Some states have attempted to limit rising liability premiums through various insurance reforms, including strict regulation of insurance companies, state-administered funds, no-fault insurance and opt-out provisions, among other measures.  But which (if any) of these measures have been truly effective?

Insurance Market Regulations.  Advocates of insurance reform point to California’s Proposition 103 as a successful government intervention in the insurance market.  Passed by California voters in 1988, Prop 103 imposed the strictest regulations in the country on the insurance market.  It required property and casualty insurance companies to roll back rates to 20 percent less than they were as of November 8, 1987.  It also required the state’s elected insurance commissioner to approve all annual rate increases, and mandated public notice for all proposed rate increases.⁴⁸ Finally, Prop 103 authorized bank holding companies to sell insurance, ostensibly broadening the insurance market.⁴⁹

“State malpractice reforms have included increased insurance regulation.”

However, the results of California’s tightly regulated insurance market on malpractice premiums is debatable, particularly since it is difficult to determine which reforms account for the state’s success in moderating insurance premiums: the new insurance regulations or previously adopted limits on noneconomic damages .  [California’s caps on noneconomic damages are discussed below under “State Tort Reforms.”]

The U.S. Government Accountability Office (GAO) examined malpractice insurance premiums for three categories of medical specialty in specific California, Florida and Nevada counties known to be more litigious than surrounding areas.  Like California, Nevada requires approvals for rate hikes, but Florida has what is known as a “use and file” procedure, which allows rate hikes as long as they are first filed with the insurance commissioner and do not deviate from the original filing.⁵⁰

The GAO found that premium increases in southern California over an eight-year period were much smaller than those in Dade County, Fla., and Las Vegas-Clark County, Nev., for the three specialties studied:  general surgery, internal medicine and obstetrics/gynecology [see Figure IV]. Indeed, by 2000, California’s insurance premiums for internists had risen only 60 percent, compared to 100 percent for Dade County and 150 percent for Clark County.  Recognizing that all three areas are highly litigious, some observers, such as the Foundation for Taxpayer and Consumer Rights, attribute California’s lower premiums to strict regulation of the state’s insurance market via Prop. 103.

However, the California Medical Association is skeptical about the effect of Prop.103 on premium growth.  The law does not apply to about half of the state’s medical malpractice insurance market, which consists of hospitals that self-insure and physician-owned nonprofit insurance companies.⁵¹ Moreover, Prop. 103 was subject to a series of court battles and did not take full effect until the mid-1990s.  By then, insurance companies had rolled back effective rates by more than the 20 percent required by Prop. 103.⁵²

Patient Compensation Funds.  Nine states have patient compensation funds (PCFs), which are insurance pools that provide compensation to injured patients above the minimum liability insurance policies the states require physicians and facilities to purchase.  For instance, Indiana requires physicians to be insured for up to $250,000 per claim paid (or a total of $750,000 annually).⁵³ Any malpractice judgment or settlement above these limits comes from the state’s PCF.  PCFs do not cover punitive (noneconomic) damages, however.  The funds are financed through annual insurance premium surcharges or assessments paid by physicians and hospitals.

“California capped tort awards for noneconomic damages and regulated malpractice premiums.”

Patient compensation funds ostensibly give both insurers and physicians incentives to remain in the market, by limiting the damages for which they are liable.  How effective are they? In a 2004 analysis of the nine existing state PCFs, Frank Sloan and several researchers found inconclusive data regarding PCFs’ effectiveness in reducing the cost of medical malpractice insurance.⁵⁴ However, one of the study surveys found that both physicians and insurers thought that states with PCFs were more attractive to private insurers because PCFs limit potential losses.⁵⁵

No-Fault Insurance.  Two states, Florida and Virginia, have limited no-fault medical malpractice insurance.  In no-fault systems, claimants are not required to prove negligence by physicians or health care facilities.  Both states’ programs cover only birth-related neurological injuries, but Virginia’s eligibility requirements for compensation are slightly stricter.  Florida claimants can choose between no-fault or tort, whereas Virginia claimants must first go through the no-fault system before pursuing litigation.  In both states, patients who experience a bad outcome can receive a pre-established amount of compensation through the no-fault program.  These two programs are state-funded through provider fees.  In spite of their similarities, the programs have produced different results.⁵⁶ According to a Duke University study by Frank Sloan and colleagues:⁵⁷

• Virginia residents were 22 times more likely to first file a no-fault claim, rather than go through the tort system.
• Floridians were more likely than Virginians to sue, rather than to drop the case, if they were denied compensation through the no-fault system.
• The combined average economic loss payout for a no-fault claim was $318,000, compared to an average payout of $214,000 for cases litigated through the tort system.
• In both states, lawyers’ fees under no-fault were a much smaller proportion of payouts — about $2,981, or 1.5 percent of no-fault payouts, versus $256,375, or 48.1 percent of awards through the tort system — because depositions and expert witnesses are not required in no-fault cases.

“Limited no-fault compensation for medical injuries reduced litigation in Florida and Virginia.”

Why did similar systems produce different results?  Unlike Virginia, in Florida plaintiffs who are dissatisfied with the outcome under no-fault can file a tort lawsuit.⁵⁸ However, in both states no-fault appears to reduce the number of tort claims that would otherwise have been filed.  Also, despite the expectation that no-fault insurance would reduce the need for lawyers, most no-fault claimants retain lawyers, probably to help them through the administrative hearing process.

Case Study: Choosing Between No-Fault and Tort.  The Duke University study also found that patients were more likely to file lawsuits when the care was substandard and a number of errors were made.  Two obstetricians evaluated the medical records of the Florida and Virginia claimants.  The results:⁵⁹

• Of the 171 cases in which no claims were filed, the evaluators consider the care received to be of “poor overall quality” in only about 8 percent.
• Of the 65 cases filed first under no-fault, evaluators determined that about 24 patients (37 percent) received poor quality care.
• Of the 26 cases filed through the tort system, evaluators determined that 15 patients (58 percent) received poor quality care.
• The evaluators found that, on the average, there were nearly three times as many medical errors per case filed under the tort system as under the no-fault system.⁶⁰ These results suggest that patients filed lawsuits when their case was strong and used the no-fault alternative when the probability of winning a lawsuit was lower or the potential tort pay-off was smaller.

Case Study:  Physician Practice Patterns under No-Fault. Sloan and his colleagues also examined the effect of Florida’s and Virginia’s no-fault programs on the practice patterns of experienced obstetricians with established practices. They found:⁶¹

• Forty-two percent of the obstetricians had been named as defendants in a malpractice suit between 1990 and 1995.
• More than 90 percent were enrolled in no-fault insurance, and 13 percent reported that one of their patients had been compensated by no-fault insurance.⁶²
• Of the individuals who quit practicing obstetrics entirely, 39 percent cited as a reason the implicit costs (time, damaged reputation) from the “threat of being sued.”
• Only 8 percent cited the rising cost of malpractice insurance.

Some physicians reduced their caseload of high-risk patients, such as diabetics, who are more likely to experience complications; 29 percent of the physicians who reduced their caseloads cited the increased threat of medical malpractice litigation as the reason.

Generally, the Florida and Virginia no-fault systems are effective in compensating individuals without the hassle and cost of litigation, but the programs are too limited in scope, particularly in Florida, to replace tort.  No-fault systems may also reduce the cost of resolving less egregious cases.

“Sweden’s no-fault system compensates patients for avoidable medical injuries.”

Efficiency in a No-Fault System.  In the 1970s, the Swedish government determined that the tort system was a costly and unreliable way to compensate victims of medical injury.  The owners and funders of the nation’s health care system (the Federation of County Councils) negotiated a “no-fault” agreement that would provide compensation for specific types of patient injuries, without a determination of responsibility for the injury.⁶³ The Swedish model determines compensation based on the occurrence of an “avoidable” injury, which is determined by the answers to these questions:  Did medical management cause the adverse event?  Was treatment appropriate or acceptable according to a medical standard?  Was the injury avoidable?  If a patient outcome was adverse, but could not have been avoided even under acceptable treatment standards, the patient is not compensated.  The avoidability standard does not impose as high a threshold as negligence, but it is a higher threshold than simply compensating patients for all adverse outcomes.⁶⁴

Compared to tort, the Swedish no-fault system is efficient.  Claims are managed by adjustors in a central office in Stockholm, who determine the patient’s eligibility for compensation.  The claim is then forwarded to a board of physicians who manage the compensation fund and determine payments.  Once a claim is made, the average resolution time is only six months.   Furthermore, administrative costs amount to only 18 percent of the cost of payouts, compared to almost 50 percent in the U.S. tort system. Compensation is awarded through periodic payments or annuities.⁶⁵

Would such a system reduce costs compared to the current U.S. tort system?  Researchers from the Harvard School of Public Health applied the Swedish criteria for a compensable injury to 15,000 medical records from Utah and Colorado.  They found:⁶⁶

• In Utah, a Swedish no-fault system would cost about the same as the state’s tort system ($55 million to $60 million), but would compensate roughly six times as many patients — 1,465 compared to 210 to 240 under tort.
• In Colorado, no-fault would cost more than the tort system, $110 million versus $82 million, but would compensate more patients (973 compared to 270 to 300).

In other words, the Swedish model is more efficient, based on the cost per compensated individual.  However, compensation costs are rising in countries with no-fault systems, such as Sweden and New Zealand, and those countries are limiting the conditions under which injuries can be compensated.

Is No-Fault Auto Insurance a Model for Medical Compensation Reform?   In a no-fault auto insurance system, each driver’s insurance company compensates him for accidents involving other drivers, regardless of who is at fault.  Motorists have the option of suing for damages for severe injuries, but only under the strictest threshold.  Twelve states currently have no-fault auto insurance, but three of them still allow motorists to sue under some circumstances.⁶⁷

“A no-fault system could increase costs by compensating patients for every bad outcome instead of injuries due to negligence.”

Expanding the concept of no-fault insurance to medicine could be problematic, according to Patricia Danzon.⁶⁸ First, events that are compensable under no-fault auto insurance are usually clear-cut, whereas deciding which medical events are eligible for compensation may be difficult due to pre-existing conditions that increase treatment risks, such as pregnant women who are diabetic.  Simply compensating patients for bad outcomes without determining negligence could increase costs to the system.  Additionally, says Danzon, even if compensable injuries were clearly defined and quickly compensated, there will always be cases that fall slightly outside the defined boundary and hence are likely to create some litigation.⁶⁹ In fact, the cases that come to trial are those where it is unclear whether medical treatment caused the injuries, since insurers have an incentive to settle cases of obvious malpractice out of court.

Finally, there is mixed evidence regarding the effect of no-fault automobile insurance on accident rates.  A comprehensive RAND Corp. study that compared no-fault states to tort states found overall 1976 to 1998 accident rates and fatalities were similar, after controlling for other contributing factors.  Furthermore, there was no evidence that no-fault policies increased negligent behavior by drivers; in fact, accidents caused by negligence were about 2 percent lower in no-fault states.  Finally, there was no significant difference between auto insurance premiums in no-fault states and premiums in tort states.⁷⁰

Based on the experience of no-fault auto insurance, it appears that no-fault medical malpractice insurance by itself would neither reduce error rates nor increase physician negligence.

Enterprise Liability.  Some advocate combining no-fault insurance with enterprise liability, which holds health care organizations — such as hospitals, health plans and physician groups — liable for their physicians and staff.  While hospitals are typically held liable for the actions of their staff, the courts have usually ruled that physicians with admitting privileges are not hospital employees.  Enterprise liability would theoretically increase organizational incentives to reduce medical errors.  It was a part of the Clinton administration’s proposed universal health plan in 1993, but met vigorous opposition from all sides.  But as managed care has become widespread, enterprise liability has become a more accepted concept.

“Some hospitals self-insure their physicians against malpractice.”

Enterprise liability would provide many benefits.  First, it would reduce “defensive medicine” practices and costs since physicians would be legally immune from lawsuits, and it would encourage the adoption of practice guidelines by physicians and health care enterprises.⁷¹ Additionally, enterprise liability would improve the efficiency of the court system.  In about 25 percent of malpractice court cases, there is more than one defendant, and enterprise liability would reduce transaction costs between parties in either settling or defending against a claim.  Similarly, Michelle Mello recommends aggregating individual physicians into larger enterprises, such as a hospital, hospital network or a health plan.  The enterprise would carry malpractice insurance for all of its employees and practitioners.⁷² Physicians working for or affiliated with a hospital would be not be individually liable, except in the case of intentional misconduct.  But they would pay a surcharge to the hospital in exchange for the hospital’s accepting liability.⁷³ Currently, the Federation of Jewish Philanthropies in New York and Harvard Medical Institutions in Boston cover their physicians’ malpractice costs by self-insuring.⁷⁴ Holding hospitals and health care institutions liable for the actions of physicians and staff would encourage the identification and correction of errors resulting from system failures.

Experience Rating.  Experience rating of medical liability insurance is the opposite of community rating:  Physicians are charged premiums based on their age, experience and number of adverse events.  According to David Studdert and Troy Brennan, experience rating would work well with no-fault insurance because it would pressure health care providers to take error prevention measures.  They point to similar rating systems in workers’ compensation, where the possibility of higher insurance premiums puts financial pressure on firms to exercise safety in the workplace.⁷⁵ While there is little data available on the effect of experience rating in the medical field, data from auto insurance and worker’s compensation indicates that drivers and employers are more likely to take precautions when their premiums are tied to claims history.⁷⁶

In order to study the effects experience rating would have on medical liability insurance premiums, economists Gary M. Fournier and Melayne Morgan McInnes examined claims data and premium rates for Florida physicians between 1989 and 1992.  They found:⁷⁷

• Seventy percent of anesthesiologists would pay lower premiums if they were experience-rated.⁷⁸
• Between 60 percent and 70 percent of OB/GYNs would pay lower premiums under experience rating, cutting premiums for some by half.⁷⁹

Most physicians would benefit because experience rating reduces the cross-subsidies inherent in community rating — where physicians with fewer claims are overcharged and physicians with more claims are undercharged.⁸⁰

“Some physicians self-insure for malpractice and bear the financial risk.”

Opt-Out Provisions.  Only seven states require physicians to purchase liability insurance.  In other states, doctors are opting out of liability insurance coverage and self-insuring — known as “going bare.”  Going bare provides advantages:  It is often cheaper than malpractice premiums, and in Florida the law protects physicians’ homes, retirement plans, life insurance and salaries from legal judgments.  Self-insured physicians also may have a greater incentive to avoid negligent behavior, since they are personally responsible for damages.  In Florida, for example, doctors who are financially unable to pay damages due to financial inability can have their licenses revoked by the state medical board.⁸¹

Although few physicians are “going bare,” the American Medical Association predicts a growing number of doctors will do so and has even dropped its recommendation against the practice.⁸² Hospitals, which carry their own liability insurance, often require physicians to have liability insurance as a condition for granting staff privileges.