One of the issues regarding the cost of health care is the role that malpractice insurance plays in the cost of health care. Malpractice insurance premiums are going up quite a bit. Some say this is due to runaway juries making outrageous awards (e.g. President Bush). Others say it is the greed and avarice on the part of malpractice insurance companies that is too blame (see Kevin Drum as a prime example). However, Alex Tabarrok has a couple of interesting observations for the latter group,
According to Independent Institute Research Director Alex Tabarrok, those who are quick to believe that insurer “greed” is the culprit must answer some troubling questions. If, for example, profits are easily earned by jacking up premiums, then why did a major medical malpractice insurer leave the market last year? And if doctors are being gouged by greedy insurers, what does one make of the rise of premiums of policies written by doctor-owned insurance companies? The reason behind these seeming anomalies is that premiums do in fact reflect awards — albeit imperfectly, because insurers can’t always tell quickly whether an increase in awards is a temporary blip or a permanent trend.–emphasis added
These two bits of data argue against the simple hypothesis of insurer greed. My guess is that perhaps, there isn’t a simple answer to this problem. Perhaps one of the culprits is the government. Government is one of the few entities out there that can make effective barriers to entry for a market. Once barriers to entry come into existence those firms already in the market gain market power which allows them to raise both their prices (premiums in this case) and their profits.
There is also this bit of information as well,
The latest study by Tabarrok, co-author of JUDGE AND JURY: American Tort Law on Trial, shows that “during the last 30 years every dollar increase in awards has led to a dollar increase in premiums.” However, in the 1990s increases in malpractice insurance premiums apparently were not high enough to cover the increase in tort awards — a mistake that insurers have been trying to rectify in recent years. Another complication: Awards have increased much more in states where judges are elected — and therefore have incentives to cater to many voters’ redistributionist leanings — than in states where judges are appointed.
We all know that politicians at the city, state and federal level will use pork barrel spending to help in their re-election bids. Seems reasonable to look for similar type of behavior on the part of judges, call it pork barrel rulings.
Also, one of the problems with insurance is trying to find out if an unexpected increase in claims is permanent or transitory. Insurance companies deal with events that, a priori, are considered random. In this case, the number of claims. It is possible, that the number of claims is high just due to bad luck. It is also possible that the number of claims has gone up permanently for another reason. For example, if there is a law or a major court precedent that makes it easier to win in court, then claims could concievably go up.