Catastrophic Payments and Medical Malpractice

Terry Baynes of Reuters has written an article about the recent study by a group of physicians at John Hopkins finding that large med mal awards do not contribute significantly to healthcare costs.  The article quotes the lead author of the study, Dr. Marty Makary, and me on the issue.  My comments appear somewhat more skeptical of the med mal tort system than I actually am (through no fault of Ms. Baynes), and that caused me to reflect further on the significance of the study. 

The study (pdf) finds that catastrophic judgments (of over $1M) constitute approximately .05% of national healthcare costs (as measured in 2010).  I believe the inferences and recommendations that Dr. Makary and his colleagues draw from this are generally correct.  First, they determine that catastrophic payouts are not a major driver of health care costs.  Second, at least in interviews, Dr. Makary argues that defensive medicine due to the vague standard of care is a bigger expense than catastrophic payouts.  Third, acknowledging the study does not include costs of defensive medicine, the authors conclude that the financial savings due to malpractice reform may be minimal compared to other drivers of health care costs.  Fourth, at least in interviews, Dr. Makary argues that malpractice reform should not be focused on caps, but on the standard of care. 

First, the study does support, at least modestly, a policy decision against caps.  The argument is that "lopping off" the top of large med mal judgments does not save a lot of money because the amount of large judgments is small.  There are, however, confounding variables.  The study uses $1M or more as the definition of catastrophic payouts.  Most caps are set well below $1M and are caps not on total awards, but on noneconomic loss alone.  I don't see that the study differentiates between economic and noneconomic damages.  This is not a criticism; I don't believe the National Practitioner Data Bank from which the data are drawn makes this distinction.  It does, however, prevent a direct comparison between catastrophic payments and how caps would operate on them.

There are certainly other arguments against caps.  They have a disparate impact on those who are most seriously injured.  The most seriously injured in tort law are already under compensated, receiving a portion of economic loss, while those whose injuries are minor tend to receive several times economic loss.  Moreover, to the extent that caps are aimed not at the top awards but at generally reducing suits, particularly frivolous suits, there is a much more direct and fair tool available:  certificates of merit.  Suits filed without merit is a problem; a 2006 study found that 37% of med mal claims in random samples of closed-claim files at 5 med mal insurance companies were non-meritorious.  (David M. Studdert et al., Claims, Errors, and Compensation Payments in Medical Malpractice Litigation, 354 New Eng. J. Med. 2024 (2006)).  Pennsylvania has used certificates of merit (and no cap) to positive results.   

Second, I agree that malpractice reform would not dramatically reduce costs in the vast health care system.  Steven Brill's Time piece in March discussed numerous non-malpractice-related problems driving up costs.  That doesn't mean malpractice law should not be reformed, just that it should be reformed for other reasons.

Third, and most significantly, I agree with the conclusion that the standard of care is a big part of the problem with med mal litigation.  What is reasonable under the circumstances can be difficult to determine under banal circumstances.  When applied to the practice of medicine, those complications multiply.  Dr. Makary focuses on this as the cause of defensive medicine, and I'm sure it happens (though measuring it seems challenging).  Moreover, the uncertainty created by the standard leads to delay and transaction costs as the parties genuinely dispute whether a health care provider acted reasonably under the circumstances.  As to delay, the Studdert study referenced earlier found the average med mal claim spanned 5 years from occurrence to closing.  As to transaction costs, the study found only 46 cents of every dollar went to claimants.  Both these figures are consistent with prior studies. 

Thus, the uncertain standard creates 3 problems.  First, not all results are accurate.  The Studdert study found an accuracy rate of determining medical errors (not quite the same as med mal, but close) at between 70 and 75 per cent.  That is a better than random, but not great, particularly in light of the other 2 problems:  delay (5 years on average) and transaction costs (running the system costs 54 cents of every dollar).  This obviously creates potential problems for health care providers:  the possibility of an erroneous adverse judgment, time spent worrying and not focused on health care, and high attorneys' fees/insurance premiums.  To me, it is even worse for claimants.  The Studdert study found 1 in 6 victims of medical error did not recover.  In fact, the study found  nonpayment of claims with merit occurred more frequently than did payment of claims that were not associated with errors or injuries.  Moreover, a 5-year wait can be devastating to a claimant, particularly if there are large medical bills and lost wages involved.

Instead of simply raising the standard to make it more difficult for claimants to recover (recall 1 in 6 already doesn't recover when s/he should), it makes sense to me to provide claimants and health care providers a voluntary way to opt out of the tort system and handle the claim more along insurance lines, paying economic loss and a modest amount for pain and suffering.  New Hampshire's early offers law passed last June was a step in the right direction.  It may not be perfect, but it is an improvement over the current system.  I won't make a long post any longer, but those who are interested in New Hampshire's early offer law can go here, here, and here.   

--CJR 

There is one other facet of the study that is interesting.  The authors find a physician's years in practice and, most significantly, previous paid claim history had no effect on the odds of a catastrophic payout.  Ted Frank mentioned this at Point of Law.  I would not have expected a strong correlation, but the lack of any correlation is surprising to me.