How Do Insurers Price Medical Malpractice Insurance?

68 Pages Posted: 7 Jul 2022

See all articles by Bernard S. Black

Bernard S. Black

Northwestern University - Pritzker School of Law

Jeffrey Traczynski

University of Hawaii - Department of Economics; Government of the United States of America - Federal Deposit Insurance Corporation (FDIC)

Victoria Udalova

University of Wisconsin - Madison - Department of Economics; Government of the United States of America - Bureau of the Census

Abstract

We study the factors that predict medical malpractice ("med mal") insurance premia, using national data from Medical Liability Monitor over 1990 to 2017. A number of core findings are not easily explained by standard economic theory. First, we estimate long run elasticities of premia to insurers' direct cost (payouts plus defense costs), allowing for lags of up to four years, of only around +0.40, when one might expect elasticities near one. Second, state caps on malpractice damages predict a roughly 50% higher ratio of premia to direct costs even though, in competitive markets, a damages cap should affect premia primarily through effect on cost. A difference-in-differences analysis of the "new cap" states that adopted caps during the early 2000's provides evidence supporting a causal link between cap adoption and the ratio of premium to direct cost. Third, the premium-to-cost ratio, which one might expect to be fairly constant over time, instead varies widely both across states at a given time and within states across time. Our results suggest that insurance companies do not fully adjust revenues to changes in direct costs even over long time periods. Insurers in new-cap states have been able to charge apparently supra-competitive prices for a sustained period.

Keywords: insurance premium, medical malpractice, physicians

JEL Classification: D22, G22, K13

Suggested Citation

Black, Bernard S. and Traczynski, Jeffrey and Traczynski, Jeffrey and Udalova, Victoria and Udalova, Victoria, How Do Insurers Price Medical Malpractice Insurance?. IZA Discussion Paper No. 15392, Available at SSRN: https://ssrn.com/abstract=4151271 or http://dx.doi.org/10.2139/ssrn.4151271

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Jeffrey Traczynski

University of Hawaii - Department of Economics ( email )

Honolulu, HI 96822
United States

Government of the United States of America - Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States

Victoria Udalova

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States

Government of the United States of America - Bureau of the Census ( email )

4600 Silver Hill Road
Washington, DC 20233-9100
United States

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