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