Tuesday, January 18, 2005

Tort Reform

Tort reform is being breathlessly touted as one of the first things in need of fixing during a second Bush term. Democrats aver that house Republicans, at the behest of big insurance companies, are only moving to cap the rewards in medical malpractice cases to the limit liability of, and protect profitably for, these big insurance companies.

Alternatively, Republicans accuse Democrats of self-interestedly eschewing tort reform because, as they see it, Democrats are disproportionately supported by the Trial Lawyer lobbies—the same trial lawyers, evidently, who pursue frivolous malpractice lawsuits, which, in turn, force big insurance companies to raise insurance premiums. Squeezed from both sides are physicians who are being virtually run out of practice as a result of skyrocketing premiums.

A similar argument was forward by car insurance companies in Canada, claiming that rising premiums correlated with the jump in “soft tissue injuries”. Skeptics viewed the rise in premiums as evidence of something more obvious: Insurance companies poor investment portfolios in the wake of the 2000 tech bust and general market imbalance since 9/11.

What is one to think of this revelation? Are insurance companies raising premiums relative to the actuarial pressures of generous malpractice rewards? Would capping malpractice rewards—tort reform—reduce the premiums paid by physicians?

Judge Richard Posner—a monetarist, a classical liberal, and a University of Chicago Law professor (all the requisite conservative qualifiers)—contends that tort reform, capping malpractice rewards specifically, misses the point:

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.

He goes on to add,

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.


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