Thanks for inviting me to discuss these issues with you. One disclaimer: This is my first experience in an online format, so I may not include many click-throughs. I have worked on medical liability – mainly malpractice but also managed care litigation and a small amount of product liability – off and on for about 15 years. Medical malpractice itself is a cyclical issue: I often call it the Rip van Winkle of health policy. It wakes up every decade or two when liability insurance premiums rise and someone declares a “crisis.” It is also Rip-like in that it slept through two decades of revolutionary change in health care from the 1980s to now, but less Rip-like in that today’s townspeople don’t recognize how outdated the established debate has become. More about that later, no doubt.

I have been living and breathing malpractice research for three years. In early 2002, when the current crisis was first being recognized, The Pew Charitable Trusts asked me to direct a research and communication program called the Project on Medical Liability in Pennsylvania (where Pew has its headquarters) that would evaluate the medical liability situation there and nationally. The project’s work, which involved more than two dozen researchers and produced about an equal number of publications, attempted to shed light on four key issues affecting Pennsylvania and many other states, issues I hope we will discuss this week:

· Access to health care in a malpractice crisis
· Patient safety and quality of care
· Capping damages in malpractice cases
· Using public funds for malpractice insurance

The project finished this fall, though there are still a few peer-reviewed articles yet to appear, plus a book that Cambridge University Press will publish early next year.

I can think of two reasons why Pew might have asked me to head their project. First, nobody else with solid academic credentials in malpractice policy wanted to do it. Academics who worked on the issue during the 1970s crisis came up with many good ideas, but the political stakeholders pretty much ignored them. Ditto in the 1980s crisis. Eventually, most people stop hitting their heads against brick walls. I had only hit my head against a malpractice brick wall once – in 1993 in connection with the proposal to subject managed care plans to “enterprise liability” as part of national health reform. I thought I had more to contribute. I’m also an optimist by nature. And I have a hard head.

Second, I am not particularly interested in medical liability for its own sake. I am a law professor at Columbia (visiting this year at the University of Texas), and certainly want lawyers to do a good job for their clients and for society. For the record, I was a large-firm lawyer for five years, working mainly on securities transactions and corporate acquisitions. At Columbia, I teach health law, regulatory theory, professional responsibility, and antitrust. I consider myself a sophisticated observer of the legal profession, and I am an avid student of professional institutions generally. So law matters deeply to me.

But I am also a physician and health policy researcher, and my interest in medical liability relates primarily to how liability affects the American health care system. If access to health care improves as the result of a reform, I’m for it. If quality improves, I’m for it. If medical costs are associated with good medical value, I’m for it. If doctors (or other health professionals) and patients share a compassionate, durable, trusting, mutually beneficial relationship, I’m for it. But those are my issues, not whether tort law or trial lawyers are good or bad for America in some overall social or economic sense.

My overarching desire is to have medical liability debated as a health policy problem and to have reforms adopted that further those goals (access, quality, cost). If that happens, I will leave malpractice research behind as a major aspect of my professional work, and will eagerly get back to more pressing problems in national health policy. Number one on that list, I should add, is access to health care and health insurance for nearly 50 million Americans. That is serious. Very serious.

Enter your report on health care as the third installment of the Manhattan Institute’s “Trial Lawyers Inc.” series (clever title). We’re both mature scholars – though you can still plausibly deny being middle-aged, which I cannot – but I’m afraid we’re speaking different languages. To me, one of the greatest frustrations with studying medical liability these days is that the general debate over (non-medical) tort reform has overwhelmed the health policy significance of medical liability. To health policy specialists, the medical liability system is deeply flawed in all three component parts: patient safety, liability insurance, and legal process. To general tort reformers, the whole ballgame is legal process. Small wonder that their main solution is capping damages and attorney fees or, for the more progressive contingent, chartering expert tribunals. What else would translate easily from medical malpractice to other tort reform arenas?

Physicians usually don’t notice this, because they have a long-standing, completely understandable fear and loathing of malpractice litigation. As Jay Gold pointed out years ago in an article that never got the attention it deserves, it is a difficult problem to hold experts accountable to non-experts (specialized courts being a compromise approach), and protracted adversarial litigation isn’t an appealing solution from the defendant’s perspective – or, frankly, from the plaintiff’s. Blunt deterrents to litigation such as noneconomic damage caps and the like – which I typically shorthand as MICRA-style reforms because those measures were at the heart of California’s Medical Injury Compensation Reform Act of 1975 – therefore are firmly entrenched medical lore. Those of us in the health policy community would say that doctors’ belief in MICRA is no better grounded in fact than the many equally established clinical practices that have proved ineffective over the years. But shaking the belief is hard.

Faith in MICRA is also easily exploited by the aforementioned general tort reformers. Medical malpractice is a terrific poster child for general tort reform. It offers grassroots activism from a large, well-respected contingent of medical professionals. It provokes public fears about losing access to health care (did I mention that access to health care is the most important health policy problem?). It can be cast as a morality play: “caring physicians” versus “rapacious lawyers.” And it offers a variety of sympathetic anecdotes, images, and narratives – though similar opportunities are available to general tort defenders as well (including introducing new morality players such as “greedy insurers” and “incompetent doctors”). Once the truly well-funded lobbies on both sides of the general tort reform debate mobilize – as they have during the current malpractice crisis – politicians and the public see only two options: MICRA-style reforms or keeping the current litigation system.

Your report toes this line and strongly urges MICRA-style reforms – though I notice, to your credit, that you don’t obsess over them and that you also support “medical courts” as an example of a “comprehensive” solution. So to politicians and the public, your report is mainstream. 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. The health policy community has reached substantial consensus on malpractice reform. Most of us believe in incremental demonstrations of various innovations that, over time, would move most malpractice cases out of the courts while doing much more to prevent medical errors, offer timely (and, indeed, capped) compensation for injury, and avoid the emotional injuries that litigation or its threat inflicts on both patients and health care providers. A minority of health policy experts remains uncomfortable with formal damage caps, even when accompanied by other measures to improve access to compensation, quality of care, or administrative efficiency. I know nobody – repeat, nobody – in my professional community who favors MICRA-style reform as a stand-alone solution.

I should add that you and I have many points of agreement, some factual and some philosophical. Regarding the former, I agree that conventional malpractice litigation serves society poorly. As examples of the latter, I generally favor market competitive solutions to social problems, and try to stay alert to the perverse incentives that litigation and regulation create in many contexts. (I might quarrel with most of your rhetorical flourishes and many of your data points, but we can go into those as needed in future posts). We are also likely to have much more in common with respect to drug product liability and managed care litigation, and somewhat more in common with respect to nursing home liability. These too can emerge in our continued conversation.

Finally, I’ll put you on notice that I have another set of fundamental issues to air with you – information and argument I expected to be central to the Trial Lawyers, Inc. project but that was absent from the health care installment. However, I’ll save that for an opportune moment.

Looking forward to your reply,

Bill

Bill,

I'd like to thank you very much for offering to participate in our PointOfLaw.com featured discussion series. We're excited to have someone of your stature here, and your deep knowledge and understanding of health care policy and litigation should give our readers a lot to think about.

To start with, I'd like to reach out on what I feel are significant points of agreement. First, I think it goes without saying that we both agree that American health care, while far better than a generation ago, could be substantially reformed.

Second, I think we agree that the legal process in the U.S. needs some reform as a component of overall health policy reform (you say as much: "I agree that conventional malpractice litigation serves society poorly").

Third, I agree with you that health policy is a vastly complicated subject and that the "legal process" is hardly the only factor important to health care quality, innovation, or access. While I do believe firmly that litigation matters—-and matters a lot—-it's but one of the panoply of factors that make American health care suboptimal. The Manhattan Institute's agenda reflects that fact. Over in the Center for Medical Progress, we have three senior fellows looking at various aspects of health policy:

· Bob Goldberg, who directs that Center, spends a lot of time thinking about how government regulation affects medical innovation; he chairs a task force that’s exploring how the Food and Drug Administration should reform for the 21st century.
· Regina Herzlinger, a Harvard professor, looks at the problems created by the disconnect between health purchasing decisions and the consumer; her Market-Driven Health Care defined the agenda, and her Consumer-Driven Health Care is a tome of information on this debate.
· David Gratzer, a practicing Canadian physician, looks at government sponsorship and control of health care, from Medicare and Medicaid to price controls; his Code Blue: Reviving Canada's Health Care System exposed many of the myths about Canada's socialized health care system.

Folks who are interested in many of these health care issues should check out our companion website, Medical Progress Today, which every week has tons of new information on all aspects of health policy.

But what the Center for Legal Policy looks at is litigation. That's my area, that's what we focus on at PointOfLaw.com, and that's what the Trial Lawyers, Inc. series is about. I think that the role of litigation in health care is sufficiently important in its own right to deserve in-depth coverage—-indeed, far more coverage than we were able to provide in our necessarily short, user-friendly report. The report isn't designed to be a comprehensive look at American health policy but rather a comprehensive overview of lawyers' business strategy for litigating in the health care sector, and the major effects of that litigation.

My fourth major point of agreement with you is that one-size-fits-all caps on noneconomic damages are not a holistic solution that would ameliorate all the negative effects American litigation has on the quality, accessibility, and improvement over time of American health care. I don't think Trial Lawyers, Inc. suggests otherwise. As you graciously note, "you don’t obsess over [MICRA-style reforms and] you also support 'medical courts' as an example of a 'comprehensive' solution."

But you also go on to say: "politicians and the public see only two options: MICRA-style reforms or keeping the current litigation system. Your report toes this line and strongly urges MICRA-style reforms . . . ." I think that’s really a misreading of Trial Lawyers, Inc.: Health Care. I never mention damage caps in my Message from the Director, nor does the report mention them in its Introduction. The report does mention damage caps in the medical-malpractice section in the following contexts: (1) in pointing out that Park Ridge, Illinois physicians who relocated to Wisconsin after their premiums jumped to $500,000 were likely attracted by Wisconsin’s then-low malpractice insurance rates, $50,000—and suggesting that the premium difference was likely due in part to Wisconsin’s then-extant damage caps; (2) in pointing out that "Texas Medical Liability Trust lowered its premiums 12 percent the first year and another 5 percent the second" following that state’s adoption of med-mal damage caps; and (3) in pointing out that lawyers have challenged caps in various states as unconstitutional. We also allude to this litigation strategy in the public relations section, in pointing to Wisconsin’s noteworthy ruling this summer finding the state's damage caps unconstitutional.

Apart from those references, the only place the 20 substantive pages in the Trial Lawyers, Inc.: Health Care report mentions damage caps is in the 2-page Outlook and Conclusion. That section of the report does give significant treatment to MICRA-style reforms, since they constitute a significant portion of state-level reforms in addition to a major part of the President’s preferred reform, the HEALTH Act. And yes, Trial Lawyers, Inc. does give favorable treatment to state damage caps in the following context:

In all, 27 states now limit noneconomic damages in medical-liability cases.

While states' laws vary in their effectiveness, in those states where damage caps and other broad reforms have passed, malpractice premiums have generally come down and doctors' shingles have stayed up. Since Texas legislators imposed a $250,000 limit on noneconomic damages in 2003, malpractice suits have dropped by half, and the five largest insurers have announced rate cuts that will save doctors and hospitals $50 million a year. An Agency for Healthcare Research and Quality study found that rural counties in states with such caps saw a 3.2 percent rise in doctors per capita. Over the long run, medical-malpractice reforms have been highly successful: since California passed its $250,000 noneconomic damages cap in 1975, its medical-malpractice premiums have risen "only" 245 percent, versus 750 percent nationwide.

So you’re right if you mean to suggest that I believe the following: noneconomic damage caps, all else being equal, reduce medical malpractice insurance costs and increase the supply of doctors/hospitals/services that are limited, on the margin, by such costs. I think that we agree on that point, too, assuming you were accurately quoted by The New York Times this winter: "There is a strong consensus among people who have really studied the issue that caps on damages would tend to keep costs down and make liability insurance more affordable for doctors."

That's really the only claim vis-à-vis damage caps that Trial Lawyers, Inc.: Health Care makes. And the report strongly suggests that a "more comprehensive" reform is needed, including federal preemption of state common law tort claims regulated by the FDA and, as you acknowledge, health courts or other experimental state reforms to better align medical malpractice liability with its policy objectives. The treatment of such reforms is sparse precisely because, as noted before, Trial Lawyers, Inc. was never designed to be a policy document but rather to show the business model of the plaintiffs' bar—-and if you don't think that there's a business model underlying, e.g., Dickie Scruggs's lawsuits against non-profit hospitals (that Judge Loretta Preska described as "orchestrated assault on scores of non-profit hospitals, necessitating the expenditure of those hospitals' scarce resources to beat back meritless legal claims"); or the class-action civil RICO suits against HMOs; or most drug and medical device mass tort litigation; or certain segments of the medical malpractice bar, including the firms that score exceptionally big wins for dubious infant cerebral palsy claims—-then I'm happy to debate the point. Trial Lawyers, Inc. is also designed to describe the cost of health care litigation.

And assessing that cost is, perhaps, where we differ, which perhaps is why we come to somewhat different positions on the appropriateness of damage caps. You make the following claim: "To health policy specialists, the medical liability system is deeply flawed in all three component parts: patient safety, liability insurance, and legal process. To general tort reformers, the whole ballgame is legal process." But I don't think that caricature is right. We claim that problems in the legal process, while not the sole variable for patient safety, adversely affect patient safety and drive up the cost of liability insurance.

You point to three different variables of interest: quality, access, and cost. I'd add to that list innovation, because the cost and quality of health care over time should matter deeply to us as a society, not just its static cost and quality today. And I'd also note that your categories are by no means mutually exclusive. Higher costs mean lower access, and thus lower quality.

I and other critics of the current legal system argue that our status quo litigation system lowers the quality of and access to health care today, as well as retards innovations that will improve health care over time. Patient safety thus suffers. What's the basis for this claim? Well, in a nutshell, if the status quo litigation system does a poor job of discouraging mistakes—-and I think the evidence supports that proposition, but we can discuss it—-and it discourages behaviors that make us safer, we’re less safe.

The important point here is that lawsuits in the health care field aren't like traditional torts, which provide compensation for injuries caused by accidents from strangers (or, more precisely, individuals who aren't contractually related). The key feature of traditional torts is that the behaviors lawsuits discourage, in general, make us less safe. Carrying wild animals, detonating explosives, discharging firearms, building pits and potholes, driving automobiles—-while there may be a place for each, we're generally safer as a society if people do less of these behaviors. But performing brain surgery, delivering babies, and developing life-saving drugs and devices are precisely the opposite: we're generally less safe as a society if we do these activities less.

Therein lies the rub. If our tort system isn't doing in practice what it's supposed to do in theory--i.e., providing appropriate incentives for harmful behaviors--and if it’s instead merely taxing useful behaviors, then it's a big problem, and lowering that tax in and of itself is salutary.

And that brings us back to damage caps, and the problem with the other statement you made to The New York Times: "there is a universal consensus that caps would do absolutely nothing to reduce medical errors or to compensate injured patients. If anything, caps on damages would make those problems worse." Leaving the compensation question to the side, I would strongly dispute that there’s a "universal consensus that caps would do absolutely nothing to reduce medical errors." My colleague Walter Olson responded, I think effectively:

That's a pithy sound bite, but it's rather misleading as regards the problem of "medical errors". Advocates of damage limits have adduced considerable evidence that the prospect of unlimited liability can seriously compromise the quality of medicine by 1) curtailing providers' availability and 2) encouraging resort to defensive medicine. If trauma centers and rural ob/gyns close their doors, and if doctors prescribe unnecessary antibiotics, CAT scans and caesarean sections for fear they will be blamed if something goes wrong, the number of "medical errors" may not be higher (depending on how those are defined), but the quality of care will nonetheless have suffered. Assuming for the sake of argument that damage caps reduce doctors' incentive to be careful, the question then becomes whether this effect outweighs or does not outweigh the benefits to the quality of patient care of improving availability and reducing the scope of defensive medicine. Notwithstanding the conclusion to which a casual reader might jump from Prof. Sage's comments, there is assuredly no "universal consensus" as to where this balance comes out.

I think he's right. Are damage caps the comprehensive solution that medical malpractice reform—-not to mention broader health care liability reform—-deserves? No. But, as you admit, they are efficacious as to cost, and if in fact such caps don't reduce (and perhaps improve) health care quality and access, then they’re unambiguously socially beneficial (though undeniably against the interests of the trial bar).

So while I don't think that med-mal damage caps are a panacea by any stretch, to me the weight of the evidence suggests that they're a good idea. Merely because an idea isn't the whole ball-of-wax doesn't mean we should oppose it. For instance, the Class Action Fairness Act is hardly sufficient to fix all the problems with class action lawsuit abuse (see George Priest's discussion here). But it should help the class action magnet court problem, which the Manhattan Institute Center for Legal Policy helped to document here, here, here, and here. So it's a step in the right direction.

I feel the same way about med-mal noneconomic damage caps (at least at the state level). That doesn't preclude my supporting other, more comprehensive reforms—-and I welcome discussion of some of the ideas you've developed in the Pew project and elsewhere. But you don't provide an objection to damage caps in principle, and you haven't persuaded me that damage caps would make matters worse, not better. In an intellectual policy discourse, I don't think it's appropriate to say something along the lines of "policy X is good—-but policy Y is better; and I'd support policy X only in combination with policy Y." Such horse-trading may be appropriate for politicians, but honest intellectual reflection should dictate that we say something more along the lines of "policies X, Y, and Z are all improvements on the status quo." Now, it's certainly legitimate to say that policy Y is the best; or to say that policy X or Z is actually harmful; or to say that policy X is so marginal, relative to policy Y, that we shouldn't devote much time to it and should try to shift the discourse toward policy Y instead.

The final approach is, I think, where you're coming down. I'm still not persuaded that policy X, i.e., damage caps, is really that marginal—-and I don't think that appeals to authority (e.g., "the health policy community") will do much to persuade me. Indeed, it's interesting that the health policy community, as you characterize it, hasn't had more traction for its ideas—-and it may be worthwhile to explore the ideas and ponder why that is.

So I've gone on for far longer than I'd expected, but I think I've at least framed the discussion from my perspective, and identified a lot of common ground. The topic is vast, and we still have a lot to cover. I look forward to your response—-and again, I'd like to thank you for your insights.

Jim

I remember learning in high school that diplomacy consists of saying nasty things in nice ways. Your first post treated my questions about the Trial Lawyers, Inc. project quite diplomatically. Perhaps you should be less diplomatic from now on. Then I might have a clearer idea of why you are so insistent about eliminating personal injury claims from medical care without putting in place a superior alternative, or why you think some shadowy conspiracy of trial lawyers is substantially responsible for the current failings of the American health care system and, moreover, is going to cripple that $2 trillion annual enterprise unless restrained by tort reform legislation.

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? Why refer me to your organization’s work on health care when your leading example consists of having federal food and drug regulation preempt (i.e., eliminate) state personal injury claims? The introductory paragraph to your report’s section on malpractice is much more direct:

“While several states have been successful in enacting substantial reforms, the American Medical Association continues to list 20 states ‘in crisis’ over malpractice litigation. Overall, then, these efforts have yet to derail the med-mal gravy train that has been one of Trial Lawyers, Inc’s longest-running and most lucrative business lines.”

What are these measures you consider successful, substantial reforms? Golly, they’re damage caps and other MICRA-style reforms, not administrative compensation systems, enterprise liability demonstrations, or error disclosure and early mediation programs. What states does the AMA consider “in crisis”? Gosh, it’s hard to know, because the AMA’s definition changes, but usually the answer is states that haven’t yet enacted MICRA-style tort reforms. What is the point of these reforms? Gee whiz, it sure seems like they’re designed to discourage personal injury claims.

Another quotation I remember from high school was Emerson’s: “A foolish consistency is the hobgoblin of little minds.” Everything in your Trial Lawyers, Inc. report on health care, and everything in your post to me, is painstakingly “on message.” As you admit, your report “was never designed to be a policy document.” Indeed, it’s a political document – something I was truly disappointed to discover, and something I wish I had known before accepting your invitation to comment on it publicly.

Well, I have a “message” too, though not a political one. Medical malpractice reform should be about health care, not about lawyers. Medical liability expanded during the late 20th century because of the tremendous success of modern medicine, not its failure. And I don’t think that litigation realistically comes within an order of magnitude of threatening medicine’s success in the future. 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). I believe that periodic crises in availability and affordability of physicians’ malpractice insurance largely reflect the failure of cyclical insurance markets – at least as traditionally structured and regulated – to keep pace with industrial change in medicine.

I make sure to convey this message loudly whenever the opportunity presents, mainly because health system change is an uncomfortable truth for both partisan camps battling over lawyers and tort reform. However, I think it is impossible to have a meaningful discussion of public policy without occasionally getting off message to acknowledge complexity or display common sense. For example, you take me to task for telling a New York Times reporter at some point that caps should reduce liability insurance premiums but not being a fan of caps. Incidentally, I’m flattered that Walter Olson would bother to comment on my comment – I don’t keep a scrapbook of press clippings so I never knew he had.

There’s nothing inconsistent about those positions, although if I were a pro-tort advocate rather than an academic I would undoubtedly be attacked for straying from my partisan message. Malpractice insurance is third-party coverage; one buys it only if one thinks one will be sued and held liable. So it’s pretty obvious that if the chance of being sued or the amount of liability drops, so should the premium in anything approaching a competitive market. For the same reason, it’s pretty obvious that payouts, not investment income, will be the principal driver of premiums – although the long delays involved in resolving malpractice claims make investments a non-trivial consideration. But that doesn’t mean that caps will lower premiums quickly or seamlessly, that enacting caps is the most cost-effective way to lower premiums, that caps won’t reduce safety incentives in some situations, or that the redistribution that caps accomplish is socially desirable. On the last point, 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.

I think you fairly characterize my position as being that caps are too marginal to bother with, at least as a stand-alone measure. On the other hand, I don’t think you are being honest with yourself, much less your readers, to reject issues of political will and political feasibility as intellectually irrelevant to public policy – to my eye, it seems that you stay so faithfully on message mainly to keep your own political coalition together.

But let me put it into plainer English for you. Here’s what I wrote about caps in 2003: “If Congress enacts MICRA-style caps on damages, no national tragedy will follow. But neither will any lasting benefit to health care be achieved. The same will be true if Congress fails to do anything after prolonged political debate. … Government will simply have missed a significant opportunity for truly productive change.”

Why do I reach this conclusion? Because in the 1970s and 1980s crises, physicians framed the malpractice problem as frivolous lawsuits and excessive awards. On this account, caps seemed a reasonable solution. But we know a lot more about both the health care system and the malpractice system, including its insurance component today than twenty years ago. As a result, we have a longer list of problems to address, and significant tensions among them (I’ll leave it to you to defend why the longer list is ignored by partisan tort reformers):

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.

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.

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.

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?

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.

Here’s an idea for a better reform: neutral, court-appointed experts to estimate survival, lost income, and future medical needs. Physicians obsess over the credentials of clinical experts testifying as to whether they are good or bad doctors because their professional reputations are on the line. However, it’s hired-gun “economic expert witnesses” who really affect claim outcomes, but nobody in the tort reform community seems to care.

That’s my list. I’ll be interested in your response. I’d prefer in our next installment to go into a couple of specific issues of your choosing in greater depth. So far we have mainly talked past each other. A second approach would be to start discussing a curious assertion you made about the Trial Lawyer’s Inc. Health Care report: that it tries to “show the business model of the plaintiff’s bar.” I would be fascinated to learn more about that business model, and in fact I expected to see a detailed analysis of it in the report. But, alas, that dog didn’t bark.

Bill

PS: If you want a sound-bite to debate, try this one: “The best malpractice reform is universal health coverage.”

Bill,

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-à-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.

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,

Jim

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.

Dear Jim:

I’m glad I woke you up. Your last contribution reads more like a passionate exchange of views and less like a promotional catalog of Manhattan Institute work. You even suggest that I’m a shill for the trial bar, which confirms that your juices are finally flowing. I’ve been called that a few times by tort reformers in Pennsylvania in connection with my research there (I’ve also been called the opposite by tort supporters when our empirical findings have supported the tort reform agenda). The one and only time it got under my skin was when the e-newsletter for Pennsylvania’s Politically Active Physicians’ Association, which is indeed pronounced PAPA, referred to me not only as a shill but also as “Mr. Sage” – as if they couldn’t bring themselves to believe that a fellow physician might not fully share their opinions on malpractice reform.

I appreciate your not using the M-word, Jim. Though I should add that PAPA’s e-newsletter writer sent me a lovely, unexpected note of apology about a year later when she learned that the reason I oppose stand-alone damage caps is that I favor a “no-trial” approach to malpractice reform that would remove as many cases as possible from litigation.

You and I can let the readers decide, based on our respective published work, whether it is more likely that I carry water for the trial lawyers or that you do so for big business. Since I’m sending you my contributions to post as text documents, and lack the web-savvy to embed links, perhaps you’ll do me the courtesy at the end of our exchange to pass along to readers a short, click-through bibliography of my malpractice writing, which they can compare to the Trial Lawyers, Inc. report :).

Now that you have recovered from the shock of seeing a smiley-face in an online liability debate, we can move on. I agree with many of the points you made in your last post, and appreciate the time you spent explaining your thinking. I’ll react to a few things you said, but will do so briefly in order to leave time for us to discuss three major aspects of medical liability that we haven’t yet broached: things I consider true innovations in malpractice reform, the class action and multi-district side of litigation, and the “health care business model” of the trial bar. I’ll try to cover the first two issues in the process of responding to your last post. I’ll save most of my ideas on the third for use in response to your next post, which you promised would be devoted to that subject.

I’m delighted that most of the tort reformers you talk to aren’t interested only in capping damages. You must know different tort reformers than I know. Likely this is because the most determined tort reformers in my world are physician groups like PAPA, who have been conditioned to believe that anything that deviates from MICRA’s sacred $250,000 cap is a bill of goods. Remember what happened to Sen. Feinstein when she tried to broker a bipartisan compromise on a more flexible cap. I assume you deal less with malpractice reform constituencies than with product liability or class-action reformers. Perhaps these groups have more sophisticated views about reform. If you can enlighten me, please do. And be honest – this is for posterity.

(That last bit wasn’t intended to be “snarky” – does that mean I’m being hunted? – but is merely a quote from William Goldman’s The Princess Bride.)

You mention Philip Howard and his organization Common Good several times in your post. I have a lot of respect for Philip, and devote much of my current effort on malpractice reform to developing medical courts proposals that might actually work (which I’ll explain momentarily). I understand why you invoked Common Good’s work in our exchange – like me, Philip does not support stand-alone caps – but you should realize that a genteel business lawyer like Philip is not generally perceived as moderate by groups that aren’t naturally sympathetic to tort reform. You might want to push the envelope a bit in future Manhattan Institute events if ecumenism is important to you.

Like Common Good, I support medical courts. My medical courts, however, are somewhat different from theirs. To my mind, their model has three significant limitations. First, their medical courts are entirely reactive. Waiting for patients to find lawyers and for lawyers to file claims perpetuates many of the worst features of the current system. Second, their medical courts are siloed. There are already enough uncoordinated bureaucracies involved in medical liability. Third, their medical courts are hypothetical. Building them from scratch will take more political force than realistically can be mustered. These risks materialized in the medical courts legislation introduced in Pennsylvania in 2003, which was a thinly veiled attempt to redistrict the state so that Philadelphia jurors, who are historically pro-plaintiff, were distributed among and diluted by jurors from suburban and rural areas. The rest of the bill, though it paid lip service to Philip’s admirable goals, was basically window-dressing.

The medical courts I support, which are also endorsed by the Institute of Medicine (2002) and the Joint Commission on Accreditation of Healthcare Organizations (2005), are administrative compensation mechanisms that would be closely connected to existing state or federal health care regulatory processes. A medical court might be integrated with state departments of health or patient safety, with self-regulatory processes such as JCAHO accreditation, or (my pet project) with Medicare and perhaps Medicaid. Private employers could also create administrative compensation systems in conjunction with sponsorship of health insurance under federal ERISA law.

In brief, participating health care providers – generally hospitals and other group practice settings – would be held accountable for instituting patient safety procedures, detecting medical errors, and communicating unanticipated outcomes of care to patients. Providers would have strong incentives to engage the patient in mediated discussions, and to offer prompt, fair compensation. The rare situation in which avoidability or payment amount was contested would be referred to an administrative tribunal. Expert documents regarding standard clinical practice and avoidability of error would help inform these decisions, as would schedules of appropriate economic and non-economic damages. Partisan expert witnesses would be the exception, not the rule.

The last point I’d make about Common Good is that their medical court proposal is part of an overall social judgment about the need for reliability in adjudication. My interpretation of their project is that they want people in society who possess expert skills (teachers, doctors, scientists, and even judges) to feel free to exercise their expert discretion without fear of being arbitrarily second-guessed in court. That seems right to me, but medical care isn’t the best illustration of their problem or solution. Medical care is the country’s most expensive cottage industry. By and large, there is too much discretion being exercised in too fragmented a fashion. What is needed is a legal environment (both judicial and regulatory) that fosters organization and efficiency without sapping medical care of professionalism or humanity. The one aspect of malpractice where Common Good’s plea for reliable justice makes sense is defensive medicine, because physicians’ well-documented mistrust of the liability system has real consequences for patients. If a medical court connected to a health care regulator is less anxiety-provoking for physicians, that’s great – and perhaps that regulator can also make liability insurance more secure (e.g., the IOM proposal).

A few words about my 2005 JAMA article with Dan Kessler and David Becker. That article concluded that adopting MICRA-style tort reforms increased the number of physicians in a state by roughly 3% over the long term. The article by Hellinger and Encinosa you mentioned in your first post (while ignoring your colleague Dan – sniff) reached a similar numerical result. Our article is about physician supply specifically, not about the overall “effectiveness” of caps. Its value lies in the following findings. First, a 3% supply increase is certainly not trivial but is also not massive – the rough equivalent of a 10% pay raise (doctors indeed do value a less hostile malpractice environment). Second, the supply increase comes entirely from initial practice location decisions and delayed retirement, not relocation from state to state. Third, the supply boost from caps was greater in high managed care states, suggesting that doctors can tolerate either managed care or malpractice litigation but not both. Fourth, solo practitioners have the greatest difficulty sustaining practice in uncapped states, and tend in those states to move into groups (lower professional satisfaction, but probably higher medical quality).

Let me also offer you a bit of support for Dan Kessler’s earlier article on defensive medicine with Mark McClellan, which the Manhattan Institute has long promoted. I always praised that work for its methodology, but was skeptical about its findings even leaving aside the extrapolation to overall national health spending. My main concern was that the authors had not sufficiently controlled for managed care, which might be responsible more than tort reform for reducing clinical expenditures. The Kessler-McClellan piece was about defensive medicine that takes the form of “assurance behavior” such as excessive testing and treatment. I asked Dan to work with me on physician supply as the first piece of what I hoped would be an exploration of “avoidance behavior,” in which liability potentially reduces access to care. (A second installment, which someone should fund, would examine the effect of caps on specific clinical services for particular patient groups). A side-benefit of this project was to confirm the Kessler-McClellan findings, as follows. Managed care cuts costs, but repels physicians. If the Kessler-McClellan findings were driven by unmeasured managed care, the Kessler-Sage-Becker study should have found that caps decreased physician supply (as managed care would). The fact that caps increased supply in our study makes me feel better about the original Kessler-McClellan results.

I’m glad you explained Peter Huber’s essay on health care costs and labor productivity. It raises a very important set of issues that I hope we can discuss further at some future time. The only comment I want to make here is that redistribution can be a legitimate goal as well as efficiency. Uwe Reinhardt, reviewing Richard Epstein’s book on health reform, opined that societies should be judged in part on how they treat their least productive members. America spends a lot of its health care dollar on the elderly and disabled. This can’t be justified on labor productivity grounds, but like Reinhardt I’m glad I live in a society that makes those resources available nevertheless.

On liability and doctor’s fear of admitting mistakes, I agree but cautiously. I attended the first two Annenberg Conferences on patient safety in the early 1990s. The stars of these conferences were true patient safety pioneers such as Don Berwick and Lucian Leape. But there were also opportunistic participants – some associated with physician-owned liability insurers – who mainly viewed the patient safety movement as a new path to traditional tort reform. In fact, I was asked to play a trial lawyer in a concluding debate at the second conference because the organizers couldn’t persuade an actual trial lawyer that it would be a balanced discussion. The insurers’ argument? That patient safety would only improve if doctors’ mistakes were cherished, not punished. Therefore damages should be capped. Putting aside a surfeit of aviation analogies (patient safety folks like airplanes as much as health economists like cars), this reasoning only made sense to doctors. To everyone else, the patient safety movement revealed that in the prior decades’ malpractice debates the lawyers had been right: there really was a lot of poor care, not just a bunch of frivolous claims. The truth, as always, is in between, but it makes me uncomfortable when you suggest that legal immunity alone will turn bewildered clinicians into effective ones.

You had a lot to cover in your last posting, as do I in this one, so we each need to be vigilant about understanding each other’s points, especially as we wind down each installment. Here are a couple of things I think you missed.

First, I am NOT echoing the trial bar’s rhetoric about evil insurance companies when I discuss the failure of insurance markets to keep pace with industrial change in medicine. Rather, I am criticizing the tort and insurance-based practice of saddling physicians with more liability than their share of health system revenue can support, and of placing the greatest burden and the highest volatility on a few medical specialties. For more detail, read my article titled “The Forgotten Third” in the July-August 2004 Health Affairs, and my essay titled “Malpractice Insurance and the Emperor’s Clothes” plus the articles by Tom Baker and Mark Geistfeld in the issue of the DePaul Law Review (2005) that published the papers from that school’s 2004 Clifford Symposium on tort law. There is no quick fix here, but in my view a real need for individual states and the National Association of Insurance Commissioners to immerse themselves in the problem.

Second, of course administrative costs matter to choice of liability regime, and you are quite correct that the only justification for high administrative costs is effective deterrence, which I agree isn’t a prominent feature of the current system. The main promise of a comprehensive “no-trial” medical court approach is that it would both improve deterrence (in part through prospective regulation) and reduce administrative costs, which in combination would allow it to improve compensation as well. BUT, please don’t pooh-pooh my point about wealth transfers. I constantly see tort reform literature that implies that every dollar not paid as a malpractice insurance premium is a dollar saved by society. I strongly suspect that you have as well. This is simply wrong.

As for universal coverage, it has a lot to do with effective malpractice reform. Dollars spent on health care and dollars spent to compensate patients for defective health care ultimately provide similar benefits to the public. But we never discuss them in the same breath. The closer we come to universal coverage, the more necessary it will be for society to structure its liability system in ways that maximize the cost-effectiveness of the health care provided. (This is another formulation of your point, following Grady, about not forcing people to buy insurance they don’t want.) Universal coverage also makes compensation for injury mainly a first-party rather than a third-party matter, which I think is a big improvement. As I explain in the Health Affairs article on malpractice insurance, third-party liability coverage runs contrary to most things that physicians are supposed to offer patients in high-quality health care systems.

I look forward to our discussion of the trial lawyer’s business model.

Bill

Bill (or should I say Dr. Sage?),

I’m belatedly getting around to discussing what’s really at the core of the Trial Lawyers, Inc. project: the fact that trial lawyers today operate much more as a business than as a profession. I don’t think that this basic fact is really much in dispute, and I can hardly go into the point here in the depth that my colleague Walter Olson did some 14 years ago in The Litigation Explosion, or even in the depth that we went in the original Trial Lawyers, Inc. report. But let me try to give a synopsis of what I call the “business model” of the plaintiffs’ bar. I’ll then turn to drug products liability, and finally I’ll touch on some of the medical malpractice liability proposals you’ve endorsed.

Law Goes From a Business To a Profession

Let’s begin with the underlying history and premises. Law historically, like medicine, has been a “profession.” That is, as opposed to general businesses, lawyers (and doctors), operate under special ethical rules of conduct (rules that, for better or worse, are typically set by the professionals themselves). There are important reasons for doctors and lawyers to be professionals. First and foremost, both professions represent patients/clients who are often unsophisticated in assessing the services being offered, so the professionals have to be scrupulous in providing a duty of care consistent with the patient’s/client’s interest. Doctors shouldn’t sell snake oil or unneeded surgeries. Lawyers shouldn’t bilk their clients with billable hours for unneeded work. And patients and clients need to be able to be totally honest with their doctors and lawyers, so they’re owed a duty of confidentiality.

Now, I think that these basic points should be relatively uncontroversial — as should the important counterpoint: the professionalism of medicine and law need not imply that there’s no place for market-based approaches, because incentives obviously do matter. Approaches that force medical patients to foot more of their own bill, as opposed to shifting their costs to a third party, will inevitably put downward pressure on costs. Aligning lawyers’ incentives with those of their clients – as the contingency fee does – will keep attorneys from wasting time that they otherwise might.

When it comes to the legal profession, there’s a significant additional point to keep in mind – one that differs from the medical profession and all others. Practitioners of law, uniquely among those not in the government itself, have the power to take property from parties without their consent. Lawyers, through the courts, have unique access to the government’s monopoly over the use of force. Now, other businesses and professions can dupe people through fraud. The medical profession has some limited ability to take people’s freedom (e.g., by forcing people into psychiatric wards). Still, in general, law is the only American business, apart from crime, where the fruits of one’s labors are directly tied to one’s ability to take others’ property without their consent. Crime, of course, is something we try to stop. But the ability to take property through the law is something the American system facilitates, in a manner unlike any other country.

A few features make American law unique. First, we have the contingency fee itself. Although some other countries are opening up to the idea, historically, the contingency fee is an American innovation. Its salutary effect is that it opens access to the courts to the less affluent and it aligns lawyers’ incentives with their clients’, as noted above. Its downside? The contingency fee creates a direct, and powerful, incentive for lawyers to take as much property as possible. In the course of representing a single client, this effect is less pernicious (though, as Olson notes, the incentive to cheat, manufacture evidence, etc. – unbecoming an officer of the court, as those in the “legal profession” are supposed to be – is far greater when you have a vested interest in the outcome). But what we’ve seen in the plaintiffs’ bar is the wholesale solicitation of clients (more on that later), many of whom aren’t really injured; and in the course of aggregative litigation (dramatically expanded since the 1960s by changes in Rule 23, which governs class actions), lawsuits where there isn’t really a client at all (if you doubt this, ask securities lawyer Bill Lerach, who once said he had the greatest legal practice in the world because he didn’t have any clients). The contingency fee is a direct inducement to litigate – and thus to take property by force. Olson analogizes the practice of enabling invading armies to keep whatever they plunder: it may help troop morale, but the consequences are predictable.

In addition to the contingency fee, the United States (apart from Alaska) has the “American rule,” i.e., the system wherein a party who unsuccessfully brings litigation doesn’t have to bear the other side’s costs. Low-value, good claims are discouraged, as I noted earlier in this discussion: lawyers working on a contingency fee don’t want to bear costs they’re unlikely to recoup. But the inverse is true, too: low probability cases are encouraged because the defendant’s litigation costs are sufficiently high that they’re willing to settle even very weak claims.

The latter incentive is significantly muted when defendants face repeated, similar claims; as game theory would suggest, to discourage low probability claims, a rational defendant would only settle repeat claims where the plaintiffs’ lawyer had a positive expected value, i.e., where the expected verdict exceeds the plaintiffs’ expected legal bills.

But in the American legal system, even for low probability claims, the expected value of a claim from the plaintiffs’ lawyer’s perspective can be quite high – because juries regularly make erroneous findings of fact, and because they can slap defendants with exceptionally high punitive damages and difficult-to-review noneconomic damages. Contingency fee lawyers, with sufficient ability to disperse risk, can play a game with a positive expected return. It’s a gamble, but they have the house odds.

America’s decentralized federal system also creates a lot of opportunities for overlitigation. In general, federalism is a salutary American feature: it disperses power, and as Brandeis noted, can let states serve as “laboratories of democracy” with competing policy packages. Such varying policies generally create incentives that drive states toward efficient rules over the long run, since labor and capital are mobile. But as our nation’s experience with the Articles of Confederation showed, the devolutionary principle has its limits. Where states have incentives to impose costs on their neighboring states – say, by dumping their refuse in a river that flows next door – the federalist premise breaks down. As Tabarrok and Helland’s research on state judges shows, states (or, more precisely, elected state judges) have incentives to adopt loose liability laws so that they can impose costs on out-of-state defendants to the benefit of in-state plaintiffs. The absence of a federal choice of law regime means that states (like West Virginia) or localities (like Madison County, Illinois) can make litigation a cottage industry. When venues are easily shopped – as in products liability cases and, at least until this year, class actions – plaintiffs’ lawyers can exploit these “magnet courts” to great benefit.

Finally, American lawyers today are able, in a rather “unprofessional” way, to hawk their services. Prior to the late 1970s, the basic American norm on lawyer solicitation generally was in accord with Lincoln’s suggestion that we “discourage litigation.” But by 1977, the Supreme Court called the “underutilization” of lawyers in America a problem, Bates v. Arizona, 433 U.S. 350, 376 (1977) – and upheld lawyers’ right to advertise the availability and price of their services. By 1988, the Court extended that right to direct-mail solicitation. See Shapiro v. Kentucky Bar Association, 486 U.S. 466 (1988). I tend to be a free speech purist, but it’s hard not to acknowledge that the ability to advertise is directly related to the de-professionalization of the plaintiffs’ bar and the litigation explosion in America.

The Trial Bar's Business Model

These incentives all matter. And they’ve led to a plaintiffs’ bar that to a significant extent works as a sophisticated business, not as a profession. How so?

• Marketing. To be successful, any business must attract customers. The plaintiffs’ bar of course lacks traditional customers: the people who pay plaintiffs’ lawyers aren’t willingly parting with their money, but rather are being forced to do so. That captive customer base is the key feature that makes the plaintiffs’ bar so successful. To get at those customers, however, the plaintiffs’ bar must attract clients. That’s something the plaintiffs’ bar is able to do today with a very high level of sophistication:

o Television, radio, and print ads. One day when you’re home sick, just check out the ads that run during those annoying daytime talk shows. Or turn on BET for a while. You’ll see scores of plaintiffs’ lawyer advertisements, going after the trial bar’s attractive client base.

o Internet-based solicitation. There are increasingly targeted banner adds, sites where you can sign up “for the money you may be due,” and targeted emails (have you gotten a Vioxx solicitation lately?).

o Automatic clients. While advertising is the bread and butter of the mass tort bar, the class action bar has it easy – they just need to find a name plaintiff (sometimes itself a dubious task: just ask Milberg Weiss), and everyone else comes in, automatically, under Rule 23, unless they bother to “opt out” of the class.

In the health care context, we see all these methods of gathering clients. When Scruggs and Boies, and later Milberg Weiss, sued HMOs under civil RICO, they developed a class action. Ditto for Scruggs’s suits against nonprofit hospitals. TV, print, and internet client solicitation for pharmaceutical mass torts are ubiquitous. Internet ads seeking clients whose babies were born with cerebral palsy shout, “Your child's cerebral palsy may be the result of a medical mistake. Don't get mad. Get Even!”

• Division of markets and labor. Some “trial lawyers” make their wares without ever pretending to go to trial – they’re client grabbers. They round up folks and sell off their claims. Other lawyers are negotiators, and others actually go to trial. Such division of labor in and of itself isn’t troublesome, and increases efficiency. The problem is that trial lawyers, at least in much mass tort litigation, don’t really “compete” for customers in the traditional sense. They work with the client aggregators to gobble up as many clients as possible – clients who aren’t really picking their lawyers based on any real criteria at all. There’s to a significant extent a division of the market – you get yours, I get mine – and the process creates a major barrier to new entrants. Of course, an enterprising plaintiffs’ lawyer can join the big boys’ club by winning a landmark case: but it’s a long-shot, and the existing players have sufficient capital to carve up much of the market for themselves. There’s a lot of rivalry, but not a lot of price competition: contingency fees are essentially standard, as Lester Brickman has shown.

• Product development. Lawyers don’t make products, but they do try to develop successful lines of business. Anyone with a deep pocket is a potential target. As Trial Lawyers, Inc.: Health Care shows in significant detail, in health care, every market segment has been in the trial bar’s crosshairs – doctors, hospitals, and nursing homes; drug and device makers; HMOs. “Developing” a product line is an expensive process, but one lawyers spend a lot of time and money on. Conferences on various types of litigation are abundant. ATLA makes information on various “litigation groups” available on its website. Now, many of these techniques relax the barriers to entry already mentioned. But the key for the trial bar is to share knowledge and score wins – because wins beget settlements. The competition to gather clients is the only real rivalry in town.

Business Analysis

If you were to do Michael Porter’s “Five Forces” industry analysis of the litigation market, Trial Lawyers, Inc. would score big:

• Buyers (i.e., defendants) have no power, apart from imposing costs on plaintiffs under the American rule.

• Since expert witnesses willing to prostitute themselves for money are readily available, the only supplier power the trial bar faces comes from the West/Lexis electronic legal research duopoly, which itself is weakening in the internet era.

• The trial bar faces no real substitutes, since its access to the courts is unique.

• Competition among plaintiffs’ lawyers is fierce, but only for initial client solicitation, and then not on price . . .

• . . . owing in significant part to the substantial barriers to entry in the mass tort/class action market, already discussed.

Now don’t get me wrong – being a plaintiffs’ lawyer per se isn’t necessarily an easy road. There are a lot of lawyers who have a hard time squeaking by. What Trial Lawyers, Inc. is about is those market leaders – the guys who are able to dominate the class action and mass tort bars – and they have a pretty lucrative business indeed.

The Problem of Law as a Business

So what’s the problem? I’m a supporter of free markets – you even characterize me as a “shill” for “big business.” What’s wrong with lawyers acting more like businesses? Well, as I’ve already suggested, the problem is that the lawyers’ business, unlike others, doesn’t inherently generate value but rather redistributes through force. If I sell you a product or service, we both benefit, assuming there’s no fraud or duress and that we’re both able to assess our self-interest. I value your money more than the product or service I sell, and you value the product or service more than the money you pay. Redistribution by force doesn’t work that way. Party A, the plaintiff, takes from party B, the defendant. Party A is better off, but party B is worse off. And there’s a net social loss in that the scarce resources spent taking from party A and giving to party B could have been spent elsewhere, i.e., generating goods or services of value.

So the real question we should use to evaluate litigation is whether it adds any value apart from redistribution itself, and whether that value added, if any, exceeds the extremely high transaction costs and opportunity costs inherent in the system. There’s nothing wrong in principle with lawyers making a lot of money. The problem presented in the litigation context is (a) whether that money is reflective of real value added for the client, and (b) whether that money should have been redistributed in the first place – i.e., whether a real harm that “should” be compensated occurred, as judged from the standpoint of either fairness or efficiency. (Ultimately, in the world of tort, I think that the fairness and efficiency criteria for (b) wind up the same: even if we buy into the notion that you advance in your last post that the way society treats its weakest members matters – and I agree to some extent – the tort system is about as inefficient a means of general redistribution as we could possibly devise.)

The problem with the plaintiffs’ bar today, for critics like me, is that it often exploits its clients and that it taxes society with litigation that it shouldn’t, leading to substantial dead weight loss today and perverse incentives not to invest and innovate for tomorrow. Though the tort system in its classic form did offer a means of redress for injured parties whose injuries were wrongly caused by others, the system is ill-equipped to be a general insurance scheme, Prosser, Traynor, et al. be damned. And though the classic common law tort system was generally efficient and served to deter harmful behaviors, the system is ill-equipped to be a general, comprehensive regulatory regime, Calabresi, Posner et al. notwithstanding.

But today, the perverted tort system is what we have. Far from its roots as a profession representing clients and owing a general duty to the public, the plaintiffs’ bar is a big business tapping into the American legal system’s unique rules that enable it to feed at the trough. The trial bar’s business success owes not to natural monopoly but to its rule-enabled abuse of lawyers’ unique access to the government’s monopoly on the use of force. And perhaps the most sophisticated part of the lawyers’ business model – their government relations and public relations efforts, which we detail at length in our Trial Lawyers, Inc. report – are geared specifically toward protecting the rules that make their government-enabled monopoly so valuable: unregulated contingency fees, the lack of a loser pays rule, maximum jury discretion, loose evidentiary requirements, loose aggregation requirements, unlimited damages, and easy venue shopping, to name a handful already discussed.

Torts for Drugs and Medical Devices

OK, so now that I’ve gone on at length about the business model of the trial bar, I’ll move into the other, specific element I said I’d cover: the mass tort problem as it relates to drug and medical device litigation, and my preferred response (preemption). Americans’ health care has been radically improved in the past generation or two in large part due to dramatic innovations in the development of pills and products that prolong life or make our lives easier to live. Bacterial scourges that once wrecked havoc have been all but eliminated, as Huber noted in the article I cited in my last post. Drugs and medical devices constitute only 11 percent of health care spending – most still goes to doctors and hospitals – but they’ve revolutionized health care. People who were bedridden and needed full-time care are now able to walk and function without assistance; people who were institutionalized can now take a pill and interact in normal society; people who would have dropped dead prematurely of a heart attack can keep their cholesterol down with a host of medications.

The medical innovations that have so changed our health care have occurred regardless of the litigation explosion, but let’s not pretend that lawsuits don’t matter on the margin. And the marginal impact on companies’ incentives is sizable. As I point out in my director’s message in Trial Lawyers, Inc.: Health Care, the estimated liability costs of Vioxx and Fen Phen, alone, are roughly ten times their respective companies’ research and development budgets. On an annualized basis, the cost of those two mass torts comes to roughly ten percent of the entire U.S. pharmaceutical industry’s revenues (the percentage would be lower if we account for the time value of money, but these aren’t super-delayed torts like asbestos). That’s a punch that packs quite a wallop.

And the punch is also, far too often, below the belt. We’ve seen lawsuits bankrupt companies with billions in liabilities over products that aren’t unsafe (e.g., the breast implant litigation). We’ve seen lawsuits force useful drugs from the market that aren’t unsafe (e.g., Bendectin). We’ve seen lawsuits saddle companies with far more liability than their products actually caused by flooding the system with bogus claims generated by fraudulent screening systems that are mass production systems “that would be the envy of Henry Ford” (e.g., Fen Phen). We develop these and other examples in much more detail in Trial Lawyers, Inc.: Health Care.

The point? Just as our system of adversarial trials before juries makes a mess of med-mal cases, it gets it wrong an awful lot in products liability cases. That’s the biggest problem with the stylized law and economic models that Calabresi, Posner and their successors developed for tort law: they assume that trial outcomes, on average, get it right. What we see is that trial outcomes, on average, get it wrong. Let me stress that when I say “on average,” I don’t mean that most juries get it wrong. They don’t have to for the expected return of trials to be way off base. You just need the odd jury to produce outlandish results, with outlandish dollar verdicts, to throw off the average verdict – and the expected return from litigation – dramatically.

The law-and-economic theory of tort regulation in essence tries to make the courts a regulator of choice – despite the fact that trial outcomes don’t come close to approaching a proper cost-benefit analysis and that the administrative costs of running the system are exceptionally high. The system lacks the fundamental principle of the rule of law, that is, predictable outcomes.

In criticizing “regulation through litigation,” I don’t mean to ignore the trenchant critique of regulation. Adopting overly strict ex ante rules can stifle innovation. There’s something to be said for setting up clear overarching guidelines – simple rules, in Epstein’s terms – and punishing harms ex post.

But for ex post penalties to work, we have to have some confidence that they will be rationally related to the harms they penalize, so that actors appropriately internalize their costs. When it comes to mass tort drug and medical device litigation, I simply lack confidence that the penalties will make sense. In addition to the aforementioned examples, take the Angleton, Texas verdict recently levied against Merck when a 59-year-old man with clogged arteries died of a heart arrhythmia (a condition no scientific testing has shown to be linked to Vioxx), after taking Vioxx for 8 months (10 months less than the length of time for which scientific testing has linked Vioxx to heart attacks), in moderate doses (notwithstanding that Vioxx has only been linked to heart attacks when used in heavy doses as an experimental treatment for precancerous intestinal polyps). Carol Ernst, the deceased’s wife of one year, scored a verdict over $250 million. Will that verdict be substantially reduced? Yes, largely due to Texas’s punitive damage caps – but the $24 million in “mental anguish” damages aren’t capped, and they will prove difficult to review.

As my colleague Peter Huber noted in Liability, “jurors, who generally can reach sensible judgments about people, perform much less well when they sit in judgment on technology.” In part, jurors’ failings are due to a lack of technical expertise. Jurors also fail because they “face accidents up close” without the “broader vision, dominated by the individual case.” In addition, jurors are particularly prone to hindsight bias, “the natural human tendency after an accident to see the outcome as predictable – and therefore, easy to affix blame,” which “makes the defendant[s] appear more culpable than they really are,” Steven Hantler, The Seven Myths of Highly Effective Plaintiffs’ Lawyers, Manhattan Institute Civil Justice Forum 42, at 13 (April 2004). Finally, jurors tend to penalize the new while accepting the old, which clearly threatens innovation. Aspirin and ibuprofen kill 16,500 people a year due to gastrointestinal side effects – the very problem Vioxx and other Cox-2 inhibitors are designed to avoid – but you’ll never see Bayer getting slapped with aspirin liability.

Compounding the inherent problems jurors have in assessing drug liability are the many structural elements of the American legal regime that enable lawyers to game the system. Widely used drugs wind up as mass torts, and lawyers can flood the system by recruiting thousands of claimants, some of whom have an actual injury caused by the drug but many of whom do not. Lawyers and defendants both know that jurors will occasionally be duped, so the cases will have settlement value, and the lawyers will only get burned if a thoughtful and energetic judge takes the time to really look into the pool of claimants, as has recently happened in Fen Phen and silicosis cases.

What jurors often fail to realize, at least for new medications, is that pharmaceuticals that save or help most people, but kill or injure some small subset of users, are often drugs that nevertheless should be on the market. To get through the onerous FDA review process, drugs must go through substantial testing for both safety and efficacy. The point of the federal regulatory regime – which is far from perfect, admittedly – is to perform a basic cost-benefit analysis. The safety-effectiveness trade-off is a function of the magnitude of effects – the harms prevented and the harms caused. A drug that kills 1 in 100 users but is the only treatment for an otherwise fatal illness, and increases the likelihood of survival from 0 to 50 percent, is clearly a drug that should be on the market. Any rational consumer afflicted with the fatal disease would choose to take the drug. Any doctor would recommend that his patient afflicted with the disease take the drug. If the disease being treated is 99 percent likely to cause death, the calculus doesn’t change.

Of course, in the real world, choices are rarely so black and white. Ailments aren’t necessarily fatal, and they often vary in degree, and side effects vary depending on patient profile. The job of the FDA is to determine if a drug, on balance, is sufficiently safe and effective to be on the market at all; and to determine what warnings and other information on the drug should be presented, and how, so that consumers – in reliance on their doctors – can make reasoned decisions about whether taking a medication is for them worth the risk.

That drug liabilities should be “known” and “reasonable” so that patients and doctors make informed decisions to assume risk was classically a key feature of how tort law handled drug liability – as long as the risks of using the product were known, drug makers