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A Business, Not a Profession

November 24, 2005 2:38 AM

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 were traditionally insulated from liability for their products unless they had been faultily manufactured (i.e., they�d made a �bad batch�). See Restatement of the Law 2d, Torts, � 402A comment k (American Law Institute 1965) (asserting that the manufacturer of drugs �is not to be held to strict liability for unfortunate consequences attending their use merely because he has undertaken to supply the public with an apparently useful and desirable product, attended with a known but apparently reasonable risk�). Paradoxically, though, even as the federal government developed a comprehensive regime to regulate drugs on the market � with the aforementioned safety and efficacy testing, as well as tediously precise dissemination of warning labels and information � the protection for drug manufacturers whose products were �apparently useful� but had a �known but apparently reasonable risk� came to be gutted by the courts.

The Solution: FDA Preemption

Hence my call for FDA preemption. Let me clarify exactly what I mean. If the FDA approves a product, and the drug manufacturer was not fraudulent in its FDA submissions, the manufacturer should not be held liable for harms caused by its products that were known to the FDA and, at the FDA�s discretion, publicized in labeling or otherwise as the FDA best saw fit to require. The FDA permits the drug on the market that kills 1 in 100 people but saves half of the 99 percent who otherwise would die? Those 1 percent killed have no claim. Likewise with any other person injured by a drug if such injury is a side effect known and publicized at the time the drug was prescribed.

Now, what about those claims � like Vioxx and Fen Phen � in which an initially unobserved side effect becomes evident through subsequent testing? We may not want to foreclose all potential for redress here. I�d be worried then about too much FDA Type II error � i.e., if the FDA knew that anyone injured by a drug it had approved had no recourse whatsoever if an undiscovered side effect cropped up, it would face that much more institutional pressure to order larger, and longer, tests. The public would suffer, as good drugs were kept off the market for too long.

So for those classes of injuries that cropped up in later testing, post-FDA approval, we might well want a compensation scheme for injured parties who took the drugs. But the claims shouldn�t be in tort! Remember that the traditional tort rule was merely that a drug be �apparently� reasonable. A drug manufacturer who complies with the FDA process but subsequently discovers a defect hasn�t committed a �wrong,� even though its product has caused injury to some individuals who weren�t fully aware of their own risks at the time they took the drug. Acknowledging that patients who are injured by drug side effects unknown at the time of FDA approval need not imply that we muddy our tort system with these claims and process them in the administratively expensive and imprecise way that the litigation process necessarily involves.

Fortunately, we have a pretty good template for handling drug claims outside the courts in the Vaccine Injury Compensation Program, which Congress established in 1986 after lawsuits threatened to wipe out vital children�s vaccines. (Vaccines present a special case: we want people to take them, because we�re all better off if they do. But there�s an inherent free rider problem in that if everyone else is vaccinated, you lose some of your incentive to assume the costs � and the risks � of taking the vaccine yourself.) The VICP operates efficiently, at 9 percent administrative cost. It effectively weeds out bad claims but generously compensates good claims. A comparable program could handle all drug claims, rejecting outright any premised on harms that were disclosed by FDA requirement at the time the drug was prescribed, and allowing claims to go forward for injuries actually caused by side effects that were unknown at the time of prescription. And if the FDA decided to add a new side effect warning to a drug, while permitting it to still stay on the market, suits by individuals who subsequently took the drug would of course also be barred.

The key caveat to the FDA preemption I propose is that the drug manufacturer was not fraudulent in its FDA submissions. If the manufacturer did in fact lie to the FDA, it should lose its statutory safe harbor � because it did do a �wrong,� and its drug was not �apparently reasonable� as the FDA had assumed. But lawyers shouldn�t be able to circumvent the statutory preemption merely by making this claim, which would be routine in all drug lawsuits and gut the regime�s whole effectiveness. Rather, the FDA � or another independent body � should have to make a ruling that the company had been fraudulent. Only then would the company lose its safe harbor protection.

Getting Back to Medical Malpractice

So that�s my take on drug liability. I�m very interested in your thoughts. Though this post is already some 5,000 words, I do want to spend a little time getting back to medical malpractice, and addressing your specific points raised in your prior post, because I don�t want us to �talk past each other.� I�ll also comment briefly on a couple of other ideas, at least one of which you�ve backed in the past.

Before I get specific, let me make a comment on my earlier invocation of Philip Howard and Common Good: I mentioned him not to imply wholehearted endorsement of his approach to medical malpractice liability but to show that the Manhattan Institute Center for Legal Policy has given a lot of attention to alternative approaches to medical malpractice reform � and relatively little to damage caps. Philip is a friend, and I think he�s done a lot both to show the problems with the American legal system and to think outside the box about solutions, but by saying that we�ve featured him in events I didn�t mean to suggest that his preferred solution gets it all right. (I would take a little issue with your statement, though, that �a genteel business lawyer like Philip is not generally perceived as moderate by groups that aren�t naturally sympathetic to tort reform� � his Common Good board of advisors includes folks like George McGovern and Bill Bradley, whom I wouldn�t call big business shills or right-wing extremists.)

Your Plan for Health Courts: Thoughts and Questions

Now let�s get to the IOM-endorsed administrative compensation scheme you outline. To begin with, I�d agree that to the extent we can take medical malpractice compensation outside the adversarial tort system, it�s a goal worthy of experimentation. The adversarial system stifles real disclosure and safety improvement in medicine, as I noted before (and as you agree, at least to some degree).

I also agree that in general it could make sense to leverage existing regulatory mechanisms as much as possible � much like I propose building from the existing FDA and VICP in handling drug liability. But note that the case here is different than for drugs, from the standpoint of one who�s interested in torts (you, admittedly, are more interested in health policy outcomes, not the overarching tort regime). I don�t think most drug lawsuits belong in tort because the mere fact that a drug causes a harmful side effect doesn�t mean that manufacturers have done anything wrong. Unless drug makers have lied to the FDA, they haven�t committed a products liability tort that should be actionable.

In contrast, doctors are negligent all the time. That doesn�t mean they�re bad people, or even bad doctors, but they�re often at fault for patient injuries. When doctors are at fault, they do commit what those of us who are interested in that area of the law would call a tort. So Philip�s notion of a more traditional legal regime � based in tort, but with specialized decision makers � is in some ways more attractive to tort scholars. When you start carving out special exceptions to tort, as with workers compensation, there may be unintended side effects over time. That doesn�t mean we shouldn�t do so; I just flag the issue.

And I think to make myself more open to your idea, I might interpret it as follows: we�re setting up a regulatory regime at the state level, much like the FDA functions at the federal level, that in itself is designed to screen medical provision to reduce injury. Presumptively, even if individual mistakes are made that cause harm, a provider that�s been compliant with the regulatory regime isn�t at fault in the tort context. Injuries, even avoidable ones, are an �apparent risk� in today�s health care world, and aren�t really torts in the traditional sense in that people assume those risks when they go to the hospital in the first place � at least if the hospital is complying with an adequate regulatory regime that ensures that on balance it�s not making more mistakes than it should. That doesn�t mean people injured � if such injuries are �avoidable� � shouldn�t receive any compensation; but it means the injuries don�t belong in tort, at least in most instances. I�m not sure if that�s a legitimate read of your idea, but such a rationale would make me a bit more comfortable that simply saying, �health care�s special, and we should carve it out of tort because it�s special.�

There are a couple of salient points to your approach as I understand it that I�d like to comment on � and if I�m off-base in my understanding of your proposal, let me know. First, as I read your idea, it�s optional to the health care provider, not mandatory. Such a feature is important, because if the proposal were to get mucked up � either in the legislature or by the regulators � providers could always stick with the status quo.

I think by now you probably have guessed that I�m very skeptical of the legislative process. Public choice theory suggests I should be. The more complicated proposals become, the more politicians can mess them up. Jeff O�Connell found this out the hard way with automobile no-fault, and your comments on Pennsylvania�s treatment of Phil Howard�s health courts idea suggests more of the same. Part of the appeal of �traditional� tort reforms � damage caps, elimination of joint-and-several liability, and the like � is that they�re simple; you�re either for them or against them, but you can�t come up with a beast that�s worse than the problem you�re trying to fix. Those who are critical of the Congress�s proposed fix on asbestos � a fix that�s as necessary as any in tort � have just that argument, i.e., that the complicated trust fund mechanism that�s made its way through the judiciary committee is worse than what we have now. I�m not saying those critics are right, but the current example is a good one in showing just how easy it is for complicated reform schemes, which are elegant in theory, to get messed up when our actual political actors get their hands on them. In any event, a proposal that gives providers an option, as I read yours to do, has that as a major plus at the very outset.

I also tend to like your reform�s emphasis on what seems to be an �early offer� mechanism: �Providers would have strong incentives to engage the patient in mediated discussions, and to offer prompt, fair compensation.� As I read your idea, in your post and in other variants I�ve seen, providers who opt into the system would be immune from suit but in turn would have to make an early offer to pay patients reasonable economic damages and noneconomic damages (according to a workers-comp-style schedule based on type of injury). Disagreements would be resolved administratively, in a process that avoided a lot of the nonsense we see in the regular courts.

I tend to like the �early offer� mechanism of your approach, because it mirrors a lot of the ideas we discuss in the tort reform community. In general, our tort system mistreats victims of injury not only through its cost but also through the length of time it takes individuals to collect. Jeff O�Connell�s new reform idea for medical malpractice uses just such an early offer mechanism, though it goes a bit further (Jeff�s idea is that early offers to compensate economic damages in full immunize doctors and hospitals from suits over basic negligence). Other tort reform ideas tap into early offers, too � often functioning as client protection mechanisms; e.g., Lester Brickman�s idea, developed about a decade ago with the Manhattan Institute, calls for attorney contingency fees to be collectible only for �value added� above a defendant�s early offer of settlement. And those of us who think that offer of judgment rules offer the best opportunity to introduce loser pays principles into American jurisprudence also welcome attention paid to early offer mechanisms.

Now I fully realize that the early offer mechanism in your approach is just a part of the overall safety regime providers would have to opt into to qualify for immunity. But I like it, and in part I like it because I think it dovetails with other ideas that are important to the broader discussion over civil justice reform. Since that�s my primary focus � not just civil justice that affects health policy, but all civil justice � it�s a relevant consideration for me.

I�m not sure exactly how the idea would work in all respects. Let�s say someone claims he was harmed in an �avoidable injury,� but the provider never approached him about it or offered to pay. I�m guessing he�s still preempted from tort, as long as the provider has generally been compliant with its regulators? He still has to go through the administrative process � but perhaps the provider is socked with a penalty if the administrative tribunal determines that there was indeed an avoidable injury and the patient should have been informed and made an offer. Is that a reasonable reading of your approach?

I�m a bit more skeptical of your preferred implementation mechanism, namely Medicare, but more for reasons of political reality than anything else. If there�s a lobby more powerful than the trial bar, it�s the seniors� groups, and the AARP and ATLA tend to be tight. Any reform that the AARP might possibly view as lowering seniors� protections � and the trial bar would sell any change to the status quo as a lowering of seniors� protections � would be a non-starter politically. If you could persuade the AARP that it�s in seniors� interest to adopt a non-tort, administrative-law-judge approach to medical malpractice claims, I�m afraid that you could only do so by making the system exorbitantly costly. I may be overly cynical, but I do have concerns. (Note that my concerns with Medicare as a fulcrum for reform are more practical than theoretical. Indeed, as a purist, I�d much rather federal damage caps be imposed specifically on Medicare and Medicaid recipients, not preempt all state regimes, for reasons of federalism. But politically, such an approach wouldn�t wash.)

I tend to be more enthusiastic about employer-initiated approaches, i.e., letting employers offering health coverage through ERISA push their covered employees into an administrative plan. If the �big business� you accuse me of shilling for has any concern that�s bigger than litigation, it�s the cost of health insurance, and I think you might get business really motivated for such a reform if you could persuade business leaders it would actually work. Of course, ATLA might get labor to side with it in opposition, which could stifle reform, but I�m not totally sure that they would, especially if labor leaders were convinced they�d get some benefit back in lowered deductibles or higher wages.

Remaining Questions

A couple of other points before I sign off. First, I think that binding alternative dispute resolution could be a tenable reform. In theory, the Federal Arbitration Act enables such an approach, but in practice, state judges tend not to enforce arbitration and ADR provisions. What are your thoughts?

Also, I�d love to hear a bit more about your thoughts on enterprise liability, which I understand was once a major project of yours. To me, it seems as if private parties probably could contract for such a solution now, to a significant extent, but they don�t. Is that true, and if so, why do you think that is? How would legislation make a difference?

Anyway, at long last, I�m ready to catch up on my sleep (in anticipation of a big Thanksgiving meal). I think we�ve moved well beyond damage caps � and any accusations of who�s a �shill� for whom (though I really never meant to imply you were a �shill� for the trial lawyers!). I think I�ve given you quite a lot to chew on, and I look forward to hearing from you sometime after you�ve recovered from your turkey.

Jim

 

 

 

Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Communications
Manhattan Institute
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