David R. Henderson  

Medical Liability and Tort Reform

What Makes Health Care Differe... Four Reactions to Charitable R...

I received an e-mail from a student of mine and thought it would be worth answering for others as well as him. He wrote:

Here are the two sides that I see on tort reform. 1. It is an attempt at regulating the free market by capping the amount people can sue for in the courts. By capping the amount of a lawsuit the law would in effect be providing an "insurance" for a doctor for example. The doctor knows that he cannot be sued for more than X amount of dollars and therefore there is a slight moral hazard incentive, he acts in a way he might not normally because he knows that if he screws up AND gets sued AND the lawsuit is successful he will only have to pay X amount of dollars. 2. It is an attempt to reign in an undervalued commodity - - the lawsuit. Because lawsuits are relatively (now this is where I might be making a mistake - - - I have not done the research on how much it costs to sue. I am assuming though that most lawyers operate on a contingency basis and only collect or need to get paid if they win the lawsuit) cheap they are almost like a public good. People "over sue" because the cost of the lawsuit to them is marginal compared to the true value (they do not have to pay for . So what tort reform attempts to do is cap the lawsuit in an effort to reign in, or at least reduce the cost of the public good to the medical community (as an example).

My answer is that it's an attempt to get rid of, or at least reduce, a forced lottery. Suing a doctor or hospital (or anyone) is like a lottery. The odds are better but the ticket is expensive. There's a lot of randomness, not just in the way the doctor treats you but also in whether you'll collect. You might be mistreated and lose the suit or not mistreated and win the suit. You pay for the lottery ticket in the price you pay for the medical services--that is, they price higher to compensate for the risk of getting sued. What makes it a forced lottery is that the courts have made it hard and well nigh impossible to refuse to play. How would one refuse? One would say to the doctor: give me this contract that I sign that obligates me not to sue you in such and such circumstances. I know that if I sign and the contract can be easily enforced, I will be lower-risk for the doctor to treat and his fee to me will reflect that lower risk. But if doctors understand that courts won't enforce that contract, then we patients are, if we want medical services, forced to buy a sometimes-expensive lottery ticket.

Let's say that X, in my student's question above, is $250,000. That's simply an upper limit on the size of the lottery payoff. As I understand the various proposals for tort reform, no one is advocating that a doctor or hospital not be allowed to put together a contract that allows the patient to sue for more than $250,000. So the bottom line is that this particular tort reform is not a regulation of the free market. It's actually deregulation, by reducing the size of the forced lottery. Medical providers and patients that want a bigger lottery are free to do so.

H/T to the student, MW.

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COMMENTS (13 to date)
Stewart writes:

If a doctor or hospital contracts with their customers in a way that creates greater liability for the providers, that's not really tort. A tort isn't contractual penalties; it's compensation for damages which occur outside the scope of the contract, but which are still one party's responsibility.

Am I wrong?

james writes:

This may be way over simplified, but what if the "loser" paid the legal fees of the "winner"? That would share some risk with the plaintiff and discourage frivolous lawsuits that are now just free "rolls of the dice".

Clark writes:

A friend had a great idea. Make it so that the person who needs malpractice type insurance is the patient and make it so you can't sue the doctor at all. That'll get rid of (in some places) half the cost of care. You still have the patients covered unless they refuse to get insurance. (Sort of like when you rent a car) If you really need punitive damages limit them to say $3000 out of pocket by the doctor and simply increase oversight by medical boards. (Too many problems and you lose your license)

Dr. T writes:

I would strongly favor medical liability torts if the courts punished bad care and recognized good care. Our current system, however, is more lottery than fair judging. I've seen bad doctors skate and good doctors nailed because the juries don't understand the evidence and vote based on their sympathies.

We need to eliminate citizen juries and establish expert panels. (This is needed for other civil torts, too.) With fair verdicts, medical liability insurers could start basing premiums on doctor or hospital quality rather than average awards in the locality.

frank cross writes:

I don't know why you think courts would not enforce that contract. There's no principle of law of which I am aware that provides this. Moreover, they could contract for a loser pays arrangement. People contract out of tort liability all the time.

Why they don't do so, I can't say (probably not wanting to signal concern for malpractice), but I believe the premise of your reasoning is quite wrong.

Less Antman writes:

@ frank cross

The principle of law that prevents patients and doctors from contracting out of tort liability is called UNDUE INFLUENCE. The argument made is that the patient is relying on the doctor's fiduciary duty and special knowledge and is not in an equal bargaining position, so that their consent to the modification is not real.

And I suspect such contracts also face statutory prohibitions passed by the lawyer-politicians who dominate the legislatures.

I'm pretty sure David's premise is right.

gnat writes:

Isn't part of the problem a lemmons market problem aside from real damages? If the doctor screws up he gets paid by insurance and then he gets paid a second time for correcting his screwup. If the patient can evaluate the doctor's competence exante then you may have a point. Still, the quality of the service is not always transparent.

I notice that Virginia has started publishing some limited hospital quality measures and the results are startling. For example, one hospital has a high infection error rate from IVs.

Rachel writes:

Actually, I believe that courts can and do enforce a "reasonable" no-suing contract. For example, most credit cards have an arbitration agreement that works out as a no class action lawsuit, and those are generally upheld. I believe that arbitration agreements for health care have also been upheld.

Suppose for the purpose of argument, that arbitration agreements are upheld most of the time and they cut the lawsuit costs enormously. Yet we don't observe doctors mandating arbitration agreements before they see a patient or HMOs mandating arbitration agreements as a condition of coverage. Then the only logical conclusion is that lawsuit costs have a very small cost to society (expected deadweight loss). Instead, doctors are using lawsuits as a red herring for other problems with the health care sector.

Even if lawsuits were causing a big problem, we could fix the problem by making arbitration agreements easier to write. That way, people can sign away their rights if lawsuits are a big problem, but keep them if lawsuits are a red herring.

SSB Charley writes:

David is correct that no court would enforce that contract, as it would be viewed as contrary to the public policy of keeping courts open to those who may have a claim. It would probably be viewed as a contract of adhesion, meaning that one side (the doctor) has extraordinarily disproportionate bargaining power. It wouldn't happen.

I practice in the area of med mal defense, I don't think it's accurate to say that the plaintiff and his attorney have no skin in the game. Indeed, I have found very few plaintiff's attorneys are willing to take med mal cases because they cost so much to prosecute relative to a regular personal injury suit. In most personal injury suits, the plaintiff has a built-in expert witness to prove his damages with his own treating physician. Most of the opinions the doc will render at trial have already been put forth in the patient's medical records. Thus, while there is the cost of the doctor's testimony at trial, the cost of review of the case and formulating an opinion about causation aren't likely part of the cost of the case (indeed, if the plaintiff wins, those costs get reimbursed as part of plaintiff's medical bills).

A medical malpractice case, OTOH, doesn't have that built in expert because the plaintiff is suing him. Thus, the plaintiff needs to retain an additional expert (or more, depending on the number of doctors and areas of specialty being sued). Given that med mal cases typically involve far more complex issues than the average personal injury suit, the cost of review and analysis of the case will probably be more than what is required in a personal injury suit. Add to that that the plaintiff will require an expert not only on causation of damages, but on a breach of the standard of care by the defendant, and there is even more cost.

In Indiana, we have a system that requires a plaintiff to bring suit in the Indiana Department of Insurance before a suit in the courts may proceed. Each side makes a submission to a panel of three physicians with areas of expertise relevant to the case. The panel then makes a ruling as to whether a) the doc breached the standard of care and b) whether the complained of conduct was a factor in the claimed injury. If the panel finds in favor of the doc, plaintiff's typically go away, because the defense now has three independent experts who can testify on his behalf. If the plaintiff goes forward with the suit, he needs to obtain his own experts to handle the stuff mentioned in the above paragraph.

Thus, a med mal case isn't cheap for the plaintiff.

Incidentally, Indiana puts a cap on damages that a plaintiff may collect. I believe it is at $1.25 million right now. The doctor's insurer is responsible for the first $250K, while the remaining balance of any judgment/settlement is met by the Indiana Patients Compensation Fund, which I believe is funded by the med mal insurers in the state. Last I checked (and this was several years ago), Indiana was one of three states that the AMA did not label as being in a "med mal crisis".

In case you're interested.

Brandon Berg writes:

It is an attempt at regulating the free market by capping the amount people can sue for in the courts.

This is wrong, for the obvious reason that lawsuits aren't market transactions. A lawsuit is one party trying to convinces the government to force another party to fork over some money.

This is not to say that lawsuits are illegitimate. They're necessary to correct market failures (externalities) and breach of contract. But verdicts are most certainly not market outcomes. Whether any money is awarded, and how much, is purely a judgment call by the judge and/or jury. By placing a cap on malpractice awards, the government isn't interfering with markte outcomes. On the contrary, it's placing a limit on the degree to which juries are allowed to interfere in market transactions.

That juries should not be given unlimited discretion to take money away from one person and give it to another should be fairly uncontroversial. Should a jury have the discretionary power to award a billion dollars to a plaintiff for a scraped knee? Of course not. So how do we limit their discretionary power? By capping awards.

Neil D writes:

Why wouldn't tort reform result in the same moral hazard we worry about when bailing out corporations?

Shouldn't doctors be required to suffer from their failures just like everyone else?

Defensive medicine = effective risk management?

We're not even talking about money; we're talking about quality of life.

William Shutt writes:

There should be a penalty for losing a suit. If the attorney is willing to take on a case for a chance to get 50% of the plaintiffs compensation, he should be held accountable for poor research, negligence, or poor performance on his part. Without some down-side risk on the lawyer's part it only costs the attorney his time.

Any talk of tort reform, IMHO, is moot because neither the ABA or Congress will allow any effective legislation to pass.

Stephen Rockower, MD writes:

Wrong. The limits on payments are only for "pain and suffering", known as "non-economic damages". Real economic damages have no upper limit, which is why bad baby cases cost so much ("Our little dear was going to go to Harvard and be the next Bill Gates"). The non-economic damages have been limited by legislatures to avoid the astronomical payouts that have been given by juries that are swayed by the drama of the plaintiff's attorneys.
The attorneys don't want any limits since they get 1/3 to 1/2 of the payout. Many physicians would be willing to release the caps if they could be structured to be fairer to the actual PLAINTIFF. A decreasing percentage to the attorney for higher awards would be the best bet. If the attorney doesn't get much to push the case from $100,000 to $200,000 or more, they would be more willing to settle to move the case along. As long as they see the potential of a big payoff, they are not going to give in. Don't tell me "they are in it to protect the little guy" BULL!! They want their money like everybody else. This is all economics.

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