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How Do Insurers Price Medical Malpractice Insurance?

Author

Listed:
  • Black, Bernard

    (Northwestern University)

  • Traczynski, Jeffrey

    (Federal Deposit Insurance Corporation)

  • Udalova, Victoria

    (U.S. Census Bureau)

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.

Suggested Citation

  • Black, Bernard & Traczynski, Jeffrey & Udalova, Victoria, 2022. "How Do Insurers Price Medical Malpractice Insurance?," IZA Discussion Papers 15392, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15392
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    References listed on IDEAS

    as
    1. David A. Hyman & Mohammad Rahmati & Bernard Black, 2021. "Medical Malpractice and Physician Discipline: The Good, The Bad and The Ugly," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 18(1), pages 131-166, March.
    2. Goodman-Bacon, Andrew, 2021. "Difference-in-differences with variation in treatment timing," Journal of Econometrics, Elsevier, vol. 225(2), pages 254-277.
    3. Myungho Paik & Bernard Black & David A. Hyman, 2013. "The Receding Tide of Medical Malpractice Litigation: Part 1—National Trends," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 10(4), pages 612-638, December.
    4. Myungho Paik & Bernard Black & David Hyman, 2013. "The Receding Tide of Medical Malpractice Litigation: Part 2—Effect of Damage Caps," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 10(4), pages 639-669, December.
    5. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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