Medical malpractice insurance: An economic view

Abstract

Medical malpractice suits are hot news items recently. The media report large financial awards, and concomitant demands of relief by health care providers. One of the highest awards was $3.7 million to a grocery clerk in California. Assuming a contingency fee of one-third to the attorney, this award, if invested at 5% interest, would provide an annuity of $131,000 for sixty years. In this case, the physician had several previous malpractice decisions against him, yet no censoring action was taken by the local physicians' licensing agency. Several other large awards have received at tention because they appear to have overcompensated the victim given the level of malpractice that could be verified. The most immediate consequence of the increase in malpractice claims has been the inefficiency resulting from the spiraling cost of malpractice insurance to bo th the physician and the nonprofi t hospital. In the last year several states have a t tempted to develop alternative p rogams that would alleviate the severity of the malpractice cost increase to health care providers. The current malpractice insurance situation is frequently called a crisis because the cost increases may discourage the supply of medical services for certain diseases and illnesses. That is, certain specialists or part-time physicians will not find it possible to cover the additional fixed costs of higher malpractice insurance. Some attorneys charge that physicians do not adequately self-police their profession to monitor the performance of those who have been convicted of malpractice. The business communi ty has a vested interest in the rising cost of medical malpractice insurance. First, we are all consumers of health care services at costs that increased in the last fourteen years to a level of 12% higher than the overall level of consumer prices. Group insurance costs, either partially or totally provided by business organizations, are also increasing. Malpractice premium costs are passed on in the form of increased health care prices, and thus also affect health care insurance rates. If we can understand the causes of and alternatives to the present malpractice insurance claims mechanism, then as individuals and organizations we can sup75