Reed Magazine November 2004
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The medical malpractice system and tort reform

By Carl M. Stevens ’42

The medical malpractice system is a complex web of interdependent institutions that includes the medical-services sector, tort law, and liability insurance. In evaluating the performance of the system, there are important issues for each of these institutions. Of these, so-called “tort reform” has become the most visible. And the tort-reform movement raises important questions about the representation of consumer preferences in medical-services markets.

The American Medical Association has made tort reform the highest priority for its legislative agenda. About 21 states have passed some form of tort reform legislation. In a number of these states, these laws are being vigorously challenged in the courts. At the federal level, tort reform legislation has been passed in the House. The Senate has not yet gone along. President Bush has stridently joined the call for tort reform.

Legislated Caps

For the purposes of this article, “tort reform” describes the imposition by legislation of caps on recoveries for non-economic damages (pain and suffering, punitive) by plaintiffs in malpractice cases. Although the size of the caps may differ from state to state, $250,000 is a popular figure. The caps will eliminate “outrageous” awards (of millions of dollars) generated by “runaway” juries befuddled by plaintiffs counsel in pursuit of large contingent fees. This in turn is expected to reduce liability insurance premiums.(A recent study estimates that caps on recoveries have reduced premiums by about 17 percent for states with caps compared with states without caps.) The proponents also expect some benefits for consumers of medical services. Some specialized services will be more readily available. In general, lower premiums for liability insurance are expected to reduce the cost burden that the medical malpractice system imposes on the medical services sector. In what follows, I suggest some perspectives to help inform our evaluation of these events.

Caught in the crossfire

My polemical tone intends to suggest, that the tort-reform movement features something of a “war” between the medical community and the trial lawyers. We consumers of health care are in the role of passive bystanders, caught in the crossfire between the warring parties. This is not as it should be.

Indeed, on the premise that efficient markets map relevant preferences into market performance, our preferences as consumers of medical care should be decisive for the outcome of the tort-reform controversy since we ultimately pay the tab for the medical malpractice system. We do so for the most part in the form of some loading on the premiums and taxes we pay (directly and indirectly) for health insurance. At the same time, we are the beneficiaries of the medical malpractice system. A major rationale for this system is that it will improve the quality of medical care by serving to deter provider negligence. Also, in the unhappy event that we are victims of medical injury, we may be awarded some compensation. Tort reform enthusiasts contend that more generous recoveries by plaintiffs (those to be headed off by tort reform) mean higher liability insurance premiums. This in turn would mean higher prices for medical services and higher premiums and taxes for health insurance.

What’s at stake

Here’s the tradeoff for consumers: higher premiums/taxes and more generous recoveries versus lower premiums/taxes and less generous recoveries. Owing to the heat generated by the tort reform controversy, we tend to lose sight of the fact that, tort reform or no tort reform, the medical malpractice system imposes only a modest direct cost burden on the medical services sector. In recent years, the national total of medical malpractice premiums has been less than one percent of total personal health care expenditures.

As a consumer of medical care, if I am a victim of medical injury, I would like to have available to me whatever compensation for pain and suffering a jury, unconstrained by tort-reform caps, sees fit to award me. I am happy to pay a little more for health insurance premiums and taxes for such a configuration. Other consumers might have different preferences.

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Reed Magazine November
2004