The Heritage Foundation

Backgrounder #511 on Legal Issues

May 21, 1986

May 21, 1986 | Backgrounder on Legal Issues

A Sick Tort System Endangers U.S. Health Care


(Archived document, may contain errors)

511 May 21, 1986 C A SiCK TORT SYSTEM ENDANGERS U mSm HEALTH CARE INTRODUCTION The liability insurance crisis is hitting the American health care system very hard. Malpractice claims and average damage awards are soaring, with devastating effects on the medical malpractice insurance industry. The result: many insurers have pulled out of the malpractice business altogether and those remaining are dramatically increasing premiums-meaning even higher doctor bills for Americans.

I The staggering cost of these premiums is in turn seriously harming medical care in the U.S. Those doctors who cannot raise their fees sufficiently to cover insurance costs are cutting services or dropping out of practice, particularly in such high risk specialties as obstetrics and surgery. This means reduced access to care. Many pr e gnant women are finding that they must travel long distances just to deliver their babies. And doctors are performing more "defensive medicine,Il ordering increased tests and other procedures primarily to cover themselves against potential suits I This ma l practice crisis is just another painful example of the nation's acute liability problem, stemming from huge awards for highly subjective assessments of pain and suffering damages. In the case of medical malpractice suits, fewer than 3 percent of all claim s win awards for pain and suffering in excess of $100,0

00. Yet the pain and suffering damages alone in these cases account for about 40 percent of all paid medical malpractice damages 1. This is the third in a series of studies examining the liability ins urance crisis. It was preceded by Backarounder 498, "The Liability Insurance Crisis: What Washington Can Do To Help" (March 27, 1986) and Backarounder Uridnte 10 The Liability Insurance Crisis May 14, 1986). Future studies will look at other aspects of th e problem including the burden imposed on consumers.

The increase in liability costs is not an attempt by insurance companies to raise excessive profits incompetence of doctors. The blame lies, rather, with the judges and lawyers who have allowed liability to be imposed in cases where the doctor is not real ly at fault. And where doctors are at fault, judges and lawyers have failed to restrain outrageous runaway jury awards.

No longer does it impose the responsibility for damages solely on the wrongdoer. Instead, the system has become a lottery with huge payo uts to the lucky few--and their attorneys The solution to the medical malpractice crisis requires measures to be taken to impose liability only where doctors are clearly at fault, to cap runaway purely subjective pain and suffering awards, and to allow gr eater freedom of contract between doctors and consumers to determine the standards of liability and damages that should apply Nor is it due to growing The result is a perverted tort system.

THE MEDICAL MALPRACTICE CRISIS Soarins Claims and Awards More and msre doctors are finding themselves facing judges rather than patients between 1979 and 1983, and tripled during that period for obstetricians and gynecologists In 1983, about 40,000 claims were brought against physicians overall; this year there will pro bably be over 50,000 The American Medical Association reports that 16 percept of all doctors were sued in 1984, compared with 3 percent In 19

78. About 25 percent of all obstetricians were sued in 1985, and about 75 percent of such specialists have been su ed at some point in their careers. The Washinaton Post reports that in Maryland, a state with better than average medical malpractice experience, about 20 percent of all pracgicing doctors are currently involved in malpractice litigation Malpractice lawsu i ts per 100 physicians doubled I I 2. American Medical Association, Special Task Force on Professional Liability and Insurance 1, October 1984, p. 10 Stopping the Bloodbath in Medical Malpractice Business Week. April 22, 1985, p. 93; Patricia Danzon, The F reauencv and Severitv of Medical Maloractice Claims: New Evidence, January 1986, p 1 3. Victor Cohn The Price of Malpractice: How the Crisis Harms the Relationship Between Doctors and Patients,"

The Washington Post March 12, 1986, p. 14 2Aggravating the problem has been the soaring cost of each claim.

The average medical malpractice jury award jumped frop $220,018 in 1975 to $1,017,716 last year, a 363 percent increase. While there were only 3 medical malpracEice jury awards of more than $1 million in 1975 1984 there were 71 of them. In 1983, total liability losses for physicians reached nearly 2 billion. In 1985, final figures are likely to show that losses topped $3 billion.

Added to this is the cost of defending against each claim-which Doctors also bea r a heavy must be paid even in the 80 percent of cases which end in dismissal or in no liability judged against the doctor cost in time lost preparing for their legal defense. This means a further loss in available medical resources for society.

Larae Pain and Sufferina Awards Are 'the Kev Fewer than 3 percent of all medical malpractice claimants win awards through settiements or verdicts for pain and suffering in excess of 100,0

00. Yet, these cases account for as much as 72 percent of total medical malp ractice damages paid to all claimants with the average total award close to 1 million. In these cases, 80 percent of the total award is for pain and suffering. Thup actual tangible damages are only a small part of the total award. The pain and suffering c o mponent alone in these cases accounts for about 40 perCent of all paid medifal malpractice damages, although only a few plaintiffs are involved. These awards account for almost all of the soaring increase in average medical malpractice award amounts in re c ent years. Indeed, if medical malpractice awards in excess of 1 million were not counted, then the increase in average awardf from 1975 to 1985 would fall from 363 percent to just 26 percent 4. es Ex n nd P ti Im licati ns pf the Current Crisis in Insuran c e Availabilitv and Affordability, February 1986, pp 35-36 5. ReDort of the Tort Policv Wo rkinn Groub, pp. 36-37 6. ReDort of the Tort Policv Workinn Grouo, p. 67; Henry Manne, ed Medical MalDractice Policv Guidebook3 Manuscript p. 134 7. ReDort of the To r t Policv Workinn Grouo, p. 67; Medical MalDractice Policv Guidebook, pp. 10, 135 8. Medical MalDractice Policv Gu idebook, p. 136 9. ReDort of the Tort Policv WorkinP GrouD, pp. 36-39 3- The malpractice system operates like a lottery, with the big payoffs going to the lucky few winners damages. The jackpot goes to the lawyers. Indeed insurance companies pay more to lawyers than to injured persons.

Emory University Law and Economics Center Director Henry Manne and leading health economists Patricia Danzon a nd Clark Havighurst argue that these huge pain and sufifering awards are inefficient and contrary to consumer preferences. They point out that the tort system can be viewed as a form of compulsory insurance cost for consumers, since they are forced to buy this insurance through higher fees paid to doctors to cover malpractice premiums run, of course, consumers bear the entire cost of providing the insurance Yet even they are not the biggest Plaintiffs generally receive onlg about 30 percent of the Over the long Do Americans actually want pain and suffering insurance? The record indicates that they do not. While consumers buy private insurance to cover many eventualities, they generally buy little or no private insurance for pain and suffering. And while the public supports government programs for health and disability insurance to cover health and losf: income expenses, there has been no support for programs.to pay benefits for pain and suffering. Evidently Americans do not think insurance for pain and suffe r ing is worthwhile. If they thought so, they could get a better deal by paying for such insurance directly through the market rather than indirectly through the tort system, with its very expensive overhead of attorney costs. By granting huge pain and suff ering awards, the courts force consumers to I I I buy an extremely inefficient form of insurance they do not want.

Insurers Retreatinq The soaring claims and awards are devastating the medical malpractice insurance industry. In 1985, medical malpractice in surers charged 2.6 billion in premiums and paid total claims and expenses of 3.9 billion. The result: an underwriting loss of $1.3 billion-or 50 percent of total premiums. Since 1981, these insurers have paid total claims and expenses of $13.3 billion, bu t received premium ificome of only $8.8 billion, for an underwriting loss of $4.5 billion.

While insurers have had some income from investments to offset these losses, it was not enough to break even. That would require a 10. Ibid, pp. 2, 31 fn. 24; James S. Todd, State ment of the American Medical Association, House Subcommittee on Health, March 18, 1986 11. Medical Malbractice Policv Gu idebook, pp 11, 13, 142-144, 170-173; ReDort of the Tort Policv Workinn GrouD, pp. 31, 42-45 12. ReDort of the Tort Pol i cv Liabilitv Workinn Group, p. 21 4-total llloss ratio" (ratio of total expenses to premium income) of 110 to 115 percent. have been 150 percent or more But for each gf the last 4 years, the loss ratios Faced by this cold financial reality, many insurers s imply have surrendered and retreated from the medical malpractice market the largest remaining commercial carrier, St. Paul's Insurance Company, which covers 20 pepent of all doctors, has slapped a mor.atorium on new policies. Making matters much worse, e v en Lloyd's of London, the legendary insurer of last resort, has stopped providing reinsurance for American malpractice insurers. Overall only 2 pergent of commercial insurers still offer medical malpractice insurance And Lack of insurance may doom certain medical services. Most of the nation's midwives, for instance, have had their coverage provided under a blanket policy to the American College of Nurse Midwives. But last year the Association's insurer cancelled its policy. The group has been unable to fi nd a replacement. If alternative coverage does not become available-and the prospects look bleak--the American midwife professional may soon become extinct, driving up the cost of having babies for millions of young couples.

Premiums Soar and Services Disa mear The insurance companies remaining in the market are dramatically increasing their premiums to cover soaring costs medical malpractice premiums rose by 45 pergent from 1982 to 1984 while physician income rose just 9 percent. Even doctors in the relati v ely low risk specialties of general practice and inte6nal medicine saw increases of 31 percent and 32 percent in 1984 For all physicians Doctors nationwide already.pay an average of more than $10,000 per year for medical malpractice insurance. But the cos t is far higher for some specialties. From 1982 to 1984, for instance, the average premium increase for obstetricians nationwide was 13. Ibid Professional Liabilitv in the 80's. ReDo rt 1, pp. 22-23; Report 2, p. 5 14. Reoort of the Tort Policv Wo rkinP Gr o uo, p. 7 15. "The Price of Malpractice The Washington Post, p. 14; Response of the American Medical Association to the Association of Trial Lawyers of America. Statements Regarding the Professional Liability Crisis, August 1985, p. 9 16. Response of the A m erican Medical Association, p. 3; Todd, OD. cit, p. 4 17. Response of the American Medical Association, p. 3 5approximately $10,000,18bringing the average obstetricians premium to about $27,000 in 1985 over $51,00O--or about one-fourth of total obstetrici an fees.

Obstetricians in Los Angeles were paying annual premiums in 1985 of between $36,000 and 2061,000, amountihg to between $685 to $1,175 for each baby delivered In New York state, the average premiufl was In Washington D.C. and New York state, neurosurgeons pay annual premiums over 100,000 per year.

The sharp increase in medical malpractice premiums forces most doctors to increase their fees and others to quit the profession.

This problem is particularly acute in the high risk specialties which have experien ced the most dramatic premium increases A recent survey, for instance, finds that 12 percent of qualified obstetricians have quit because of soaring malpractice premiums. Another 14 percent have decreased the number of births they are willing to handle. A m ong practiging obstetricians, 23 percent have begun turning away high risk cases Another recent survey reveals that 21 percent of family physicians nationwhde have reduced their obstetric services.because of malpractice costs. -In two rural areas of Hawai i, for instance, all the family physicians have stopped delivering babies because of malpractice costs, leavifig only one midwife to care for low-risk pregnancies in one area other states.

Similar problems are developing in many Medicaid patients particularly have been hit, since doctors generally are unable to pass on higher costs to the state.

West Virginia doctors, for instance, finds that 41 percent of obstetricians, 25 percent of surgeons and 20 percent of general A study of 18. California Medical Ass ociation Professional Liability Issues in Obstetrical Practice," Socioeconomic Reoort Vol. XXV, NO. 5, July/August 1985, p. 3 19. Medical Society of the State of New York An Analysis of Medical Malpractice Insurance Expenses and Physician Income in New Yo r k and Selected States September 1985 p. 6, Exhibit 6 20. "The Other Side of Medical Malpractice California Lawver, p. 40 21. "Professional Liability Insurance and Its Effects p. 23; Todd, OD. ciL p. 5 22. Response of the American Medical Association, p. 3 23. "Family Physicians Stopping OB in Hawaii American College of Obstetricians and Gynecologists, November 12, 1985 6-practitioners would not take Medicaid patients. 24 In the Washington D.C. area, 84 percpt of obstetricians will not accept Medicaid patie n ts Defensive Medicine Not surprisingly, the increased threat of lawsuits is causing doctors to order increased tests and perform procedures which they do not really feel are medically necessary. They do so, they are frank to admit, just to defend themselv e s against potential claims. Known as defensive medicine, this adds substantial unnecessary costs to health care. A 1983 study, for instance, discovered that 41 percent of physicians surveyed ordered additional diagnostic tests, 27 percent provided additio n al treatment procedures, 36 percent spent more time with patients explaining medical details, and 57 percent maintained more detailed records--all primarily as a defensez6against a potential claim. They were not necessary in medical terms. Overall, the Am erican Medical Association estimatp that needless defensive medicine costs $15 billion per year section to deliver babies, which requires major abdominal surgery.

Plaintiffs have been suing doctors by claiming that various birth defects could have been avoided if Caesarean delivery had been used.

Consequently, doctors now deliver more than 20 percent of all babies by this very costly and more dangerous method, compared with 5 percent in 1970 x-rays for all head injuries to laymen, doctors feel they have to order it to avoid liability on any potential claim. But medical research establishes that the treatment would be the same in virtually all cases regardless of what the x-ray might show, and that in the few cases where special treatment is warranted the n e ed' for such treatment could generally be determined by routine examinations. Such x-rays are deemed medically 24. West Virginia Medical Association, Physigian Survey, Table X necessary in only a small minority of cases Typical of defensive medicine'is in c reased use of Caesarean Another example bf defensive medicine is the routine use of Because this procedure seems so logical 25. Statement of the Medical Society of the District of Columbia, October 22, 1985, p. 3 26. American Medical Association Study of P rofessional Liability Costs 1984, pp. 97 100-101, Table 3 27 Study of Professional Liability Costs," pp. 100-101; Professional Liability in the 80's. ReDort 1, pp. 3, 16 28. Robert L. Dickman The Practice of Defensive Medicine: Ramifications and Solutions ,"

MalDractice Digest September/October 1980, pp. 1-2; "The Other Side of Medical Malpractice California Lawver pp. 39-40 7CAUSE OF THE CRISIS Some so-called "consumer advocates" maintain that the malpractice insurance explosion has two causes. First, they say, doctors who at one time could hide their mistakes are now being forced to pay proper restitution. And second, they insist, the insurance industry is exploiting the American people by inventing a crisis to justify higher premium charges. Both argumen ts collapse under scrutiny.

The Doctors The malpractice problem is not the result of more doctors being found guilty of more malpractice increase in awards, primarily for pain and suffering, and by the enormous increase in claims filed-the overwhelming maj ority of which ultimately prove to be without merit It is caused by the dramatic It is not just incompetent doctors who are sued. A high percentage of all doctors have been taken to court, including over half of those in some specialties of repeat offende rs A New Jersey study reveals that of the state's 7,079 doctors, only 19 had more than two awards against them for.ove8 $100,000, and only two doctors had three such awards against them.

Medical malpractice of course, exists. But doctors have not suddenly become more incompetent than in the past, creating a malpractice crisis. In fact, quality has improved. Emory's Manne reports a number of inaicators showing improved quality and high consumer satisfaction Nor is the problem the existence To the contrary.

The Insurance Companies Rather than reaping profits from medical malpractice coverage the insurance companies have lost money on it for years increases are merely an attempt to make the business viable again.

The commercial carriers, moreover, are leaving the market in droves hardly what one would expect if the business were profitable The premium Over 29. Response of the AMA, pp. 15-

16. It is also wrong to suggest that just a few doctors are responsible for most of the damages. The fact is that just a f ew cases predominantly involving huge awards for pain and suffering are responsible for most of the damage. It is generally different doctors who are held liable for such cases each year 30. Medical MalDractice Policv Gu idebook, p. 23 ahalf of all doctor s , meanwhile, are covered by cooperative doctor-owned companies, and the premiums these doctors are charging themselves are just as high, if not higher, than those charged by commercial carriers. There is no reason for doctors to exploit themselves moreove r , have been allowing the premium increases, because they recognize that insurance company losses have to be staunched if the U.S. insurance industry is to survive Strict and often unsympathetic state regulators Judaes and Lawvers The cause of the medical m alpractice crisis is a breakdown in America's legal system, due primarily to the actions of judges and lawyers. Lawyers seek, and judges allow, findings of liability in cases where any reasonable standard of medical malpractice would rule out actual liabi l ity show that the doctor negligently failed to provide treatment in accordance with the prevailing standard of care provided by other doctors, and that the failure caused the plaintiff's injury. Yet the courts too often find liability where there is neith er a clear showing of negligence by the doctor nor any failure to provide treatment in accordance with the normal standard of care--nor even evidence that the injury was caused by anything the doctor did or failed to do.

Rather, liability often is allowed out of sympathy for an obviously sick or injured person, and a desire to award him or her some compensation, regardless of the actual culpability of the doctor for the plaintiff's condition the basis of mere speculation t hat had the doctor followed a different course of treatment, the patient would have fared better To prevail.on a medical malpractice claim, the plaintiff must Liability is often found in such cases on Allowing courts to find liability and grant awards whe re no real fault by the doctor exists amounts to a court-operated welfare system where benefits are distributed on the basis of perceived need, and the costs of such benefits are borne by patients through higher fees for medical care.

The purpose of the ti me-tested, Anglo-American tort system, of course, is not to distribute compensation to anyone who has an injury but to distribute justice. Absent any wrongdoing, compensation should be provided by those who have contracted for that responsibility such as p rivate health and disability insurers, or by federal, state and local programs the costs of injury and negligence, when the injury is caused by a wrongful act. It is only such wrongdoing or fault which justifies imposing a burden on a defendant The tort s y stem is designed to make a wrongdoer bear Unfortunately the nation's courts have become the arena for an ideological crusade by lawyers and judges to turn the tort system into an income redistribution scheme, based on the notion that any injury 9should be compensated handsomely out of the surely-undeserved wealth of the nearest "deep pocket.11 the tort system, leading to the general liability insurance crisis.

It is this principle that now pervades SOLVING THE PROBLEM The solution to the malpractice proble m is primarily at the state level. It is state law that governs most tort actions. The federal government, however, can provide essential advice, guidance and data.

Washington should urge states to make reforms in such a way that a national pattern of tor t enforcement emerges. Washington, of course also should amend federal law where appropriate. The elements of a sound tort approach to medical malpractice claims would .include, among other things 1) Rewire the Dlaintiff to show that the doctor was at fau lt before liabilitv is found.

Mere speculation that the patient would have fared better if the doctor had done something different, or second-guessing of a doctorls judgment in choosing between medically-acceptable alternative courses should not be enough to find liability. The plaintiff should be required to prove that the doctor failed to provide the treatment or care that any reasonable doctor would have provided under the circumstance, and that this failure caused the injury.

States should codify this common law standard into statutory form, with language making its application unavoidable, perhaps requiring certain, specified jury instruction as well 2) Place a car, on damaues for Pain and sufferinq.

Since judges no longer can be counted on to perform their traditional role of limiting runaway jury awards, statutes regrettably, may be needed to put a reasonable cap on pain and suffering awards. Pain and suffering damages are purely subjective in any event and money cannot actually compensate for the h arm.

Consumers show little willingness to insure against pain and suffering in the marketplace, and they should not be forced to do so through the tort system. A cap of, say, $100,000 would go far to alleviate the medical malpractice problem because of the high proportion of total damages represented by large pain and suffering awards would still allow reasonable compensation for pain and suffering.

Yet the cap States also should enhance by statute the power of judges to reduce or reject excessive or unjus tifiable jury awards should be required by statute to itemize the components of their damage awards, indicating exactly for what the awards are meant to compensate And juries 10 3) Abolish punitive damaaes There never was a sound basis for granting puniti v e damages in The purpose of the tort system is to make the wrongdoer Where punishment is justified, it tort cases pay for the damage he has caused should be imposed through criminal, regulatory or professional disciplinary proceedings set up for that purp ose, with proper procedural safeguards for the accused 4) Allow the winnina party to recover its attornevls fees and litiaation expenses from the losina Dartv.

This would discourage unmeritorious claims and the tendency for plaintiff's attorneys to try to run up the opponent's expenses in the hope of exacting a favorable out-of-court settlement. Litigation expenses needed to recover a just claim are part of the damages caused to a plaintiff-they should be paid by a defendant found at fault.

Attorney and de fense expenses for a party not at fault, on the other hand, are a harm caused by nonmeritorious claims. There should be compensation for them 5) Allow defendants to pav damaaes in annual payments coverinq actual damacres as thev occur. rather than in a lu mp sum.

This would make damage payments less expensive for insurers to There is no reason why the plaintiff should receive finance compensation before damage is incurred. This would allow payments to stop if the plaintiff recovers, or died earlier than exp ected and damages incurred were thereby reduced.

Adopt standards for expert witnesses.

A party should b e required to show that a proposed expert witness is knowledgeable and qualified and will accurately represent scientific opinion on the subject he or she is addressing should be granted authority to refuse to allow testimony by putative experts who do no t meet these standards accurately represent scientific opinion on the subject at issue should be subject to suit themselves for damages caused the opposing party Judges I1Expertsl8 which do not I 7) Allow consumers and doctors areater freedom of contract t o set their own standards for liability.

States should pass legislation-requiring courts to allow more scope for limited contractual waivers of liability or limitations of damages under appropriate circumstances situations where a sophisticated economicall y substantial agent such as a union, employer or insurance company, had negotiated the deal for the consumer. It would also include situations where the consumer had a valid choice of care with full potential tort liability, or care This would include 11 - with limited liability and a lo.wer price accurately reflecting the reduced costs of such an arrangement For instance, a patient might sign an agreement with a doctor or hospital accepting that a certain procedure does involve risk, and limiting his righ t to sue if the outcome is not ideal allow the sygtem to adapt consistently to actual consumer and public preferences Leading economists have argued that this would 8) Do not restrict continaencv fees.

While limiting contingency fees would be applauded by some critics of the tort system, it would limit the ability of plaintiffs with valid claims but limited resources to obtain legitimate damages.

There is no reason for believing that contingency fees contribute to the medical malpractice crisis awards, and not the other way around.

The fees are a product of high 9) Retain the collateral source rule.

This rule states that amounts awarded to a plaintiff for damages should not be reduced by compensation that the plaintiff receives from collateral sources, su ch as insurance. Some have suggested that the recovery of any compensation from collateral resources should reduce the damages of medical malpractice plaintiff receives, so that he does not recover for the same injury twice. But a wrongdoer should have to pay the full costs of the actual damages he causes. He should not benefit through a reduced payment for damages simply because of the foresight of the injured plaintiff in arranging for insurance or other collateral support. If anything, the amount that c ollateral sources have to pay should be reduced by the amount of the .tort recovery shifting the burden of compensation on the wrongdoer 10) Reject Patient ComDensation Funds.

Some states are establishing so-called patient cornpensation funds, while puttin g a limit on total damages which can be collected from a doctor in each case the limit. These funds are financed by premiums paid by the doctors themselves. This system simply forces doctors to purchase a major portion of their insurance coverage from new government insurance monopoly. This would do nothing to solve the medical malpractice crisis The fund would cover damage awards above 31. Medical MalDractice Policv Guidebook, pp. 11, 13, 142-144, 170-173, 199-207 12 CONCLUSION Many states already have be g un adopting reforms to address the medical malpractice crisis at insurance companies and doctors so far they have. Instead reforms need to be addressed to the real problem-the departure from a fault-based standard of liability, leading to runaway, unjusti f ied awards for pain and suffering. The medical malpractice crisis is an example of what can happen when judges ignore one of the basic principles of law-only those at fault are liable for damages The states should reject fingerpointing Prepared for The He ritage Foundation by Peter J. Ferrara, a Washington attorney, formerly a member of the White House Office of Policy Development 13

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