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Medical Malpractice Reform
State Tort Reforms

Every state has considered tort system reforms, either alone or in conjunction with insurance market reforms, and most have changed their systems in recent years.  Kessler and McClellan concluded that tort-reform states could expect to reduce medical costs by 3 percent to 6 percent a year without affecting health outcomes, especially in elderly patients.83

Damage Caps.  The most popular tort reform measure is to limit, or cap, monetary awards for noneconomic damages, commonly known as “pain and suffering.”  There is no objective basis for the amounts juries award for pain and suffering, and other types of noneconomic awards, such as punitive damages.  Therefore, caps on noneconomic damages are a popular state tort reform, and some experts argue that noneconomic damages should be completely eliminated.  [See the sidebar on “Noneconomic Damages.”]

Noneconomic Damages

In jury trials involving injury or death, the money awarded to plaintiffs sometimes includes noneconomic damages as well as economic damages. Economic damages are awarded for actual and projected expenses and losses, such as medical bills and lost wages. Noneconomic damages are awarded
for such things as pain and suffering, disfigurement, mental anguish or loss of consortium. Noneconomic
damages can also include punitive damages — monetary penalties that aim to deter defendants from future wrongdoing. The term noneconomic generally refers to a subjective amount that is separate from actual economic compensation, such as lost wages and medical bills.

Punitive damages have historically been limited by a formula — say, two or three times the amount of compensatory damages awarded.1 Furthermore, some states require punitive damages to be paid into a victims’ compensation fund rather than be paid directly to the plaintiff. This ensures that punitive damages meet the social goal of deterring defendants rather than encouraging litigation by providing additional compensation to plaintiffs and their lawyers.

By contrast, damages for pain and suffering are hard to quantify because pain is subjective and varies from person to person. For instance, it is impossible to really compensate parents for the emotional or psychological loss from the death of a child. But the presumption is that juries and judges who show compassion toward an injured party must somehow compensate them for their emotional experience, be it a painful corrective surgery, a permanent disability, or the loss of a child or other loved one. After all, it seems like the right thing to do.

Paul Rubin, an expert in law and economics, argues against the practice of awarding noneconomic damages to individuals, based on the revealed preferences of consumers.2 He points out that individuals do not place much value on compensation for pain and suffering because there is no market for that type of insurance coverage. There are markets currently for medical insurance (including psychiatric therapy and counseling), disability insurance and life insurance, which cover medical injuries, lost wages and loss of lifetime income to the family, respectively. But if consumers wanted to be compensated for emotional distress, they would willingly purchase some type of insurance and a market would exist for it.33 Generally, tort law for malpractice events does not provide any additional benefit to, and is far more expensive than, traditional insurance.4

Furthermore, another expert, federal appellate Judge Paul Niemeyer, says there is no rational criteria
for noneconomic damages, and that courts have long recognized that such awards violate common law principles. Judges have allowed them because juries frequently award them. Almost as frequently, the trial judge or an appellate court will reduce multimillion-dollar or multibillion-dollar awards for noneconomic damages. Judge Niemeyer argues that because there is no rational basis for pain and suffering
damages, the legislature, not judges and juries, should determine a formula or set amount beforehand.5

One reason judges may like noneconomic damage awards is because it gives them the discretion to give the victim what, in the judge’s view, is the “just” amount of compensation.

  1. Paul V. Niemeyer, “Awards for Pain and Suffering: The Irrational Centerpiece of Our Tort System,” Virginia Law Review, Vol. 90, No. 5, September 2004, pages 1,401–21.
  2. Paul H. Rubin, Tort Reform by Contract (Washington, D.C.: American Enterprise Institute, 1996).
  3. Paul H. Rubin, “Courts and the Tort-Contract Boundary in Product Liability,” in Frank Buckley, ed., The Fall and Rise of Freedom of Contract (Durham, N.C.: Duke University Press, 1999).
  4. According to Rubin, about 50 cents of every dollar of awards is consumed by transaction costs, principally attorneys’ fees and court costs.
  5. Niemeyer, “Awards for Pain and Suffering: The Irrational Centerpiece of Our Tort System.”

Several studies have examined the effect of damage caps on physicians’ and insurers’ behaviors.

Effect of Damage Caps on Claim Payouts and Types of Injuries. California’s Medical Injury Compensation Reform Act (MICRA) of 1975 limited noneconomic damages to $250,000.  However, due to court challenges, the MICRA caps were not consistently applied for a number of years.  Researchers examined the effect of MICRA caps in more than 150 cases between 1985 and 2002 where juries awarded noneconomic damages in excess of the state’s damage cap.  The injuries varied in type and severity, and some resulted in the death of the patient.84

“State caps on court awards for noneconomic damages (pain and suffering) have moderated increases in jury awards.”

The average uncapped award per verdict was $1.1 million, while the caps reduced the average to $295,648 (measured in 2002 dollars).85 Since the type and degree of injury strongly, if not consistently, influenced the amount of noneconomic damages awarded by juries before the imposition of caps, limiting noneconomic damages had disparate effects on awards for different injuries.  For instance:

  • Noneconomic payouts for neurological and newborn injuries fell the least (less than 8 percent) after caps were imposed on noneconomic damages, since noneconomic awards for these types of injuries had not been especially high before the caps.
  • Noneconomic payouts for injuries that caused pain or disfigurement — but no loss of physical function — were reduced the most by damage caps, more than 70 percent.

These results indicate that juries are swayed by real or perceived pain and suffering and respond by awarding large payouts for noneconomic damages.

Effect of Damage Caps on Physician Behavior.  One of the litigation costs previously mentioned is the effect on physician behavior, such as the practice of defensive medicine and avoidance of certain specialties.  In a study previously noted, Robert Quinn showed that damage caps have a generally positive but limited effect on physician behavior:86

  • In highly litigious states, damage caps reduced lab test revenues, indicating that physicians were less apt to practice defensive medicine.
  • However, damage caps did not lead to a statistically significant higher percentage of physicians practicing obstetrics or neurosurgery.

Effect of Damage Caps on Insurance Premiums.  Researchers have not found a direct connection between damage caps and reduced premiums.  However, an examination of claims data from the National Practitioner Data Bank by Milliman Consultants and Actuaries concluded:87

  • Between 1992 and 2002, paid losses resulting from malpractice claims increased substantially, with a 25 percent jump over a two-year period at the end of the 1990s.
  • Premiums per physician were consistently higher in uncapped states than in capped states; in 2002, the average physician premium in a capped state was $12,000 compared to $16,000 in a uncapped state.
  • By 2002, malpractice awards and settlements per physician were 46 percent lower in capped states than in uncapped states.

“Malpractice insurance premiums are lower in states with caps on noneconomic damages.”

Damage caps allow insurers to better predict their future expenditures on claims, especially if the law mandates periodic payments for large awards.  A 2005 study by Harvard law professor W. Kip Viscusi and Patricia Born shows that losses for insurers in states with damage caps were 17 percent lower than in uncapped states.88 A 2006 study from George Mason University found that insurance premiums are positively associated with the dollar amount of awards per doctor, even after controlling for other factors, such as market concentration and the number of claims per doctor.89 In fact, for every $1 increase in awards, insurance premiums increase by $2.89.  Both of these studies imply that reductions in awards for noneconomic damages lead to lower malpractice insurance premiums.  In fact, recent data from Texas has found that damage caps may have effectively lowered premiums and attracted more physicians to the state.  [See sidebar “Damage Caps in Texas”]

Damage Caps in Texas

In 2003, Texas voters approved a constitutional amendment limiting noneconomic damage awards in malpractice suits to $250,000 per defendant
(or $1.6 million for wrongful death). Despite the continuing debate surrounding the effectiveness of damage caps, Texas has seen some remarkable
results on physician supply since the caps took effect:1

  • The Texas Medical Board reports that since 2003, 10,878 new physicians have received licenses, up from 8,391 in the prior four years.
  • In fact, the influx of physicians has created a backlog of about 2,500 additional license applications waiting to be processed.

The largest gains in physician supply have occurred in obstetrics, orthopedic surgery and neurosurgery. These are specialties that are prone to malpractice litigation.

Moreover, Texas’ malpractice insurance market has grown highly competitive, with 33 companies now writing policies.2 Physicians’ malpractice
premiums have dropped an average of 21 percent.3 One doctor who recently chose Texas over Mississippi for his urology practice expects to pay only $2,000 for malpractice premiums in 2007, compared to the $60,000 he would have paid had he practiced in Mississippi.4

  1. Ralph Blumenthal, “More Doctors in Texas After Malpractice Caps,” New York Times, October 5, 2007.
  2. Eric Torbenson and Jason Roberson, “Are Texas’ Malpractice Damage Limits Healthy?” Dallas Morning News, June 17, 2007.
  3. Blumenthal, “More Doctors in Texas After Malpractice Caps.”
  4. Jason Roberson, “How Tort Reform Has Affected Four People: The New Doctor,” Dallas Morning News, June 17, 2007.

The Collateral Source Rule.  Historically, in setting damage awards, courts have prohibited juries from considering other sources of compensation an injured party could receive, such as life insurance, health insurance or disability insurance.  This is called the “collateral source rule.”  A repeal of the collateral source rule would prevent “double-dipping” by allowing juries to consider such payments when determining monetary awards.  Several states have either repealed the collateral source rule or have limited the cases in which juries must ignore other payments.  Some states have mandatory offset rules that require most forms of compensation to be considered when determining awards.  Other states have discretionary rules that allow judges to consider other forms of compensation.

“More medical specialists and more malpractice insurers have entered the Texas market since damage caps were imposed.”

Kenneth Thorpe of Emory University found ambiguous effects from the full collateral source rule, the mandatory offset rule and the discretionary rule on damage awards.  He found that compared to states with the traditional collateral source rule, the loss ratio (portion of each premium dollar spent on claims) was 13.3 percent lower in states with discretionary collateral source rules (offsets considered at a judge’s discretion).90 Furthermore, in states with both limited discretionary collateral source rules and damage caps, loss ratios were an additional 25 percent lower.  The reduced loss ratios translated into higher profitability for insurers, but they did not appear to lower medical malpractice premiums for physicians.91

“More than half the states allow defendants to pay awards over time.”

Periodic Payments. More than half of all states allow defendants to pay a damage award over time rather than a lump-sum award up front.  Period payments (or structured settlements) benefit both plaintiffs and defendants:

  • A lump-sum award can be subject to potentially unwise investment decisions by the plaintiff, causing them to spend down their award money before their needs are met.
  • However, periodic payments can be invested in an annuity that pays out a guaranteed amount over time to the plaintiff; furthermore, unlike lump sum awards, in which interest on the lump sum is subject to federal taxes, periodic payments (including interest) are tax-free.92
  • Defendants (insurers, hospitals) can spread the costs over time, allowing them to invest reserves from which they will make payments.

State laws on periodic payments vary.  Some states allow periodic payments for damages only over a specific amount.  In California, for example, the plaintiff or the defendant may request the court to order periodic payments for damages that exceed $50,000.  But awards for lost earnings must be paid in a lump sum to survivors.93

“Mediation and arbitration by third parties are ways to avoid the tort system.”

Periodic payments can reduce costs.  Some states allow the payments to cease once the victim dies, and unlike lump-sum awards periodic payments do not require a present value calculation.  One criticism of lump-sum awards is that states often calculate the present value of an injured worker’s future earnings at a lower discount rate than the market interest rate, essentially allowing claimants to profit from lump-sum awards. As a result, workers prefer them over periodic payments, although claimants can spend lump-sum awards before their medical needs end.94 Indeed, periodic payments can meet the needs of claimants who require long-term care without emptying state patient compensation funds or forcing insurers to raise malpractice premiums in order to pay awards.

Limiting Attorneys’ Fees.  Some states limit attorney fees in order to reduce the incentive to demand higher awards.  For instance, Florida limits fees to one-third of damages up to $1 million, with lower percentages on awards over $1 million.95 California imposed stricter limits of 15 percent on awards exceeding $600,000.96 Theoretically, limiting attorney fees allows plaintiffs to keep more of their awards and helps filter out frivolous lawsuits.97

Alternative Dispute Resolution (ADR).   Alternative dispute resolution involves arbitration or mediation between the injurer and the injured.98 Arbitration agreements are typically binding, while mediation tends to be less formal.  Proponents say alternative dispute resolution is a less costly and more efficient alternative to tort.  In 1997, Thomas Metzloff of Duke University and Ralph Peeples and Catherine Harris of Wake Forest University examined the effectiveness of a court-ordered mediation pilot program for medical malpractice cases in North Carolina. They found: 99

  • The average cost of a simple case with a single defendant, including premediation preparation at an hourly rate, was $5,000, compared to $35,000 for the defense cost of a trial.
  • It took less than six months, on the average, to resolve cases in which mediation was ordered, compared to an average of five years to litigate a malpractice claim.100

Arbitration is more commonly used to settle disputes between health care providers and patients regarding insurance coverage of treatments rather than malpractice.  But that experience shows how arbitration might fare in malpractice situations.  For example, California allows but does not require arbitration of medical malpractice disputes.  A 1997 survey of 369 physicians and 99 hospitals in California revealed that: 101

  • Only 9 percent of physicians and 9 percent of hospitals use arbitration agreements.
  • Physicians who use arbitration agreements are typically associated with HMO plans or are covered by an insurer that strongly encourages the use of arbitration.

Of the physicians who used arbitration agreements:

  • Fifty-seven percent did so because their insurer recommended it, while 31 percent reported it is the policy of their practice group.
  • More than one-third believed it was cheaper than court trials to resolve disputes.

However, of the physicians and hospitals that did not use arbitration agreements:

  • Forty percent of physicians and 19 percent of hospitals reported they were not familiar with them.
  • Another 31 percent of physicians and 36 percent of hospitals felt that such agreements “set the wrong tone for the patient,” indicating that patients may view such agreements as adversarial and not in their best interest.

Arbitration agreements in health care disputes, even in an environment as supportive as California, are simply not commonplace.102 One of the challenges in using arbitration agreements is that courts do not always enforce them, so the legal system must effectively recognize them as an exclusive remedy or as trial evidence.

Other Legal Reforms.  A recent study on tort reforms across all 50 states found that a few legal reforms had significant effects on the number and cost of claims:103

  • Stronger expert-witness requirements reduced both claim payment levels and the number of claims.
  • States that prohibit (or restrict) plaintiffs from informing jurors of the specific amount of damages they are seeking saw a smaller percentage of claims that resulted in payment (although the level of awards were similar), compared to states where juries know the amount of damages sought by plaintiffs.104
  • Stronger frivolous-suit penalties were associated with reductions in the paid number of claims and paid claims per physicians, but had no effect on payment levels.

“Health courts with specially trained judges could expedite proceedings.”

Health Courts.  Phillip K. Howard, chairman of the legal reform group Common Good, advocates medical courts.  In these special courts, medically trained judges would expedite proceedings, thus reducing legal costs and allowing patients to keep more award money.105 Charles J. Lockwood of the Yale School of Medicine says medical courts would have other advantages:106

  • Judgments would be based on peer-reviewed medical evidence and medical society guidelines, while court experts, not plaintiff and defense attorneys, would gather data.
  • Compensation would be based on measurable economic losses, not noneconomic damages or pain and suffering.
  • The courts would “work with state medical societies and specialty boards…giving them greater authority than existing state agencies” to monitor physician performance and take action against bad doctors.

Several bills to fund state health court pilot programs have been introduced in Congress, and similar legislation has been proposed in several states.107

How exactly would health courts work?  Testifying before the House Subcommittee on Health, Paul Barringer of Common Good described a medical liability court system based on a broader standard of “avoidability,” such as that used in Sweden, rather than negligence.108

To promote consistency in rulings, judges would refer to practice standards such as the National Guideline Clearinghouse at the U.S. Agency for Healthcare Research and Quality. Additionally, health courts would have compensation schedules to ensure that those injured in like manner received more equal compensation and individuals with legitimate medical injuries would have access to compensation.109
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