Tort Reform

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Malpractice Insurance Caps

January 13, 2012 in Malpractice | 3 comments

Many people support malpractice insurance caps.  They believe that malpractice insurance award caps will reduce medical costs in two ways: i) by decreasing malpractice premiums and ii) by decreasing the amount of defensive medicine physicians practice to avoid lawsuits.  An article by Shirley Svorny, however, argues that malpractice awards are bad medicine.  Physicians who are more careless will have higher malpractice premiums; instituting malpractice caps dulls the incentive to practice safe medicine.

Physicians make a number of arguments of why this logic doesn’t fly. The first is that malpractice awards are haphazard and that few victims of actual negligence sue.  Svorny cites some research (see below) which finds a correlations between the presence of negligence and the amount of the award; demonstrating that there is some relationship between physician performance and court awards.  Other critics claim that the malpractice system has high administrative costs.  This is true.  Svorny accurately points out, however, that most of the administrative costs occur in the limited number of cases that go to court.  Further, there is open debate of whether malpractice lawsuits keep doctors from reporting errors.  Although the article cites some research that states that lawsuits start discussions about improving care quality, I believe that self-reporting of errors will decrease in a non-linear fashion as malpractice awards increase.

Svorny’s research also identifies that conventional wisdom that physician malpractice premiums are not experience rated is not entirely correct.  Additional information is below.

Malpractice Insurance Market, Premiums and Risk

Physicians who are higher risk do end up paying higher malpractice premiums. This occurs through a number of mechanisms.

  • Underwriting: When applying for malpractice insurance, physicians describe their practice profile, whether they perform surgery, number of patients treated, educational background, whether their license has been suspended, whether they are board-certified and other information.
  • Experience Rating.  Although base premiums often do not very within a specialty by state, carriers often “impose premium surcharges on physicianswhose claims histories do not meet the company’s standards, or offer discounts to physicians with clean histories.”  Some carriers also give physician longevity credits to physicians with good claims experience.
  • Experience Rating across carriers.  “…most experience rating takes place across carriers. Insurance carriers specialize in serving physicians with similar risk profiles. Physicians who do not meet one carrier’s risk profile must seek insurance elsewhere. This allows insurance carriers to specialize in underwriting certain risks.”  Specifically, surplus-line carriers offer malpractice coverage to physicians who cannot secure coverage through more standard market.  As expected, premiums are much higher in this market.

Other Malpractice Insurer’s Risk Management Tools

  • Practice Constraints.  Some insurers limit the scope of the physicians practice which they will cover.  “For example, California rate filings include forms to exclude performing surgery, administering anesthesia, treating pregnancy, and practicing over the Internet…Underwriters verify that physicians adhere to the restrictions in their policies when the policies are renewed each year and by looking at the doctor’s website or advertisements aimed at consumers.”
  • State Medical Board Sanctions.  Although State Medical Board sanctions of physicians is somewhat rare, those who are sanctioned generally must gain malpractice coverage in the more expensive surplus lines.
  • New Treatments. Malpractice insurers often do not cover more novel and riskier procedures.
  • Direct Risk Management Practices. “A 1989 Institute of Medicine survey of 20 commercial and physician-owned carriers found four types of risk-management strategies to be prevalent: (1) data gathering and analysis,(2) development of clinical standards and protocols, (3) educational programs, and (4)premium discounts for risk-management activities.

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Is ‘Loser Pays’ the solution for frivolous Medical Malpractice Lawsuits?

December 26, 2011 in Malpractice | 1 comment

Frivolous lawsuits may increase medical spending in two ways: i) they increase the cost for physicians to practice medicine by raising malpractice insurance premiums, and ii) they increase utilization of unnecessary services when physicians practice ‘defensive medicine’.

Creating a ‘loser pays’ tort system may be the best way to stop frivolous lawsuits.

Loser-pays in the U.S. and Around the World

In a loser-pays framework, the individual who loses a lawsuit must pay the legal costs of the winning side.  This framework decreases the incentive of brining cases to court where the plaintiff is unlikely to win.  According to the Economist, ”‘Loser pays’ is the norm in many countries, including England, Canada and Germany. But there, “loser pays” is the rule in most torts.”

However, the ‘lower pays’ framework has appeared in the U.S.  Alaska currently has a loser-pays framework, but the loser only pays a portion of the winner’s legal fees.  ”…Florida imposed ‘loser-pays’ in 1980 for medical-malpractice cases. The number of claims dropped, but the average award rose, suggesting that more high-merit cases got their day in court while low-merit filings were deterred or settled for less.”

Additional Loser-Pays Regulation

Fairly implementing a loser-pays system, however, requires regulation.  Poor plaintiffs may never bring a lawsuit if they are required to pay the defendants legal costs if they lose or (as is currently the case) poor plaintiffs would have an incentive to bring the case to court if poor plaintiffs didn’t have to pay the legal costs.

One could still make poor plaintiffs pay even if they could not afford it.  The plaintiff’s lawyer could be made responsible for the opposing side’s legal fees.  Thus, the lawyer would have to be very sure of the merits of their case to take it to court.

Another solution to the inability to pay the opposing sides legal fees is legal insurance.  ”Marie Gryphon of the Manhattan Institute…argues that loser-pays countries need legal insurance, which can be bought (for example) in England for just £100-200 ($150-300) after an alleged loss, but before a suit is filed. Lawyers can advance the premiums and add them to their bills. In other countries, such as Germany, many households carry standing legal insurance with a small monthly premium.”

Effect on National Health Spending

Although implementing a loser pays system may improve the efficiency of the tort process, it will only have a small effect of overall medical spending. Although large jury awards grab headlines, in practice reducing medical spending simply requires patients and physicians to agree to use less services.

For instance, the CBO rated a legislative proposal [the “Help Efficient, Accessible, Low Cost, Timely Healthcare (HEALTH) Act of 2003] that would impose limits on jury awards in medical malpractice cases. The CBO concluded that this proposal would reduce federal direct spending on Medicare, Medicaid, and the Federal Employees Health Benefits program by about $1.5 billion per year. Since federal spending on Medicare and Medicaid in 2004 was about $484 billion, this amounts to a 0.3% decrease in spending.

Fixing med mal would reduce spending but certainly not be a cure for larger medical spending issues.

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Are juries too stupid to judge technical drug safety cases?

March 9, 2009 in Public Policy | No comments

Yes,  Dr. Peter Schuck (Professor, Yale Law School):

  • “…juries in different states make different decisions on the same drug–hardly a recipe for the uniformity and predictability to which manufacturers should be entitled. A jury’s flaws are inherent in its design. In contrast, the FDA’s flaws–and they are many–can at least be remedied by Congress, to which it is highly accountable.“

No, Merrill Goozner (Journalist, GoozNews):

  • “The jury system may be an imperfect solution to this flawed regulatory system, but sometimes it is the only option…the FDA over many decades has been denied the resources it needs to do its job properly. In the past decade, it has been run by political appointees like former drug industry counsel Dan Troy, who nakedly used public office to advance the interests of his former clients. When regulation fails, the states’ civil justice system — including the right to a jury trial — remains a vital backstop.”

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Tort Reform and Birth Outcomes

May 14, 2008 in Economics - General, Public Policy, Supply of Medical Services | Permalink

Many doctors claim that the medical malpractice system is broken and needs to be fixed. Doctors have high malpractice insurance premiums and often practice defensive medicine to protect themselves against lawsuits. To help alleviate this problem, many politicians have asked for some sort of tort reform. Tort reform can be generally categorized into 4 types of legal changes:

  1. Caps on noneconomic damages. Noneconomic damages cover items other than monetary losses, such as pain and suffering.
  2. Caps on punitive damages. Punitive damages are awarded in addition to compensatory (economic and noneconomic) damages in order to punish defendants for willful and wanton conduct.
  3. Modifications of collateral-source rule. Under the common-law collateral source rule (CSR), amounts that a plaintiff receives from sources other than the defendant (e.g., from his or her own insurance) may not be admitted as evidence in a trial.
  4. Modifications of the joint-and-several liability (JSL) rule. In a trial with more than one defendant, the first step is to apportion blame for the harm. Under JSL, the plaintiff can then ask the “deep pockets” defendant to pay all of the damages, even if that defendant was responsible for only a small fraction of the harm. Modifications to the JSL rule often hold that the “Deep pockets” defendant must be at least 50% liable for the harm in order to be held 100% responsible for the damages.

Which of these reforms are helpful? A paper by Currie and MacLeod (QJE 2008) aims to answer this question. The authors look at variation in tort laws across states between 1989 and 2001. They claim that malpractice laws put doctors more at risk for a lawsuit is a good thing because it will cause them to behave more carefully. When doctors fear expensive lawsuits or a blow to their reputation, they may behave with more caution. Thus, capping punitive and non-economic damages should decrease caution. On the other hand the JSL rule puts doctors more at risk. They will not be protected from a suit simply be associating with a deep pockets hospital.

Empirical Results

To test this, the authors look at the number of Caesarean sections performed and the rate of induction or stimulation of labor. C-sections are popular with doctors because they receive additional compensation compared to a “regular” birth. However, performing a C-section on a mother who does not need it exposes them to additional risks. The authors find that “JSL reform reduces C-sections and complications of labor and delivery…In contrast, caps on damages are found to increase procedure use, and hence costs. They also increase complications of labor and delivery in some specifications.”

For a robustness check, the authors look at C-section rates for high- and low-risk babies separately. The authors assume that doctors have less treatment discretion for high risk cases, and the results demonstrate that tort reform had less of an effect on procedure rates or outcomes for high risk cases.

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