Roles of Medical Malpractice Insurance in Reforming the Medical Profession in the US.

While one might hope that medical malpractice insurance could decrease the prevalence of errors and enhance the overall quality of medical care, evidence proves otherwise. This article examines the roles of malpractice insurance in reforming the medical profession in the United States. It argues that, in principle, malpractice insurance should be a quality-assurance mechanism. However, in practice, it falls short of achieving this goal because there is no empirical evidence that the threat of medical malpractice claims makes medical providers more careful in providing care to patients. It maintains that malpractice insurance, rather than incentivizing providers to provide better medical care, does the exact opposite. Overall, it concludes that while scholars have proposed more sweeping reforms of the current system, enterprise insurance has the potential to initiate a system-wide change that will influence providers to improve care to patients.

Currently, malpractice insurance creates a moral hazard problem because it shields providers from financial exposure of being sued. As a result, it creates an incentive for providers to engage in conduct that is more likely to give rise to a malpractice lawsuit than prevent one. The United States is seized with a zeal to reform the medical malpractice system, which is commendable. However, this zeal appears to be motivated by circumstances that have little to do with addressing medical malpractice’s fundamental problems and neglects to impel providers to improve patient care, making this enthusiasm unfortunately lacking.

In examining the shortcomings of a system that fails to provide incentives for providers to improve medical care, the first section of this article highlights the history of malpractice insurance in the United States, establishing the origin of malpractice in medicine.

The second part of this article delves into malpractice reform attempts in the United States, determining that although one might expect these reforms to remedy the flawed system effectively, they have only proven to be short-term fixes.

This article concludes by asserting that although medical malpractice insurance can promote patient safety, it is inefficient in solving the overall care problem. As such, it proffers a recommendation that should help improve the performance of the overall malpractice system.

I. History of Malpractice Insurance in the United States

Suffice to say, the history of medical malpractice is a lengthy one, spanning back thousands of years. The concept of medical responsibility is historically ingrained, with first mentions dating to the fabled Code of Hammurabi, which established the maxim, “an eye for an eye.”

The Code offers the following founding statement of medical malpractice law: “If the doctor has treated a gentleman with a lancet of bronze and has caused the gentleman to die, or has opened an abscess of the eye for a gentleman with a bronze lancet, and has caused the loss of the gentleman’s eye, one shall cut off his hands.” Millennia later, “lancet” became synonymous with the concept of medical malpractice itself. The Hippocratic oath best embodied this idea of ‘do no harm.’ Although this oath has been revised over time, it is still very much relevant to doctors today.

The first instance of medical malpractice in the United States was witnessed in 1794. In this case, the defendant argued that the medical personnel who had worked on his wife had cruelly operated on her, leading to his wife’s death. Furthermore, the husband claimed that, before the surgery, the physician had promised to conduct the surgery wisely and skillfully. Consequently, the man was awarded £40 (Notable Malpractice Lawsuits, 2020).

In the 19th century, the United States witnessed a spike in medical malpractice cases, many of which involved dislocations and fractures. In 1847, the American Medical Association (AMA) was founded. As a result, a uniform standard for medical education and training and the world’s first national Code for ethical medical practice was established. Presently, the AMA is the largest organization of physicians and medical students in the United States (News, 2017).

Around the 1970s, courts proceeded with publishing a list of medical malpractice awards for the first time. With it came a rapid increase in the number of malpractice awards and settlements. Subsequently, some states soon passed tort reform laws to cap amounts of certain kinds of damages awarded by courts (See, for example, the California Medical Injury Compensation Reform Act, 1975). After that, a dramatic malpractice case transpired in 1984 that sparked further reforms.

In 1984, Zion was admitted to a New York hospital and treated by two residents. Post-treatment, her sickness continued as her condition worsened until she eventually died. Her father sued, claiming the resident physician was overworked and negligent. Her father won, and a grand jury indicted the two residents. Because of this, a blue-ribbon panel of experts (also called the Bell Commission) was established to address this systemic problem. As per their recommendations, New York state adopted Bell recommendations that residents could not work more than 80 hours a week or more than 24 consecutive hours and that attending physicians needed to be physically present in the hospital at all times (Lerner, 2006). In July 2003, the Accreditation Council for Graduate Medical Education (ACGME) adopted similar regulations for all accredited medical training institutions in the United States (Philibert, 2002).

II. Malpractice Reform Attempts

Although medical malpractice allegations were already visible in the 1800s (Deville, 1990), it was not until the 1960s that a spike of medical malpractice claims appeared in the courts (Sloan, 1991). This spike was a result of several factors, namely: new and more complex medical treatments with a high risk of iatrogenic harm; a changing legal landscape that removed barriers to lawsuits and changed lability rules that had previously shielded charitable institutions from suit; and changes in satisfaction with the health care system, among others (Robinson, 1986). The rising costs of malpractice litigation paved the way for organized medicine to lobby for state and federal interventions to alleviate the burdens of the current malpractice liability system.

Medical malpractice reform is an aftermath of political processes, whereby groups with different interests attempt to push their agendas. Physicians and physician organizations perceive most medical malpractice claims as illegitimate and damaging to the medical system. On the contrary, patient advocates view the malpractice system as both a deterrent to the negligent practice of medicine and an avenue for much-deserved compensation for injured patients (Kessler, 2011).

In 2011, the National Conference of State Legislatures (NCSL) compiled an analysis of medical malpractice tort reform initiatives and goals. The NCSL addressed cost containment challenges while acknowledging that medical malpractice reform (i.e., tort reform) needs to address three major areas: deterring errors, limiting the systemic costs associated with medical malpractice, and ensuring fair compensation for harmed patients (NCSL, 2011).

Traditionally, malpractice tort reforms have attempted to change the medical malpractice system in one of three ways: (1) allowing fewer lawsuits by creating barriers to the filing, such as a prefilling certification or review of the medical merits of the case; (2) limiting plaintiffs’ compensation by imposing damage caps on non-economic damages (such as punitive damages or damages for pain and suffering); or (3) changing how awards are paid out to plaintiffs (payments over time versus large lump-sum settlements). Caps on non-economic damages are the most common type of reform and have been implemented in over half the states in various forms (American Tort Reform Ass., 2005).

For instance, Texas is a state with a constitutional cap on non-economic damages. (While many other states have passed legislation to cap non-economic damages, Texas is the only state to have done so through a constitutional amendment in 2003.) Tort law in Texas is known for aggressive conservative measures geared at protecting defendants’ rights and limiting the damages plaintiffs can recover. From 1977 to date, Texas has passed 15 pieces of legislation that placed restrictions on the damages plaintiffs recover. Findings suggest that the 2003 Texas tort reform, which amended the state constitution to include a cap on non-economic damages, decreased non-economic damages by 10%. Accordingly, we can infer that the influx of doctors into Texas post-2003 is a direct result of the state reducing the threat of non-economic damages. Texas’ aggressive history of reform has given the state the label of “the tort reform state.” (LeMance, 2015).

This article argues that non-economic damages should not be considered a value to be traded in the market. Instead, these damages serve as a potential source of immeasurable impact on a claimant’s welfare. Hence, calculating a particular value to attach to such non-economic damages can be problematic; and applying an arbitrary cap to such damages can be devastating. To illustrate, assume a medical provider is found guilty of medical error during a patient’s back surgery. Unfortunately, the error results in a permanent back injury to the patient, meaning the patient will suffer from mild back pain for the rest of her life. Nevertheless, she can only recover the set maximum as permitted by law regardless of the patient’s peculiar situation. From the preceding, it can be argued that caps on non-economic damages likely end up punishing genuinely injured plaintiffs who might end up living the rest of their natural lives with the injuries caused by medical errors.

Although malpractice reform by way of caps on non-economic damages may reduce overall costs associated with the malpractice system (e.g., through reduced payoffs to plaintiffs and reduced malpractice insurance premiums), the broader impact of these reforms — on providing incentives to medical providers to improve medical care or deter medical error — is less clear.

III. Roles of Malpractice Insurance in Reforming the Medical Profession

While malpractice insurance is yet to directly address the overall level of care by medical providers or decrease the prevalence of medical errors, it has nonetheless been instrumental in promoting patient safety. Malpractice insurance promotes patient safety in the following ways:

A. It Compensates Victims For Injuries Attributable To Malpractice

Malpractice insurance protects patients from the consequences of adverse events caused by negligence by compensating them for injuries and losses they sustain. These losses come in two forms: (1) financial cost, which may be attributed to lost income, a need for additional medical treatments, a need for continuing care services and other expenses; and (2) debilitation, which may include but is not limited to physical disfigurement, psychological impairment, and ongoing pain and suffering.

B. Medical Malpractice Insurance Performs A Regulatory Function

Malpractice insurance not only compensates injured patients ex-post, but it also promotes patient safety ex-ante. In this regard, it is only logical to say that malpractice insurance also performs a regulatory function by (a) identifying negligent providers, (b) providing incentives for patient safety by charging risk-adjusted premiums and denying coverage to high-risk providers, (c) periodically conducting loss prevention inspections of medical facilities, (d) accumulating data for root cause analysis, (e) educating medical providers about legal oversight and risk management, and (d) supporting patient safety organizations.

Contrary to only compensating patients for medical errors, a well-functioning system should focus on preventing these errors from occurring in the first place. Although the United States has faced several medical malpractice insurance crises since 1970, each of these crises was precipitated by conditions that created a hard market: decreased insurer profitability, rising insurance premiums, more restrictive coverage and reduced availability of insurance. Furthermore, each time, the crisis became a polarized battle between trial lawyers on one side and organized medical groups and insurers on the other. The medical groups and insurers typically link the crisis to runaway juries and greedy plaintiff lawyers; the trial lawyers typically blame low-interest rates, medical providers who are unwilling to improve the quality of care, and greedy insurance companies.

In the end, amidst the varying perspectives, there remains a steady point: the state of patients’ care remains lacklustre. We are stuck with a malpractice insurance system in which most medical error victims are not compensated sufficiently for their losses, and the overall quality of care has yet to be improved.


In an ideal world, medical malpractice insurance should be a quality-improvement mechanism. However, in practice, it falls short of achieving this goal. Currently, there is no verifiable evidence that the threat of medical malpractice claims makes medical providers more cautious. Many believe that this results from the easy – and relatively inexpensive – availability of malpractice insurance which protects providers from the adverse financial consequences of their negligence. Unfortunately, medical malpractice tort reform has aimed primarily to lower the cost of malpractice insurance rather than make it an effective mechanism for assuring quality and efficiently compensating injury victims. For instance, the caps placed on damages work to reduce medical malpractice insurers’ exposure and create premiums below what they likely would have been otherwise. Damage caps have not altered the fundamental incentives for any of the parties involved in the malpractice system (except perhaps to discourage attorneys from representing medical malpractice plaintiffs — even those with valid claims – because of the limitation on recovery). Caps do, however, effectively redistribute income from injured victims and their attorneys to providers.

Although the current medical malpractice system has several flaws, it also has its positive aspects. One redeeming feature is the contingency fee system for plaintiffs’ attorneys that allows injured patients a mechanism for addressing their grievances in a legal action — something that may not be possible through other channels.

The current malpractice system has serious paucities. First, unlike other fields of personal injury tort, there is no factual evidence that the threat of medical malpractice lawsuits deters negligence or provides an incentive for providers to offer better medical care. This is a crucial deficiency because deterrence is listed as a primary goal of tort liability. Second, compensation to injured patients is typically less than what they deserve based on the loss. Third, most medical errors do not result in a malpractice claim. Therefore, the signal from the tort system to health care providers is either insufficiently precise or wrong. As a result, it is only right to say that other insurance types, such as health disability insurance, are more efficient in distributing compensation to persons who have incurred a loss from receiving less than appropriate care.

Finally, providers in the United States often reject the belief that medical malpractice plays a constructive role in healthcare delivery. Providers generally see no link between medical malpractice litigation and the provision of low-quality care. A great deal of commentary on malpractice insurance assessments and patient safety view medical malpractice as part of the problem rather than part of the solution. The misconception is an essential roadblock because malpractice claims often arise from deficiencies in care.

Thus, medical malpractice does poorly on deterrence, improved patient safety, and appropriate compensation of persons with medical injuries. Its most positive features are giving injured victims a day in court and making professionals accountable to ordinary citizens. Patient safety and malpractice insurance are inextricably linked. However, neither market forces nor the threat of tort liability seems to provide sufficient quality assurance incentives. This study finds that the risk of lawsuits has not improved patient safety because relatively inexpensive malpractice insurance shields potential defendants from the burden of significant financial exposure, thereby constituting a moral hazard problem.


Meaningful tort reform should consider that medical mistakes are not merely medical providers’ errors; they are failures of a faulty system. Besides, medical providers must have financial incentives to exercise care and implement quality assurance mechanisms.

Overall, what has been held as tort reforms have been short-term fixes that failed to improve the system’s overall performance. In recent years, the reform most favored by physicians, hospitals, and insurers has been a cap on non-economic damages. These caps lower payments per paid claim and probably discourage trial lawyers from representing some medical malpractice plaintiffs. By contrast, they do not provide incentives for providers to improve medical care.

Consequently, scholars and other experts have proposed more sweeping reforms of the current system. They include no-fault insurance, enterprise liability, and enterprise insurance. Accordingly, each proposed reform has its cons and pros, and no one reform provides an exclusive remedy to the problems with the medical malpractice system. After careful consideration of all these options, enterprise insurance appears to have the most potential to initiate positive system-wide change.

A. No-Fault Insurance. No-fault insurance is considered a substitute for tort. It provides compensation to the insured regardless of fault. Currently, no-fault is widely utilized as a substitute for tort in auto liability and workers’ compensation. Medical no-fault has been implemented by only two states — Florida and Virginia — and only for a few medical procedures. The low administrative expense and faster payment of damages make no-fault insurance an attractive alternative. However, in Florida and Virginia, these State programs were implemented to achieve savings in medical malpractice premiums instead of distributing compensation to numerous victims of medical negligence. Assuming the system is genuinely no-fault, why are hospitals and physicians the only parties taxed by Florida and Virginia to fulfil a broad social obligation to compensate those with misfortunes? It seems more appropriate to tax the public at large, although no U.S. state has agreed to implement this idea.

Another intriguing alternative is private no-fault insurance. In this case, a hospital with an effective quality-assurance program could offer hospital-sponsored no-fault insurance to its patients for a reasonable premium, extending a considerably lower premium to patients who agreed to forego filing tort claims in the event of an injury. Provided that the hospital has an effective quality-assurance program, patients could reap the benefits of premium savings, and the hospital could attract more patients with its low-cost no-fault insurance program. This form of the voluntary no-fault program would confer several advantages to hospitals and medical staff. First, it relieves the providers of the threat of tort. Second, offering no-fault benefits signals to consumers that the hospital has confidence in its patient-safety program and low medical error rates.

Although hospitals may anticipate some savings, such no-fault coverage would have to extend to a greater quantity of conditions. When exclusions from coverage are necessary, they should be easily understood by patients. While a few decidedly costly procedures may be excluded from coverage, they should be listed and described in understandable terms in advance.

Complete substitution of no-fault for tort is infeasible. But a system in which patients could contract for no-fault coverage well in advance of receiving care at the hospital is reasonable in comparison. If a patient is forced to consider the purchase of no-fault at “the point of service,” this could be interpreted as a contract of adhesion because of the relative inequality of bargaining power between patient and hospital at that moment. To avoid that risk, contracting in advance is recommended rather than at the point of service. Allowing employees to indicate whether they wish to substitute a no-fault process when choosing their health plans is an additional way to avoid misunderstandings. Surcharges for no-fault — assuming they are imposed on patients — could then be built into the health insurance premium.

B. Enterprise Liability. Enterprise liability is a means of aligning providers’ incentives and those of the hospital where they provide medical services; after all, many errors arise from defects in the system rather than individual providers. Considering that many medical injuries occur while receiving medical care in a hospital, it makes sense to commence the alignment process with hospitals and physicians who work there. Under enterprise liability, when the receipt of care is in the hospital setting, the hospital will be named the defendant in medical malpractice suits. Separate suits against the individual physicians would not be filed. If the hospital were the only named defendant, it would have a greater incentive to adopt quality-assurance measures, including outpatient care. Under this setup, physicians should bear some financial burden – perhaps some sort of “premium” payment to the hospital — to provide an incentive to avoid claims. Hospitals could implement their systems of surcharging physicians with medical malpractice claims. Hence, hospitals would have a greater incentive to monitor physician performance and remove physicians with adverse claims experience.

With hospital enterprise liability, the deterrent would be internalized to the hospital, establishing a clear financial incentive for quality improvement and error reduction. Collectively, the hospital and physicians at the hospital will have an incentive to promote patient safety.

Unfortunately, there are several drawbacks to enterprise liability. First, plaintiffs might view hospitals as rich and faceless institutions with deep pockets, thus increasing plaintiffs’ demands for compensation. Second, plaintiffs would lose the ability to seek recovery from the individual physician(s) who caused their injury, thereby reducing potential compensation. Nevertheless, enterprise liability addresses many current deficiencies, especially the inadequate incentives providers have to invest in patient safety. A significant barrier to implementation is the lack of political constituency at the federal and state levels. Health care consumers are not well organized, and providers appear to be concerned with the deep pocket argument.

C. Enterprise Insurance. This approach does not affect the cause of action against physicians and hospitals nor the named defendants. Instead, physicians who render services to patients in hospitals would obtain their malpractice insurance through the hospital. Large organizations could self-insure for medical malpractice. Because all pool members would stand to lose from the provision of substandard care, there would be an organizational incentive to monitor quality-improving care systems.

Although enterprise insurance seems very promising, it too faces obstacles. For instance, in the United States, hospital medical staff have been mostly independent of hospitals. Physicians have resisted being under the control of hospitals, for loss of professional autonomy. Any proposal that would cede control of medical decision making to hospitals is likely to be resisted by many physicians. The key here would be to have active physician involvement in hospital-based enterprise insurance. While smaller hospitals would be posed with a unique challenge because they might be too small to operate a medical malpractice insurance plan independently, this could be resolved with them joining a regional compact. Accountability incentives alone are not likely to provide sufficient motivation for hospitals to create a system that manages medical injuries. Thus, the implementation of enterprise insurance alone may not lead to optimal patient safety levels in the hospital. Still, enterprise insurance is an appealing solution because it provides those in the best position to improve care with an incentive to implement patient-safety measures.

Enterprise insurance creates efficiency by combining patient-safety measures and insurance, including premium setting. Because the insurer — in this case, the hospital — is better suited to poke inside the clinical organization and recognize its errors, the insurer hospital may be less likely to drastically raise premiums because it has a better sense of what is occurring. As with enterprise liability, hospitals would have added incentives to be selective about the quality of physicians they admit to and retain on their medical staff. Of course, enterprise insurance has its limitations, but it also can provide the initiative for systemic change.

In summary, while malpractice insurance has been instrumental in promoting patient safety by compensating victims, it has failed to provide an incentive to medical providers, so they, in turn, can render superior medical care to patients. Upon examining several reform options, this paper recommends enterprise insurance as a viable solution to initiate positive system-wide change. While it has its limitations, enterprise insurance is conveniently and strategically seated at a juncture where the functions of preventing injuries and insuring loss (if and when injuries do occur) intersect.

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