In Philadelphia, a family alleged that a birth injury had led to their baby’s cerebral palsy. They sued Penn Medicine and were awarded $183 million.
In Boise, a jury recently awarded the state’s second-highest-ever award, $13.5 million, in a suit against an emergency medicine group that was filed after a patient was disabled by a stroke. This verdict is especially notable because Idaho usually caps noneconomic damages at $400,000—but exceptions are possible if the jury determines that the plaintiff’s injuries arise out of “out of willful or reckless misconduct.” The jury’s holding that misdiagnosing the patient’s evolving stroke arose out of willful or reckless misconduct added over $8 million in noneconomic damages to their verdict.
Each of these verdicts shows us something about social inflation, a little-understood trend that is driving up costs for medical professionals all over the country.
What is social inflation?
The term “social inflation” is a variation on the more familiar “economic inflation.” Social inflation describes a trend of increasing loss costs that occurs when expenditures to resolve medical malpractice claims rise faster than economic inflation. To quantify these increasing loss costs: In the decade ending in 2021, social inflation added between $2.4 and $3.5 billion, or 8 to 11 percent, to medical malpractice losses incurred by insurers focused on the physician market.
As these cost trends continue, medical professional liability carriers may have to increase their rates to keep up with the losses. Therefore, although social inflation hits insurers first, it ultimately affects practices’ premiums.
What is the reptile strategy?
It takes many forces acting together to create momentum for social inflation, and one of these forces is a tactic of the plaintiff’s bar. This tactic 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. This type of appeal attempts to activate a juror’s survival instinct, inducing fear to overcome logic. Attorneys use this tactic when they try to present the defendant’s conduct as a danger to the community. They argue that the jury needs to return a very large award in order to deter others from acting as the defendant has.
Our civil justice system was designed to compensate an injured party. Recognizing injuries and entitlement to compensation is valid and valuable. This is precisely why it is destructive when plaintiffs’ attorneys use fear-based persuasion to push far beyond compensating the plaintiff into punishing the defendant—that’s not what our civil justice system was designed to do.
What else drives social inflation?
Changes in attitudes and beliefs underlie social inflation, which is then buoyed along by new sources of litigation funding. Contributing factors include:
Plaintiffs’ and jurors’ expectations. Over time, societal attitudes have shifted relative to entitlements to compensation for injury and loss, and relative to people’s willingness to pursue litigation or file an insurance claim to obtain compensation.
The failure of large numbers to impress us. Big lotto jackpots go into the billions of dollars. College athletes are paid millions of dollars a year for their name, image, and likeness. Our society’s desensitization to big numbers permeates our culture, including our legal system.
Third-party litigation financing. Lately, 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 enable lengthy lawsuits.
What are nuclear verdicts, and how do they affect settlements?
The prepandemic years featured 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. These large verdicts startled insurance industry veterans when they began appearing in locations and judicial venues where they hadn’t been seen before, such as Nebraska, Alabama, and Utah.
Over time, unusually large verdicts can become the new usual, because each large verdict pushes upward on not only plaintiffs’ damages from other tried cases, but also on negotiations for medical malpractice settlements. This is because 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, a surprisingly large number of claims are affected by social inflation.
What proportion of claims are affected?
Plaintiffs’ verdicts are few and far between. Specifically, 93 percent of our claims are resolved between the parties before trial, and of the 7 percent that go to court, we win all but 1 percent. In that case, you might ask: How can social inflation affect costs across health care when it touches so few claims?
Plaintiffs’ verdicts influence the amount that cases settle for. Therefore, it’s not just the tried cases that social inflation affects—it’s all claims that result in a payment to the patient. This is how social inflation takes over a wider lane within the total claims pool. Thus, depending on the state: Social inflation affects between 20 and 35 percent of all our claims.
How does individual sympathy lead to system-wide imbalance?
People are, understandably, sympathetic to injured patients. Jurors can also form emotional bonds with credible, empathetic medical professionals, but it’s harder to be sympathetic to a hospital—if jurors perceive a health care organization as a faceless but deep-pocketed entity, then an enormous award may be easier for the plaintiff’s attorney to inspire.
Again, cases that settle are also affected, as demonstrated by a recent $15 million settlement in Massachusetts. In Boston, a couple’s baby died during a routine sleep study when a series of errors left him without oxygen for 20 minutes. Following this tragic event, the $15 million settlement might seem reasonable, on its face, to a sympathetic onlooker. However, to those of us in the industry, it is a clear sign that there is a new dynamic in play when it comes to valuing cases for settlement. A clear sign that insurers are concerned about letting the jury system price our cases. Eight-figure cash settlements prior to a jury verdict used to be a rarity, but now we see them happening more often.
How does social inflation affect rates for medical malpractice insurance?
Rates for medical professional liability insurance sit at the intersection of two forces: claim frequency and claim severity. Claim frequency is defined as the number of claims per 100 insured physicians. Claim severity (as distinguished from injury severity) is the cost to settle the average claim. Claim frequency is flat to decreasing nationwide, but social inflation has been amplifying severity for years. With medical malpractice insurance rates already affected by increases in severity, if claim frequency were to spike also, rates could be driven higher.
When we commissioned a social inflation study to dig into drivers of social inflation, evidence in the annual statement data pointed to an acceleration beginning around 2012, picking up steam in 2017, continuing through 2021, and expected to persist through 2023 and beyond. The study confirmed what an observer of the news headlines might surmise, which is that the pace of settlements larger than $1 million has been accelerating—and that these large settlements are the result of social inflation.
In addition, the study’s findings suggested that states that cap noneconomic damages may reduce the impact of social inflation. This finding reinforces the importance of tort reform.
To learn more about how social inflation is affecting the medical malpractice insurance industry, read the study.