Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?

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Supporters of capping court awards formedical malpractice argue that caps will makehealth care more affordable. It may not be thatsimple. First, caps on awards may result in somepatients not receiving adequate compensationfor injuries they suffer as a result of physiciannegligence. Second, because caps limit physicianliability, they can also mute incentives forphysicians to reduce the risk of negligent injuries.Supporters of caps counter that this deterrentfunction of medical malpractice liability isnot working anyway—that awards do not trackactual damages, and medical malpractice insurancecarriers do not translate the threat of liabilityinto incentives that reward high-qualitycare or penalize errant physicians.

This paper reviews an existing body of workthat shows that medical malpractice awards dotrack actual damages. Furthermore, this paperprovides evidence that medical malpracticeinsurance carriers use various tools to reducethe risk of patient injury, including experiencerating of physicians' malpractice premiums.High-risk physicians face higher malpracticeinsurance premiums than their less-risky peers.In addition, carriers offer other incentives forphysicians to reduce the risk of negligent care:they disseminate information to guide riskmanagementefforts, oversee high-risk practitioners,and monitor providers who offer newprocedures where experience is not sufficientto assess risk. On rare occasions, carriers willeven deny coverage, which cuts the physicianoff from an affiliation with most hospitals andhealth maintenance organizations, and precludespractice entirely in some states.

If the medical malpractice liability insuranceindustry does indeed protect consumers, thenpolicies that reduce liability or shield physiciansfrom oversight by carriers may harm consumers.In particular, caps on damages would reducephysicians' and carriers' incentives to keep trackof and reduce practice risk. Laws that shield government-employed physicians from malpracticeliability eliminate insurance company oversightof physicians working for government agencies.State-run insurance pools that insure risky practitionersat subsidized prices protect substandardphysicians from the discipline that medicalmalpractice insurers otherwise would impose.

Shirley Svorny

Shirley Svorny is an adjunct scholar at the Cato Institute and professor of economics at California State University, Northridge.