The following case study shows the use of the Decision Analysis Reserve and Trial Strategy (DARTS) tool, a structured reserve-setting process The Risk Authority Stanford created from the hospital risk management department serving the Stanford University School of Medicine, Stanford Health Care, and Stanford Children’s Health in California.

It is provided by John Littig, ARM, chief finance and underwriting officer with The Risk Authority Stanford, and vice president of risk finance for Stanford Health Care and Stanford Children’s Health.

In 2012, a hospital was sued with a community physician as co-defendant. The plaintiff suffered a very serious stroke immediately after a procedure that was meant to determine the cause of a persistent headache. Early investigations confirmed that the procedure was ordered by the community physician and performed at the client hospital. The plaintiff claimed the procedure was too high risk and should not have been ordered.

Hospital leadership strongly agreed with its expert that, while there could be an argument around ordering the procedure, the hospital’s care met the medical standard. However, if the jury found against them, the potential damages could be huge, and the client had a bad experience with this particular co-defendant.

The hospital leadership approached The Risk Authority Stanford for help in understanding their risk exposure in the case so they could set an appropriate reserve and to gauge their instinctive decision to take the matter to trial. Using DARTS, The Risk Authority led the client through an assessment of the various risks and uncertainties in the case, including issues such as the standard of care, causation issues, the damages that might be awarded, and issues of apportionment of liability among the co-defendants.

The analysis revealed that while the case had only a 20% chance of a plaintiff verdict based on strong expert testimony, the recommended reserve, representing the overall average exposure in the case (including the 80% of a “not liable” verdict), was $1.4 million. The reason for this was that while the most likely outcome was a verdict for the defense, if the jury did return a verdict of “liable,” the awards could range from $3.7 million to $13.6 million depending on what proportion of the damages the jury attributed to each co-defendant.

The hospital’s leadership decided to take the case to trial because it was determined to be “an unmeritorious case and should be defended.” However, before the trial, the plaintiff produced an expert that was critical of the decision to order the procedure, and then the community physician claimed that it was ordered by one of the hospital’s physicians.

The Risk Authority case manager knew that the plaintiff would seize on that inconsistency but didn’t know how much that would increase the risks of a plaintiff verdict, so the information was put through the DARTS tool again. The analysis found that the average exposure had now increased to $2.8 million with a probability of an adverse verdict of 40%.

When a settlement opportunity arose for far less than that amount, the hospital leadership agreed to settle the case. When the remaining claims against the physician went to trial, a jury delivered a verdict against the community physician in the amount of $12 million.