Tort Reform

1. 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

2. Key Issues • What is broken? • Does tort reform address the issue? • What are other alternatives?

3. 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

4. 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

5. 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

6. 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

7. 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

8. Factors that Contribute to Uncertainty

9. 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

10. 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

11. 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?

12. 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

13. 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

14. 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?

15. 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

16. 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?

17. 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?

18. 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

19. 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

20. 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

21. Is Tort Reform the Answer?

22. 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

23. 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

24. 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

25. How Effective is Compensation?

26. 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

27. 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

28. 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

29. 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

30. 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

31. Does Medical Malpractice Litigation Improve Medical Practice?

32. 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

33. 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?

34. 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

35. 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

36. 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

37. Alternatives to Tort Reform

38. 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

39. 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?

40. Key Difference Baseline Condition of Claimants

41. 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

42. 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

43. 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

44. 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

45. 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?

46. 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?

47. 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?

48. 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

49. 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