PAYOUT CAPS AND MEDICAL MALPRACTICE….WARNING: Extreme tedium ahead!

A few days ago I wrote a post about a study on medical malpractice premiums done by Weiss Ratings. You should read that post before you go any further in this one. I’ll wait.

On Friday I spoke to Stephanie Eakins, a financial analyst at Weiss who was one of the co-authors of the report. I asked why they used medians, and she said they were trying to show norms, not total payouts. But the whole point of caps on malpractice payouts is that they prevent a small number of extremely high awards, something that’s completely missed by looking at medians. Don’t you need to look at total payouts?

Long story short, Eakins said the data showed that payouts haven’t increased, I said it really didn’t, she said they thought they could measure payouts with medians, and again I said that you really couldn’t. “You don’t seem very satisfied with that,” she said, and I had to agree.

“We just don?t think caps are the be all and end all,” she said, “We do think caps can be a part of reform.” Now, I certainly agree with that, and in fact I think the Weiss report does a good job of pointing out a host of other factors that are probably more important to the malpractice crisis than payout caps. But even so, we’re still left with the question of whether caps have any effect on reducing medical malpractice payouts.

So Eakins referred me to Robert Oshel, an associate director in the Division of Practitioner Data Banks of the federal Health Resources and Services Administration. He sent me the raw data for payouts for 1991-2002 and I decided to stick it in a spreadsheet and take a look at it myself.

And here’s my conclusion: I still don’t know what the hell is going on. Here are a few specific points, though:

  • The statistic you want to look at is average malpractice payout per doctor, and to take into account the possible effect of a small number of very large payouts, you want to use the mean, not the median. Has that number gone up faster or slower in states with payout caps?

  • Answer: in states with caps, it’s gone up 24% and in states without caps it’s gone up 54%. So caps appear to have had some effect on keeping down payouts.

  • OK, but how about the cost of premiums compared to the average payout per doctor? You’d expect that the higher the average payout, the higher the premium. So let’s take a look at the ratio of premiums to payouts.

  • It’s just the opposite of what you’d expect: in states with caps, premiums are higher, and the ratio is increasing faster than in states without caps.

Does this mean that in states with caps the insurance companies are making a killing (low payouts, high premiums)? Or does it mean that in states without caps insurance companies are going broke (high payouts, low premiums)?

Beats me. As near as I can tell, the cost of malpractice premiums has virtually nothing to do with actual payouts. And one thing I can tell you for sure is that payouts per doctor haven’t really gone up that much. In Pennsylvania, for example, currently in the middle of a big tort reform battle, average payout per doctor has gone up about 75% since 1991. This is exactly the rate of medical inflation. So while average payouts in Pennsylvania are indeed quite high, they’re actually the same now as they were in 1991 adjusted for inflation. So where’s the crisis?

POSTSCRIPT: None of this takes into account the fact that certain medical specialties may be hit a lot harder than others. It just shows overall payouts. However, even if certain specialties are hit harder than others, if the problems were serious I’d expect them to at least show up as a blip in the rates of increase. That doesn’t seem to be the case.

And a bit ironically, even though I think the Weiss methodology was wrong, my conclusions ended up about the same as theirs. Funny how that happens.

One final thing. In an effort to either ask a pretty good question or else expose the depth of my ignorance, there was one part of the data that I found especially perplexing. I expected that average premiums (per doctor) and average payouts (per doctor) should be roughly the same. After all, if the average doctor in the average year is going to be responsible for $1,000 in malpractice payouts, then his average premium ought to be about $1,000.

But it’s not. In fact, premiums are higher than payouts by a factor of about 4, and in many cases by factors as high 10 or 15, which means that insurance companies ought to be making a killing. Something is wrong with this picture, but I’m not quite sure what it is.

If anyone feels like looking at this data themselves, here are the sources:

These data sources aren’t perfect. The Weiss data on premiums, for example, shows medians, not means. However, in the case of premiums my guess is that means and medians are fairly close. The data on doctors is also a little loose, since it’s impossible to say how many of them are practicing doctors, but I imagine the error is fairly consistent from state to state. And finally, the doctor information is for 1990 and 1998, not 1991 and 2002, but again, I imagine that the differences are small.

Overall, my guess is that this data is not perfect but is pretty close. If anyone can make more sense of it than me, please feel free to have at it.

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