Tort Reform

The Program has been receiving numerous questions from participants about how medical malpractice tort reform will affect medical malpractice insurance rates. In this question and answer article, we hope to address participants' commonly asked questions and explain, in general terms, how tort reform and rates may interact.

What is tort reform?

The general term "tort reform" refers to a variety of actions that may be taken by state legislatures with the intent to limit the number of malpractice suits that are brought and/or minimize the amounts of the verdicts that are awarded by juries.

There are many ways of effecting tort reform, but the different approaches taken by legislatures can be grouped into several general categories. They are:
1. Limiting the time period in which plaintiffs can bring a suit;
2. Imposing requirements on potential plaintiffs that limit their ability to bring a suit, e.g., requiring a letter from a like professional attesting that there is good reason to believe malpractice occurred; and
3. Setting limits on the amounts and kinds of damages that can be awarded, commonly referred to as "caps."

This last category of "caps" seems to be the type of legislative action that is most strongly identified with tort reform.

What is the potential effect of caps on malpractice lawsuits?

Caps limit the types and amounts of non-economic damages that can be awarded by a jury; however, non-economic damages are only one type of damages that can be awarded in a malpractice suit.

There are three general types of damages.
1. Economic damages encompass things like lost wages or the cost of medical care and are based on concrete numbers.
2. Non-economic damages encompass things like pain and suffering or loss of consortium and are based on the subjective beliefs of the jury. Non-economic damages have the potential to significantly inflate a verdict which is why they are the focus of tort reform.
3. Punitive damages are awarded in order to punish the defendant. Punitive damages are rare but also have the potential to inflate verdicts.

Because caps are directed at non-economic damages, they would have no effect on economic damages, and economic damages usually constitute the greatest percentage of a verdict. Therefore, it would still be possible to have a high verdict even with caps. For example, a jury could awards a total verdict of $1 million, with $250,000 for non-economic damages (the cap) and $750,000 for economic damages. For this reason, psychiatrists still need insurance in excess of the caps imposed by law.

Similarly, in cases that are settled, as most cases are, there is no awarding of non-economic damages, and thus caps would have no direct effect.

Will tort reform affect rates?

Tort reform may have an impact on rates, but it is too early to predict exactly how that impact will be manifest. Because tort reform occurs within the context of law, whatever changes do occur will take time to work through the legal and regulatory systems and will not be immediate, especially in the private insurance sector. For a brief discussion of how rates and caps on damages may interact, see the next question.

How might caps on non-economic damages affect rates?

In order to understand how caps on non-economic damages may affect rates, it is necessary to understand how rates are determined, without going too in depth into actuarial science. Basically, rates are based on the loss experience of like risks.

Specifically, a group with similar characteristics or risk factors, i.e. exposures, is assessed based on known losses. Losses include claims, lawsuits, and other types of payments and are based primarily on historical information and like data on similar groups or situations.

The ratio of exposures over losses determines the rate. This formula is true of all types of insurance, be it personal property, personal injury, or professional malpractice.

Other factors will also be considered when establishing rates, including interest rates that affect insurers' investment returns, certain market forces such as the leveling of market competition among insurers, and the presence of state laws regulating the rate-setting process.

Once rates have been determined, admitted insurance carriers must then file those rates with and receive approval from the individual states' departments of insurance.

As explained above, caps on non-economic damages affect only one part of jury verdicts. Because of this, as quickly becomes apparent, caps can have only a limited effect on the exposures/losses ratio and, thus, only a limited effect on rates overall.

What is the long-term picture?

As with everything, tort reform is cyclical. The medical community saw tort reform movements in both the 1970's and 1980's. This current spasm is only the latest round.

Our legal system is dynamic; that is both its greatest strength and its greatest weakness. Each time, changes are made, the system adapts, and another round of reform comes into being. Therefore, it is impossible to say with certainty whether this round of tort reform will have a lasting effect. It is only possible to say that things will continue to change and adapt and change yet again.

What are some additional resources about tort reform?

The U.S. General Accounting Office (GAO) report, Implications of Rising Premiums on Access to Health Care (GAO-03-836) at www.gao.gov.

The U.S. General Accounting Office (GAO) report, Multiple Factors Have Contributed to Increased Premium Rates (GAO-03-702) at www.gao.gov.

The Physician Insurers Association of America (PIAA) at www.thepiaa.org. PIAA has information specifically about medical malpractice tort reform.

The American Tort Reform Association (ATRA) at www.atra.org. A good site for information about tort reform of all kinds and about specific state tort reform efforts.