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Agreements and disagreements

December 9, 2011 8:10 AM

Ted Frank

I'm surprised that Svorny is so unwilling to concede that educational malpractice liability is unquestionably a bad idea. There seems to be a fundamental disagreement between us about the transactions costs of the legal system. It's easy to think, as a theoretical matter, that legal adjudication is frictionless, but that leads to dramatic policy mistakes by courts, legislators, and regulators. (I've seen first-hand someone drag out a frivolous libel suit for two years without resolution of a straightforward legal issue.) I'm happy to agree to disagree about the merits of uncapping liability for educational malpractice, and let readers decide for themselves who has the grasp of the facts that better reflects the realities of legal-system transactions costs.

Svorny pushes her research on experience rating as demonstrating benefits to the system, but she draws the wrong conclusions from her data. There are high-risk doctors, to be sure, and low-risk doctors: why can't the surgeons be more like the pediatricians who never get sued? That sort of classification does not do much to protect good surgeons, however, since nearly all surgeons end up getting sued. And, sure enough, even Svorny's own numbers show that intra-practice experience rating doesn't make much difference: the Massachusetts insurer she looked at most closely charged 98.6% of physicians within the same 25% range, with only a tiny percentage of those getting any surcharges at all. (And even then, all she found was that the small percentage who are charged outside of that 25% range are being charged "surcharges" that sometimes reflect factors other than experience rating.) Little wonder: there does not seem to be any empirical evidence that previous claims experience predicts future claims experience once one controls for the riskiness of the practice. That's first-hand evidence of haphazardness: if medical malpractice were predictable, we'd see more effective experience rating. (Life insurance and car insurance certainly don't operate within a 25% band.) But Svorny again works with a binary metric: if it's not the case that insurers never experience rate (another strawman), then there isn't a problem with uncapped damages because insurers can always experience rate. She never asks why, if efficient experience rating is possible, it has so little effect on insurance rates.

I'm pleased to see that Svorny agrees with me that the medical malpractice legal system is not producing perfect results. I can agree with Svorny that we should look to reforms that reduce the error rate of the legal system.

What she has failed to recognize in her paper, however, is that non-economic damages caps can work to reduce the error rate of the legal system. Svorny considers only the false negatives, the cases where a cap might result in undercompensation; she never looks at the costs of the false positives, the cases where the lack of a cap results in overcompensation.

The error rate is not just the "11%" Svorny calculates in her most recent post. It's the uncompensated costs put on doctors when meritless malpractice suits are brought in the hopes of jackpot justice—another 29% of the cases. But that the other 60% of cases supposedly have merit (and, as we've seen, merit is often judged with hindsight bias, whether by lay or expert evaluators) does not mean that they're not also imposing erroneous costs. Even where an individual doctor commits malpractice, a shotgun complaint might bring in another dozen entities in the hopes of extorting a settlement. And the biggest cost of all comes from the outlier verdicts that caps are intended to address.

The problem is that the legal system is poorly situated to make judgment calls about complex medical decisions. Returning to the anesthesiologists again, even expert witnesses suffer from extraordinary hindsight bias when evaluating the quality of medical care: we can hardly be surprised when lay juries, encouraged by attorneys with an incentive to slant the evidence do not do any better. Uncapped economic damages present gigantic opportunities for injustice: John Edwards by himself won tens of millions of dollars in verdicts based on junk science. When non-economic damages are uncapped, a single outlier judgment can impose tremendous disproportionate costs that get spread across all doctors. Obstetricians or neurologists facing uncapped noneconomic damages (and the hospitals that employ them) are always at risk of an eight-digit award.

When damages are uncapped, obstetricians are playing a game of Russian roulette. If ten meritless cerebral palsy cases are brought, and jackpot-justice litigators can get a $20 million or more judgment when they win, a legal system that gets it right "only" 90% of the time will have disastrous consequences: the one error more than overwhelms the effect of the nine cases where the system got it right. A noneconomic damages cap limits the false-positive error rate of any single outlier jury. Such caps also reduce the incentive to bring low-merit/high-potential-damages cases that impose other costs on the system. Caps have benefits as well as costs. It's one thing to say that one's research shows that caps have a marginal cost that has previously been unconsidered (though the "unconsidered" part of that is questionable, as I argued about it with reform opponents six years ago); it's another to leap to the conclusion that therefore caps are always a bad idea when one admittedly hasn't evaluated the relative costs and benefits.

It's always tempting to oversell incremental improvements in data collection as having far-reaching policy implications. I've been critical of this problem before, including with papers Svorny relies upon. In this case it results in a non sequitur. The bottom-line conclusions of Svorny's paper are not supported by the data or the analysis.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.