Medical Malpractice: A Closer Look at Payout Redistribution

Redistribution, in some circles, is a dirty word. It is meant to invoke images of nanny-state excesses that place us just a hop, skip, and a jump away from socialism, which is assumed, for whatever reason, to be the worst of all worlds. Apparently, because nothing could be more un-American than taking from some people and giving to others, it is interesting that last spring the US House of Representatives gave the green light to an enormous redistribution of wealth to take from some of the nation’s sickest patients to give to malpractice insurance providers.

The patients affected by the HR 1215 bill — the latest effort to reform the medical malpractice system on a federal level — are not exactly fat cats. The bill, which was ratified by the House but has not yet been taken up by the Senate, proposes a number of changes to malpractice liability rules. The big headline, however, is the $250,000 cap on non-economic damages (economic damages, like lost wages or out-of-pocket hospital costs, are not limited by the rule).¹ Under the proposed legislation, juries would be free to award whatever sum of money they think is appropriate for pain and suffering caused by physician negligence, but during the sentencing phase, judges would be compelled to truncate any higher amounts down to $250,000. It would be hard to draw up a more brazen transfer of wealth from one group to another — in this case, taking from patients who have been victimized by a catastrophic medical error and giving to insurance companies.

As it stands now, if a jury awards a million dollars because, as a result of physician negligence, a patient is paralyzed, or a child has cerebral palsy, or a parent died of preventable sepsis, then the person filing suit gets a million dollars. It may not be a perfect solution, but it’s something. Under HR 1215, the situation is nearly identical — the plaintiff still gets the same million dollars — but now the plaintiff gives $750,000 right back to the insurance company. Sounds like redistribution to me.

The whole idea of capping malpractice payouts is based on the notion that defensive medicine, the practice of ordering tests or otherwise altering medical decision making with the intent of avoiding legal liability, is both bad and costly, and suggests that altering malpractice payout regulations can curb this behavior. Defensive medicine is certainly pervasive — by some estimates, more than a quarter of all physician orders are defensive.² That is an impressive number, but it is unclear whether defensive medicine is an epidemic to be eradicated or merely a side effect of other beneficial trends. Much of physician defensiveness is driven by the excellent accuracy of modern diagnostic tests and the explosion of medical information that is now easily accessible to patients. It is not at all clear that we should hastily throw the diagnostic accuracy and patent autonomy out with the bathwater. Still, it is worth considering that defensive medicine costs billions of dollars annually in the American health system, but this figure might represent as little as 2.4% of our spending.³ Both that enormous absolute value and the relatively small percentage appear to be decreasing, even before the advent of federal tort reform.⁴ Nobody quite knows why.

The $250,000 figure is both arbitrary and not arbitrary. Because there is no body of serious empiric scholarship that suggests an optimal magic number, Congress could have settled on any dollar figure. However, it is no coincidence that HR 1215 caps noneconomic damages at that level — this is precisely the level that California used to cap malpractice payouts more than 40 years ago. Putting aside the question of why Congress decided that it is reasonable that malpractice limits have not even increased with inflation over the course of nearly a half century, the similarity of HR 1215 to the legislation from California is convenient because it gives us a window into some likely outcomes if this new federal bill were to become the law of the land.

One outcome that should not be remotely surprising but still bears mentioning is that, at least in California, limiting malpractice payouts did not result in lower insurance premiums or hospitalization costs for patients.⁵ More notably, when Florida instituted liability limits, physician malpractice insurance premiums barely budged after the cap was put in place.⁵ In Texas, tort reform was followed by a 5% increase in the number of physicians in the state — and almost a 400% increase in the number of insurance companies.⁶ Meanwhile, back in California, malpractice insurers have comfortably banked rates of return well in excess of their counterparts in automobile and property insurance.⁷

The state-level experience makes it obvious that the insurance companies are the big winners in HR 1215-style tort reform. Payout ceilings lower liability and mitigate uncertainty, which is music to the ears of any insurance company. That money has to come from somewhere, though — every dollar on the insurance company’s bottom line is a dollar that did not make it into the pocket of a victim of malpractice. In addition, any spike in insurance company revenue that comes from liability limits can be traced directly to patients whose awards are capped. Again, California’s experience tells us everything we need to know — 45% of California plaintiffs have their awards capped, 58% of capped cases involved a death, patients with paralysis or brain damage experienced a median reduction of more than $1 million, and cases where the victim was less than 1 year old were capped 71% of the time.⁸ These are the patients who pay increased insurance company profits when liability is capped.

Maybe redistribution is a dirty word, after all.

References

1. H.R. 1215: Protecting Access to Care Act of 2017. GovTrack. https://www.govtrack.us/congress/bills/115/hr1215/summary. Updated April 1, 2017. Accessed January 13, 2018.
2. Rothberg MB, Class J, Bishop TF, Friderici J, Kleppel R, Lindenauer PK. The cost of defensive medicine on 3 hospital medicine services. JAMA Intern Med. 2014;174(11):1867-1868.
3. Medical liability costs in U.S. pegged at 2.4 percent of annual health care spending [press release]. Boston, Massachusetts: Havard T.H. Chan School of Public Health. https://www.hsph.harvard.edu/news/press-releases/medical-liability-costs-us/. Published September 7, 2010. Accessed January 13, 2018.
4. Lincoln T. Medical malpractice payments remained at historic low in 2013 despite slight uptick. Public Citizen’s Congress Watch. https://www.citizen.org/sites/default/files/medical-malpractice-2013.pdf. Published October 2014. Accessed January 13, 2018.
5. Angoff J. Insurance against competition: how the McCarran-Ferguson Act raises prices and profits in the property-casualty insurance industry. Yale J Reg. 1988;5(2):397-415.
6. Burkle CM. Medical malpractice: Can we rescue a decaying system? Mayo Clin Proc. 2011;86(4):326-332.
7. Lewis JJ. Putting MICRA under the microscope: the case for repealing California Civil Code Section 3333.1 (a). West State Univ Law Rev. 2001;173:173-197.
8. Changing the medical malpractice dispute process: What have we learned from California’s MACRA? RAND Corporation. https://www.rand.org/pubs/research_briefs/RB9071/index1.html. Accessed January 13, 2018.