NY Times on med malpractice
As long-time readers of this blog (both of them) know, I've been very interested in the tort reform issue that the Bush administration has been pushing of late. One question I've posed is to challenge the claim that malpractice insurance premiums go up because of high damage awards (sorry about wading so deep into wonkland). I wondered why, in a competitive market, insurers wouldn't try to steal business away from doctors who don't get sued with cheaper premiums.
The New York Times addresses this issue today, reporting on a study that shows that this market dynamic in fact worked in the '90s until the stock market bubble burst and insurance companies couldn't stay in business with premiums that didn't cover their costs anymore.
The New York Times addresses this issue today, reporting on a study that shows that this market dynamic in fact worked in the '90s until the stock market bubble burst and insurance companies couldn't stay in business with premiums that didn't cover their costs anymore.
Labels: torts
posted by honestpartisan | 6:58 PM
9 Comments:
Does a practice that only works when the stock market is in the "boom" phase of a cycle actually constitute a market force? Insurance companies have some of the best actuarial data around, and if they can't manage their premium / investment balance to cover payouts they are doing something seriously wrong.
Your neighbor,
Jeff
Insurers tried stealing away doctors for disability insurance, since they were such good risks. Then, some decided to game the system, and claimed to be unable to continue working as a surgeon (for example). They could, however, earn a nice salary as a lecturer or some such. Not quite what most people envision disability insurance as being used for, huh?
I recall hearing lawyers are considered uninsurable for disability insurance purposes.
It sounds like malpractice insurance is priced like airline tickets, with price wars resulting in losses and eventual market corrections.
If you're right about malpractice insurance being like airline tickets (and I think you are), then why would damage caps bring premiums down?
Thats like saying why would lower oil prices bring airline tickets down.
Basically, my read on this article is that since the early 90s the costs for insurance provides to provide coverage has risen (something that damage caps would have a direct effect on) but, because of a booming stock marker, insurers were able to afford the payouts without raising rates by making profits on their collected money. The 2000-2001 recession ended this luxery and hence, we have seen dramitic increases in the cost of this insurance since then as insurers not only play catch-up to past cost increase but are also dealing with current cost increases.
Rational profit-maximizing insurance companies will charge what the market can bear, regardless of their costs, so they will charge high premiums with or without damages caps. The thing taht changed that caused insurance companies to go out of business and reduce competition was not paying out damage claims but that the stock market tanked.
You seem to be missing that there are other variables that go into setting insurance rates. Insurance companies do look at total return on their investment, and it makes perfect sense that the same level of unfavorable claims would be more tolerable if investment income is more favorable than if it is less favorable.
Look at it this way: Companies were saying "Losses are higher than we anticipated, but we're willing to suck it up to keep your premiums lower." You're complaining about that?
There are plenty of forms of insurance where rates can change, or where there are non-guaranteed elements that can change. You do have to worry about your position in the market. Companies feel pressure to maintain a competitive interest rate credited on an annuity or universal life product, or a dividend scale on a participating insurance product, or annual premiums on a long term care insurance product. Changing rates can weaken a company's competitive pressure.
In theory, you could design an unbundled malpractice insurance product, where there are specific charges for cost of insurance and expenses, and specific credits for interest. (That's basically how universal life insurance works.) In the 90's environment, the insureds would receive a higher credit due to positive investments, and pay more due to higher cost of insurance, and would basically come out the same.
Here's another way to think of it. If the cost of cocoa beans rises 10%, Hershey may not raise the prices on its candy bars, particularly if the price of sugar falls at the same time. If the price of sugar jumps up, you'd be saying that Hershey's problems are solely due to their not raising prices when cocoa bean prices rose.
Doctors complain a lot about malpractice insurance premiums. Some of the anecdotal horror stories you hear about about doctors who never get sued being priceed out of business by premiums.
In theory, a competitive market has a remedy for high prices: suppliers enter the market and try to take business away by lowering the price. That's not happening in malpractice insurance now.
If there aren't apparently enough competitive market pressures nowfor this to happen, why would it happen if damage caps were instituted? I guess one answer you're proferring is that caps mean lower business costs and therefore additional opportunities for competitors to enter the market.
I think that's speculative, and you could get a more direct result from regulating malpractice insurance in the way that California does as described here:
http://www.washingtonmonthly.com/archives/individual/2005_02/005703.php
I would almost be willing to consider such caps (just for medical malpractice, not for product liability) if doctors would do a better job of policing themselves and taking away licenses of doctors who do some of the things that fill out anecdotes cited by the trial-lawyer side of the arguments.
Insurance Company reform is something that should be looked at and be on the table as well.
I still don't get why you don't see it as obvious that lowering the amount insurance companies would have to pay out wouldn't lower the price of malpractice insurance though (or at least slow the rate of growth, depending on how much they are lowered.)
I am not sold on the idea of damage caps, but it is obvious that they would lower costs. There seems to me to be sufficient competition in the insurance industry still that if costs were lowered, prices would be lowered as well. The only way this would not happen is if their is a defacto monopoly (true in many states via regulation) or if their is collusion between insurance companies (creating another defacto monopoly.)
Even in this case though, a lowered cost would, in the first case, likely prevent regulation based rate hikes from occuring in the futre and in the second case increase the tendancy for the collusion to be broken unless the colluding groups as a whole decided to lower their prices to prevent break aways.
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