Danzon, Patricia M.

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The Effects of Tort Reforms on the Frequency andSeverity of Medical Malpractice ClaimsPATRICIA M. DANZON*I. INTRODUCTIONThis paper summarizes the results of studies I have conducted on the determi-nants of the frequency and severity of medical malpractice claims, focusing inparticular on the effects of tort reforms.' I shall also comment briefly on the extentto which the evidence ftom medical malpractice can be generalized to other areas oftort law, to which similar statutory changes have more recently been applied.In the late 1960s, the frequency of claims per physician and claim severity(average amount per paid claim, including jury verdicts and out-of-court settlements)began to increase at unprecedented rates. For example, in California the averageannual rate of increase in claim costs (frequency times severity) was roughly fortypercent a year. Initially, insurance premiums did not keep pace. In 1974-75 insurancecarriers sought huge premium increases--over 300 percent in some states-precipitating the so-called malpractice crisis of the mid-1970s.In response to that crisis, legislatures in virtually every state enacted tort"reforms" intended to curb the rise in claims, in addition to other changes designedto assure the availability of malpractice insurance. 2 The scope and the detail of thesechanges differ from state to state. Broadly, they fall into the following categories:caps on awards; provisions for mandatory or discretionary offset of collateral benefitsagainst the tort award; statutes of repose; mediation or screening panels; sliding scalelimits on contingent fees; provisions to permit periodic rather than lump sum paymentof large awards for future disabilities; and attempts to curtail or clarify the use of resipsa and informed consent.What has been the subsequent trend in the frequency and severity of claims?Between 1975 and 1978 claim frequency per physician slowed or even fell in manystates, but since 1978 it has resumed an upward trend. Averaging over the decade1975-84, the number of claims per physician has increased at roughly ten percent ayear.3 On average over the decade 1975-84, claim severity has increased at almosttwice the rate of increase of the Consumer Price Index (CPI). This real growth* Assoc. Professor, Health Care Systems and Insurance, University of Pennsylvania.1. P.M. DANzo-i, MEDIc.A. MALemcncE: THEORY, EvioEsCE AND PUBUC POLICY (1985) [hereinafter P.M. DANZON,MrDIC. MAtu'AcncE]; Danzon, The Frequency and Severity of Medical Malpractice Claims: New Evidence, 49 LAw &Co.atu. Peoas. (1986); Danzon, The Frequency and Severity of Medical Malpractice Claims, 27 J. LAw & EcoN. 115(1984); Danzon & Lillard, Settlement Out of Court: The Disposition of Medical Malpractice Claims, 12 J. LEGAL STUD.345 (1983).2. I shall adhere to conventional usage by referring to these changes as "reforms," without wishing to imply anyjudgment on the merits of these changes. For a detailed evaluation of these reforms from an economic standpoint, seeP.M. DAezoN, MEDICAL MAt'AmcncE, supra note 1.3. The St. Paul Fire and Marine Insurance Company, which has been the leading writer of malpractice insurancefor many years, reported a 55 percent increase in claim frequency between 1980 and 1984, from 10.5 claims per 100physicians in 1980 to 16.3 in 1984. St. Paul, 1985.OHIO STATE LAW JOURNALof payments to successful tort claimants cannot be fully explained by the fact thatmedical care prices have risen more rapidly than consumer prices in general, becausemedical expenses account for less than one quarter of reported economic loss inmalpractice cases closed with payment.4II. DATA AND METHODSTo assess the impact of tort reforms and other factors on malpractice claimfrequency and severity, statistical methods were used to analyze the averageexperience of physicians in different states, some with and some without tort reforms,over the years 1975 through 1984. The unit of analysis is not the individual physicianor individual claim, but the average frequency of claims per 100 physicians andaverage severity per paid claim in each state. To estimate the impact of a particularreform, one cannot simply compare the experience of physicians in a particular statethat enacted a reform, before and after the change, because other factors may havechanged. Similarly, one cannot simply compare, at a point in time, states with andstates without a particular reform, because other factors may contribute to anyobserved differences or, conversely, may mask real effects of differences in the law.For example, one might observe that a state that has enacted a cap on awards hasthirty percent higher claim severity than a state without a cap; however, the differencemight have been fifty percent in the absence of the cap. Thus to estimate the netimpact of reforms, statistical methods are used to control for other relevant factors,to the extent possible.There are several practical difficulties in applying this type of statistical analysisto estimate the impact of tort reforms on malpractice litigation. First, ideally onewould like to analyze the complete universe of claims against physicians andhospitals. Because malpractice insurance is written by a large number of companiesand there has been a substantial turnover of insurers in recent years, obtaining sucha complete census of claims is not possible. The data used in the most recent studyto be described here were obtained from some of the leading stock and physician-owned insurers. Forty-nine states are represented for at least some of the ten years.However, it remains possible that the data base may not be fully representative of thesituation nationwide.Second, it is not possible to measure separately the effects of each variant ofeach law. For example, states that adopted caps differ in the level of the cap and inthe types of damages to which it applies. Because the number of observations on eachvariant of a particular type of reform is so small, the average effect of each generaltype of change has been estimated, with a few exceptions to be described below.Finally, the analysis does not take account of the fact that many of the reformswere under challenge during the period of study. A state is assumed to have aparticular reform if such a statute had been enacted and had not been overturned. Tothe extent the effect of a reform is dampened by the fact that it is under challenge, the4. National Association of Insurance Commissions (NAIC), Malpractice Claims, 2(2) (1980).[Vol. 48:41319871 EFFECTS OF TORT REFORMS ON MALPRACTICE CLAIMS 415evidence from this period 1975 through 1984 may underestimate the full long runeffect of a reform once it has been upheld-assuming that the passage of time doesnot also permit the development of incentive ways around the constraint.III. FINDINGSA. Medical, Social, and Demographic FactorsSeveral variables were included in the analysis as proxies for exposure toiatrogenic injury. Most consistently significant was the number of surgical proceduresper capita, which is positively related to the frequency of claims filed per physician.Claim severity is significantly higher in states with a high ratio of surgical specialists,relative to medical specialists. These variables may capture the general effect of morecomplex medical practice, as well as the likelihood that surgical mishaps involvemore serious errors and are easier to prove.Urbanization is a major determinant of interstate differences in the frequencyand severity of claims. States that have a higher percentage of the population in urbanareas tend to have a higher frequency of claims per physician and higher awards. Thisdifference remains after controlling for measurable differences in medical practiceand in number of attorneys per capita. Although there is a high simple correlationbetween number of attorneys per capita and the frequency and severity of claims,after controlling for urbanization the number of attorneys has no statisticallysignificant impact. This tends to suggest that lawyers are attracted to areas with highlitigation rates and high awards, rather than being an independent cause of thelitigation. However, such conclusions remain tentative, until the causes of theapparently higher rates of litigation in urban areas are better understood. The higherfrequency of claims in urban areas could be in part a response to higher awards inurban areas. 5 Thus the higher awards are the primary puzzle to be explained.The statistical evidence tends to reject the hypotheses that higher rates oflitigation are associated with differences in per capita income; percent of thepopulation on welfare; unemployment rates; percent of the population that hasrecently moved to the area (a rough proxy for lack of established ties withphysicians); or the percent of the population over sixty-five.B. Tort ReformsIn evaluating the evidence on the impact of tort reforms, it must be emphasizedthat this evidence from the last decade, when the reforms were under challenge inmany states, may underestimate the full long run effect of reforms that have beenupheld. Further, the inevitably simplified measures of complex statutes mayintroduce bias in estimating effects. There is also some uncertainty as to the true5. It is also possible that the higher frequency of claims in urban areas is in part a result of "border crossing,"that is, out-of-state patients in rural areas may visit physicians in urban areas and file claims in the jurisdiction where thephysician's office is located.OHIO STATE LAW JOURNALlevels of statistical significance. 6 Taken at face value, the results show how much aparticular reform affected experience, relative to what that experience would havebeen, had the reform not been enacted. Thus, the statement that reform X reducedclaim frequency by Y percent does not mean that frequency fell by Y percent but thatit was Y percent lower than it otherwise would have been. The percentage differencenoted is the average differential in a single year if a particular change had beenenacted and had not been overturned.Caps on awards. The average impact of statutes to limit all or part of theplaintiff's recovery has been to reduce average severity by twenty-three percent. Thisaverage impact obviously masks great differences among cases, with the majority ofcases being unaffected but a major effect on the minority of very large awards.Because large awards account for a very substantial share of total dollars paid out (anearlier study found that over fifty percent of dollars are paid on five percent of paidclaims), caps that severely reduce the few very large awards can have a significanteffect on the average and on the total payout.Collateral source offset. Laws providing for collateral source offset appear toreduce awards by between eleven and eighteen percent. This estimate is broadlyconsistent with estimates derived from examining the amount of economic loss thatwould be covered by other sources of private and public insurance. Using this latterapproach yields the estimate that mandatory offset of all collateral benefits mightreduce average severity by thirty to forty percent. 7 Since some statutes apply only toa subset of collateral sources or credit the plaintiff with the cost of the premium forprivate insurances, and some statutes only provide for offset at the discretion of thecourt, the observed effect of roughly half this maximum possible effect seemsplausible.In addition to reducing claim severity, collateral source offset also appears toreduce claim frequency by roughly fourteen percent. This feedback from an effect onseverity to a reduction in claim frequency is quite plausible. Collateral source offsetwould reduce the expected recovery on many small claims which involve primarilyshort-term medical expense, which is relatively well covered by private and publichealth insurance plans. Thus, many of these small claims may cease to be worth filing.Statutes of repose. States that have adopted shorter statutes of limitations and setan outer limit on the time allowed to file a claim have experienced some reduction inclaim frequency. Reducing the statute of limitations for adults by one year reducestotal claim frequency be eight percent and frequency of claims paid by six to sevenpercent. This estimate is the average effect of a one-year reduction, measured at thesample mean of roughly five years. The effect is presumably greater for a reductionfrom, say four to three years, less for a reduction from ten to nine years, because themajority of claims are filed in the first few years after the occurrence of the injury.No attempt was made to estimate the effect of shorter statutes for minors.6. For details, see Danzon, The Frequency and Severity of Medical Malpractice Claims: New Evidence, 49 LAw& CovEmP. PRoss. (1986).7. See P.M. DANZON, MEDICAL MAURACtIcE, supra note 1, at 169.[Vol. 48:4131987] EFFECTS OF TORT REFORMS ON MALPRACTICE CLAIMS 417Other reforms. None of the other reforms appear to have had a consistentlysignificant effect. An earlier study did find some reduction in awards from ceilingson contingent fees, 8 but this result was not observed in the larger study covering alonger span of time reported on here. However, the fact that on average other typesof reforms have not had a systematic impact does not preclude the possibility thatspecific variants in some states may have had an effect.IV. CONCLUSIONSAlthough medical malpractice claim frequency and severity have continued toincrease since the enactment of reforms in the mid-seventies, this does not mean thatthese reforms have had no impact. Caps on awards, collateral source offset, andstatutes of repose have had significant effects, in the direction and magnitude that isconsistent with theory, prior evidence, and common sense.The effects experienced over the last decade, when many of the reforms wereunder challenge, may understate their potential long-run impact once upheld. If dollarthresholds for caps are not revised upward to keep pace with inflation, such caps willhave a greater proportional downward effect in future years.No attempt was made in these studies to estimate the effect of tort reforms onmalpractice insurance rates. In the long run, with competitive insurance markets,reduction in claim frequency and severity can be expected to be reflected in insurancerates. However, the exact magnitude depends not only on the impact on averageinsurance claims costs but also on the timing of disbursements (and hence oninvestment income) and on the effect on uncertainty. Reforms which reduceuncertainty-notably, caps and statutes of repose-should reduce insurers' risk andhence reduce both the level and the volatility of insurance premiums.The reforms which have been found to reduce malpractice claims can reasonablybe expected to have an impact if applied to other lines, for example products liability.However, the percentage effect will differ, depending on the size distribution ofawards and the timing of filings. For example, a given dollar cap or threshold willhave a greater effect, the larger the proportion of dollars paid out on large claimsrelative to small claims. Similarly, a statute of repose running from the date of injurycould have a larger effect in products liability than in medical malpractice, if a largerfraction of claims are filed relatively long after the date of injury.Finally, an evaluation of the merits of the various reforms, in terms of theefficiency and equity with which the tort system performs its dual functions ofdeterrence and compensation, has been done elsewhere and is beyond the scope ofthis paper.98. Danzon & Lillard, supra note 1.9. P.M. DANzo.', MEDiCAL MALRACenCE, supra note 1.

The Effects of Tort Reforms on the Frequency and Severity of Medical Malpractice Claims

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The Effects of Tort Reforms on the Frequency and Severity of Medical Malpractice Claims

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