Reply to the Effects of 'Early Offers' in Medical Malpractice Cases: Evidence from Texas

Abstract:     
This article is a Reply to the critique by Black, Hyman, and Silver (BHS) of our 2007 Journal of Legal Studies article, “An Empirical Assessment of Early Offer Reform for Medical Malpractice.” The early offer reform gives insurers the option of making an early offer that will expedite payment of claimants’ economic losses and reasonable attorney fees. Using data on closed medical malpractice claims from the Texas Department of Insurance (TDI), our 2007 article estimates the financial impact of this proposal by comparing the expected payments to claimants under the early offer reform to the payments under current tort rules. A central component of our calculation of expected payments is unique information on insurers’ reserves associated with the claim; actual payments are reported in the TDI data for all litigated and settled cases involving payments of at least $10,000. The BHS article misrepresents fundamental aspects of our empirical analysis, including the following. BHS set out to correct our purported “false assumption” that all claims have a 1.0 probability of success, which is a problem that arises because BHS omit the probability of claimant success from the formula that is presented in our paper. BHS’s error is compounded as their discussion of our paper fails to recognize that our use of reserve amounts in the analysis incorporates the insurers’ estimates of the likelihood of claimant success, Indeed, they neither acknowledge our use of the insurer reserve data, nor do they use the insurer reserve information in their paper. BHS claim incorrectly that our analysis does not discount deferred payments whereas in fact it does. Our early offer analysis uses data for both litigated and settled claims, avoiding the selection bias and measurement error problems associated with BHS’s extrapolation from the 2% of paid claims that are litigated to the universe of all settled and litigated claims. In addition to these and other errors in their characterization of our empirical analysis, the BHS article reflects a misunderstanding of the operation of the early offer reform, which leads them to erroneous statements regarding how the parties would behave if the early offer reform were implemented. We also provide a brief critique of the BHS two-sided version of the early offer proposal, which would not be workable and would not reduce litigation costs significantly.

Number of Pages in PDF File: 16

Keywords: early offer reform, medical malpractice, insurance, Texas Department of Insurance

JEL Classification: K13, K41, G22, I18

Accepted Paper Series