In the mid-1980s, University of Chicago law professor Richard Epstein argued for replacing the tort-law malpractice system with a system in which liability would be determined by contract.¹²¹ Epstein’s proposal, however, lacked an institutional mechanism that would make such contracts palatable.  As explained below, courts have been reluctant to accept contracts signed in the hospital admissions office, let alone in the emergency room, as a true meeting of the minds.  In 1993, Emory University professor Paul Rubin extended Epstein’s idea by describing a reasonable institutional environment for contracts.¹²² Rubin suggested that insurance companies contract with providers and then offer people insurance governed by different legal regimes.  In return for waiving the right to sue for pain and suffering and settling for economic damages only, people would be able to purchase lower-priced insurance.¹²³

While Rubin’s contribution is important and moves in the right direction, it does not go far enough.  In general, market-based (contract) solutions should be encouraged for all medical malpractice claims — both economic and noneconomic.  The following discussion shows how most malpractice issues could be better resolved in the marketplace.

“Courts have not enforced contracts between patients and medical providers that would resolve medical injury claims.”

Free the Patients.  Under the current system, most hospitals and doctors ask their patients to sign a form at the time of treatment releasing the provider from any legal liability in case of a bad outcome. In malpractice suits, the defendants point to the form and claim the plaintiff (victim) has contractually waived her right to sue as a condition of treatment.  Courts have routinely dismissed such arguments, however, on the grounds that they do not really constitute informed consent.  After all, how can a patient who is ill, frightened and intimidated by the health care system make rational decisions about complex legal liability issues?  The position of the courts is understandable, but it has had an unfortunate side effect:  Doctors and patients are unable to avoid the costs of the malpractice system through any contract whatsoever.

How can the system give patients and doctors other options, while at the same time protecting patients from making unwise decisions when they are least able to negotiate contracts? One solution is to have the state legislature specify the elements of enforceable contracts in law. Physician boards could identify conditions and procedures that generally have a low risk of death and, therefore, could warrant compensation in the event of a bad outcome.  Economists could establish minimum amounts of compensation based on the economic loss from an unexpected death or disability as well as procedures for determining future health costs, if any.

Patients would not be required to agree to such contracts as a condition of treatment although physicians would have the right to restrict their practices to patients who agree to such contracts.  However, if the patient and physician voluntarily signed the agreement, it would be binding. The following provisions should be considered for inclusion in such contracts:

Compensation without Fault.  This provision obligates the provider to compensate the patient (or family of the patient) in the case of unexpected death or disability.  In the case of an unexpected death, the amount could be set in advance and be generally known to all patients.  In the case of an unexpected disability, the contract might use provisions similar to those used to determine disability payments in state workers’ compensation systems.  The amount of compensation could be varied by patient characteristics, including the patient’s age and income.  In other words, the amount could be based on some of the same criteria the current malpractice system uses — but without judges, jurors, lawyers and courtroom costs.

“A contract alternative to tort suits would require physicians and hospitals to disclose information on errors and patient outcomes.”

Adjustments for Risk.  Not all medical cases are the same.  Even if the probability of an unexpected death is low, complications for one patient may create risks twice as high as for another.  There must be a way of adjusting for differences in risks, or providers would try to avoid the harder cases.  One possibility is to reduce the amount of compensation for the riskier patient (or high-risk procedure).  Furthermore, the patient (or the patient’s health insurer) could purchase additional coverage to insure the event.  (See the discussion below.)

Full Disclosure.  As a condition of waiving the patient’s legal right to pursue liability claims under traditional tort law, providers should be required to make certain quality information public.  For example:

• For routine surgeries, hospitals and doctors should post (case-adjusted) mortality rates, readmission rates, hospital-acquired infection rates and so forth.
• Providers should also be required to disclose the use of safety measures, including electronic medical records, computer software designed to reduce errors and procedures designed to prevent hospital-acquired infections.
• Additionally, in the case of unexpected death or disability, providers should be required to fully disclose all facts to appropriate investigative bodies so that steps can be taken to prevent future recurrences.

The patient should also be required to provide full disclosure of such routine information as when the last meal was consumed or what other drugs are being taken, since these might lead to adverse medical outcomes.

Patient Compliance.  Even for simple surgery, patients must comply with certain provider directives, including diet restrictions, full disclosure of medications being taken and so forth.  For maternity cases, compliance in the form of prenatal care is more involved and extends over a longer period of time.  Failure to comply in all these cases would result in a reduction in the amount of compensation and perhaps no compensation at all.

Additional Insurance Options.   In most cases, insurance companies will insure contracts.  However, once premiums for a doctor, patient and procedure are set, patients could increase the coverage by paying an additional out-of-pocket premium.  For example, if the legislature requires a minimum payout of $500,000 for an unexpected death and the providers have to pay $X of premium for the insurance, patients should be able to pay an additional $X to obtain $1 million of insurance coverage (or any other multiple).

These are only a few provisions that seem reasonable.  The reason for having some constraints on the freedom to contract is to promote good social policy and avoid unconscionable outcomes. People will no doubt think of additional items.  The list should not be long, however. If too many burdens are placed on the contract, there will be no contracts.

Advantages. A liability-by-contract system would have a number of advantages, including the following:

“Physicians’ insurers would become the primary monitors of quality.”

Advantage No. 1:  Insurers rather than patients would become the primary monitors of health care quality. Under this proposal, a great deal of quality information would be available to patients that is currently unavailable.  However, patients would not be the primary monitors of quality.  That role would fall to insurers.  If doctors could escape the costs and burdens of the liability system by compensating patients for unexpected outcomes, they would naturally want to insure against such payments.  So instead of buying malpractice insurance, they would be purchasing what amounts to short-term life insurance on all patients, say, undergoing surgery.  In the current system, there are no life and disability insurance products specifically tied to episodes of medical care.  However, if the contract system becomes widely used, such products are likely to emerge.  In pricing these policies, insurers would have a strong interest in monitoring how doctors practice medicine.  The market, rather than bureaucratic bodies, would determine who is a good surgeon and who is a bad one, and those determinations would be reflected in insurance premiums.

Advantage No. 2:  Medical providers would have strong financial incentives to improve quality.  In addition to the fact that malpractice premiums do not accurately reflect the actual incidence of malpractice, physician premiums rarely indicate the quality of medicine they practice.  In the reformed system, insurance premiums should be closely related to actual outcomes.  Surgeons with high mortality rates will pay higher premiums to insure against unexpected outcomes, other things being equal.  These higher premiums, in turn, will constitute a strong financial incentive to find safer ways to perform surgery.

Advantage No. 3:  All the parties responsible for patient care would have strong incentives to cooperate in improving quality.  Under the current system, a patient undergoing surgery typically does not deal with a single doctor responsible for the entire procedure.  Instead, the patient (implicitly) contracts with several doctors, each as an independent contractor, for example:  the surgeon, the anesthesiologist, the radiologist, the pathologist and the hospital itself.  Because each of these entities is independent of the other, none bears the full cost of his or her bad behavior and none reaps the full benefits of good behavior.  Some have proposed making the hospital fully responsible for all malpractice claims.  But that practice would not work when most or none of the other parties to the medical incident are hospital employees.  Under the proposal envisioned here, all parties to a surgical event, for instance, would have strong incentives to contract with each other and cooperate with each other on error-reducing, quality improving changes (including electronic medical records and hospital infection reduction procedures).  The incentives proposed here would avoid the current tort system, offer the patient a contract insured by a single insurer and minimize the cost of that insurance.

Advantage No. 4:  Patients will receive cash compensation for unexpected outcomes without the stress or expense of a lawsuit.  The loss of a loved one is a traumatic event.  The prospect of filing a malpractice lawsuit is also inherently stressful and traumatic.  Patients and their families could better face their grief if they received a check without being forced to negotiate with doctors and lawyers, or to endure unpleasant confrontations with an opposing party in litigation.  The compensation system envisioned here would put doctors and patients on the same side, with only one obligation — completing the paperwork needed to collect from an insurance company.

“Patients and their families would be compensated for unexpected outcomes.”

Advantage No. 5:  Patients and their families could self-insure for additional compensation.  How much should a surviving spouse receive for the death of a loved one?  The decision will, to a certain extent, be arbitrary — especially if made by a legislative body. However, if the amount is publicized in advance and broadly known, families can make adjustments to meet their expected needs. If the amount is too low, for example, families could buy additional life or disability insurance on their own — including (as described above) insurance under the provider’s insurance contract.

Advantage No. 6:  The social cost of a liability-by-contract system is likely to be much lower than the cost of the current system.  As noted above, as many as 98,000 people die each year because of errors and mistakes in our health care system — primarily in hospitals.¹²⁴ That estimate is probably high. But suppose, for the sake of argument, we accept it; and suppose that the surviving family members of these patients each received a check for $500,000.¹²⁵ The total annual cost would be less than $50 billion.  To put that number in perspective, note that the total cost of the current malpractice system is estimated to be as much as $200 billion annually, or four times as much.¹²⁶ If the average compensation were $250,000, the total cost would equal one-eighth the cost of the current system.  Moreover, the current system involves a huge use of real resources — lawyers, judges, courtrooms and so forth.  By contrast, the check-writing solution involves very few real resources — other than monitoring and administration costs; it primarily involves moving money from some people to others, leaving real resources to be used in more productive ways.  Further, if hospitals were required to pay $500,000 per unexpected death, on the average, the health care system would not continue to sustain 98,000 deaths from medical errors each year.  Hospitals would quickly find ways of reducing their error rates.

Advantage No. 7:  Health care costs for patients would likely be reduced.  Ultimately, patients and potential patients will absorb most of the cost of any compensation system.  Just as the cost of malpractice premiums is embedded in the price of patient care, the cost of a liability-by-contract system will also be passed on to patients (and their insurers) in the form of higher prices.  However, if the proposed system is socially more efficient, patients will see an overall reduction in health care costs (as well as an increase in quality and better personal protection against untoward events).

Advantage No. 8:  Liability by contract is a socially better way of handling sympathetic cases. Some of the most heart-wrenching cases in malpractice law involve newborns facing the prospect of a lifetime of care.  Even if the doctors and hospital personnel committed no error, the parents are confronted with an enormous burden — in terms of both time and money.  The tendency on the part of jurors, therefore, is to have great sympathy for the plaintiffs.  One reason obstetricians’ malpractice premiums are so high is that the system is inching ever closer to a system of liability without fault.  But if this is the case, why not move there directly and dispense with the lawyers, judges and juries?  The reformed system would handle the sympathetic cases in an efficient, responsible way.

“In cases where contracts are inappropriate, binding arbitration would be an alternative.”

Free the Doctors.  A system of liability by contract will not work in all cases.  Many patients have a high probability of death or disability.  Doctors are unlikely to want to pay the cost of those adverse outcomes, and it would be unreasonable to expect them to do so. Further, when patients seek care at emergency rooms, no one has time to evaluate the likelihood of death or permanent injury prior to the delivery of care.  Even in these cases, however, an alternative to the current system is desirable.  Accordingly, medical providers who offer their patients the opportunity to escape the current malpractice system by contract should have the chance to escape the system themselves in cases where contracts are impossible or impractical. In particular, these providers would be able to insist as a condition of treatment that all malpractice claims must be submitted to binding, unappealable arbitration by an independent party.  (The exception would be cases of gross negligence, discussed below.)

What criteria should arbitrators use in deciding cases?  Unlike the liability-by-contract system, here the paramount issue is one of fault.  Doctors (and their insurers) pay nothing unless they are found to be at fault, and the amount they pay would be based on the degree to which they are at fault.  As in the case of liability by contract, doctors would be freed from the burden of the traditional malpractice system, provided they do certain things.  For example, they must make their quality data available to all patients; they must cooperate with all safety bodies; and they must (in arbitration cases) make all relevant data available to the patient without costly discovery.

Free the Experts.  All too often, expert witnesses in tort cases are “hired guns.”  The same witnesses appear time and again for one side or the other.  They are selected as witnesses precisely because their testimony can be counted upon to be overly generous to one of the two sides.  Further, these witnesses are often handsomely paid, which gives them an incentive to continue the practice and become “professional witnesses.”  These witnesses would have no role in a properly run system of arbitration.  The arbitrators would be free to call on real experts who would be agents of the arbitrator rather than agents of one of the two parties.

“A model for arbitration is the federal ‘vaccine court’ for injury claims.”

A model for the arbitrators is the so-called “vaccine court,” a branch of the U.S. Court of Federal Claims in Washington.  The vaccine court was created in 1986 as Congress’ response to a liability crisis. In rare cases, vaccines were being blamed for catastrophic injuries and even death.  Manufacturers were threatening to quit the business, which in turn threat shielded the industry from civil litigation by instituting a system of no-fault compensation.  Under the law, aggrieved families file petitions, which are heard by special masters in the vaccine court.  Successful claims are paid from a trust fund fed by a 75-cent surcharge per vaccine dose.  The U.S. Department of Health and Human Services oversees the fund, with the Justice Department acting as its lawyer.¹²⁷

Free the Courts.  The reformed system described above should be available in all cases except gross negligence.  Medical practitioners should be able to insure against the consequences of their mistakes.  There seems to be no socially defensible reason, however, to allow them to contract out of the consequences of gross negligence.

There is evidence that a few of the tort system reforms considered so far have reduced the rate of growth in medical malpractice costs, while others have had little effect.  But none has had a noticeable effect on health care quality.  As noted, the goals are to: 1) compensate every patient (potentially) who is harmed by a medical error; 2) compensate patients fully; 3) minimize the cost of determining compensation; and 4) encourage health care providers and patients to act in ways that reduce the frequency of errors.  Further, an ideal solution would generally allow patients and health care providers to achieve these goals while avoiding the tort liability system altogether.  A contractual solution may be the answer.

This backgrounder was prepared by Pamela Villarreal, policy analyst, John C. Goodman, president, and Joe Barnett, director of publications, of the National Center for Policy Analysis.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.