©The Journal of Risk and Insurance, 2001, Vol. 68, No. 2, 255-276 255 THE CASE FOR EXPERIENCE RATING IN MEDICAL MALPRACTICE INSURANCE: AN EMPIRICAL EVALUATION Gary M. Fournier Melayne Morgan McInnes ABSTRACT Experience rating is largely absent from medical malpractice insurance con- tracts. This article presents evidence that physician risk differences persist, and it develops an empirical model for experience rating with a semi-para- metric estimator. Estimating the model using claims history data from Florida, the authors obtain improved prediction of individual claims over several years and provide a detailed picture of the incidence of surcharges under experience rating. This evidence suggests that an experience rating system would be feasible and would greatly reduce the subsidization across physician risk types that exists under most current medical malpractice in- surance contracts. INTRODUCTION Experience rating, i.e., adjusting premiums based on claims history, is the norm in many insurance settings such as workers compensation, and automotive and health insurance. In workers compensation, for example, the amount firms must contribute depends on the rate at which their employees have made claims in the past. In medi- cal malpractice insurance, however, it is rarely found (Weiler et al., 1993). Adjusting insurance premiums through experience rating has two benefits: (1) cross-subsidiza- tion of high-risk subscribers by those subscribers of low risk is reduced and (2) high- risk subscribers are given incentives to find cost-effective ways to reduce risk. For these reasons, economists have advocated the adoption of experience rating in medi- cal malpractice insurance, and two states have made a limited form of experience rating mandatory (Weiler et al., 1993). Earlier experiments with experience rating in malpractice insurance, whether initi- ated by private insurance carriers or mandated by states, were abandoned in the face Gary M. Fournier is professor of economics at Florida State University and research associate, Pepper Institute on Aging and Public Policy at FSU. Melayne Morgan McInnes is assistant professor of economics at the University of South Carolina, Columbia. The authors thank two anonymous referees, Tom Zuehlke, Bengt-Arne Wickström, Alf Erling Risa, David Pearce, McKinley Blackburn, and participants at seminars and workshops at the University of Kentucky (Lexington), the University of South Florida (Tampa), and Florida State University.