Health Insurance and Malpractice

Kevin Drum has a post on Health Care and Malpractice and argues that there is no reason to believe that there is crisis in healthc are due to malpractice claims. His conclusion is thus,

Analysts on all sides of this debate agree that reform of the malpractice process would be a good idea. But for the most part, the skyrocketing premiums we’ve seen over the past couple of years are the result of insurance company incompetence and greed, not actual increases in malpractice payouts. Until everyone figures this out, there’s not much chance of making any real progress.

While I think he has made a good case that there is no crisis due to malpractice lawsuits and payouts, I don’t see the incompetence and greed angle. Well, okay the greed angle I can see if one means profit maximization, but the incompetence? Let me see if I have this straight, incompetent companies are raising rates and there are no competitors out there smart enough to provide the same service with lower rates? Have I got the argument down?

How about the problem is that people keep thinking that insurance should cover things that really shouldn’t be covered by insurance. For example, pregnancy is not something that should be covered by insurance in the sense that a single male is never going to get pregnant. If he is stuck in a pool with women who have such benefits then the single male is helping to subsidize the reproductive decisions of others (or more simply the single males insurance rates are going to be higher through no fault of his own). If we keep adding on services like this to insurance the premiums are going to go up. Is this really all that shocking? Now maybe this is the way it should be done, but then don’t complain if insurance premiums go up.

Update: Damn, I should have known better. Kevin is once again playing fast an loose with the data and the study. He selected a graph that shows virtually no growth in malpractice payouts (including awards and settlements). The problem is that his graph is as a portion of overall health care spending. Thus, if say health care spending goes up by 10%/year and malpractice spending goes up by 10%/year then you’d see a flat graph…which is precisely what we see.

In reading the actual article we see that malpractice awards have gone up quite a bit.

The average payment grew 52 percent between 1991 and 2003 (4 percent per year) and now exceeds $12 per capita each year.

Now, this may not imply a crisis (and note a crisis in terms of malpractice premiums and malpractice payouts are different issues), but it sure doesn’t imply that malpractice payouts aren’t going up which is what Kevin’s graph shows. Kevin also claims that the number of judgements gradually went down, but the article says different.

The number of payments (which comprises the number of judgments and settlements) remained stable over the study period.

Now Kevin could say he was talking about judgements vs. payouts, but in looking at the data on settlements in Exhibit 1, I see that judgements are also pretty flat for the sample period. Further, the severity of payouts has gone up considerably, about 52%. According to the article in 1991 the average payout was $173,018, and by 2002 the average payout was $263,101.

Finally in the discussion section of the paper the authors themselves suggest that there is a crisis in regards to malpractice premiums and their rate of increase.

Payment size and frequency represent only one dimension of the currentmedical malpractice crisis.

In short, don’t look to Kevin Drum to represent a study accurately.

FILED UNDER: Economics and Business, Health
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. denise says:

    I’m confused at your last paragraph. You seem to have shifted from malpractice insurance to health insurance. After all, pregnancy is a big factor in setting malpractice rates. If a single male is an OB/GYN, his malpractice insurance premiums are probably going to be higher than a female dentist.

    Fault is also a strange concept to apply to pregnancy (“the single males insurance rates are going to be higher through no fault of his own”). Most women who get pregnant do so with the involvement of a man. So on average, a man is as likely to be “at fault” for pregnancy as woman is.

  2. Steve Verdon says:

    Fault is also a strange concept to apply to pregnancy (“the single males insurance rates are going to be higher through no fault of his own”). Most women who get pregnant do so with the involvement of a man. So on average, a man is as likely to be “at fault” for pregnancy as woman is.

    Sure, but the single male, if he is not the father, had nothing to do with it now did he? So why should his rates be higher?

    This is the problem with putting people in pools; the low risk end up subsidizing the high risk. And when you throw in things that really aren’t insurable like pregnancy all you are doing is encouraging couples to get pregnant. Especially when pregnancy is usually not considered a bad thing (like a heart attack, a car accident, etc.) and it is a voluntary activity (i.e. nobody goes out looking for a heart attack, but some couples purposefully get pregnant).

    So the poor single guy is stuck with higher rates and he has done nothing to cause those higher rates. The reason is not greed or incompetence of the insurance company, but people demand that insurance covere these sorts of things. Now it isn’t just pregnancy that is the problem, it is other things as well. For example, insurance that covers corrective eyewear and eye surgery is another example of an uninsurable event that is often included in insurance policies that drive up the costs.

  3. joe says:

    Barriers to entry in the insurance industry are high, but new competitors are not impossible. Just unlikely.

    And I would argue that pressure for coverage of “things that really shouldn’t be covered” comes from medical technology and pharmaceutical companies, not the general public.

    As to pools, I agree with those who believe that the only pool large enough to spread costs equitably is an all inclusive (dare I say national) one.

  4. Anon says:

    Kevin was referring to malpractice insurance, not health insurance. In a true free market, with low barriers to entry, perhaps competent competitors would step in with lower rates. But such a market does not currently exist.

  5. EyeDoc says:

    Drum is completely off base. Malpractice premiums are skyrocketing (mine have doubled in two years and I’m in a low risk specialty and have never lost a malpractice case)because malpactice insurers are paying out more in settlements and jury awards than they are taking in in premiums. It’s as simple as that.

    The average malpractice insurer in the US loses lots of money, and insurers are leaving the business and refusing to write new policies. It’s obvious that the economics of malpractice insurance are beyond lousy. To claim that premiums are rising due to greed on the part of insurance companies shows a complete lack of understanding, and all Drum is doing is mindlessly parroting the latest report from Reuters that claimed that jury awards have not been rising very quicly over the past five years or so, and so caps on non-economic damages were not necessary.

    But so what if jury awards haven’t gone up much over the past few years. They were sky high already and only about 10% of cases get tried in the first place. What happened to the size of the settlements that were made out of court? And, what about the actual volume of cases filed? Talking about the size of jury awards as if that’s the only thing that maters makes no sense.

    There’s no question that caps on non-economic damages cause malpractice premiums and the number of frivilous cases filed to fall, and that fear of malpractice suits cause the ordering of unnecessary tests which drives up the cost of health care for everyone who pays. Caps are the answer, which is why they’re being enacted all over the country.

  6. Steve Verdon says:

    Barriers to entry in the insurance industry are high, but new competitors are not impossible. Just unlikely.

    What barriers.

    Kevin was referring to malpractice insurance, not health insurance.

    Are you sure? The argument that there is a problem with malpractice insurance is as follows:

    Increasing Malpractice Payouts => Higher costs => Higher health insurance premiums.

    Thus, solving the malpractice payout crisis solves the malpractice premium crisis, which also solves the health care premium crisis.

    As to pools, I agree with those who believe that the only pool large enough to spread costs equitably is an all inclusive (dare I say national) one.

    I see no reason why the conclusion that the low risk would be paying higher premiums to help covere the costs of the high risk wouldn’t hold in a national pool as well.

  7. There are some unexplained data exclusions in the study as well, Steve, such as removing payments for non-physicians. Maybe that removal made the data interesting to physicians, but malpractice claims on nurses are part of the health care industry.

    I’m also suspicious of their methodology for overcoming the problem that settlements made for corporations without individuals are not reported to their database. I am concerned that their data may not properly account for a trend in that area.

    If I understand Exhibit 1 in the study, it alone demolishes Drum as it shows a dramatic increase in constant dollars. And I’d like to see a trend line drawn through Exhibit 3 because it doesn’t look that constant to me.

  8. darkuspawnus says:

    I’m curious as to why you would want to discourage people from having children by shifting the costs to the individual, considering the alarming demographic patterns in Europe, Japan, and now even China.

  9. Steve Verdon says:

    I’m curious as to why you would want to discourage people from having children by shifting the costs to the individual, considering the alarming demographic patterns in Europe, Japan, and now even China.

    Why should I bear the costs of other people’s decisions? I want a new car, can you send me a check for $5,000?

  10. darkuspawnus says:

    The question is not about personal choice. It’s about a shrinking tax base. Western European countries, e.g., Belgium, as well as Australia have already instituted direct cash payments to people who have babies (they apparently don’t even have to be citizens, as my sister an expat received one). Countries which don’t have replacement level birthrates are, for lack of a better word, dying. Fewer people means fewer people who pay taxes which means you’ll be paying higher taxes. This is a real and serious problem for industrialised nations, and as I mentioned before it’s becoming a serious problem for China because of their one-child policy.

  11. Steve Verdon says:

    The question is not about personal choice. It’s about a shrinking tax base.

    You may want to say the personal choice is irrelevant here, but since having children is a personal choice, you really don’t have a leg to stand on.

    Western European countries, e.g., Belgium, as well as Australia have already instituted direct cash payments to people who have babies (they apparently don’t even have to be citizens, as my sister an expat received one).

    Great, but this doesn’t answer the question of why a single person should pay for another person’s reproductive choice.

    Countries which don’t have replacement level birthrates are, for lack of a better word, dying.

    Please, the better word (or more accurately phrase) is that their population is shrinking.

    Fewer people means fewer people who pay taxes which means you’ll be paying higher taxes.

    Not necessarily. Spending could be held constant on a per-capita basis. Your assertion only holds if gov’t spending has to increase continuously or has to be held constant.

    I realy don’t see such a huge problem here.

  12. Tresho says:

    On national health insurance: People keep hoping that pooling of risks will be equitable. There’s no way that will happen, whether it’s done on a nationwide basis, or in the context of a health insurance plan. As I understand insurance, those who don’t need compensation for loss, still pay premiums for those who do sustain losses. People who are well and need no health care will be paying for the needs of others. (This is a commonly-used strawman argument that comes up in every health insurance discussion, including this one.) Those who demand incontrovertible equity will not participate in insurance plans of any kind. For the rest of us, there’s insurance and paying out good money for someone else’s needs in the hope that money will be there for us should we need it.