Authored By: Randall Hart

The Myth

$2.7 million for severe burns caused by scalding coffee. $4.5 million for years of complications caused by a medication. $28 billion to a cancer victim who began smoking in the 1950s. These awards are a sign that juries are out of control in awarding damages, and we need tort reform laws to control our insurance premiums.

The Reality

Between 1974 and 1978, insurance premiums skyrocketed, and under pressure from their constituents, lawmakers sought to ease the crisis through a series of laws that restricted victims’ rights. The market eventually settled, and insurance premiums became more affordable — until the mid-1980s when another premium crisis hit. State lawmakers again identified victims and claims against insurance companies as the primary culprit behind those grossly exaggerated premiums, and forty-six states passed different degrees of “tort reform,” all of which had the effect of limiting a victim’s ability to recover damages rather than restricting an insurance company’s ability to raise rates arbitrarily.

But, as many argued, if it lowered premiums, it was a small sacrifice to make, right?

Well, not quite — because tort reform laws didn’t have a permanent effect on insurance premiums, after all.

In 2002, yet another inflationary crisis struck the insurance industry, which hit medical malpractice particularly hard. With some healthcare providers seeing an increase of over 100% in their premiums, many doctors marched on state capitals, smaller facilities were forced to close, and the media stoked the flames by suggesting this insurance crisis could turn into an American healthcare crisis.

But if tort reform laws had already been passed, what else could lawmakers do?

Turns out, they could still enact quite a bit of harmful legislation. With half the states passing laws further restricting patients’ rights and protecting doctors from negligence and fourteen states enacting legislation to lower the caps on damages, the already under-regulated insurance industry won further major victories.

That’s not to suggest these crises were engineered by the insurance industries in order to win beneficial legislation; rather, these crises were engineered by the insurance industries because their business model is unsustainable. To understand why, we have to first examine how insurance companies actually make the bulk of their income, which isn’t through selling policies. Instead, those companies use the funds from premiums (or, more specifically, the difference in premiums and payouts) and invests in the stock market. When the market is doing well, they can lower premium prices and engage in fierce competition for your business. But when the stock market crashes and those investments are no longer as profitable, insurance companies react by drastically raising premiums.

So where does that leave the huge awards like those listed above? Do they have an effect on premiums?

In short, no. Massive awards are rare and tend to be blown out of proportion by the media, simply because sensationalism sells. And even the cumulative effect of smaller payouts by insurance companies shouldn’t negate their ability to sustain a profitable company.

The Myth

Tort reform legislation works — it keeps premiums from skyrocketing.

The Reality

There’s really no evidence that tort reform laws have had any effect on managing runaway premium prices. If they were effective, the spate of late 1980’s tort reform legislation should have prevented, or at least mitigated, the crisis of the early 2000s.

Tort reform, though, is popular among politicians because it gives their constituents the illusion that their elected representatives are sympathetic and proactive. And the market will eventually stabilize, creating a correlation between legislation and premium prices, even if there’s no causative factor involved.

According to Premium Deceit — the Failure of “Tort Reform” to Cut Insurance Prices, a retrospective study on the impact of tort reform laws passed in the 1980s, tort legislation had no impact on premium rates. In fact, states that didn’t pass any or very little tort reform legislation experienced the same premium rates as states with severe tort restrictions.

In 2009, Americans for Insurance Reform published a study that looked at the medical malpractice insurance crisis of the early 2000s and again found no correlation between legislation and premium rates, with states experiencing similar insurance rates whether they passed restrictive tort reform laws or not.   

Finally, Americans for Insurance Reform’s 2016 study of the medical malpractice tort reform legislation found that in states where limits on a patient’s rights were enacted, there was a “22.7 percent decrease in pure premiums from 2002 to the present — but states that did nothing saw a larger average drop of 29.5 percent.”

The Myth

Insurance caps—those limits on non-economic damages like infertility or chronic pain—are necessary to prevent exorbitant awards that can bankrupt insurance companies.

The Reality

Insurance lobbyists are particularly fond of pressuring legislators to enact strict caps on non-economic damages, but Americans for Insurance Reform again “found that states that enacted or lowered caps on non-economic damages saw an average 21.8 percent decrease in pure premiums …but the states that did not saw an even greater average drop of 28.9 percent.”

Furthermore, a 2012 study¹ of nine states with damage caps also found “no significant impact on Medicare Part A spending,” thus suggesting that limiting a patient’s legal right to recover damages has no discernible impact on healthcare costs.

Conclusion

Tort reform tends to have the same impact: limiting a person’s right to recover damages, particularly general damages (those awarded for immeasurable injuries like pain and suffering). The insurance industry has very few legal restrictions on its operations, and its business model of allowing stock market trends and interest rates to determine premium prices has had the deleterious effect of limiting consumers and patients’ rights to compensation for a company or medical provider’s negligence. Liability insurance is supposed to exist so that we consumers have recourse if we are harmed by the actions of others, not to ensure insurance companies’ massive profitability. If we want to seek true insurance premium reform, we must look to the insurance companies themselves and hold them accountable for the cyclical destabilization of their market.

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References

¹ Paik, Myungho and Black, Bernard S. and Hyman, David A., “Damage Caps and Defensive Medicine, Revisited” (November 8, 2016). Journal of Health Economics, 2017, vol. 51, pp. 84-97; Northwestern Law

& Econ Research Paper No. 13-20; Illinois Program in Law, Behavior and Social Science Paper No. LBSS14-21. Available at SSRN: https://ssrn.com/abstract=2110656