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What a Difference a Day Makes

November 17, 2005 9:10 AM


In our Point of Law featured discussions, we always strive for civility, and I�ll continue to endeavor to do so. You may think my initial post overly �diplomatic� � in your phraseology, �saying nasty things in nice ways.� I don�t really think anything I said was nasty, implicitly or explicitly. I merely have a difference of opinion with you, and I took issue with your characterization of the Trial Lawyers, Inc.: Health Care report vis-�-vis its treatment of med-mal damage caps, as well as what I felt was a caricature of the tort reform movement as a whole � and of my and the Manhattan Institute�s role in it. As to who�s being nasty, I�ll let our readers decide.

In any event, you seem to be frustrated that I�m too �on message� � really, for not saying what you�d want or expect me to say (E.g., �Why be so coy in response to my pointing out that you favor damage caps and blame the legal system? Why deny that caps are your preferred medical malpractice reform while, in the course of that denial, rehashing all your arguments about the virtues of damage caps?�). But I don�t think I was coy: I do favor damage caps, at least at the state level, and my initial post said so. Still, I don�t think they�re the only or even the best reform � your beliefs or suggestions to the contrary notwithstanding.

Why did I give the issue of damage caps so much attention in my initial post, if they�re not my �preferred medical malpractice reform�? Because I think you unfairly characterized the tort reform debate as a simple dichotomy between �tort reformers� who favor damage caps and lawyers who want to defend the status quo, and because you try to fit Trial Lawyers, Inc.: Health Care into that box. You mentioned MICRA six separate times in your opening post. I think that you were basically attacking a straw man � saying that tort reform was just about damage caps, and that Trial Lawyers, Inc.: Health Care was all about support for damage caps: �But guess what? The report would be a lone voice � far out of the mainstream � in any gathering of health policy experts interested in medical malpractice. . . . I know nobody � repeat, nobody � in my professional community who favors MICRA-style reform as a stand-alone solution.�

But I�ve got a guess what for you, too: damage caps aren�t at the core of what most of the tort reform people I talk with on a daily basis think about, either. Damage caps are a significant component of a lot of tort reform legislative activity, but they�re far from the only tort reform policy idea out there, and I don�t know anyone who supports them as a �stand-alone solution� either. The reason damage caps get so much public attention, in my view, is precisely that the plaintiffs� bar and its supporters want to define tort reform down to being all about damage caps. It makes for good soundbites: �they�re taking away your rights,� �it�s all about protecting greedy corporations who injure you,� �what about the woman who loses her breasts through a doctor�s incompetence?� The other major legislative tort reforms out there that actually have been enacted � including those that deal with prejudgment interest, collateral source rules, caps on contingency fees, periodic payments, joint and several liability, or statutes of limitations, each of which you use as variables in your own June 2005 JAMA article that you co-authored with Dan Kessler and David Becker � aren�t quite as easily adapted to this line of attack.

Another guess what: far from advancing an agenda to push damage caps to the exclusion of other policy alternatives, the Manhattan Institute has sponsored writings and programs that do precisely the opposite. We�ve had Phil Howard of Common Good here to speak, twice, on his idea for medical courts (and we�re having another dinner with Phil and other opinion makers this very evening, in Washington, D.C.). Indeed, Phil Howard launched Common Good at a Manhattan Institute luncheon, featuring him and Johns Hopkins�s William Brody, in March 2003. On the issue of no-fault administrative compensation schemes, we hosted a large conference in Washington, D.C. this January. The focus was the 9/11 Compensation Fund � highlighted by a keynote address from the Fund�s administrator, Ken Feinberg � but a clear undercurrent was the adaptability of no-fault approaches to health care. Dan Troy, former counsel to the FDA, was on one of our two panels and spoke on the issue as it relates to drug liability. Finally, last fall the Center for Legal Policy put forth a working paper by Dan Kessler � your JAMA co-author � with commentary in a featured discussion here at Point of Law including, yes, Phil Howard. Kessler�s paper summarized the empirical evidence on various traditional tort reforms (the weight of the empirical evidence does indeed clearly support damage caps and other traditional tort reforms � as does your more recent JAMA article that your co-authored with Dan). But Kessler went further to explore various alternative reforms: guidelines-based systems, enterprise liability, binding alternative dispute resolution, and no-fault systems.

Over the almost three years since I�ve been at MI, we�ve sponsored only one event or publication that could plausibly be construed as focusing on damage caps. And even that event wasn�t really: two leading New York physicians spoke here on the crisis in obstetrics in the state driven by liability. On a panel with them: Dan Kessler, summarizing the empirical evidence. The luncheon keynote speaker: Phil Howard, talking about medical courts. Although the doctors tended to focus on caps as a preferred policy outcome, they mostly chronicled the problem, not the solution.

Characterizing my position, or that of MI, as be all about damage caps simply isn�t accurate. I think they�re a good idea in that they�re proven to be effective. I think states should adopt them. But they�re far from a holistic solution, and I � and most people who think seriously about (rather than lobby for) tort reform � agree with you strongly that we should look for more comprehensive solutions.

So forgive me for being a bit skeptical: defining tort reform down to being all about damage caps is the primary tactic of the trial bar, and your initial post � and your second post � fit well within that paradigm. Your initial post basically said, as I read it: (1) I care about health policy outcomes, not tort law per se; (2) tort reformers only care about legal process, and the tort reform debate is just about people who�re for damage caps and those who aren�t; and (3) we sophisticated folks in the �health policy community� have a much deeper, more nuanced view that you simple tort reform folks can�t or won�t appreciate. My response was guided by that reading, so I freely admitted that there were tons of very important health policy issues outside the scope of tort law, which I wouldn�t be discussing; that your (and the trial bar�s) caricature of the tort reform debate was highly simplistic; and that while tort law is certainly not the only variable at play in improving U.S. health policy, that I thought it plays a very important part, and in fact intersects with all variables of interest to overall health policy, namely cost, access, quality, and innovation.

Just as I think your (and the trial lawyers�) caricature of the tort reform debate as being all about damage caps is inaccurate, I don�t think that support for damage caps is the main point of, or takeaway from, Trial Lawyers, Inc.: Health Care. The report is designed to speak to a general audience � reporters, political staffers, and community leaders � not to academics, policy wonks, or practicing lawyers; and it�s designed to show just how the trial bar operates, increasingly, as a very sophisticated business, how that business is targeting all segments of the U.S. health care industry, and how American health suffers as a result � not to develop or discuss the best legal reform ideas out there. As I�ve described at length, we do that in other venues.

Do I, or the report, �blame the legal system�? Yes � inasmuch as I think the legal system exacts a staggering, often unappreciated cost on U.S. health care; no, if you mean that I, or the report, blame the legal system for all of America�s health care system failings � far from it, which is why I referenced the other health care work MI is doing, with which I generally agree, though the areas aren�t my specialties.

Is the Trial Lawyers, Inc.: Health Care report �a political document,� as you suggest? Well, I suppose that too depends on what you mean. Do we want politicians � and voters � to pay attention to the report? Sure, because the Manhattan Institute is all about �turning intellect into influence.� We aren�t about publishing dry articles in academic journals that nobody reads. And compared with empirical studies or policy documents, Trial Lawyers, Inc. is much more intended to reach a lay audience. But no, the report is not �political� if you mean partisan. In the government/public relations section of the report, we specifically explore how trial lawyers have worked to influence both parties. ATLA and major plaintiffs� firms do give overwhelmingly to the Democrats � and in the last presidential cycle were at the center of the party�s fundraising apparatus � so any discussion of how the plaintiffs� bar works to influence politics would have been lacking indeed if it didn�t point to that fact. But we also gave significant attention to Republicans with ties to the trial bar � from Judiciary Committee Chairman Arlen Specter to former trial lawyers Lindsey Graham and Mel Martinez to former Congressman and media personality Joe Scarborough. (Believe me, I got phone calls and emails from those in the �tort reform community� to complain about our having included some of the folks we highlighted in the report.)

Our regular readers on Point of Law and the followers of my and Walter Olson�s work over time know well that we take issue with both parties on quite a regular basis. Last fall, we scheduled a featured discussion in which Ted Frank, now at the American Enterprise Institute, and Ron Chusid, of Doctors for Kerry, debated the merits of the Bush and Kerry approaches to med-mal reform. I think that Ted won the debate � and that Chusid took the all-to-familiar tack of reducing the issue to damage caps, and recycling trial lawyer talking points against them � but you can decide for yourself. The point is that we presented both points of view.

OK, enough about all that. We agree that damage caps aren�t a holistic solution � we merely differ on whether they should be supported at all � so let�s get down to the business of trying to explore other facets of the problem, on the way toward looking at other reform ideas. I�ll begin with problem definition. In your most recent post, you say the following:

Medical liability expanded during the late 20th century because of the tremendous success of modern medicine, not its failure. . . . Liability is never truly �unlimited,� whether or not damages are capped. Rather, liability expands incrementally as medical care improves, costs of receiving services and remediating injuries rise, and care delivery processes become industrialized. In the late 1980s, now UCLA law professor Mark Grady argued persuasively that negligence law is primarily a response to technologic progress. (You might know Prof. Grady � he used to be Dean and Chairman of the Law and Economics Center at George Mason University School of Law, hardly a front for the trial bar).

In general, well put, and an important caveat to the debate. I�m familiar with Professor Grady�s work � his seminal article Are People Negligent? Technology, Nondurable Precautions, and the Medical Malpractice Explosion, 82 Nw. U. L. Rev. 293 (1988) and subsequent follow-ups � and I think his point is very well taken, if perhaps overstated. Simply put, in medical malpractice law, technological change can drive new types of litigation precisely because the costs of failing to use the new technology can result in death, whereas people would have died regardless before the technology was in place. That�s important to keep in mind, as is the fact that the explosion in observable health care costs is also to a significant degree technology (and division-of-labor) driven: a very strong case can be made that health care costs, rightly understood, have fallen dramatically in the last fifty years. My colleague Peter Huber made just such a claim last year in Forbes:

The cost of health care in the U.S. has been declining steadily for the last 50 years. It will decline faster still in the next 50. All of the doleful commentary about mushrooming costs and budget-busting programs ignores the principal economic costs of illness, which are falling fast, and the science of pharmacology, which is transforming the economics of health care.

By far the largest economic cost of illness is lowered labor productivity. Sick people can't work, and when adults die in their prime, they take all their intelligence, skills and initiative with them. Until recently, the cost of illness among children and the elderly was also shouldered mainly by the healthy adults who devoted countless hours to their care. Such costs aren't reflected in revenues to doctors or hospitals, still less in federal insurance programs. They are felt in lost corporate profits, lower wages and, for many women, tireless but entirely off-budget toil in the home.

Several developments radically changed this economic calculus in the second half of the 20th century. Vaccines all but eradicated many of the most common childhood diseases and substantially curbed infectious disease among adults as well. However much it cost to develop the whooping cough vaccine or to distribute it free to families who couldn't afford it, the cost must surely have been dwarfed by the economic gains that came from freeing up mothers to engage in other pursuits. Antibiotics had a comparable impact. Tuberculosis was a fantastically expensive disease a century ago--think of the balconies in the mountains of Davos or New York's Saranac Lake. Polio meant braces and iron lungs. Those costs have all but disappeared.

But while the costs of incapacity, home care and the sanitarium declined, spending on hospitals and physicians rose sharply. Families began outsourcing their health care, particularly for the elderly. This pushed the costs out into the open, where they could be covered by insurance programs and decried by budget experts. The real cost of health care--avoiding disease or recovering from it--certainly continued to drop fast, but now the costs were incurred not in time but in dollars--often government dollars--and that of course changed the debate.

It�s important, though, that we correctly characterize Professor Grady�s work. While he looks to technology rather than doctrine as the primary cause of the medical malpractice litigation explosion, he isn�t saying that the explosion isn�t a problem. He certainly isn�t saying as you do � echoing the favorite mantra of the trial bar � that these crises �largely reflect the failure of cyclical insurance markets.� What does Grady say? �New lifesaving technology can easily create a tort crisis by expanding the amount of insurance that doctors are obliged to offer their patients. For various reasons, patients and other potential victims may not be willing to pay for the amount of insurance that the new technology, operating through the tort system, foists upon them.� Not the �insurance cycle� (I agree with you that insurance companies� investment returns matter, by the way, due to the time value of money; but the long-term driver of liability insurance is liability, which you essentially agree to in your last post) � but rather insurance that new technology �foists upon them� �through the tort system.�

Let�s put this point in different terms. Patients cannot �opt out� of tort contractually (notwithstanding that they�re really in contractual relationships with their medical care providers � they don�t run into doctors accidentally on the street). They can�t buy health insurance policies that are cheaper but have binding provisions that, say, cap the damages they could recover in a tort negligence claim. (Paul Rubin argues rather convincingly that they should be able to, but his ideas, like some of yours, haven�t gained political traction.) In essence, the tort system �foists� unwanted insurance on health care consumers.

Grady�s work merely points out that rather than being due to changes in substantive or procedural legal rules, this effect may be due in significant part due to the rapid pace of technological change itself. That doesn�t mean it isn�t a problem. Grady again:

Technology-induced insurance effects are practically indistinguishable from the older insurance effects that are implicit in applying the negligence rule to old activities. While negligence liability generally has a beneficial deterrent effect, liability for inadvertent negligence inevitably has an undesirable insurance effect that after a point outweighs the benefits of increased deterrence. . . . [F]or a variety of reasons already emphasized by Danzon, Priest and others, the normal measure of damages may exceed the amount of insurance against physician inadvertence that the patient would wish to purchase, and this may be especially so in periods in which risk-loading technological change has an edge over the risk-dumping variety. The very magnitude of medical benefits relative to most people's income can make unwanted insurance very costly to consumers, and this problem becomes more acute as medical technology improves.

I think that the �point� Grady describes has been reached. Access to health care is limited for many Americans, in no small part, due to the fact that American tort law � operating on what law and economics scholars call strict �liability rules� � can�t be contracted around in the medical malpractice (or products liability) arena. So all Americans must purchase the maximum technologically feasible health care � as determined by courts (ultimately, lay juries) � or be left unable to afford health care at all. Do you really think that liability problems don�t �come within an order of magnitude of threatening medicine�s success�? (Caveat: I know that you write �success in the future,� which shouldn�t be overlooked. But I�d say the effects on innovation of product liability abuses � see, e.g., Bendectin, breast implants, Fen Phen, which we detail in Trial Lawyers, Inc.: Health Care � are enormous. Vioxx and Fen Phen will cost their companies ten times their respective research and development budgets. The annualized cost of the liability for these two drugs alone is roughly one-tenth the annual sales of the whole U.S. pharmaceutical market. That doesn�t have a significant impact on innovation?) I think here�s the crux of the issue: we just don�t agree on the degree to which the liability system generates health care problems.

I�ve gone on for a while, but problem definition is important. I will however touch upon each of the health care issues you call out, at least briefly.

1. Compensation for avoidable injury is inadequate.

I can�t imagine how flat caps on damages would help get more injuries fairly compensated in conventional litigation, or would fail to harm the most severely injured. But perhaps you see possibilities I don�t.

I agree with you on point one, and at least somewhat on point two. Damage caps (here we go again�) aren�t a solution that would help compensate the many avoidable errors that our liability system doesn�t reach. Why aren�t many injuries compensated? Because the administrative costs of the tort system are enormous. (A side point: in your last post, you snarkily remark: �I�m always surprised that tort reformers, despite their business allegiances, fail to grasp the basic economic fact that, administrative costs aside, a reduction in insurance premiums unaccompanied by a reduction in insurable events is merely a wealth transfer, not a net savings to society.� Well, the administrative costs can�t be left �aside� � they represent over half of all litigation costs. Tort awards themselves are nothing but wealth transfers, effected by a system with extremely high administrative costs. The question is whether those transfers make sense in the first instance. If, say, the tort system were merely a random lottery in which one out of every 100 medical patients struck it rich, it probably wouldn�t make a heck of a lot of sense, even leaving administrative costs to the side. Why should the other 99 patients have to pay to support this lottery? Now I�m not saying that the tort system is literally a lottery, but if the system is just transferring money without properly meting out its deterrence function (which can include deterring the wrong things, it�s not simply having no deterrent effect at all), it�s not a system we�d want to defend, since we could operate a no-fault or alternative system at much lower administrative cost.)

Why are these administrative costs so important? We have this peculiar �American rule� that means the losing party to a lawsuit doesn�t pay the other side�s expenses. So if Jane Roe is injured by a clearly avoidable error, but her injuries only amount to $25,000, she won�t be able to get a lawyer to take her case, since the lawyer won�t recoup enough to cover his own legal bills � and the defendant insurance company knows that.

A loser pays rule, like the rest of the developed world enjoys, dramatically changes this calculus. The lawyer can recover all his fees for a clearly avoidable injury, once he goes to court and wins. The insurance company knows that, too, so it offers to compensate her reasonably.

My colleague Walter Olson has written about loser pays for years, and it�s something we at the Manhattan Institute continue to work on. Unfortunately, like some of the other reforms � many potentially salutary � that you�ve advanced, the �political will� to implement loser pays in almost any U.S. state isn�t really there at the moment.

A quick caveat on point two: I agree that at least some severely injured claimants would suffer, at least somewhat, with damage caps. But it�s important to emphasize that other reforms adopted in conjunction with damage caps can soften this blow. California�s MICRA, for instance, has contingency fee caps on higher-dollar cases, in addition to damage caps. Some severely injured claimants make out better under this system precisely because their lawyers� fees fall, even though their noneconomic damages are capped. Some percentage of claimants � 7 percent, according to a RAND study � do see an actual reduction in damages received (presumably because their damages are predominantly noneconomic). This effect is a real negative for some, though not one in my view that trumps the generally sensible notion that society can decide a reasonable ceiling for noneconomic damages, which if that ceiling lowers costs is worth adopting.

2. Too many avoidable errors occur.

Again, one would think that capping damages alone would do nothing to reduce errors, and might increase errors by removing financial incentives for safety improvement.

Now, I can almost see the saliva dripping onto your keyboard as you mouth �defensive medicine.� I agree that defensive medicine matters; in fact, I co-authored the most recent empirical study of defensive medicine to appear in the health policy literature (JAMA, June 1, 2005). Defensive medicine is important for more than the aggregate-health-care-cost arguments intended to sustain political momentum for tort reform between crisis periods even though physicians have easy access to cheap malpractice insurance. Defensive medicine is important during malpractice crises because physicians who fear an imminent loss of affordable coverage treat patients worse as a result � not only engaging in wasteful �assurance behavior� such as expensive diagnostic testing, but also performing unnecessary invasive procedures that plausibly increase risks of physical harm and avoiding types of medical care and types of patients they consider unduly risky, even when those patients need services. But MICRA-style reforms are tangential to defensive medicine. The deeper causes of defensive practice are clinical uncertainty, fragmented medical practice, and a malpractice insurance system that is as isolating and unforgiving in bad economic times as it is oblivious to health care quality in good economic times.

I�m not sure I agree with you here. Yes, I agree that too many �avoidable errors� occur (though we may have a normative disagreement about what an �avoidable error� really means; I think individuals should be able to contract around liability rules that mandate an immutable standard of care consistent with the most cutting-edge technologies available). But in some sense it�s an �error� if there aren�t enough ER doctors, no? Moreover, the fear of unlimited liability undoubtedly keeps doctors from honestly admitting mistakes, and discussing them, and working to improve practices and procedures that could reduce mistakes. Limiting the scope of that liability would free doctors and hospitals to be more open. I think that most doctors genuinely want to help their patients. Most hospitals want to rectify errors. But they don�t want to risk crippling liability in the process.

As for defensive medicine, I�m not sure liability is � or caps are � tangential (again, you reduce the entire discussion here to the �MICRA boogeyman� so I feel I have to respond). Doctor surveys suggest otherwise. Kessler and McClellan�s seminal 1996 study, and many others, suggest otherwise. Kessler and McClellan found a 5 to 9 percent cost reduction from �MICRA-type� reforms. That�s pretty sizable.

3. Litigation is too slow, too costly, too uncertain, and too unpleasant.

Physicians and patients should be intimates, treating each other with respect, concern, and compassion. Third-party liability coverage turns them into strangers, and litigation turns them into adversaries. Caps do not help. At most, MICRA results in somewhat less of a bad process, not a better process. Ask any doctor in California.

I agree that litigation is too slow, costly, uncertain, and unpleasant. I disagree that �caps do not help.� A �somewhat less bad process� is a better process, in my book. But enough about that. For someone who complains that the tort reform debate is all about caps, you sure do want to talk about them a lot.

4. Premiums for primary coverage are too volatile and, for some physicians, too expensive.

This is an insurance market problem. Caps help, but very bluntly. Why not address risk-pooling problems and the clinical bottlenecks they create during crisis periods directly? For example, try revamping specialty- and geography-based rating practices for physician liability coverage and moving more of the market into stable, diversified institutional settings?

Now we�re getting somewhere. Time constraints prevent me from responding fully here, but I would like you to expand on this idea in your next post, if you�re willing. Precisely how do you propose �revamping specialty- and geography-based rating practices�? And what�s your mechanism � by reducing insurance regulations to permit more insurer innovation or by mandating how insurers work through a top-down central command?

5. Excess coverage and reinsurance are too costly for hospitals and other institutions.

The biggest insurance problem during the current malpractice crisis is high-dollar coverage for institutional defendants, say $10 million or more per claim. Even in the most severe malpractice crisis, hospitals can handle smaller cases just fine (a $250,000 cap is a rallying cry, not a policy prescription, and is irrelevant once one looks beyond individual physician defendants and the narrowly exposed liability carriers that insure them). Caps might help in the large cases, though again very bluntly, but not when applied only to non-economic damages as their proponents � bowing to political reality � generally urge. Economic damages, not non-economic damages, are the principal source of financial exposure in the largest malpractice cases � usually involving newborns or children who have suffered lifelong debilitating injury.

I certainly agree with your initial factual claim. And I also agree with an implication of your point, if I�m reading it right, that it might make some sense to cap economic damages in addition to noneconomic damages. While some economic damages shouldn�t be capped � say, the cost of medical care (which as you note can be exceptionally high in some cases) � I�m not sure why we shouldn't cap lost wages after a certain level. If someone�s earning over $100,000 a year, and fails to buy long-term disability insurance, I don�t have too much sympathy, and I�m not sure the tort system should bail him out. I think that capping lost wage recoveries � precisely because the only ones who�d suffer would be the better heeled � would add to the political salience of tort reform, and I wish someone would get behind the idea.

I�m less confident in your claim that noneconomic damages aren�t a huge part of the med-mal problem. Overall, we know that noneconomic damages exceed economic damages in the tort system. Is medical malpractice liability really that different � and if so, why?

Finally, I�ll touch on your �neutral, court-appointed experts� idea. I agree wholeheartedly that expert evidence is a huge part of this equation. My colleague Peter Huber wrote two books on the issue in the 1990s. In short, I enthusiastically support state experiments in this area. A caveat though. The political reality is that many state-court judges are captives of the trial bar. There isn�t good empirical evidence that I�m aware of that shows such reforms to be effective in practice. So while I�m all for such approaches, that�s in addition to � not in lieu of � traditional tort reforms (yes, Bill, including damage caps), which have a strong empirical track record of success.

I hope that�s enough to chew on for now. I will get into the �plaintiffs� bar business model� in the next post. For now, I�d refer you to our original 2003 report, which outlines the concept in more detail. This new report builds upon that idea.

I�ll also, in my next post, want to go into at least some more detail on drug and device products liability, not just medical malpractice. I�ll give some attention to the FDA preemption point, which you lampoon.

And in your next post, if you want to advance some of your other ideas that you�ve worked on in addition to court-appointed experts, please do. I�d love to discuss them.

Looking forward to your response,


P.S.: I�m not going to get into a universal health coverage debate, though I�m curious as to how it has much to do with tort reform � unless you want the government to take over health care and use its sovereign immunity. But maybe I�m missing something.




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.