Insurance is a critical piece of a modern economic system, but it often goes unnoticed until it becomes prohibitively expensive or its availability is curtailed. Such problems occurred in the medical malpractice insurance market in the first half of this decade. Many physicians experienced substantial increases in insurance premiums, and there were reports of problems with the availability of physician services because of doctors retiring or relocating from areas that have seen high premium increases. There were also protests and job actions in some locations, with hospitals finding it necessary to curtail services and send patients to more distant facilities. Crises have been proclaimed in the past as well; similar events occurred in the latter half of both the 1970s and 1980s. Since 2004 or so, overall losses experienced by medical malpractice insurers have dropped significantly and overall premiums have moderated as well, although not nearly to the same extent as losses. The recurring problems have provoked various reactions in the insurance marketplace and in legislatures both at the state level, where insurance law and tort law are normally shaped, and in Congress. In the 107 th ( H.R. 4600 ), the 108 th ( H.R. 5 and H.R. 4279 ), and 109 th ( H.R. 5 ) Congresses, the House passed bills whose central thrust was to limit damages for medical malpractice tort claims. The Senate, however, did not act on any of these House bills and failed to invoke cloture on the Senate bills addressing medical malpractice ( S. 11 , S. 2061 , and S. 2207 in the 108 th Congress; S. 22 and S. 23 in the 109 th Congress). The 110 th Congress did not consider any bills on the floor to address directly medical malpractice insurance. The medical liability insurance market is not currently exhibiting widespread crisis symptoms. That is not to say that the affordability and availability of malpractice insurance are no longer issues, but such problems are not as acute as compared with other time periods. According to the latest summary information published by the Medical Liability Monitor, 2008 premiums for malpractice insurance are part of a "downward trend of the past few years." By extension, physicians and physician groups (primarily the American Medical Association) are not responding to current market conditions in the same manner as during crisis periods, when they engaged in more public displays of dissatisfaction (e.g., participating in "strikes"). However, even during a non-crisis period, the malpractice system is characterized by issues with equity, access, and other problems. For example, the current system performs poorly with respect to compensating patients who have been harmed by malpractice, deterring substandard medical care, and promoting patient safety, among other issues. The current legislative interest in medical malpractice reform differs from the past in that it is largely driven by overall health reform, rather than an immediate crisis in medical malpractice insurance. As such, the focus is likely to be broadened. Beyond asking what can be done to stabilize premiums for medical malpractice, Congress may decide to ask what changes to the medical malpractice system might do for overall health reform? In terms of direct costs, medical malpractice insurance adds relatively little to the cost of health care. Medical malpractice premiums written in 2008 totaled approximately $11.2 billion, whereas health expenditures are estimated by the Congressional Budget Office (CBO) to total $2.6 trillion. Indirect costs, particularly increased utilization of tests and procedures by physicians to protect against future lawsuits or "defensive medicine," have been estimated to be much higher than direct premiums. These conclusions, however, are controversial, particularly in light of synthesis studies that have concluded that national estimates of defensive medicine are unreliable. CBO has noted that there is no "consistent evidence that changes in the medical malpractice environment would have a measurable impact on health care spending." CBO conducted its own analysis, as well as synthesized and analyzed previous studies on the relationship between medical malpractice and health care costs. These studies differed somewhat in their findings. For example, the studies' estimates for the reduction of health care spending attributable to state tort reforms varied, though they all found relatively little impact (4%-6%). Other studies not analyzed by CBO have found even less of an impact. To date, of the health reform proposals that have been reported out of the three committees of jurisdiction in the House (Ways and Means, Energy and Commerce, and Education and Labor) and the Senate Health, Education, Labor and Pensions Committee, only the one reported out of House Energy and Commerce includes language addressing issues with the medical malpractice system. The Energy and Commerce version would allow states to receive incentive payments to enact and implement a medical liability law. The state law would be required to provide for an "early offer" system, a "certificate of merit" program, or a combination of both. The Secretary of Health and Human Services would determine that a state law was compliant if she were satisfied that the state had enacted and was currently implementing the law, and if she found the law to be "effective." To determine the effectiveness of a law, the Secretary would consider whether it (1) made the medical liability system more reliable through the prevention of, or prompt and fair resolution of, disputes; (2) encouraged the disclosure of health care errors; and (3) maintained access to affordable liability insurance. The most obvious function of insurance is to allow a person or corporation facing some risk, such as the risk that a physician will be sued for medical malpractice, to transfer this risk to another economic entity. Typically the entity accepting the risk will be a company, resulting in this risk then being spread across the owners of the insurer, either the stock holders in a normal incorporated insurance company or other policy holders in the case of a mutual insurance company. Risk is also spread from one insurer to others through reinsurance. Transferring risk, however, is not the only role that insurance plays. In the course of receiving payment for accepting risk, large amounts of capital are generated. This capital is then invested, allowing for its productive use to generate jobs and economic growth in addition to providing a reserve against future losses. Although the risk transfer and sharing aspect of insurance is the most obvious, the financial intermediation aspect is an equally integral part of the modern operations of insurance companies. The gains from investment of capital typically allow an insurer to offer lower rates to the insured than would be the case if the insured was paying completely for the transfer of risk. This also means, however, that the insured face some of the volatility in premium amounts inherent in relying upon investment returns. This can be seen in the alternating market cycles that are discussed below. Insurance involves complex calculations regarding uncertain outcomes of future events, although the basic operations can be explained in simple terms. A company begins with a certain amount of capital, or "policyholders surplus," to allow it to promise credibly to provide insurance in the future, as well as enough to satisfy regulators that it will be able to fulfill this promise. It offers insurance policies against whichever risks it is willing to assume. Money flows into an insurer primarily from two sources: premiums from customers of insurance and investment income from the company's reserves. Money flows out of an insurer primarily to pay for claims made for events for which the insurer has agreed to bear the risk, including costs such as defending against lawsuits in the case of medical liability insurance. The ability of insurance to fulfill its role as a financial intermediary, as well as the solvency of individual insurers, rests critically on keeping the inflows and outflows balanced over time. This means estimating the future return on investments as well as estimating future losses from claims. The accuracy of these estimates can vary widely and insurers have relatively little direct control over what either actual value will turn out to be. Insurers can affect their returns somewhat by varying the mix of their investments, but this mix is subject to state regulation. In the United States, most investments are relatively stable investments such as bonds, but even bonds are subject to the vagaries of the marketplace. Many insurers also try to minimize claims through sharing information with policy holders on reducing risks and offering incentives to policy holders who take action to minimize risks. The one variable that an insurer does directly control, subject to the pressures of the marketplace and sometimes state insurance regulators, is the price or premium that it charges for a certain amount of insurance. This price should cover the value in today's dollars (the "present value") of any future loss, multiplied by the expected probability of this loss. If a physician wants to insure against the risk of paying a $1 million malpractice claim today, and the insurance company believes that there is a 1% chance that this claim will occur today, then it will charge approximately $10,000 for this insurance. If the insurance extends for a length of time further into the future, then the future amounts of money to be paid out would be adjusted based on the expected inflation rate, or the expected rate of return, that the insurer foresees over the period of time the insurance is in place. Because insurance pricing is theoretically based on the risk that is being transferred, this implies charging a different premium to people or companies with different inherent levels of risk. Without the ability to segment different risks into different categories, and charge these different categories different rates, the price charged to everyone will be relatively high reflecting the possibility that the purchaser is in a high risk category. A high price would tend to lead those who believe their own risks are low not to buy insurance or to underinsure, whereas those who believe their risks are high would tend to continue to buy insurance or even to overinsure. This tendency is known as "adverse selection" and usually results from the insured having more information than the insurer regarding their own risk. Adverse selection results in a higher overall level of risk in the pool of those who buy insurance and thus results in higher than expected claims. Higher claims are eventually followed by higher prices, which are then followed by lower risk clients not buying insurance and so on.