Moving medical malpractice out of the courts

By Christopher Guadagnino, Ph.D.

Pamela Villarreal
Pamela Villarreal

Pamela Villarreal is a policy analyst for the National Center for Policy Analysis (NCPA) and co-author of an NCPA report released in December, Medical Malpractice Reform.


PND: What is the scope of subject matter that NCPA covers?

PV: We are a nonpartisan, free-market think tank. We work to provide free market solutions to problems that have traditionally been handled by government. One of our primary areas of interest is health care, but we do work on other issues. I became interested in the subject of medical liability a few years ago and my co-author, John Goodman, has written extensively about health care reform.

PND: What are the problems with the current medical liability tort system, in your view?

PV: The system is inefficient. Our research shows that about half of every dollar of compensation awarded goes to court costs, attorney fees and administrative costs. Many of those who are true victims of malpractice never file a claim and, for cases involving real malpractice, less than two percent are ever compensated. Moreover, in the United States we have an adversarial climate that discourages errors from being brought out in the open and resolved. As a result, doctors are reluctant to report errors and they practice defensive medicine to protect themselves from being sued. Our analysis shows that in 2006, the malpractice system cost an estimated $200 billion a year, which is about $2,000 for every household in America. That cost includes trials and defensive medicine, in the form of patient fees. So, the problem with our medical malpractice system is that patients who may be true victims of malpractice aren’t being compensated in an efficient and quick way, and the system discourages the reporting and resolving of errors, which could pre-empt malpractice in the first place.

PND: What alternative does NCPA propose to solve these problems?

PV: We have done a lot of research on tort reform approaches tried by states. These solutions have been somewhat effective, but they have pertained to the court system. Our idea is to get medical malpractice out of the courts, except for cases involving severe, egregious, or criminal negligence. We are advocating a liability by contract approach. This is not new – back in the 1980s Richard Epstein, a law professor at the University of Chicago, had argued for replacing the tort law malpractice system with a system in which liability would be determined by contract. However, his proposal didn’t have an institutional mechanism that would make it palatable. A decade later, Paul Rubin of Emory University expanded upon the idea by advocating an institutional environment in which insurance companies would contract with providers and offer people insurance governed by a legal regime.

In a contract solution between patients and doctors, in the event of an adverse outcome beyond the expected risk, patients would be compensated for a certain amount, similar to a no-fault system that has been implemented in other countries. Patients would be compensated quickly for preventable injuries, and doctors would be more willing to disclose errors, which could be investigated and prevented. In liability by contract, doctors would be freed from the burden of the traditional system provided that they do certain things. They would have to make their outcomes data available to all patients and cooperate with patient safety agencies. That is one of the main reasons for medical malpractice lawsuits: patients want to find out what happened in their case. Much of the time, it’s less about compensation and more about discovery.

Under the current system, most hospitals and doctors ask their patients to sign an informed consent form at the time of treatment, releasing a provider from legal liability in case of a bad outcome. But courts have routinely disregarded these forms and dismissed arguments about them on the grounds that they don’t really constitute a genuinely informed consent. Some of them can be pretty vague. Our solution would have a state Legislature specify the elements of enforceable contracts, thereby recognizing that malpractice can be done through contracts, and not through courts, lawyers, and several years of discovery and litigation.

PND: What would elements of an enforceable contract look like?

PV: The state would probably have to have a constitutional amendment allowing this because state Supreme Courts have struck down attempted malpractice reforms, such as using arbitration as an exclusive remedy. The Legislature would review recommendations from physicians, patients and insurers, and would require specific minimum standards to be spelled out in a contract, such as the minimum standard of care that a patient could expect, the potential for risk, the mortality rate for a certain procedure, and the compensation for a preventable adverse outcome. All contracts would have basic information in them that patients could read and understand. It would be more comprehensive than what you would see on the typical release form today. Additional provisions and compensation amounts would vary by specialty, and should be adjusted based on the risk of the procedure, which is partially determined by the patient’s characteristics – e.g., whether they are elderly, diabetic, or at higher risk for the given procedure. If you don’t adjust for patient risk, then you would have physicians avoiding high-risk patients. The contracts would spell out, particular to each patient, what their compensation would be.

Most of this system would be market-driven because medical liability insurers would be the ones that reimburse patients for an adverse outcome, and the insurers would have an incentive to see that physicians improve their performance and reduce errors. Because they would have predetermined payout amounts in these contracts, insurers would be given a better system of predictability, bringing more stability to the market. Insurers would have the option to drop liability coverage for a physician for whom they are paying out compensation several times over, if there is no error reduction improvements made. We believe that experience rating would be a fairer system than the current community rating system – in which a physician practicing in a highly litigious area must pay extremely high premiums even if they have a good record. This way, premium payments would be more closely tied to physician performance.

PND: Who would set the patient compensation amounts?

PV: Economists would determine the amounts. Some of it would be quite simple and include basic economic compensation such as lost wages and health care bills. We advocate basing lost wages more on a workers’ comp system where, if a patient is disabled by a procedure, there would be a sliding scale to determine the degree of disability and the amount of compensation they would get. Compensation could also include some form of noneconomic damages, up to a certain limit, and patients who want to purchase insurance above that limit would have the option to do so. There is currently not a market for purchasing insurance on noneconomic damages. Some economists have argued that patients don’t really want that because the cost of that insurance outweighs the benefit, but our system would give people that option, especially if it’s a procedure where the risk of death will be high. An appropriate thing to do would be to allow medical specialties in which litigation risk is high – obstetrics, neurosurgery, general surgery – to experiment with these contracts. Eventually, we think this system would work for all medical specialties.

PND: Would the new system be administered by the state?

PV: Initially, the state would determine a minimum amount of compensation that must be included in contracts, as well as other parameters for contracts. But private liability insurers would process claims and pay compensation. Moreover, if contracts became common, health care providers could compete in the market. For example, if hospital A paid out fewer claims than hospital B, they could essentially compete for patients by offering a higher amount of compensation because their premium per dollar of compensation would be lower. In that sense, health care providers would offer varying amounts of compensation based on their record of quality.

PND: Would this system be voluntary?

PV: This would all be voluntary. The patient wouldn’t be required to sign a contract, but the benefit would be that they would not have to go through the tort system if something happened to them. If they did sign and they suffered a preventable adverse outcome, they would simply file a claim and the medical liability insurer would pay it. Physicians would have the option not to enter into a contract with anyone they choose. However, one of our stipulations for contracts would be that the compensation will be adjusted based on the risk of the patient, and compensation for a young, healthy patient would be higher than for an 85-year-old frail patient. That would prevent physicians from avoiding patients who might have a higher risk going into a procedure. If the contract solution became widespread enough, it would be to a physician’s disadvantage to avoid these patients because they would lose business. We would hope that the benefit of contracts for physicians and patients would be maximized as compensation became predictable, timely and efficient.

PND: Is it ethical for high-risk patients to get paid less in the event of a preventable adverse outcome?

PV: There have always been ethical questions involved in determining risk-adjusted value of life. Economists have argued over that for some time. That’s why we would have the option of a person being able to purchase additional insurance. It would likely not be that expensive, and would be similar to what we have in the market now for life insurance. We would not want to have a patient enter into a contract and feel as though they are being under-compensated. But on the other hand, if you want an efficient system, then you have to consider how the risk of a given surgery is going to vary according to patient characteristics. These decisions are already routinely made in courts. People sit in jury boxes during malpractice trials and determine the economic value of a person’s life, and sometimes the result is not fair. Our proposal takes those decisions out of the courts.

PND: What recourse would a high-risk patient have if he or she couldn’t find a physician to take them, under this contract system?

PV: There are going to be cases, as well, where a patient will not have time to establish a contract with a physician – such as in an emergency room. In these cases, there would be a provision for binding arbitration, which to-date has not been recognized by the courts for medical malpractice. Arbitration has been somewhat effective in dealing with insurance coverage disputes. In our system, a binding arbitration system would cover emergency patients, as well as high-risk patients who do have trouble finding physicians. Doctors would pay nothing, unless they are found to be at fault.

PND: Who would adjudicate whether an adverse outcome was avoidable, or whether it constituted severe, egregious or criminal negligence?

PV: A physician specialty board could determine a reasonable standard of care. In the Swedish no-fault compensation system, for example, they use a central claims panel in which physicians participate to determine compensable events. In our system, since it would not be state-administered like the Swedish system, liability insurers would handle claims resolutions. Some egregious cases would be pretty obvious as far as determining fault: an anesthesiologist who leaves the room during surgery, a surgeon under the influence of alcohol or drugs, wrong-site surgery. Those cases would be able to bypass the contract and go directly to the tort system.

PND: Your proposal appears to have three systems operating simultaneously: the contract system, the traditional tort system, and a binding arbitration system. Isn’t that much more complicated than the status quo?

PV: Ostensibly, it would be a cheaper system and would not involve lawyers, except in very rare cases. Much of noneconomic damage awards – 40 to 50 percent – currently go to lawyer fees. We are hoping to reduce the frequency of noneconomic damage awards and, by eliminating the cost of lawyers and the cost of waiting three to five years for case resolution, we’re hoping to reduce the total cost of the malpractice system. Obviously, getting a system like this off the ground is going to take some legislative decisions to recognize and establish the validity of these contracts. But once these contracts gain a foothold, we believe the market would essentially take over, and it would become like having insurance against a bad outcome.

PND: What is your sense of the feasibility of this proposal, given the considerable hurdles it faces, not least of which is state constitutional change?

PV: From an operational standpoint, I think it is very feasible. Some other organizations, such as Medical Justice – which is run by a neurosurgeon – are already proposing these types of contracts. I don’t see why medical malpractice should be treated differently from any other contract, where you have two people contracting for the purchase of goods and services. Medical treatment is a service, and from my standpoint, there’s really no reason why these contracts could not be effective in the way that they are with other product liability. I agree that it would require a lot of pressure and political change, and that will be difficult. The best way to go about doing that is to make people realize the current cost of the malpractice system – not just in money, but that there are areas in many states where physicians are leaving, producing a shortage of specialists. I think those are warning bells that it’s time to try something different.


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