How Do Insurers Price Medical Malpractice Insurance?

The medical malpractice insurance market has experienced significant increases and decreases in premia over the past 30 years. However, it remains unknown what drives changes in premia as most of the research examining the determinants of medical malpractice premia resulted in mixed findings. Our paper attempts to fill this gap using an improved measure of premia from a previously unavailable dataset on firm-specific premia charged per physician. Specifically, we use annual firm-level data on medical malpractice premia originally collected by Medical Liability Monitor (MLM) over 1990-2015 available from Black et al. (2017) to test how competitive pressures and malpractice payouts affect premia. Using these measures with annual data on medical malpractice claims and payouts from the National Practitioner Data Bank (NPDB) and data on physician and lawyer counts from the Area Health Resource File (ARF), the American Community Survey (ACS), and the Current Population Survey (CPS), we estimate both fixed effects and first difference models to evaluate the determinants of firm medical malpractice premia.

Our paper makes several contributions to our understanding of medical malpractice premia. First, we use yearly MLM data over 1990-2015, which give us a firm-specific measure of the price charged per physician over a lengthy period. Other studies use firm direct premia written as a proxy for premia paid by physicians, which confounds changes in prices with changes in the number of physicians obtaining policies from that company or changes in the policy limits purchased by physicians. Neale, Eastman, and Drake (2009) show that there is substantial variation over time in the number of firms writing policies, suggesting that these quantity effects may be an important part of the total direct premia written for a firm. Second, our lengthy period of study allows us to examine determinants of premia during years when premia changed rapidly as well as when premia were in steady decline. Third, we study whether firms in the same group of companies set premia in order to cross-subsidize or otherwise insure one another, testing the standard assumption in the literature that malpractice awards or other firm losses are only important within a state.

Our preliminary findings indicate that while several factors have statistically significant impacts on premia within a reasonable number of lags, the estimated elasticities are generally small even when allowing shocks to persist over a four-year period. These findings show that competitive pressures, malpractice payouts, and effects within insurance groups have very small quantitative effects on medical malpractice premia. We estimate long run elasticities over four year periods on the order of 1 percent changes in premia in response to sustained 10 percent increases in each of our potential determinants. Overall, our results suggest that while insurance companies do change premia in response to changes in costs, they do not fully adjust revenues, leading to changes in firm profits.