The Effects of 'Early Offers' in Medical Malpractice Cases: Evidence from Texas

Abstract:     
Medical malpractice litigation is costly and time-consuming. Professor Jeffrey O'Connell, with various coauthors, has long advocated 'early offer' rules that would encourage defendants to offer to settle for economic damages plus attorney fees, and punish plaintiffs who refuse such offers. Using detailed closed claims data from Texas for 1988-2005, we simulate the effects of these 'early offers.'

We find that defendants will normally not make early offers in cases with large economic damages (over $500,000 in 1988 dollars) because doing so will increase payouts. Early offers will normally reduce payouts, and hence will be made, in cases with small economic damages (under $100,000 in 1988 dollars). Defendants may also make offers in cases with moderate ($100,000-500,000) economic damages, depending on case characteristics and the plaintiff’s chances of prevailing.

An early offer program will (i) sharply reduce payouts in cases with small economic damages; (ii) will not materially affect predicted payouts in other cases; (iii) will have very different effects on different types of plaintiffs, with large payout reductions for elderly and deceased plaintiffs and much smaller effects for newborns and employed adult plaintiffs; and (iv) will overlap substantially in its effects with statutory caps on non-economic damages, and hence have a smaller effect in states with these caps.

Our mixed results contrast sharply with dramatic claims by O’Connell and co-authors, who predict 70% reductions in payouts and defense costs. Their estimates reflect the compound effects of a series of unreasonable assumptions.

Keywords: litigation, settlement, early offers, medical malpractice, torts

JEL Classifications: K13, K32, K41

Working Paper Series