O’Connell Early Settlement Offers: Toward Realistic Numbers and Two-Sided Offers

Abstract:     
In a prior article in this journal, we estimated the effect of an “O’Connell” early settlement offer program on payouts in medical malpractice litigation. Using Texas data and a base set of assumptions, we predicted that early offers would result in a 16% (20%) decline in payouts in currently tried (settled) cases. The overall decline came almost entirely from a sharp drop in payouts in cases with small economic damages. We compared our results with the estimate by Hersch, O’Connell, and Viscusi (2007) (HOV) of a 70% reduction in payouts, reconciled the two estimates, and explained why HOV’s estimate reflected the compound effects of a series of unreasonable assumptions.

In a reply in this journal, Hersch, O’Connell, and Viscusi (2010) (HOV-2) complain that we misunderstand both the early offer proposal and their analysis. Remarkably, they do not dispute our estimates, given our assumptions. In this rebuttal, we defend our assumptions and provide an alternate analysis of settled cases based on insurer allocations, which also produces an estimated 20% payout decline. We also develop further our proposal for two-sided early offers. This proposal would reduce the predicted payout decline to 14% (18%) in tried (settled) cases. We also explain in greater detail the problems with HOV’s analysis. If we correct an error they made in understanding the Texas data set, and leave their other assumptions unchanged, their payout decline estimate drops to 30%, not far from ours.
Our initial article, Black, Hyman and Silver, The Effects of “Early Offers” on Settlement: Evidence From Texas Medical Malpractice Cases, 6 Journal of Empirical Legal Studies 723-767 (2009), is available at http://ssrn.com/abstract=1112135.

The working paper version of the reply by Hersh, O’Connell and Viscusi, Reply to the Effects of 'Early Offers' in Medical Malpractice Cases: Evidence from Texas, 7 Journal of Empirical Legal Studies (forthcoming 2010), is available at http://ssrn.com/abstract=1487681.

The initial article by Hersh, O’Connell and Viscusi, An Empirical Assessment of Early Offer Reform for Medical Malpractice, is published at 36 Journal of Legal Studies s231-s259 (2007).

Number of Pages in PDF File: 23

Keywords: early offer, medical malpractice, settlement, tort reform

JEL Classification: K13, K32, K41

Accepted Paper Series