Cap Malpractice Awards - Does It Work?

Texas was the first state to cap malpractice awards. This occurred in 2003 when Texas lawmakers passed a statute limiting malpractice awards at $250,000. The Bush administration urged passage of similar laws in each state. Subsequently, states found strong opposition by consumer and legal groups and strong support by hospital and medical groups.

Proponents argue that laws which cap malpractice awards help reduce health care costs. They purport that physicians must pay malpractice insurance premiums which increase when courts grant large malpractice awards. These premium increases are passed on by physicians to patients.

Opponents argue that laws which cap malpractice awards are unjust for patients who suffer at the hands of medical personnel and that the awards should be related to the extent of the injury to the patient. Patient injuries can range from temporary but painful medical problems such as surgical instruments erroneously left in the patient to permanent lifetime injuries, such as quadriplegia, resulting from treatment error. Therefore, a capped malpractice award may be inadequate.

State insurance divisions regulate insurance companies and premium increases are subject to the approval of the state insurance division. Insurance companies must base premium increases on actuarial science models supported by review and approval of a licensed certified actuary. Actuaries asses the risk of events occurring and provide a scientific foundation through statistics and formularies to determine appropriate premiums. One risk faced by insurance companies is loss due to payment of malpractice claims.

State insurance divisions also require insurance companies to have an annual external audit by an outside and independent Certified Public Accounting company to review the work of the insurance company's actuary and to render an opinion on its accuracy.

All insurance companies are required to have cash surpluses sufficient to pay several months of claims. This is a measurement of the company's financial strength. To improve their financial strength and overall profitability, all insurance companies invest their surplus cash in the stock market. These investments are regulated by the state insurance divisions and can benefit consumers.

Industry and consumer analysts found that stock market gains and losses had a greater impact on insurance companies overall financial results than malpractice claim payments and therefore premium increases were more directly related to stock market results than malpractice awards. Further, GE Medical Protective, the largest malpractice insurer, argued argued for a rate increase in Texas stating that malpractice caps did not reduce premiums.