Using a large sample of closed individual medical malpractice claims from Texas, supplemented with data from Florida, this article provides an empirical assessment of the impact of early supply reform. O'Connell (1976), O'Connell and Pohl O'Connell and Boutros (2002), and O'Connell, Kidd, and Stephenson (2005) provide background discussions and a more detailed presentation of the concept of early supply reforms. Let c be the expected liability and litigation costs if the claim is not settled under the early offer approach.
Let c' be part of the litigation costs already incurred before the early offer. The second set of versions of the early offer reform does not provide for a deduction for payments of insurance sources. If there is no minimum payment amount in this approach, an early offer will be made if.
The insurer will make an early bid when the insurer's expected exposure due to a full claim is greater than the amount of the early bid. Some of the savings for both parties are in terms of lower transaction costs, as legal fees will be reduced due to the early offer reform. There may also be a jury backlash that will reduce the cost savings of early supply reform.
Defense Legal Expense
To achieve this projection, we scale up the primary insurer's reserve amount by the size of the total settlement or award, divided by the payment from the primary insurer plus any deductible.
Net Economic Loss
Because age and type of injury are not reported for the TDI short-form claims, we use the same economic share of .348 for all short-form claims calculated as the weighted average of the economic damage share for all non-fatal claims.18. The large non-economic damages portion of the total award accounts for most of the large insurer cost savings under the early supply reform and is of independent interest in its own right. Because the focus of the early offer plan is to compensate for economic loss, and because the Florida data do not report either exemplary (punitive) damages or prejudgment interest as separate categories, we also do not provide non-imputed economic damages, exemplary damages, or prejudgment interest.
According to TDI staff, for cases settled out of court, a defect is only requested to be reported if, in the opinion of the individual completing the form, the settlement was affected by a claim or potential award of non-economic damages, exemplary damages or prejudgment interest. An examination of these data indicates that reporting of sources of insurance was incomplete.9 Therefore, we imputed the percentage of economic loss offset by sources of insurance under early supply reform using medical malpractice data from Florida, which provide more complete information on sources of insurance. For positive economic loss claims in the Florida data, we calculate the share of economic loss that will be offset by insurance resources as the sum of the percentages of total recovery from the following insurance categories: health, disability, workers' comp. compensation, car, 2" and Medicare.
The average percentage collateral for the various categories of cases is then calculated as the average dollar value of collateral divided by the total economic loss calculated for each of the four age and death categories used to impute economic loss. A useful measure of whether plaintiffs would anticipate that this higher legal standard could be met, and therefore opt out of the early offer settlement and instead choose to file suit, is whether exemplary damages in the tort or court order are reported to TDI. In the event of settlement, exemplary damages reported were those assessed as part of the settlement, rather than awarded by the court.
For purposes of our analysis, we assume that all claims in which there are such reports of exemplary damages will be withdrawn from the early offer and that all claims without exemplary damages will be able to accept an early offer if made one. Based on these assumptions, we distinguish claims that report exemplary damages from those that do not, and we show the results under the early offer reform with and without these claims. As the breakdown into damage categories in Table 2 shows, only 521 of the 16,437 claims involve exemplary damages.
Likewise, some claimants who will not ultimately receive exemplary damages may choose to reject the early offer because they overestimate their chances of receiving such damages. First, we consider the effect of basing the decision on an early bid on the actual net economic damage incurred, and second, we consider the effect of setting a floor of $250,000, or alternatively of $100,000 or.
Reserve Amounts and Awards
First, we consider the effect of the ground of the early offer decision on actual net economic damages incurred, and second, we consider the effect of setting a floor of $250,000, or alternatively of $100,000 or. 500,000, as the minimum amount of damages payable in such serious cases. THE CONSEQUENCES OF EARLY SUPPLY REFORM. minimum-payment requirement in the early offer reform and, second, without a minimum payment, such claimants gain nothing from the early offer and will have the most incentive to continue litigation. Whether insurers will choose to make an early offer and how much they will save relative to the current medical malpractice regime depends on the maximum amounts they would be willing to offer under the current tort regime minus the amounts they would under the early offer regime.
We refer to these amounts as the insurer savings resulting from the early offer plan, which means that compared to the current system, the early offer reform will save insurers these amounts. In calculating economic loss plus legal fees, we assume that the early offer plan sets the plaintiff's attorney's fees at 10 percent of the value of the tendered economic loss. That seemingly paradoxical result can be traced to the change in the mix of demands for which an early offer is desirable.
As the minimum payout increases, it is desirable for insurers to make an early offer for fewer claims. The 100,000 minimum is set, it is only very high stock claims that the insurer will find an early offer attractive. Increasing the minimum payment consequently reduces the number of claims in which an early offer will be made, but increases the average savings for this changed case mix.
The savings are high because the mix of remaining claims has a high level of non-economic harm, which is not offset under the early supply reform.24. Repeating this analysis, subtracting the imputed sources of collateral from the economic loss, indicates that early supply reform is obviously more likely to be attractive to insurers when the sources of collateral are offset by the economic loss. The early supply reform will accelerate payments by about two years overall and by about 2.5 years for serious non-fatal injuries.
Because early offer reform speeds the claims process and reduces attorney fees, the most significant quantifiable benefit of early offer reform is the savings in litigation costs.26 These litigation cost savings are shown in Table 5. We convert these estimates to an present value (PV) assuming an interest rate of 3 percent and a time period equal to the time period savings under the early supply reform. In all cases, we estimate litigation cost savings to plaintiffs at 0.23% of what the total settlement or award would have been without the early bid reform.
When the early offer decision is based on total settlement or court award, Litigation cost savings = .23 x Total settlement or court award.
Gains or Losses to Claimants
As the estimates in Table 5 indicate, the litigation cost savings are substantial, as these average savings exceed $100,000 per claim for every category except for one of the estimates based on the initial reserve amount. As the analogous distribution by injury type indicates, the cases for which the litigation cost savings are less than $100,000 are the non-serious, non-fatal injuries and short-form claims. The magnitude of these effects is highly dependent on the structure of the early supply reform, in particular the different minimum payments ranging from $100,000 to $500,000 for fatalities and serious non-fatal injuries.
These minimum payment amounts affect the parties' net gains or losses, with these effects varying by claim type. Because noneconomic damages make up about two-thirds of current medical malpractice settlements and awards, insurers usually reap greater net economic benefits than claimants. Except when there is a minimum payout amount, most, but not all, claimants will suffer a loss in expected payout amounts.
However, these calculations do not take into account the risk premium that claimants would be willing to pay for compensation that avoids the uncertainties of the current tort system. On average, they will receive compensation 2 years earlier than they would under the current tort system. Such savings, in turn, should significantly reduce medical malpractice insurance premiums in the long run."'.
For documentation of the effect of medical malpractice losses on premiums, see among others Born and Viscusi (1998). Selected sample features of the Texas Department of Insurance Commercial Liability Insurance Closed Claim Reports: Medical Malpractice. Primary insurer payment = total settlement or court award Primary insurer payment + deductible = total settlement or.
The poor state of US health care quality: Is malpractice accountability part of the problem or part of the solution. An Economic Model That Costs "Early Bids" Medical Malpractice Reform: Trading Non-Economic Damages for Immediate Payment of Economic Damages.
