Fiscal Fitness: How States Cope

President to pursue malpractice caps, which proponents say may help stem rising care costs

President George W. Bush, who says he has political capital from his reelection victory over Sen. John Kerry (D-MA) that he intends to spend, will use some of that capital to push for limits to jury awards in medical malpractice cases. Citing a RAND Corp. study on California’s medical malpractice law, which reduced awards in malpractice trials by an average of 30%, Bush says he intends to push for a nationwide cap on malpractice verdicts.

The push to cap malpractice verdicts, beyond actual economic damages such as the cost of long-term medical care or inability to work, was a major element in the president’s campaigning. It was the first health-related item he mentioned in his Nov. 4 post-election news conference at which he reiterated the agenda he wanted to follow for his second term. "We must confront the frivolous lawsuits that are driving up the cost of health care and hurting doctors and patients," he said at that news conference.

With Republicans having increased their majority in the Senate, some political observers say there could be enough support to overcome Democratic-led resistance to limits on malpractice awards.

Suits said to drive up costs

Advocates for capping the jury awards say suits without merit drive up health care costs by forcing malpractice insurance rates up and by encouraging the practice of defensive medicine by physicians who may order unneeded tests or procedures to protect themselves against charges that they didn’t provide adequate care.

America’s Health Insurance Plans CEO Karen Ignani said such suits are worth $100 billion a year if one factors in the cost of unnecessary tests. "Then there’s the whole issue of safety and quality," she added. "Providers are afraid to talk about things that go wrong because they are afraid of being sued."

When Centers for Medicare & Medicaid Services administrator Mark McClellan was an economist and physician at Stanford (CA) University, he and a colleague published research that showed spending for hospital care was lower in states with malpractice caps than in those that didn’t have the caps. But other studies have found little or no evidence of a link between costs and liability limits. An analysis of the president’s health agenda during the campaign by the Lewin Group put the savings from changes in liability at $37 million over 10 years.

The RAND Corp. study found that California’s malpractice law reduced awards in malpractice trials by an average of 30%. Because attorney fees were capped as well as jury awards, the researchers said, the net recovery by injured patients and their families only went down 15%, while payments to plaintiffs’ attorneys were cut 60%.

California’s Medical Injury Compensation Reform Act (MICRA), enacted in 1975, had two main provisions — it limited to $250,000 the amount of noneconomic damages a plaintiff could recover through a medical malpractice trial, and it limited attorney contingency fees on a sliding scale.

RAND researchers Nicholas Pace, Daniela Golinelli, and Laura Zakaras looked at data from 275 malpractice trials from 1995 to 1999 to determine:

1. how MICRA’s caps on noneconomic damages affected the final judgments;
2. what types of cases and claims were most likely to have an award cap imposed following trial;
3. what effect MICRA had on attorney fees;
4. what effect MICRA had on net recoveries for plaintiffs;
5. what the effect on final awards would be if the MICRA cap were adjusted for inflation.

The three said their analysis indicated MICRA appeared to have achieved the California legislature’s intended initial result of limiting defendants’ expenditures. "Whether such savings have translated into reduced premiums and greater availability of coverage, which were the California legislature’s ultimate goals, is beyond the scope of this analysis," they added.

While the study did not go into the adequacy of compensation for plaintiffs, it did identify types of cases and plaintiffs that lose the most under MICRA:

Plaintiffs with the severest injuries, such as brain damage, paralysis, or a variety of catastrophic losses, had noneconomic damage awards capped far more often than plaintiffs with injury claims, and had median reductions of more than $1 million, compared with a median reduction of $286,000 for injury cases.

Plaintiffs who lost the highest percentage of their total awards were often those with injuries that led to relatively modest economic damage awards (about $100,000 or less) but that caused a great loss to their quality of life, as suggested by juries’ million-dollar-plus awards for pain, suffering, anguish, distress, and the like. The plaintiffs sometimes received final judgments that were cut by two-thirds from a jury’s original decision.

Death cases are capped more frequently than injury cases (58% vs. 41%) and when they are capped, death cases have much higher percentage reductions in total awards than injury cases, with a median drop of 49% as compared with a 27% drop for injury cases.

According to RAND, the study also suggested that MICRA resulted in a significant change in the economics of attorney representation in malpractice cases. The analysis suggested savings to defendants and their insurers were funded by plaintiffs and their attorneys. The effect of the financial shift on attorney practices is unclear, the report said. Important questions raised by the analysis included whether MICRA has discouraged attorneys from practicing in this field, whether MICRA has changed the way claims are litigated and settlements are negotiated, and whether MICRA has made it more difficult for plaintiffs in malpractice cases to find attorneys who will represent them.

Meanwhile, a report by the Congressional Budget Office (CBO) reviewed a number of studies evaluating state-level tort reform and assessing the relevance of that research for evaluating similar proposals at the federal level.

A number of the studies, the report said, have found that state-level tort reforms have decreased the number of lawsuits filed, lowered the value of insurance claims and damage awards, and increased insurers’ profitability as measured by payouts relative to premiums in the short run. But CBO warned the findings should be interpreted cautiously for several reasons: First, data are limited, and the findings were not sufficiently consistent to be considered conclusive. Second, the more persuasive studies were limited in that they analyzed specific types of cases such as claims of bodily injury from auto accidents, making generalizations difficult. And third, because most reforms are often enacted in packages at the state level, distinguishing among the effects of different types of reforms can be difficult.

"The most consistent finding in the studies that CBO reviewed was that caps on damage awards reduced the number of lawsuits filed, the value of awards, and insurance costs," the CBO analysts wrote.

"Yet even those finding must be viewed in context. As a whole, the studies provided little systematic evidence that any one type of reform had a significant impact on any of the various outcome measures studied. Few of the findings — except for a reduction in the losses experienced by insurers — were independently corroborated by other studies. Some studies were unable to document any measurable effects from the tort reforms, a result that may be more reflective of the lack of data than of any failure of the reforms."

Many of the studies, CBO said, concluded that tort reform can affect outcomes most closely related to the tort system in much the same way that advocates of changing the tort system would claim. Those studies find that reforms, in general, have decreased the number of lawsuits, reduced awards, and improved the profitability of insurance providers.

But, "moving further away from economic behaviors most directly influenced by torts, the literature is thin," CBO said. "For that reason, the conclusions should be interpreted with caution, especially insofar as they indicate how federal tort reform might be expected to affect the economy."

The Coalition for Affordable and Reliable Healthcare (CARH) — an organization of hospitals, long-term care providers, businesses, health care professionals, and concerned citizens dedicated to working with the administration, Congress, and the media to educate the public about the medical liability insurance crisis and support federal reform legislation — has been calling attention to various studies that back its position.

Wyoming’s action is promising

Late in 2004, it praised the Wyoming Healthcare Commission for providing evidence that capping noneconomic damages in medical malpractice cases will reduce malpractice costs. CARH said the Wyoming study found that capping noneconomic damages at $250,000 could lead to a 15% reduction in malpractice losses.

"Too many Americans can’t find quality health care because runaway jury awards are driving malpractice liability insurance costs higher and forcing doctors to shut their doors," said CARH president John Thomas. "This report proves that capping noneconomic damages has a very real effect in lowering overall malpractice costs."

Wyoming is one of 20 states identified by the American Medical Association as a health care crisis state where high malpractice costs are driving doctors away. Mr. Thomas said average malpractice awards have tripled to $3.5 million since 1994, driving medical liability insurance premiums up more than 500%. In 2001, he said, 12 juries awarded verdicts higher than $20 million, including a $269 million judgment in Texas The cost of America’s tort system is predicted to go from $200 billion in 2003 to $300 billion by 2005.

Critics of caps are pointing to a 2003 filing with the Texas Department of Insurance by medical malpractice insurer Medical Protective that said caps would reduce payouts by approximately 1%.

Medical Protective had supported Texas legislation mandating a $250,000 cap on noneconomic damages in most cases, calling such caps a "critical element [of tort reform] because in recent years we have seen noneconomic damages spiraling out of control."

Insurer not sure caps help

But when the company filed for a 19% rate increase, it said noneconomic damages represented a "small percentage of total losses paid." The insurance department denied the request and the case moved to an administrative law judge.

Commenting on the filing, the Texas Medical Association said the caps already had helped reduce malpractice insurance rates. The doctors’ organization said Texas Medical Liability Trust, the state’s largest malpractice insurer, had reduced premiums by 17% after the caps were enacted.

An attorney for Medical Protective said the comment on the role of caps was one small part of the filing and had been taken out of context. Insurance department deputy commissioner Mike Geeslin said information in the filing should not be applied across the industry. "You’re looking at information submitted in a rate filing that is obviously slanted toward trying to justify some sort of rate action," he said.

Finally, a Massachusetts study reportedly has malpractice attorneys wondering why they’re still looked at as the bad guys in the liability crisis. The study showed that malpractice settlements in the state peaked three years ago, but insurance premiums continue to go up. "These skyrocketing malpractice rates have to be due to something else," noted attorney Mark Breakstone. "It is a fraud being perpetrated by the insurance industry, which the medical society has swallowed hook, line, and sinker. Doctors should be up in arms with the insurance industry that’s gouging them."

Massachusetts Medical Society president Dr. Alan Woodward said the report’s conclusions are misleading. While overall payments appear to have leveled off, he said, average individual award amounts have increased since 2001 from $388,800 to $431,000. "What we still have is a system that’s unsustainable going forward," he maintained.

Malpractice attorney Neil Sugarman told the Boston Herald he can understand why doctors are upset, given that some are paying 30% more for malpractice insurance. "But the leveling of their ire should not be on the people who get hurt," he continued. "It should be on the people who make the rates."

(Find the RAND study on-line at www.rand.org/publications/MG/MG234/. The Congressional Budget Office study is available at www.cbo.gov.)