Risk-adjusted malpractice insurance prices and physician response to increased malpractice claims

Physicians have been professionally liable for their actions since the eighteenth century. As medical science developed and new knowledge was gained, the value of good medical care increased. Similarly as good medical care improved and became more effective, the cost of inappropriate care became more apparent. This cost is measured not only as the direct iatrogenic damage to the patient, but also as the foregone opportunities of those patients receiving inappropriate care.;As these costs have risen society has responded with the development of both civil and criminal malpractice law. The medical profession has responded with many programs of licensing, monitoring, and controlling the quality of care. However, ultimately each physician responds to the risk of facing a malpractice claim by purchasing insurance. It is this decision and its cost which is the focus of this dissertation.;To date, studies analyzing the effects of the increased frequency and magnitude of malpractice claims have ignored the eroding of protection afforded by the traditional fixed limit policy. The risk of a malpractice claim is a cost to physicians. By ignoring it, the true cost of the increase in malpractice claims is underestimated.;A mean of estimating physician risk and generating policy limits necessary to maintain constant risk is developed. By using policy data provided by the St. Paul Insurance Group, a series of constant risk policy limits and prices is calculated for the years 1975-1985. With this series, and survey data provided by the American Medical Association, it is possible to monitor the changing profile of physician liability.;It is shown that physicians have not increased malpractice insurance purchases sufficiently to maintain a constant risk of exposure. They have assumed more liability risk. The usefulness of the constant risk series is shown in a study of the relationship between physician fees and malpractice costs. The fee response to the changes in malpractice costs seems excessive when physician risk is ignored. However, by controlling for the changing profile of physician risk, the fee response seems appropriate and confirms the observed reduction in physician net income.