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Policy Analysis no. 685
October 20, 2011

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October 20, 2011
Policy Analysis no. 685

Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?

by Shirley Svorny

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

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

Published on October 20, 2011

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Supporters of capping court awards for
medical malpractice argue that caps will make
health care more affordable. It may not be that
simple. First, caps on awards may result in some
patients not receiving adequate compensation
for injuries they suffer as a result of physician
negligence. Second, because caps limit physician
liability, they can also mute incentives for
physicians to reduce the risk of negligent injuries.
Supporters of caps counter that this deterrent
function of medical malpractice liability is
not working anyway—that awards do not track
actual damages, and medical malpractice insurance
carriers do not translate the threat of liability
into incentives that reward high-quality
care or penalize errant physicians.

This paper reviews an existing body of work
that shows that medical malpractice awards do
track actual damages. Furthermore, this paper
provides evidence that medical malpractice
insurance carriers use various tools to reduce
the risk of patient injury, including experience
rating of physicians’ malpractice premiums.
High-risk physicians face higher malpractice
insurance premiums than their less-risky peers.
In addition, carriers offer other incentives for
physicians to reduce the risk of negligent care:
they disseminate information to guide riskmanagement
efforts, oversee high-risk practitioners,
and monitor providers who offer new
procedures where experience is not sufficient
to assess risk. On rare occasions, carriers will
even deny coverage, which cuts the physician
off from an affiliation with most hospitals and
health maintenance organizations, and precludes
practice entirely in some states.

If the medical malpractice liability insurance
industry does indeed protect consumers, then
policies that reduce liability or shield physicians
from oversight by carriers may harm consumers.
In particular, caps on damages would reduce
physicians’ and carriers’ incentives to keep track
of and reduce practice risk. Laws that shield government-
employed physicians from malpractice
liability eliminate insurance company oversight
of physicians working for government agencies.
State-run insurance pools that insure risky practitioners
at subsidized prices protect substandard
physicians from the discipline that medical
malpractice insurers otherwise would impose.

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