States with reformed litigation systems have lower premiums

With no consensus on the causes of malpractice insurance problems or their cure, many patients covered by state health programs such as Medicaid and the State Children’s Health Insurance Program (SCHIP) may have a tough time obtaining needed health care. States that have not reformed their litigation systems, according to the federal government, are those with the highest average malpractice insurance premiums.

Physicians complain about the high premiums they pay and demand reductions or threaten to leave the practice of medicine or perhaps move their practice to a state that has lower premiums, as the Washington, DC-based American College of Obstetricians and Gynecologists in (ACOG), recently told a U.S. House of Representatives subcommittee.

"Across the country, the meteoric rise in medical liability premiums is threatening women’s access to health care. Faced with the unaffordability and unavailability of insurance coverage, OB/GYNs are forced to stop delivering babies, reduce the number of deliveries, scale back their practices by eliminating high-risk procedures, or close their doors entirely."

Group members made it clear that the crisis is centered in a culture that looks to lawsuits to solve problems. "The high rate of suits does not equate to malpractice," ACOG told Congress. "Rather, it demonstrates a lawsuit culture where doctors are held responsible for less than perfect outcomes. And in obstetrics and gynecology, there is no guarantee of a perfect outcome, no matter how perfect the prenatal care and delivery."

ACOG says OB/GYNs win most of the claims filed against them. A 1999 survey of its members found that 54% of claims were dropped by plaintiffs’ attorneys, dismissed, or settled without payment. Of cases that proceeded, doctors won more than 65% of those resolved by court verdict, arbitration, or mediation, meaning that only 10% of all cases filed against OB/GYNs were found in favor of the patient.

"Enormous resources are spent to deal with these claims, only 10% of which are found to have merit," ACOG declared in its testimony. "The costs to defend these claims can be staggering and often mean that physicians invest less in new technologies that help patients."

Support for the notion that the litigation system is responsible for the malpractice problem can be found in an official U.S. Department of Health and Human Services (HHS) report issued in March 2003 that flatly declares that "the crisis that we face, as consumers, taxpayers, or health care professionals, is caused by our expensive litigation system, which often finds liability on a random basis and increasingly imposes very large judgments for noneconomic damages."

HHS says that expenses on claims settled in 2001 averaged $39,819. And between 1999 and 2001, the number of payments made for malpractice claims against physicians reported to the National Practitioner Data Bank increased 21.6% from 13,711 to 16,676. During that same period, the median payment more than doubled, from $63,750 to $135,941, while the maximum payment report went from $5.3 million to $20.7 million.

Mega-awards’ going up

"Of particular concern," says the HHS report, "is the rise in mega-awards and settlements. The number of payments of $1 million or more . . . exploded in the past seven years. . . . Between 1991 and 2002, the number of payments of $1 million or more . . . increased from 298 to 806; payments of $1 million or more increased from 2.2% to 5.4% of total payments reported."

HHS says that mega awards for noneconomic damages have occurred in states that do not have limitations on the amounts of noneconomic damages that can be recovered. Awarded on top of compensation for an injured patient’s actual economic loss, noneconomic damages are meant to be compensation for intangible, nonmonetary losses such as pain and suffering, loss of consortium, hedonic damages (loss of the enjoyment of life), and various other theories that are developed. The report complains that the theories on which noneconomic awards are made are entirely subjective, with juries told to apply their "enlightened conscience" in determining an amount that is fair.

The report says that at the same time the litigation system is expensive, it also is slow and provides little benefits to patients who are injured by medical error.

"The friction generated by operating the system consumes most of the money," according to HHS. "When doctors and hospitals buy insurance (sometimes, they are required to buy coverage that provides more protection than the total amount of their assets), it is intended to compensate victims of malpractice for their loss. However, only 28% of what they pay for insurance coverage actually goes to patients; 72% is spent on legal, administrative, and related costs. Our current system forces injured patients to sue their doctors to obtain compensation, and forces both patients and doctors to go through what is a traumatic process for all. Patients must wait years for recovery (if they ever win any). Doctors are subject to minute scrutiny of actions they took, often years before, and their actions are judged on the basis of hindsight and perhaps even on the basis of changed medical standards. The process consumes the time and energy of the doctor that could better be spent in patient care."

State caps needed

The conclusion HHS draws is that the states with the highest average malpractice insurance premiums are those states that have not reformed their litigation systems. "Over the last two years, states with limits of $250,000 or $350,000 on noneconomic damages have seen average combined highest premium increases of 18%, but states without reasonable limits on noneconomic damages have seen increases of 45%." (See chart.)

It praises the action California took with the Medical Injury Compensation Reform Act of 1975 which (1) placed a $250,000 limit on noneconomic damages while continuing unlimited compensation for economic damages; (2) shortened the time in which lawsuits could be brought to three years; and (3) provided for periodic payment of damages to ensure the money is available to the patient in the future.

HHS says the California reform has been a success: "Doctors are not leaving California. Insurance premiums have risen much more slowly than in the rest of the country without any effect on the quality of care received by residents of California. Insurance premiums in California have risen by 167% over this period while those in the rest of the country have increased 505%."

According to the HHS document, President Bush supports federal reforms in medical liability law that would:

  • improve the ability of all patients who are injured by negligence to get quicker, unlimited compensation for their economic losses, including loss of the ability to provide valuable unpaid services such as care for children or a parent;
  • ensure that recoveries for noneconomic damages not exceed a reasonable amount ($250,000);
  • reserve punitive damages for cases that justify them such as where there is clear and convincing proof that a defendant acted with malicious intent or deliberately failed to avoid unnecessary injury to a patient;
  • provide for payment of a judgment over time rather than in one lump sum to ensure that the money is there for an injured patient when needed;
  • ensure that old cases cannot be brought years after an event when medical standards may have changed or witnesses’ memories have faded, by providing that a case may not be brought more than three years following the date of injury or one year after a claimant discovered or, with reasonable diligence, should have discovered the injury;
  • inform the jury if a plaintiff also has another source of payment for the injury such as health insurance;
  • provide that defendants pay any judgment in proportion to their fault, not on the basis of how deep their pockets are.

The administration also calls for legislation to protect efforts by hospitals, doctors, and other experts to improve quality by encouraging reporting of needed information and collaborative use of it.

Another federal government report, this one issued by the General Accounting Office (GAO) in July 2003, says that multiple factors, including falling investment income and rising reinsurance rates, have contributed to recent increases in malpractice insurance premiums. But GAO says that losses on malpractice claims, which make up the largest part of insurers’ costs, appear to be the primary driver of rate increases in the long run. Although losses for the entire industry have shown a persistent upward trend, GAO says that insurers’ loss experiences have varied dramatically across the sample of states it studied, resulting in wide variations in premium rates.

The GAO report declined to make any specific recommendations, saying only that to further understanding of conditions in current and future medical malpractice markets, Congress may want to consider encouraging the National Association of Insurance Commissioners and state insurance regulators to identify and collect additional mutually beneficial data necessary for evaluating the medical malpractice insurance market.

The GAO report was praised by the Physician Insurers Association of America for its emphasis on higher claims costs as the primary driver of malpractice premium increases, and by the American Association of Health Plans for refuting trial lawyers and some politicians who have said that higher insurance premiums are not connected to a similar rise in lawsuits and jury awards.

But not everyone agrees that claims are the primary culprit. While HHS has offered a strong defense for the position staked out by physicians and come down on trial lawyers, a July 2002 paper written by Mimi Marchev, senior analyst at the National Academy for State Health Policy (NASHP), says that the malpractice insurance companies may be equally to blame due to their pricing policies of the 1990s, and warns that the "move toward restrictive tort reform does not address the complexity of the problem."

Striking a note of caution on the increasing call for limits on the right to sue, she says that reforms that followed earlier malpractice crises of the 1970s and 1980s "have not succeeded in preventing periodic and dramatic rises in insurance premiums. And tort reform does not address the important and related issues of patient safety and medical errors."

Ms. Marchev previously said the data are inconclusive as to the causes of rapidly rising medical malpractice insurance premiums. While there are reported increases in frequency and severity of medical malpractice claims, the underpricing of malpractice premiums throughout the 1990s in an effort to expand market share and a downturn in the stock market exacerbated by Sept. 11 are also to blame, she maintains. Because of the reluctance to report errors, the data also are inconclusive as to whether any increase in malpractice claims corresponds to an increase in incidents of medical malpractice and medical errors.

The NASHP report says that state interests straddle the divide because states want quality medical care and hospital services to be accessible throughout the jurisdictions and are concerned that medical liability insurance be available and affordable for all providers. And states also want to see medical errors reduced or eliminated, while making sure that patients who are injured, either by error or malfeasance, can be fairly compensated.

"The challenge facing the states — to determine the cause and find a solution to this pressing and complicated problem — is made that much more difficult by the crossfire of accusations and dearth of empirical research," Ms. Marchev explains.

Comprehensive solution

Citing the experience of Pennsylvania with a comprehensive reform package, Ms. Marchev says that a comprehensive approach to the medical malpractice insurance crisis that addresses tort and insurance reform in conjunction with reporting requirements and other strategies aimed at reducing medical errors may be the most effective course of action for states.

"Although evidence suggests that tort reform is not the definitive solution to the malpractice insurance crisis," she says, "some reform may be beneficial if it serves to diffuse the defensiveness and antagonism of the malpractice debate and provides the opportunity to build patient safety initiatives. In a less hostile environment, states may be able to work collaboratively with stakeholders and develop creative strategies that meet the goals of affording victims of medical negligence fair compensation, ensuring available and affordable liability insurance to all medical practitioners, and reducing or eliminating medical error."

William Sage, a physician and Columbia University Law School professor, says the key message for all parties is that the malpractice insurance crisis reflects changes in the health care system and there is a need for reforms that improve the health care system, rather than being distracted by broader ideological battles. Mr. Sage spoke at a Kaiser Family Foundation briefing on malpractice. There are six problems that malpractice reformers should address, according to Mr. Sage: liability coverage is expensive and sometimes unavailable; liability crises potentially impair access to medical services because the health care system is less resilient now than in the past; compensation for injured plaintiffs is inadequate; too many avoidable medical errors occur; the process of resolving disputes through tort law is too slow, too costly, too uncertain, and too unpleasant; and the liability climate threatens the economic success of the health care industry by discouraging providers and reducing incentives to innovate.

"No reform can solve all of these problems, but the desirability of any proposal must be measured by its likely effect on each of them."

He points out that most reform proposals touch on only one or two of the problems and could worsen the rest. One notable exception, he says, is an Institute of Medicine (IOM) proposal that "draws on established though largely untested reform ideas [and] integrates liability policy with other key areas of health system performance: primary care, chronic care, information technology, and access to health insurance."

The IOM recommended replacing much of current malpractice law with an administrative system of strict liability for clearly avoidable injuries. It offers two options — provider-based early payment and statewide administrative resolution. Mr. Sage says that both options are intended to be "no-trial" rather than "no-fault" systems, capping noneconomic damages in accordance with a predetermined schedule based on severity and duration of injury, but preserving financial incentives for safety at the provider level.

If Congress enacts a California-style cap on damages, no national tragedy will follow, he says. But there also will not be any lasting benefit to health care. And the same will be true if Congress fails to do anything after prolonged political debate, as was the case with the right to sue managed care plans. Government will simply have missed a significant opportunity for truly productive change.

"The real malpractice debate," according to Mr. Sage, "is between those who view medical liability as an external drag on the health care system and those who see a properly functioning liability system as integral to its future success. Politics favor the former camp, but history is on the side of the latter."

[To contact ACOG, go to: For the HHS report, go to: To download the GAO report, go to: To learn more about the Kaiser briefing, go to: Contact Ms. Marchev at (207) 874-6524.]