Some Puzzles in Medical Malpractice Insurance Pricing

We use staggered difference-in-differences and panel data methods to study the factors that predict medical malpractice (“med mal”) insurance premia, using national data on three specialties (internal medicine, general surgery, ob-gyn) from Medical Liability Monitor over 1992 to 2017. A difference-in-differences analysis of states that adopted caps during our sample period provides evidence supporting a causal link between cap adoption and higher premia, lower direct costs (payouts plus defense costs), and thus much higher profitability (proxied by the premium-to-direct-cost ratio). The savings to insurers from lower direct costs, following damage cap adoption, are at most partially reflected in premia even over long time periods. Instead, insurers in new-cap states have been able to charge apparently supra-competitive prices for a sustained period. In the panel data analysis, we estimate long run elasticities of premia to direct cost, allowing for lags of up to four years, of only around +0.40, when one might expect elasticities near one. Also, the premium-to-cost ratio, which one might expect in competitive markets to be fairly constant over time, varies widely both across states at a given time and within states across time.