Social inflation drives up malpractice payouts—and insurance rates

Large verdicts are becoming more common, putting pressure on insurers to raise rates

Between 2014 and 2020, U.S. inflation rose roughly 15%—but the cost to resolve the average paid medical malpractice claim reported to the National Practitioner Data Bank (NPDB) rose by 42%.

Robert E. White Jr., The Doctors Company: ©The Doctors Co.

Robert E. White Jr., The Doctors Company: ©The Doctors Co.

When the cost to resolve a medical malpractice claim grows faster than general inflation, this spike in loss costs is known as social inflation. In the decade ending in 2021, social inflation fueled between $2.4 and $3.5 billion, or 8 to 11 percent, of all medical malpractice losses incurred by physician-focused insurers.

To keep pace with these spikes in loss costs, medical professional liability carriers may have to increase their rates. Although social inflation is doled out one verdict and one settlement at a time, as these loss costs accumulate, social inflation increases insurers’ overall loss costs, and ultimately practices’ premiums.

Where are nuclear verdicts more common?

During the prepandemic years, the medical professional liability industry was already noticing an acceleration in loss costs—and these costs were outpacing general economic increases. Specifically, we were seeing an increase in the number of so-called nuclear verdicts, meaning verdicts in excess of $10 million—and even thermonuclear verdicts, meaning verdicts in excess of $25 million. Moreover, these extraordinarily large verdicts were appearing in states and venues where they hadn’t been seen before.

Nuclear verdicts used to be confined to places like California, New York, Florida, Texas, and maybe Illinois. Now, when we see nuclear verdicts cropping up in Iowa, Idaho, Nebraska, Alabama, and Utah, it’s a shock to those of us who know the industry, and it’s concerning to those that underwrite and handle claims for our members.

How do nuclear verdicts create larger settlements?

Verdicts are the yardstick by which all settlements are measured. Very large verdicts exert upward pressure on not only the awards for other tried cases, but also on medical malpractice claims that are settled.

At the start of the settlement process, when a plaintiff’s attorney is drafting a demand letter, that attorney needs to know the value of that case in their local legal venue. Thus, large verdicts contribute to determining not only the value of subsequent jury awards, but also the value of settlements.

How many claims are affected?

Ninety-three percent of our claims are resolved between the parties before trial, and of the 7% that go to court, we win all but 1%. It would seem that social inflation affects only a small number of claims.

However, the picture is not quite so rosy, because plaintiffs’ verdicts, while few and far between, influence the amount that cases settle for, and so we see that social inflation affects a wider slice of the claims pie. Depending on the state, social inflation affects between 20 and 35% of all our claims, because it affects all claims that result in a payment to the patient.

What contributes to social inflation?

Social inflation is fueled by societal shifts, juror expectations, the tactics of the plaintiff’s bar, new funding sources, and more. These factors contributing to social inflation include:

  • Changes in attitudes and beliefs: At its heart, social inflation begins with changes in attitudes and beliefs about entitlements to compensation for injury and loss, accompanied by a willingness to pursue litigation or file an insurance claim to obtain compensation.
  • Desensitization to big numbers: Our society has become comfortable with big numbers. We now hear about people winning big lotto jackpots that go into the billions of dollars. We hear about college athletes getting millions of dollars a year for their name, image, and likeness. We’ve become a bit desensitized to big numbers in our society, which has worked its way into our legal system.
  • Changes in funding sources: Something new added to the mix is third-party litigation financing, meaning we have people loaning either the plaintiff or the plaintiff’s lawyer money to tide them over until the completion of the suit. Third-party litigation financing may further suits that could not come to fruition otherwise.
  • Plaintiff’s attorney tactics: One courtroom tactic fueling social inflation attempts to activate a juror’s survival instinct. This type of appeal is nicknamed an appeal to the “reptilian brain,” because it riles up our oldest brain structures, i.e., those shared by animals such as reptiles—which are related to our most primitive drives. The so-called reptile strategy induces fear to overcome logic, and attorneys using this tactic try to present the defendant as a danger to the community. Our civil justice system was designed to compensate an injured party, but attorneys using fear-based persuasion are often trying to push far beyond compensating the plaintiff into punishing the defendant.

How is social inflation affecting rates for medical malpractice Insurance?

Right now, medical professional liability insurance rates are fairly stable overall, because although claim severity—the cost to settle the average claim—is going up, claim frequency—the number of claims per 100 insured physicians—is flat to decreasing nationwide. That said, social inflation has been amplifying severity for years, to a point where medical malpractice insurance rates are impacted, so if claim frequency were to spike also, rates could be further impacted.

Reflecting this risk, the AM Best market outlook for the medical professional liability segment remains negative. They cite concerns including rate adequacy and rising loss cost trends due to social inflation.

Why are we all paying a tort tax?

Jurors are understandably sympathetic to injured patients. If those jurors also perceive the hospital, for instance, as a faceless but deep-pocketed institution, then it is easier for a plaintiff’s attorney to inspire an enormous award. But a trend of ever-increasing awards has consequences for everyone.

By increasing loss costs for insurers, big verdicts affect premiums for medical professionals and practices. Further, they affect the cost of living throughout this country. We call it the tort tax. The U.S. Chamber of Commerce Institute for Legal Reform calculated a tort cost equivalent to 2.1% of gross domestic product, or $3,621 per American household.

What’s next?

When we commissioned a social inflation study to dig into drivers of social inflation, we found that the evidence in the annual statement data points to an acceleration beginning around the year 2012, with a more drastic acceleration beginning around 2017. This acceleration continues through the period studied, and is expected to persist. Consistent with what we have observed, the study found that the pace of settlements larger than $1 million was accelerating, and that these large settlements are driving social inflation.

The study’s findings also suggested that it is possible that states that cap noneconomic damages may reduce the impact of social inflation, reinforcing the importance of tort reform.

Read the study to learn more about how social inflation is affecting the medical malpractice insurance industry.

Robert E. White, Jr. is president of The Doctors Company and TDC Group

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