Posner [Chicago]: Tort Reform

Richard Posner, University of Chicago Law School:

"There is a movement afoot, assisted by the strengthening of Republican control over Congress, to impose federal limits on tort litigation, particularly medical malpractice; premiums for malpractice insurance have soared in the last two years and physicians are protesting vigorously.

The costs of malpractice premiums are only about 1 percent of total U.S. health-care costs. Moreover, insofar as physicians are forced to swallow the cost of the premiums rather than being able to pass them on to their patients or their patients' insurers in the form of higher prices, the premiums do not actually increase total health-care costs. There is an indirect effect, however, insofar as malpractice liability causes doctors to practice defensive medicine. But there may be offsetting benefits, to the extent that defensive medicine actually improves outcomes for patients; and surely it does for at least some. What is more, because malpractice insurance is not experience-rated—physicians are not charged premiums based on their personal liability experience—malpractice liability may have only a slight effect on physicians' methods or carefulness, except insofar as physicians are pressured by their insurers to change their methods in order to reduce the amount of malpractice litigation.

The relation between malpractice premiums and malpractice judgments is also uncertain. No doubt capping judgments, which is the principal reform that is advocated, has some tendency to reduce premiums, but perhaps not much, because there is evidence that premiums are strongly influenced by the performance of the insurance companies' investment portfolios.

A better reform would be to permit, encourage, or even require insurance companies to base malpractice premiums on the experience of the insured physician, much as automobile liability insurance is based on the driver's experience of accidents. That would make malpractice liability a better engine for deterring malpractice—which in turn would reduce malpractice premiums by reducing the amount of malpractice. Capping judgments, in contrast, would reduce the incentive of insurance companies and their regulators to move to a system of experience-rated malpractice insurance.

It is always important to distinguish between financial and real costs. Insofar as malpractice liability merely transfers wealth from physicians to (some) patients, aggregate costs are unaffected. The real cost of malpractice liability is limited to the cost of the actual resources consumed by such liability, principally the time of lawyers and expert witnesses (roughly half the total amount awarded in judgments goes to pay lawyers and expert witnesses), unless defensive medicine is assumed to cost more than its benefits in improving treatment outcomes. The real benefit of malpractice liability is its effect if any in deterring medical negligence; reducing that benefit would impose a real cost. Hence it is simplistic to assume that the total annual malpractice premiums paid is a good index of the net social cost of malpractice liability, or that measures to reduce those premiums by capping malpractice liability would result in a net improvement in welfare. To repeat, part of the premiums represent simply a wealth transfer from physicians to the patients who receive malpractice judgments or settlements paid by insurers. The part (roughly half) that pays for lawyers and expert witnesses should be understood as the cost of maintaining a system for increasing medical safety; the efficacy of the system could be improved, I have argued, by experience rating, but not by capping judgments.

In any event, there is no compelling case for federal limitations on malpractice liability. The issue belongs at the state level, and as reported in a New York Times article last Friday, a number of states have adopted or are seriously considering adopting the kind of caps being advocated in Congress. Federal legislation would simply stifle state experimentation with different methods of regulating physicians and prevent us from learning which is best.

There is a stronger case for federal regulation of class actions, as in the case of suits against asbestos manufacturers. When the members of a plaintiff class are scattered across the country, the class lawyer has a wide range of places in which to sue, and there are certain counties in the United States in which judges and juries are disproportionately generous to tort plaintiffs. Most of the costs of a large judgment or settlement in such a case are exported to other states, while the benefits are concentrated in the locale where the suit was litigated, because of the business generated for local lawyers, as well as the judgments or settlements received by the members of the class in the locale. This is a formula for abuse, concretely for a tendency for such judgments and settlements to exceed an unbiased estimate of the true costs imposed on the class by the defendants' misconduct. Malpractice litigation does not give rise to such an abuse to any very great extent, because patient and physician are usually in the same state, and a single plaintiff has only a limited choice of courts in which to sue. This is another reason not to make medical malpractice the principal object of federal tort reform.

We should be cautious about tort reform. It would be unfortunate if interest-group politics, and anecdotes concerning outlandish lawsuits (such as the suit against McDonald's by the customer who spilled hot coffee in her lap), were allowed to obscure the difficult policy issues." [January 16, 2005; The Becker-Posner Blog has the post]

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