By Max Schloemann, Guest WriterSocial inflation in the United States continues to intensify and bear influence on liability-based industries. This cultural shift toward more extravagant claims and indemnity payouts is leading to higher loss ratios for medical malpractice insurers. As a result, medical malpractice insurance premiums are being raised to help mitigate losses and ensure solvency.
In my role as a medical malpractice insurance broker, I detect growing concern among physicians about claim severity and inflated verdicts. These socially driven trends contribute to increased insurance premiums which strain operational budgets for my clients. In this post, we'll explore how social inflation plays a role in the medical liability insurance industry and highlight ways that clinicians can focus on claim prevention to shield themselves from the financial impacts of social inflation.
What Is Social Inflation?
Social inflation occurs when average insurance claims grow at a faster rate than economic inflation. Driven by public perception and cultural attitudes, social inflation increases the probability of record-breaking settlements for plaintiffs and extreme financial consequences for defendants. In the last 10 years, more than $2.4 billion of medical malpractice losses stemmed from social inflation.
- Contemporary views shape the foundations of social inflation. Public opinion on topics such as corporate responsibility or social inequity set the tone for legal discourse regarding risk, fault, and indemnity. For example, 71% of Americans harbor a negative opinion of large corporations. This widespread view manifests in the tort system when plaintiffs and lawyers base the severity of their claims on the perception that large corporations have very deep pockets.
- Social inflation increases the potential for significant verdicts. Nuclear verdicts over $10 million are a major contributing factor to social inflation. Between 2010-2019, the median nuclear verdict increased by 27.5%, outpacing inflation by more than 10%. With social inflation, juries tend to lean more sympathetically toward an individual plaintiff than a sizable commercial entity like an insurance company.
- Third-party litigation funding enables social inflation. Litigation funded by an outside party, such as a hedge fund, is referred to as third-party litigation funding (TPLF). Growing in popularity as an $8 billion industry in the United States, TPLF contributes to social inflation by incentivizing litigious behavior and desensitizing the public to mega-verdicts. Plaintiff lawyers often use outside funds to enable expensive appeals or to launch publicity campaigns that normalize excessive payouts and attract new clientele.
More information here:
4 Malpractice Insurance Pitfalls to Avoid
How Is Social Inflation Impacting Medical Malpractice Insurance?
A 2023 report found concrete evidence of social inflation for medical malpractice insurance. However, it notes that the effect is less pronounced compared to the hardest-hit sector, commercial auto liability.
- Nuclear verdicts lead to higher premiums for physicians. When a jury awards $10 million or more to a plaintiff, that verdict is considered nuclear. As reported by the Institute for Legal Reform, medical liability cases account for 20.6% of nuclear verdicts. It's unclear, though, how many of these nuclear verdicts cause doctors to lose personal assets. We simply can't find hard data on this question because “the legal system publishes filed cases and judgments rendered, but they do not publish the collections of those judgments.” Doctors can lose personal assets if they have no or inadequate medical coverage and/or they don't take steps to protect personal assets, but the probability varies from physician to physician because of different state laws and personal financial planning decisions. While the awards from a nuclear verdict at this level are often reduced by a trial court or reversed on appeal, they set legal precedents that concern insurance companies and present a viable threat to the solvency of their reserves. Ultimately, nuclear verdicts lead to increased medical malpractice insurance premiums.
- The impact of social inflation varies from state to state due to local tort law. In the US, around 30 states have limits on medical malpractice verdicts, which creates regional variance for social inflation. According to the American Medical Association, limitations on non-economic damages have been shown to constrain medical liability premium growth and claim volume.
- Social attitudes toward healthcare professionals remain positive. The public continues to esteem doctors and nurses, which helps guard against social inflation for medical malpractice claims. According to a 2021 Gallup survey that asked respondents to rank professions based on honesty and ethics, physicians ranked second only to nurses who have maintained a first-place standing for two decades now. I take comfort on behalf of my clients that the strong majority of Americans remain loyal to physicians and nurses.
Top 4 Strategies to Soften the Impacts of Social Inflation
#1 Claim Prevention Leads to Rate Reduction
A physician’s record impacts insurance rates and significantly impacts an underwriter’s risk assessment. The best advice I can give my clients about getting lower rates is to focus on keeping a favorable claims history.
- Take advantage of continuing education courses. Demonstrating a commitment to claim prevention through continued education holds value to an underwriter. Some insurance companies will apply discounts if you complete their proprietary risk mitigation curriculum.
- Optimize communication-based processes. When it comes to patient correspondence, the data is clear: more is more. Aggressive follow-ups, thoughtful explanations, and active listening can all help reduce the chances of being named in a lawsuit.
#2 Ward Off Third-Party Litigation Funding with Thorough Documentation
Poor documentation ripens the investment opportunity for third-party litigation funding. Maintaining meticulous records can help prevent a legal team from pursuing a claim. In the event of a lawsuit, highly accurate and detailed documentation bolsters a physician’s defense.
#3 Research All Reputable Carriers Before Accepting a Renewal Offer
Stay well-informed and avoid the assumption that all carriers are implementing rate increases just because your carrier is doing so. Consult with an independent malpractice insurance broker for expertise to get the best coverage and rate for your unique situation.
#4 Demonstrate Risk Mitigation Efforts During the Application Process
An experienced broker can help draw an underwriter’s attention toward your risk-mitigating improvements during the application process. For example, outlining a data-driven safety and quality improvement plan could lead to a more favorable premium because it positions your practice as lower risk.
More information here:
How to Survive a Medical Malpractice Lawsuit
How Physicians Can Prevent Getting Sued
The Bottom Line
Social inflation impacts the severity of claims and the magnitude of indemnity payouts. This leads to major losses for insurance providers and consequent increases in medical malpractice premiums. Preventing claims and partnering with the right broker are proactive strategies to sidestep the effects of social inflation.
As you accumulate wealth, you need a way to protect your assets. Check out The White Coat Investor's Guide to Asset Protection; it provides the techniques you can use to safeguard your money AND the most comprehensive list of state-specific asset protection laws ever published. Pick up the Amazon best-selling book today and protect your wealth!
Are you worried about social inflation? What else can be done to mitigate the risks of a malpractice suit?
Thought this was going to be about feeling pressure to spend more money in order to ‘keep up with the Joneses’ . Interesting that the insurance industry is using this term.