Tort Reform

Edward P. Richards

Director, Program in Law, Science, and Public Health

Harvey A. Peltier Professor of Law

Louisiana State University

richards@lsu.edu

http://biotech.law.lsu.edu

Key Issues

What is broken? Does tort reform address the issue? What are other alternatives?

What was the Crisis?

Medical malpractice insurance and defense costs have never been a large part of the health care budget

The crisis was in the pricing and availability of medical malpractice insurance

The Nature of Liability Insurance

Sources of revenue Premiums Return on the investment of reserves

What are reserves? Money set aside to pay future claims

Costs Administrative Defense Settlements and judgments

Setting Reserves

Reserves are based on projections of future claims Reserves are easy to predict for insurance with a high

volume of relatively small claims Auto insurance

Reserves are harder to set for insurance for low probability, high value claims Medical malpractice Products Environmental claims

Dealing with Uncertainty

The more the uncertainty, the more reserves must be kept over the average level of claims

Reinsurance If the risk level is hard to predict, or if the

insurance company wants to level out its bottom line, it will buy its own insurance

Reinsurance and Investment Income

Plaintiffs assume that the longer insurers keep from paying settlements, the more money that they make from investments

This depends on the amount of risk that is reinsured

Reinsurance costs are affected by open claims, and this may wash out the benefits of stretching out a case

Factors that Contribute to Uncertainty

Failure of the Law of Large Numbers

Insurance is based on averaging claims All insureds must have about the same risks The larger the number of claims through time,

the better the predictions of claim cost The larger number of insureds, the more

potential claims to average and the more to spread the costs over

The smaller the pool, the more uncertainty

Limits on Class Size in Medical Malpractice Insurance

Insurance is rated by specialty and procedures Insurance is state based

Even the largest medical specialties are relatively small groups in Louisiana

Small specialties, such as neurosurgery, are small even in big states

The smaller the group, the more uncertainty

Individual versus Class Rating

Medical malpractice insurance is generally rated by specialty All general surgeons pay the same Family practitioners who deliver babies (high

risk) pay more than those who do not Physicians who are sued frequently generally do

not pay more, or much more, but can find themselves unable to buy private coverage

Does this send physicians the wrong message?

Linked risks

If the insureds are subject to common threats, this can dramatically increase risks Housing on the LA coast Terrorism

Not as much of an issue in medical malpractice insurance, but has happened when there is common problem - renal dialysis case

This is managed by diversifying the pool of insureds

Unpredictable Upper Bounds on Liability

Huge jury awards or settlements that exceed predicted amounts Can be handled by upper limits on coverage A big problem for self-insured providers and

providers with deep pockets Less an issue for med mal than for products Punitive damages can affect this

Long Tail on Claims

Traditional medical malpractice insurance was written as occurrence polices If you were insured in 1995, that insurance

covered any claims made on care provided in 1995, no matter when they were filed

Why does this make predicting rates hard? What type of physicians would be at the most

risk? How does a discovery rule affect this?

Availability and Cost of Medical Malpractice Insurance: 1970s

Some states saw the prices of medical malpractice insurance increase dramatically

Some states saw insurers withdraw from the states

Since insurance is written one year at a time, the changes can be very fast Rates double or triple Insurance is unavailable

What was the Cause of this Rise?

Claims had been rising since the 1960s Part of the general increase in tort litigation

driven by liberalization of state damage rules and better organization and funding of legal practices

Main criticism of the rise Why so sudden? What was the data?

Was this a Scam?

Were the insurers transferring assets between subsidiaries in different states to hide profits?

Were the insurers charging below market premiums to get business to invest into the market?

Was the change in rates due to losses in the market? Does that mean that low rates were subsidized

by the market?

Responses to the 1970s Crisis

Tort reform laws All limit the ability to bring claims Various strategies, which we will discuss later

Changes in insurance policies

The Shift from Occurrence to Claims Made Policies

Cover claims filed during the policy year Underlying incident can be before the policy

You buy in or buy out Tail coverage Nose coverage

Makes it easier to predict risks Makes it worse for the doc because you have to

buy out or you have NO coverage

The Continuing Crisis

Many states have continued to have shifts in the insurance market with cost spikes and unavailable coverage There is limited evidence that claims have

changed dramatically Are the insurers cheating?

Market losses change reserves - is this fair? Reinsurance costs have been ignored

Is Tort Reform the Answer?

Is the Cost of the Tort System too High?

Medical malpractice insurance and claims are not a significant % of the total health care budget The problem is that it is not evenly distributed over the budget Docs are the general focus but only a fraction of the market

High risk docs inflate costs for all the specialty Risks are related to the number of procedures and other practice

factors which are not factored into the ratings Neurosurgeons who do bad backs Docs who run mills have an edge over responsible docs

What are Ancillary Costs of the Medical Malpractice Tort System?

Defensive medicine Ordering medical tests that would not otherwise be

ordered X-rays of head bumps Also economic reasons to order tests

Doc avoid high risk situations Usually wrong on what are high risk

Limit practice styles because of the one-size fits all rating

What are the Benefits of the Tort System?

Compensation for negligent injuries There is a lot of bad medicine out there A lot of people are injured

Provides incentives to improve medical care Plaintiff's lawyers argue that medical malpractice

provides the only discipline on medical practice Licensing boards generally do not care about quality

of care, as opposed to fraud or criminal behavior

How Effective is Compensation?

How do Tort Lawyers Get Paid?

Plaintiff lawyers Contingent fees 1/3 to 50% plus expenses, many want expenses

reimbursed or fronted by the client, but it varies Defense lawyers

Traditionally by the hour, plus expenses Some are now on bids

What are the Incentives for Plaintiff Lawyers?

Pick big cases Work them as cheaply as possible until you are

sure they are good Drop them if they turn out to be hard

Different from criminal law - it is always an economic decision

Settle when you can Winning is good even if you lose on appeal

What are the Incentives for Defense Lawyers?

Hourly Drag everything out Be careful to not do critical things until the end Lots of dilatory practice

Fixed fee See plaintiff's lawyers

How does the Financing of Litigation affect Compensation?

What happens to small claims? What about unpleasant plaintiffs? Where does the money go?

Lawyers Insurers Plaintiffs - probably less than 25%, possibly

much less

Delays

The system can be fast with a settlement, but can take years or decades if there are is a trial with contested legal issues

These delays hurt claimants and exacerbate the insurance cycle

Does Medical Malpractice Litigation Improve Medical Practice?

Unfounded claims

Causation uncertainty drives unfounded claims Unfounded claims encourage litigation fatalism Unfounded claims sometimes result in huge

payouts, undermining confidence in the legal system Vaccine cases Breast implant cases Bad baby cases

Polycentric Problems

New drug approvals Limiting care to broaden access to care

Managed care Government benefits programs Persons who have to pay for their own care

Is it better to have care that is below standard or no care at all?

Time Frame

Since causation is not obvious, most claims are not identified until long after their occurrence

This breaks the link between behavior knowledge of a liability event

Like disciplining your dog the next morning

The Quality Signal

Current system does not link fault determinations made for compensation to discipline or reeducation to improve quality

Random nature of claims undermines any signal that malpractice claims might send to improve quality

Plaintiffs and defendants argue unworkable and sometimes even dangerous standards of practice to win their cases

No Linkage between Tort Claims and Quality

No evidence that tort claims improve quality Licensing boards do not look at tort claims In LA, tort claims do not keep a doc from being

insured if he can raise a 125K bond

Alternatives to Tort Reform

Administrative Solutions

Agencies do a better job of technical determinations Agencies do a better job of dealing with small claims Agencies can be more efficient in getting dollars to

claimants Agencies do a better job with polycentric problems In all cases, better does not perfect, just better than

litigation

Is Medical Malpractice Different from Other Compensation Systems?

Administrative compensation models are used in many other areas, but will these map

effectively to medical malpractice?

Key Difference

Baseline Condition of Claimants

Other Comp Systems

In other comp systems claimants are basically healthy so it is easy to know that the compensable event caused the injury

In disability systems, where there are confounding injuries and illnesses, the system compensates for the entire injury so there is no need to sort out causation

In either case there is no need to determine fault, only injury

Malpractice

Many people are already in bad shape Great diversity of preexisting conditions You cannot compensate everyone who is injured

as you do in worker's comp because most of the injuries are not related to medical malpractice

More like some issues in occupational diseases, but those only require causation analysis, not fault

Determining Compensation

Comp schedules depend on determining compensation against a baseline of a healthy worker

Not so easy when you have to deal with already sick people Compensation is very different for a young otherwise

healthy person and someone with a serious or fatal underlying condition

Must be individualized, which undermines scheduling

Causation

Fault does not equal causation in many cases The patient might be terminal

Background noise of morbidity and mortality In auto no-fault you have a pretty good idea of causation

and thus the accident can trigger comp In worker’s comp fault is also not an issue

Second injury and occupational disease complicate the analysis, but are relatively rare and are still within the comp umbrella

Paying for the awards

Do we keep the same model that is based on collecting from docs?

Do we move to a general funding mechanism that is more fairly spread over the system?

Does it come with salary caps for docs to make up for spreading it out?

Who decides?

Key distinction between courts and adlaw is the decisionmaker Must be expert and must be inquisitorial to get at the

truth A devoted panel might be one solution, but getting

expertise is hard Could be draw from the community as is done for the

Louisiana review panels How do you keep the panel fair?

The real test - Are they better than judge and jury?

How are the cases prepared?

Who initiates the case? Does the agency prepare the cases? Do the parties prepare the full case or only the

response to the agency?

Deterrence

Tort theorists argue that doing away with the tort system would reduce the deterrence value of tort awards There is little evidence that there is a

deterrence effect in med mal An administrative system could be tied to both

health care licensing and reimbursement Being excluded from insurance is a greater threat

that tort damages

The Role of National Health Insurance in Medical Malpractice and Torts

The largest part of tort damages, by far, are medical costs Future medical is the largest cost of the LA fund

Even when insured, these are collectible because of the collateral source rule Plaintiffs may not see them because of subrogation

In a national health system, medical costs would not be part of the damages If insurance is universally available, there is not

incentive issue reason to refund costs