2002,A.M. Best Statistical Study, November 17, 2003, p. 1.
19 “Medical Malpractice, Top Writers—2003,A.M. Best Statistical Study, November 15, 2004, p. 1.
20 See The St. Paul Companies, Inc. press release “The St. Paul Announces Fourth-Quarter Actions to Improve
Profitability and Business Positioning, December 12, 2001, at
21 “Continued Improvement in 2005 Results as Medical Malpractice Premium Growth Subsides, A.M. Best Statistical
Study, August 28, 2006, p. 1.
22 “2006 Rate Survey Shows Rate Increases Leveling Off and the Early Signs of a Softening Market, Medical Liability
Monitor, vol. 31, no. 10, October 2006, pp. 1-3.

Given the importance of insurance, when problems of availability or affordability have arisen, the
situations have been met with more than just marketplace evolution; various policy changes have
been made as well. Some of these changes have been intended to facilitate market supply, such as
the creation of alternative sources of insurance, whereas others have addressed the problem from
the cost side through various changes in the tort system. In addition, there have been attempts to
address the problem through direct regulation of insurance, with California’s Proposition 103
being the primary example as discussed below.
The basic legal structures for the mutual insurers that arose in response to the market difficulties
in the 1970s have been in place for some time. Mutual insurers have a long history going back
essentially as long as insurance has existed. In some cases, however, states went beyond the
existing mutual framework to allow for medical malpractice insurance. For example, in Florida,
particular statutes were passed in the 1970s specifically allowing for medical malpractice self-23
insurance trusts. This statute was amended in 1992 to disallow its future use, but a governor’s
task force recommended rescinding this action given the difficulties in Florida’s medical 24
malpractice market. States also created nonstandard entities, such as joint underwriting
associations (JUA). JUAs are nonprofit pooling arrangements intended to provide an “insurer of
last resort” for healthcare providers who are unable to find insurance elsewhere.
The federal government, although not the primary regulator in the insurance markets, has also
taken an interest in the market supply of liability insurance. The Liability Risk Retention Act of 25
1986 allows for the establishment of risk retention groups and risk purchasing groups. Risk
retention groups operate much like a mutual insurer. They are made up of groups of entities
involved in a similar business who wish to spread the risk among group participants. Such groups
can be formed under state law, but the federal law allowed for reduced regulation because under
federal law these groups are regulated only in the state where they are chartered rather than in
every state where they write insurance. Risk purchasing groups essentially allow for group
purchasing of insurance with the expectation that such purchase will be lower cost than individual
The initial 1981 act was limited to manufacturers, and was not widely used because of the soft
market that prevailed at its time of passage. The 1986 law, however, amended the availability to
include nearly all types of liability insurance, including medical malpractice. Companies offering
medical malpractice liability insurance under the act began as early as 1987 with the Ophthalmic
Mutual Insurance Company. The act’s usage has continued to the current day. For example, at the
beginning of 2003, 10 risk retention groups that had been formed in the previous year were 26
offering insurance in Pennsylvania, one of the states experiencing serious market difficulties.

23 Section 627.357, F.S.
24Report and Recommendations,” Governor’s Select Task Force on Healthcare Professional Liability Insurance,
Tallahassee, FL, January 2003, p. xv. Available online at
25 Formerly the Product Liability Risk Retention Act of 1981 (15 U.S.C. 3901 et seq).
26Risk Retention Act Responds to Pennsylvanias Health Care Crisis,” The Risk Retention Reporter, vol. 17 no. 1,

As detailed above, the primary outflow of money from a medical malpractice insurer is driven by
the tort system. The tort system has thus been a primary focus of attempts to reduce insurer costs. 27
It is beyond the scope of this report to discuss proposed tort changes in detail, but it should be
noted that a cap on noneconomic damages for medical malpractice claims, which has been the
center of attention during the recent debate in Congress, is not the only change that has been
implemented at the state level. There have also been limits on other damages, lawyers fees, and
joint and several liability. Some states have implemented patient compensation funds, which limit
insurer liability to a certain amount, or allow or encourage arbitration in place of litigation to
resolve medical malpractice disputes. There have even been states, such as Florida and Virginia,
where a very limited “no-fault” system has been installed, bypassing the question of liability
The most cited example of tort reform, as well as the expressed model for the previous bills th
considered by Congress, such as H.R. 5 in the 109 Congress, was passed by California in 1975:
the Medical Injury Compensation Reform Act (MICRA). MICRA placed a $250,000 limit on
noneconomic damages, such as pain and suffering, forced disclosure of other sources of payment
to injured parties, limited lawyer fees, and strengthened the system that disciplines doctors. After
passage in 1975, MICRA was challenged in the courts over several years before finally being 28
upheld in 1984 and 1985.
The first two policy responses implicitly treat an insurance “crisis” as the result of what might be
described as normal market forces. An alternative explanation, however, is that the increasing
prices and reduced availability that have marked the medical malpractice crises are the result of
improper market manipulation rather than a confluence of market forces. This concern has been 29
raised at the federal level where the McCarran-Ferguson Act gives a limited antitrust exemption
to the insurance industry. It is not clear what the impact of removing this exemption might be,
since some observers believe the information sharing facilitated by the exemption helps the 30
industry operate more efficiently and leads to lower rates. Previous bills, such as Senator Patrick th
Leahy’s Medical Malpractice Insurance Antitrust Act of 2003 and of 2005 (108 Congress’ S. 352 th
and 109 Congress’ S. 1525), were narrowly aimed at the exemption as it relates to medical th
malpractice insurance. In the 110 Congress, Senator Leahy has introduced a broader bill (S. 618)
that would repeal the antitrust exemption for all insurance. Representative Peter DeFazio has
introduced a companion bill (H.R. 1081) in the House.

January 2003.
27 See the aforementioned CRS Report RL31692, Medical Malpractice Liability Reform: Legal Issues and Fifty-State
Survey of Caps on Punitive Damages and Noneconomic Damages, by Henry Cohen, for a more complete discussion.
28 Fein v. Permanente Medical Group, 38 Cal.3d 137 (1985), appeal dismissed, 474 U.S. 892 (1985); Roa v. Lodi
Medical Group, Inc., 37 Cal.3d 920 (1985), appeal dismissed, 474 U.S. 990 (1985); Barme v. Wood, 37 Cal.3d 174
(1984); American Bank & Trust Co. v. Community Hospital, 36 Cal.3d 359 (1984).
29 15 U.S.C. Sec. 1011 et seq.
30 See CRS Report RS22639, Impact of the Abolition of McCarran-Ferguson Antitrust Exemption for the “Business of
Insurance”, by Janice E. Rubin and Baird Webel.

Such federal action would be relatively indirect compared to what individual states have done or
might do. The insurance industry is highly regulated at the state level, with many states, for
example, requiring prior approval before a company can adjust rates, change policy forms, or
even withdraw from writing certain lines of insurance. The most dramatic action taken on the
insurance regulatory front since the recurring market problems began was Proposition 103, a
ballot initiative approved by California voters in 1988. Proposition 103 was a broad change that
was not specifically aimed at medical malpractice insurance but affected all property-casualty
insurers in California. It created an elected, not appointed, insurance commissioner, forced
insurers to justify their rate increases to the insurance commissioner, required insurance
companies to open their books so regulators could determine if they needed rate increases, and
allowed citizens to challenge proposed rate increases.
Assessing the effectiveness of any of the various policy changes over the past three decades is
empirically difficult and strong conclusions are often equally strongly disputed. For example,
after the Liability Risk Retention Act of 1986, the U.S. Department of Commerce issued a report
concluding that the 1981 and 1986 Acts were effective in reducing problems with the availability
of liability insurance, citing among other things the numbers of insured then covered by risk 31
retention groups. In contrast, the NAIC saw no improvement from the formation these groups,
indicating that the market cycle would have inevitably turned and that these insureds would have 32
been able to find insurance in the commercial market. As noted before, risk retention groups are
still being formed to deal with the current medical malpractice market situation, but this alone
does not prove conclusively that either of the previous Department of Commerce or NAIC
positions were correct. Coming to this, or any, conclusion requires assessing both what has
happened and what would have happened in the absence of the law.
The most voluminous debate has been over the effect of California’s experience. California has
experienced significantly lower medical malpractice premium growth over the 28 years since the
passage of MICRA in 1975. This is cited by some as proof that tort reforms work and should be 33
more widely adopted. Countering this, others have argued that most of the slow growth, or even
declines, in California premiums have come since Proposition 103 in 1988, indicating that the 34
answer should be strengthened regulation.
A major difficulty in economic analysis of the two arguments stems largely from the relative
closeness of the two policy changes, particularly because MICRA was not finally upheld in court
until 1985. As was discussed earlier, the pricing of insurance is a long-term economic enterprise
fraught with many uncertainties. In such an endeavor, it would not be surprising that underwriters
may wait to see what definite effect a policy change has on their losses before making dramatic
moves in insurance pricing. Another difficulty in judging the California experience is the fact that

31 U.S. Department of Commerce, Liability Risk Retention Act of 1986: Operations Report, 1989, NTIS PB 90-123134,
pp. 9-14.
32 Ibid., Appendix E-4.
33 See, for example, California’s MICRA Should Go National, an opinion piece written by a past president of the
California Medical Association, available at
34 See, for example, Insurance Regulation, Not Malpractice Caps, Stabilize Doctors’ Premiums, a fact sheet by The
Foundation for Taxpayer & Consumer Rights, available at

liability insurance in general was experiencing a hard market in the mid-1980s and these market 35
conditions may very well have temporarily overwhelmed the effect of other policy changes.

The recent difficulties in medical malpractice insurance are due in part to a cyclical hard market
that was experienced generally in the property/casualty insurance industry. However, because
significant differences in experiences are observed among the various states, other factors, such as
tort laws and insurance regulations, seem also to be playing a significant role. The responsibility
for these two areas has traditionally been left to the individual states. During previous experiences
with insurance market difficulties, Congress enacted laws encroaching to a minor degree on state
insurance regulation. The current congressional focus is largely on intervening in the tort system,
although proposals have been made to alter the insurance exemption from federal antitrust laws as
well. Given the large amount of federal spending dedicated to Medicare and Medicaid, as well as
the public sensitivities raised when health care services are curtailed, strong congressional interest
in this issue seems likely to continue.
Baird Webel
Analyst in Financial Economics and Risk
Assessment, 7-0652

35 Although the general economic analysis regarding Californias experience seems inconclusive, there is at least one
specific case where the stronger regulatory structure introduced by Proposition 103 directly resulted in lower medical
malpractice premiums. In 2002, an insurer, the SCPIE Companies, filed for a 15.6% rate increase for 2003 that was
then approved by the California Department of Insurance. Following the procedures set forth in Proposition 103, this
increase was challenged by The Foundation for Taxpayer & Consumer Rights. On July 24, 2003, an administrative law
judge reduced the increase to 9.9% in response to this challenge. See
SCPIE_Decision_for_Internet.pdf for the text of the decision. Arguments from the two sides can be found at and