Mandatory Caps on Medical Malpractice Could Doom Patients [USA Today]

"... Caps on damages would reduce physicians' and [insurance] carriers' incentives to keep track of and reduce practice risk. "

SUHORTERS of capping coot awaids for medical malpractice ajgue that caps will make health care more affordable. U may not be that simple. First, caps on awards may result in some patients not receiving adequate compensation for injuries lhey suffer as a result of physician negligence. Second, because caps limit physician liability, they also can mute incentives for physicians to reduce the risk of negligent injuries. Supporters of caps counter that this deterrent function of medical malpractice liability is not working anyway - that awards do not track actual damages, and medical malpractice insurance carriers do not translate the threat of liability into incentives that reward high-quality care or penalize errant physicians.

An existing body of work shows (hat medical malpractice awards do track actual damages. Furthermore, medical malpractice insurance carriers use various tools to reduce the risk of patient injury, including experience rating of physicians' malpractice premiums. High-risk physicians face higher malpractice insurance premiums than their less-risky peers. In addition, carriers offer other incentives tor physicians to reduce Ine risk of negligent care: they disseminale information to guide risk-management efforts, oversee highrisk practitioners, and monitor providers who offer new procedures where experience is not sufficient to assess risk. On rare occasions, camers even will deny coverage, which cuts the physician off from an affiliation with most hospitals and health maintenance organizations, and precludes practice entirely in some stales.

If the medical malpractice liability insurance industry does indeed protect consumers, then policies that reduce liability or shield physicians from oversight by carriers may harm consumers, fn particular, caps on damages would reduce physicians' and carriers' incentives to keep track of and reduce practice risk. Laws that shield government-employed physicians from malpractice liability eliminate insurance company oversight of physicians working for government agencies. Slate-run insurance pools that insure risky practitioners at subsidized prices protect substandard physicians from the discipline that medical malpractice insurers otherwise would impose.

Medical professional liability insurance commonly is referred to as malpractice insurance. Stale governments regulate medical malpractice insurance. Companies approved by state insurance departments are called admitted carriers. They must demonstrate financial stability and adhere Ki state regulations, as well as seek state department of insurance approval for rales and forms. State guarantee programs protect injured patients against insurer insolvency. Since the mid 1970s, the share of the medical professional liability insurance market held by traditional, forprofit, commercial insurers has declined as notfor-profit, physician-owned insurers' share has grown. Other risk-transfer entities provide insurance to medical societies or physician groups.

Physicians denied coverage or dropped by admitted carriers turn to surplus-lines carriers. This includes doctors who nave lost hospital privileges, (hose with a history of medical malpractice claims or drug or alcohol abuse, and physicians sanctioned by state medical boards. Medicare or Medicaid ftaud also can be a ticket to the surplus-lines market Doctors with cfean clinical records may be in lhe surplus-lines market because they practice in more than one state, have gone without insurance coverage for a time, or are utilizing a new procedure not yet widely in use.

For the most part, surplus-lines carriers are not as heavily regulated as admitted carriers nor backed by a state guarantee fund. Because they are not required to file forms and rates, they may change rates or policy ternis as conditions warrant This allows them to design insurance products for nonstandard risks.

The number of physicians in the surplus-lines market depends on lhe medical malpractice insurance cycle. In a buyers' market, lhe so-called soft market, admitted carriers take on more risky physicians. Tbday, an aging soft market has led many admitted carriers to expand the set of physicians they will cover, crowding out lhe surplus-lines carriers. CNAHealthPro underwriting director Tim Vlazny estimates that the share of premiums attributed to doctors in lhe surpluslines market can be as tow as one percent in a soft market and as high as 10% in a hard market.

Tbrtlaw serves two functions. The Gist is to compensate individuals who are harmed by others. The second is K). deter harmful behavior. If the medical malpractice system is working properly, court verdicts (and settlements motivated by previous verdicts) not only would compensale patients who suffer due to physician negligence, but would deter future harmful events. The medical malpractice Systran's ability to deter negligence depends first on the accuracy of court judgments and awards. If awards and settlements aie random, lheie can be no deterrent effect, making me enure system a costly way ID compensate victims of negligence.

Researchers have found lhat awards are not haphazard The medical malpractice system generally awards damages to victims of negligence and fails to reward meridess claims. Plaintiffs' attorneys, paid on a contingency basis, filter out weak cases. Patients who file valid claims arc likely to collect, generally through out-of-coun settlements. Though some unfounded daims do result in settlements or the rate court award, the dollar amounts arc smaller than lhey would be for similar injuries that result from physician negligence. The fact that settlement is common suggests courts are providing good signals as to when plaintiffs will prevail. Under these conditions, insurance companies assess aie validity of claims and setde valid claims rather man go Io court. The feet lhat defendants win most court trials makes sense if defendants (providers and insurers) generally settle valid claims out of court.

Anolher common criticism of ihe medical malpractice system is lhat few cases of negligence result in claims. This partially could be explained by the fact fliat, in most cases of negligence, the damages ate minimal. A prominent study found that nearty 80% of patients who suffered a negligent injury either recovered fully within six months or were very okL Both factors indicate relatively small financial losses, which can discourage patients from filing a claim. The evidence suggests that the majority of claims ate concentrated heavily among a small percenlage of practicing physicians. So, if more cases of claims, the set of defendants likely would not difier significantly from the set of high-risk professionals matite current system already identifies.

Critics of the system point to the fact that many initial claims do not involve negligence. This can be explained by patients and their attorneys seeking to gather information about the level of negligence associated with an injury. Once discovery shows a small likelihood of success, many plaintiffs drop their claims.

Critics of the medical malpractice system point to its high administrative costs. High legal fees may reduce the system's efficiency by leading insurers lo settle meritless claims and by deterring some injured patients from filing valid claims. Yet, as economist Patricia Danzón observes, the bulk of administrative costs are limited to the small fraction of cases mat go to court Meanwhile, the deterrent effect influences all medical practice.

Although the conventional wisdom is that lawsuits keep doctors ôom discussing problems and reporting errors. Cato Institute adjunct scholars David Hyman and Chartes Silver credit lawsuits with starting discussions that improve care. For instance, high malpractice premiums motivated Ihe American Society of Anesthesiologists to launch a safety campaign that resulted in a dramatic reduction in anesthesia-related injuries and deaths in the U.S. They point to a hospital mat did not lake efforts to reduce infection rates until it faced significant costs of litigation; it was mis potential expense that motivated the hospital to improve sanitary procedures and resulted in a near elimination of hospital-borne infections.

How do patients benefit?

When asked how consumers benefit from medical malpractice insurance, industry executives typically mention only patient compensation. Yet, much more is at work

Competition in the market for medical malpractice insurance, and each insurer's interest in reducing its exposure to malpractice awards, leads insurers Io provide oversight that protects consumers from physician negligence. Malpractice underwriters review physicians annually. They evaluate claims histories and investigate loss of hospital privileges, substance abuse, and loss of specialty board certification. They alert the medica] community to situations that result in bad outcomes and offer advice on how to reduce such outcomes. The evidence shows that physicians pay a price for putting patients at risk. Carriers reward claims-free physicians and physicians who take part in risk-management activities. The indusiry provides oversight of risky practitioners, dictates patterns of practice, mom tors the introduction of new procedures, imposes policy exclusions for specific activities, and denies coverage in the most egregious cases, precluding affiliations dial require insurance.

More broadly, patients derive protection from an interdependent system of physician evaluation, penalties, and oversight that includes hospital and health maintenance organization credentialing and privileging activities, specialty boards, and me médical malpractice insurance industry. Underlying nearly all of ihese activities is the threat of legal liability for negligent injuries. Reducing physician liability for negligent care by capping court awards, all else equal, will reduce the resources allocated to medical professional liability underwriting and oversight and make many patients worse off. Legislators who see mandatory liability caps as a cost-containment tod should look elsewhere.

Moreover, state licensing of medical professionals is ineffective, A cheaper, more effective approach to consumer protection would be for states to require public reporting of malpractice coverage. Medical professional liability insurance companies know considerably more about physicians than do state medical licensing boards, and Ihe Ie vel of oversight dwatfe what state medical boards have had the resources, ihe incentive, or even me capability to accomplish. Hospitals and health maintenance organizations already inquire about physicians' medical professional liability insurance coverage. Requiring public reporting of malpractice coverage would encourage consumers ?? inquire about it when searching for independent physicians.

Finally, government agencies should not assume malpractice liability risk for physicians they employ. Profit-maximizing insurers have stronger incentives to promote effective riskmanagement efforts. State legislatures should shut down state joint underwriting associations. If medical malpractice insurers are unwilling io bet meir own money on a particular physician, legislatures should not force taxpayers or other physicians to take Ihe same bad wager, particularly since doing so exposes patients to a higher risk of adverse medical events.

Shirley Svorny is professor of economics at California State University, Northridge, and an adjunct scholar at the Cato Institute, Washington, D.C.