Torts Get a Raspberry

I haven't read much from Sebastian Mallaby but he writes a cogent piece in the Washington Post on the costs of our current tort system:

In 2003, according to Tillinghast, the tort system cost $246 billion -- meaning that the average American paid $845 for it via more expensive goods and services. But the really shocking thing is where the billions went. Injured plaintiffs -- the fabled little guys for whom the system is supposedly designed -- got less than half the money.

According to Tillinghast's 2002 data, plaintiffs' lawyers swallowed 19 percent of the $233 billion. Defense lawyers pocketed an additional 14 percent, and other administrative costs, mainly at insurance firms, accounted for a further 21 percent. The legal-administrative complex thus guzzled fully 54 percent of the money in the tort system, or $126 billion. That's 43 times as much as the federal government has budgeted this year to combat the global AIDS pandemic.

While Mallaby recognizes that Tillinghast's clients are mostly insurers, the numbers are the best available.  The 21% for administrative costs in the tort system dwarfs the 14% figure for the insurance industry, 3% for Social Security and 2% for Medicare.  Of the 46% that actually goes to plaintiffs, 22% compensates for damages and 24% goes to "pain and suffering".  Worse than the amounts is the uneven and unfair distribution of damage awards.

If the administrative costs are a scandal, and the pain-and-suffering payouts are dubious, what can be said for the residual 22 percent of the money in the tort system? Perhaps this portion -- the part that finances economic damages for plaintiffs -- is defensible?

Actually, you can't even defend this chunk, because the money is distributed so badly. People who suffer small and medium-size losses usually get nothing: Claims have to be in the hundreds of thousands before they are economic to litigate. Big claims do get compensated, but at a rate that depends on the location of the trial, the composition of the jury and the depth of the defendant's pockets -- not just on the size of the injury.

Mallaby provides another revealing cost comparison, ours now versus ours 45 years ago, and our current costs versus those of other countries.

Measured as a share of GDP, America's tort system is more than twice as expensive as it was in 1960, twice as expensive as the current systems in France or Canada, and three times as expensive as the system in Britain. A reasonable goal for the American tort system is to halve it.

Amen for halving it.  What Mallaby doesn't quantify are the hidden costs of our litigious system, the defensive tactics taken to prevent from being sued.  How many additional unnecessary medical tests are ordered, not for purposes of medical diligence but for proper legal ass-covering?  Of course, those costs--in addition to higher malpractice premiums--are passed right through to insurers and ultimately patients, exacerbating health care inflation.

On a personal note, my wife and I are good friends with a pediatrician who is one of the most talented and capable people we know.  Everything she does, she does extraordinarily well.  Because of the current environment, the thoughts that run through her mind when seeing patients are "which one of these people could sue me".  As a result, additional unnecessary tests are ordered and additional unnecessary anxiety weighs on her conscience.  Multiply those real costs and those real anxieties by 650,000, which is the number of US licensed physicians, and you get the picture.  Sadly, our friend is leaving the profession, and that is another hidden cost of our present tort system:  the loss of good physicians who are chased away by this situation.  It hurts the medical profession and it hurts patients because there are fewer top-flight practitioners to choose from.

Comments

[von]

Amen, CB. I'm not convinced that a cap (on punitives or anything else) is the best way to go, but the system does need reforming.

[Jason]

Two things:
One of the "costs" involved in malpractice insurance is profit to the insurer. One insurer advertised that an investment in them grew at twice the rate of the S&P 500 (or roughly 30% a year over the time period in question).

Second, AFAICT what's really needed is malpractice reform, it seems that the vast majority of awards go to patients of a very, very small number of doctors.

Two solutions: One, doctors form a co-op (non-profit) insurance company, that'll force the other insurance companies to reduce their profit margins significantly, and to keep price increases in-line with actual cost increases.
Second, if a certain doctor is resulting in a large number of damage awards, maybe they need another line of work...

[Jesurgislac]

Interesting. So, is it your contention that people should get help from lawyers to defend their rights for free?

[von]

Interesting. So, is it your contention that people should get help from lawyers to defend their rights for free?

Well, that's one of the reasons why I'm cautious about caps; the American system works, in part, because plaintiffs' attorneys have the scent of a large payoff at the end. (Other countries employ a "loser pays" system, which creates other incentives -- and not necessarily better ones.) Still, too many poor quality claims are being brought and, in some states, it's becoming impractical to practice medicine. That has to stop.

Incidentally, by way of full disclosure:

1. I did, early in my career, help represent certain insurance companies in class action litigation involving car insurance. Thus, I do have an appreciation for both the lack of merit in many claims (reading claim file after claim file will do that to you), as well as how insureds sometimes game the system.

2. That said, I'm not blindly pro-insurance. Indeed, one of my significant pro bono projects at the very start of my career was to help in an anti-discrimination lawsuit against two insurance companies under the ADA; each had company had capped insurance payments for AIDs treatments at an obscenely low level, without sound actuarial support. (I.e., out of prejudice.*) My firm (the same one which defends car insurers in class action claims, above) sued on behalf of two AIDs patients and, with the help of the Lambda Legal Defense fund, resolved the issue.

von

*A nuance you might find interesting: the prejudice claim was based on the argument that AIDs sufferers were "disabled" under the Americans with Disabilities Act, not based on any anti-discrimination law targeting homosexuals. It was a creative reach -- and, before anyone starts quoting that as the law of the land, some research is required. The track record for the argument was mixed, at best.

[Bernard Yomtov]

Let's take a closer look at this study, shall we?

First of all, payouts to plaintiffs are not part of the cost of the tort system. They are compensation for damages, including pain and suffering. They are costs of the torts themselves, not of the system for obtaining redress.

Second, Mallaby is awfully dismissive of pain and suffering awards. No doubt they may be erratic, but his implicit assumption that they are unjustified is ridiculous.

Third, what is this 21% for insurance company administrative costs? That's an awfully big number. I won't accept it without some serious explanation.

Finally, if this is a cost-benefit analysis, where are the benefits? Let's say companies do live in terror of lawsuits. Surely some of the "excess" caution they exercise pays off in reducing the chance of damaging someone. Similarly, some of the excess tests doctors order do turn up something. I have no way of knowing the size of these benefits, but they are there, and an honest analysis ought to at least mention them.

[Charles Bird]

So, is it your contention that people should get help from lawyers to defend their rights for free?

No.

[hilzoy]

It's hard to write about tort reform in the context of medicine without noting that it has become, basically, the only means we have of dealing with bad doctors and unsafe products. In a saner world, the FDA or some other body would do serious followup on drug safety after drugs had been approved, and the AMA (or someone else) would do a serious job of policing its own. As things stand, however, it's suits or nothing. This distorts the tort system, but the answer is surely not to remove the only way we presently have of dealing with these issues.

[votermom]

What hilzoy said.

Malpractice suits should be able to go after licenses. Suspend or remove entirely, depending on the severity.

Plus, if we had universal healthcare, a lot of the rationale for large payouts to crippled plaintiffs would go away, n'est ce pas?

[Jesurgislac]

Von, one simple method of reducing the costs of the US's tort system with regard to health care (and reducing the costs and improving the efficency of the US's rather shoddy health care system) would be to have a health care system with universal health insurance provided by the government, not by corporations.

This would work to reduce torts costs: it would (relatively) cheap: it would have the added effect of dramatically reducing health costs as proportion of GDP and of dramatically improving the health care system of the US as a whole. (Very likely, it would save the lives of approximately 18000 people per year - that being the number estimated who die because they have no health insurance.)

But since no right-winger will ever support such a useful socialist institution as a national health service, I suspect that the "solution" will be found either in forcing people injured to make do with less compensation, or in forbidding people injured to sue the corporations who have injured them. That, as far as I can understand, is George W. Bush's idea of a "solution".

[Gromit]

Bush's answer is to cap awards for pain and suffering, ostensibly to de-incentivize lawyers (certainly not as a handout to the insurance industry, or anything like that). But aren't most of the lawyers I see advertising on TV out there chasing non-economic awards of far less than $250,000 in the first place? How many cases exceed this cap each year? Will this plan reduce the incidence of suits in any significant way? Won't doctors still see every patient who walks through the door as a potential plaintiff? If so, then the defensive medicine argument (which represents the bulk of increased health-care costs) and the doctor peace-of-mind argument both go up in smoke.

So what we are left with is some reduction in costs to insurance companies (which might or might not be passed along to their customers) and a commensurate increase in insurance companies' incentive to insure incompetent doctors. So insurance wins big, maybe doctors win a bit, maybe healthy folks win a bit, and sick people lose big time. Am I wrong?

[sidereal]

"The legal-administrative complex thus guzzled fully 54 percent of the money in the tort system, or $126 billion."

What a silly notion. Where does Mallaby think that money goes? Into the toilet? Of course not. It gets spent by general partners on things like yachts and hookers. And that, my friends, is the trickle that drives the American economy.

[fdl]

Please keep in mind that the pain & suffering cap will have 3 principal effects:

1. fewer cases will be brought, because plaintiffs' attys will need clear evidence of negligence before discovery even starts.

2. the impact of imposing a higher threshold on plaintiffs' attys is that fewer MERITORIOUS cases will be brought, ie. those where negligence could have been proven had discovery occurred.

3. While the (largely unstated) purpose of the P&S cap is to raise the bar for filing litigation, the effect will be to impose a great deal of hardship on profoundly injured people.

I'm willing to have an intelligent discussion about the best ways of regulating corporate behavior. Our mixed system, with federal agencies like OSHA, EPA and CPSC plus a plaintiffs' bar, has its inefficiencies.

But, as Professor Bainbridge points out, corporations are in theory responsible only to their shareholders, not to society. Corporations, therefore, have a fiduciary obligation to find ways of externalizing their costs.

And before we saddle the plaintiffs' bar with all the blame, let's remember that there are two further gatekeepers of the defendants' money: the judge and the jury (three, if you include the courts of appeal which frequently orders dramatic cuts in the multi-million dollar awards which get so much press.)

Yes, the plaintiffs' bar acts in its narrow self-interest when it advocates against no-fault insurance schemes. But the insurance companies usually end up on the same side at the end of the day.

Before my taxes have to go pay for dealing with un- or under-compensated tort victims, I'm going to need a lot better proof than what's been offered so far that a different system is better than the one we have.

Francis

[Bernard Yomtov]

fewer cases will be brought, because plaintiffs' attys will need clear evidence of negligence before discovery even starts.

Fewer cases will also be brought because the cap will make it uneconomical to bear the expense of preparing complex cases, no matter how meritorious.

[von]

But since no right-winger will ever support such a useful socialist institution as a national health service

Well, yes. Because all socialist medicine is replace one form of rationing (largely, by price) with another (by quality or length of time spent waiting for it). It does not increase the net amount of "medicine"; indeed, in many cases, it actually decreases the incentives for folks to become doctors.

Don't get me wrong: I'm all in favor of offering more to help poorer folk get needed meds. But I fear that socializing medicine will be a cure worse than the disease.

Incidentally, with one exception, every doctor I know is stressed to hell over (a) how to repay his/her school loans and (b) what to do about insurance. Med mal claims are driving good folks out of the practice. That needs to change.

(The exception is, well, an exception. And, I should note that I haven't chatted with my NY-doctor connection of late so, if he's reading, I ain't trying to speak for you.)

[Michael Cain]

"Incidentally, with one exception, every doctor I know is stressed to hell over (a) how to repay his/her school loans and (b) what to do about insurance. Med mal claims are driving good folks out of the practice. That needs to change."

Do other developed countries run their medical training system in such a way that doctors start their careers hundreds of thousands of dollars in the hole? How much of the current price of an office visit is needed to meet the loan payments?

[Jesurgislac]

Von: Well, yes. Because all socialist medicine is replace one form of rationing (largely, by price) with another (by quality or length of time spent waiting for it). It does not increase the net amount of "medicine";

It increases access to health care. Because socialist health care systems are by nature more efficient than the US method of delivering more health care to people who can pay more for it (whether they need it or not) and less or none to those who cannot afford it, in fact socialist health care systems without exception deliver better health care than the US system - and cost less.

The US is locked into a health system that primarily benefits health insurance companies, which is why the US health care system is so bad considered in human terms.

indeed, in many cases, it actually decreases the incentives for folks to become doctors.

Got any evidence of that? I mean, how many doctors trained in the UK versus how many doctors trained in the US? I did a casual google just now, but couldn't find any immediately-obvious websites with that data.

[fdl]

Von,

There is a major difference between tort reform and access to medical care. However, if you want to conflate the two, you need to recognize that the current liberal/democratic position is to nationalize health care INSURANCE, not health care.

Kerry's proposal -- that the USGovt would be a reinsurer for a certain percentage of claims over a certain amount -- would have reduced some of the worst incentives of private insurers to dump their policyholders on society. Insurers could have still competed on price, quality, range of covered services.

As far as i can tell, there isn't a single mainstream proposal in the US to nationalize health care services, ie to make all/many doctors employees of the govt paid pursuant to a legislatively determined schedule.

Returning to the point I made above, how should we as a society eliminate incompetent doctors from the pool of providers. Tort litigation is messy, inefficient and creates substantial unwanted conduct in response. I'd be willing to accept as an alternative that we pay for a far more aggressive state review board including both legal and medical professionals to examine doctors' conduct.

a little snark here -- the tort system is the market in action; tort law is one of the oldest forms of common law. (any society without judicial review in some form of breaches of the rules of conduct is, to me, basically an anarchy.) It's a little odd to see pro-market conservatives arguing for the legislative and executive branches of the state to deny persons access to the judicial branch.

cheers

Francis

[JWO]

Unless I am confused about this, the percentages for torts reflect all of the various suits, ie, personal injury from accidents, other suits for persons who have been wronged in some fashion, etc. The total would not be strictly for medical malpractice suits. In point of fact, in our area, it is practically impossible to get a judgement in a medical malpractice suit, so I don't know who is getting the big judgments....but it is not in my section of VA.

And there was a commentary on NPR's morning news show today by a professor of Economics at Georgetown U.(?)and a Research Fellow at Stanford. (Sorry, I was not wide-awake when this started and he was identified....) He was discussing the FDA in relation to the Vioxx withdrawal, and his comments made a lot of sense to me. First, he said that all drugs have risks. That should be understood. What we really need is not some chosen level of safety as determined by the FDA, but the information about what the side effects might be. For some, the risks of those side effects would be worth taking, while others might decide that they were not. But in either case, it is a decision that should be made between a patient and his doctor, rather than looking to the FDA to only provide "safe" drugs. By removing them from the market totally, there could be some promising uses that will be lost. I believe that his example was Vioxx was showing promise in the treatment for colon cancer. But by treating drugs in this manner, where everyone was informed and made their decision accordingly, it seems to me that litigation, as far as drug side effects, would then be reduced to a minimum.

[hilzoy]

As far as I know, the FDA doesn't claim to 'provide only safe drugs'. (When I was a teenager, I spent six years taking a medication whose warning label would make your hair stand on end.) It does require that drugs be (a) more effective than placebo for some condition, and (b) that its known side effects be commensurate with its benefits. (Thus, risky cancer drugs are OK; risky headache medicines are not.)

There are problems with what it claims to do (even leaving aside such questions as, is it too influenced by industry? etc.) One might ask: why ask only whether a drug is better than placebo, and not whether it's better than existing drugs? Why not do a lot more in the way of follow-up? Why doesn't someone fund a lot more head-to-head studies of one drug against another (there is surprisingly little of this)? But it's not as though they now claim to certify drugs as safe -- or even as though they could do so, given the studies that would be involved in catching either rare and unforeseen side effects or side effects that only appear much later.

[CaseyL]

One might ask: why ask only whether a drug is better than placebo, and not whether it's better than existing drugs?

I worked for a medical researcher for a few years, and to my knowledge, where there are other drugs used for Condition X, new drugs are tested against the existing drugs. SFAIK, placebo trials are only used when there is no recognized standard drug therapy; or, depending on the type of trial, a placebo may be tested against both the new and old drugs. The point of the research isn't just to find out if a new drug is "better than nothing," but if it is in fact better than the existing drug therapy.

All reputable drug trials also use "randomized, double blind" models, to prevent investigator bias from skewing the results. A randomized double-blind trial means that even the investigator doesn't know which members of the study population are taking which drugs.

JWO and his (?) friend are right: all drugs have risk factors. You have to weigh the risks, see whether the side effects are worth it. For example, a few years ago there was a big todo about estrogen hormone replacement therapy "doubling" a woman's risk of breast cancer. That sounds bad. But not taking EHRT increases the risks of osteoporosis (not a trivial condition); and, IIRC, heart disease. You have to weigh what your specific risk of breast cancer is versus your risk of osteoporosis and/or heart disease.

Oh, and there are many good reasons a drug stays on the market even if there are better ones available. One is cost: the old drug might be cheaper, and the difference in efficacy not so vast as to preclude using the old drug. Another is individual efficacy and side effects: people react differently to a drug, and maybe they're better off with the old one. Another is regimen: the new drug might work great, but demand too difficult a regimen - esp., say, if the patient has memory or other cognitive problems.