Coming Issues of Medical Malpractice Reform

In the process of building America, the English came to rely on a brilliant new legal concept: the company. This concept did something that had never happened before, it allowed an investor to limit his risk in the enterprise. How? It is such a part of our thinking today, that we do not even consider it. The company said that an investor could lose his entire investment, but no more.

Think about it in today’s context: a couple years ago, you had Enron, for example, in your retirement account. When Enron went bust, you looked at your portfolio and Enron was worth zero. Have Enron’s creditors coming knocking on your door to take possession of your house to pay Enron’s bills? Of course not.

This limitation on the creditors ability to take your house is “limited liability.” In a more theoretical sense, limited liability is a partial shifting of risk from the investor to society-at-large. In the strictest sense, once the business and the investor’s investment in the business run out, creditors have nothing to collect against. These creditors as part of society-at-large take a hit and have to write off the account as bad debt, never to be recovered.

In the professional world, we have a theory that no professional should be able to completely shield himself from liability. Theory is the doctor, lawyer, accountant, etc. will have an incentive to watch his patient’s or client’s matters more closely, in order to protect the professional’s home, investments, etc. (As a lawyer myself, I am not terribly enamored of this theory.)

At its core, the medical malpractice crisis that is building today is founded upon this unlimited liability. The doctors cover their risks of losing a lawsuit in two major ways (and many others that are beyond this analysis’s scope): purchase medical malpractice insurance and order many studies to raise the probability of finding all findable problems. These two techniques ultimately cause medical costs to skyrocket.

From my own observations, I know how true this is. My father is a recently retired radiologist specializing in nuclear medicine – the speciality of x-raying soft tissues like brains, lungs, hearts, kidneys, etc. Up until HMO’s and health insurance pushed cost controls, my father’s practice in nuclear medicine boomed. It was the most or second-most profitable part of his company’s radiology practice. His practice as what he called “a doctor’s doctor” was to do these esoteric studies to see tissues in the body with exploratory surgery. He would report to the surgeons and internists as to what he saw on very grainy (primarily before modern medical imagery) pictures. This would save vast amounts of risk for the surgeons in particular – unnecessary surgeries avoided or surgeries with longer invasion periods.

Unfortunately for the patients, these studies were not always necessary. But the surgeons ordered them anyway. HMO cost management and the start of standardized pricing for Medicare, for which my father was on the Harvard University-based study committee, put a severe crimp on the profitability of this proliferation of esoteric studies. Quickly nuclear medicine was not the profit performer that it had been for my father’s company.

Now days, the doctor has fewer options and his risks of being sued continue to climb as my professional brethren make money in many states at the expense of physicians, their patients, and the taxpayer.

In my home state of Indiana, we have heavy caps placed on medical malpractice awards. We have a formal physician review tribunal that determines whether a case has medical merit before it is allowed to go to court. The result of these procedures is that Indiana has indirectly created limited liability for the physician and a review process that has physicians act as a court of first impression. These restrictions have drastically lowered Indiana’s malpractice premiums. Some would suggest that it has not been lowered enough for the cost savings. I would suspect the national exposure may have an impact on that. The best benefit is that Indiana has some of the best health care in the country, since doctors such as one of my clients are seeking to move to Indiana from states like Pennsylvania solely because of the malpractice exposure differences.

So what should we do to improve the system. I do not suggest that Indiana’s system be adopted. There are still ways to make the system better than Indiana’s.

I would suggest a less bureaucratic system with some of the same intents.

First, the doctors must have a way to limit their liability statutorily. This could be done per-incident or it could be done over a period of time. Using the SEC Rule 10b-5 analysis for when a company is liable for failing to disclose a fact, the limit should take into account the probability and magnitude of the problem. As the U.S. Supreme Court said in Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988), "Under such circumstances, materiality will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. SEC v. Texas Gulf Sulphur Co., 401 F.2d at 849." In the securities world, this means that a company has an obligation to disclose a fact if it is "material." The fact is material if the balancing of probability of the fact being true and the magnitude of the impact of the fact being true suggests that the fact is important. So a chance that the company will go bankrupt for being sued because an employee was fired for incompetence is probably not material for SEC compliance because while the former employee will likely sue, the chance of bankruptcy is nil. If the company would go bankrupt due to product liability suit even though the suit has little chance of winning, this would probably be material.

This balancing method is the key to my proposal. To understand its importance, one must understand the "eggshell skull doctrine." Rardin v. T & D Mach. Handling, Inc., 890 F.2d 24, 28 (7th Cir. 1989). In all lawsuits, the person being sued is liable for all damages that he causes regardless if the person harmed was especially likely to be harmed or is more likely to suffer huge damage. The classic example is if you are in a bar fight and hit another person, you are liable for the medical expenses regardless if the punch would typically cause a black eye but your victim had a skull the thickness of an eggshell. You pay for the damages you did cause, not what you could have caused. In the doctor's world, they start at a huge disadvantage. The doctor did not just walk into a bar to get a drink and ended up in a fight. Their job is to help patients who are in trouble. These patients need help. Yet the doctor could be found liable for damages as he finds the person. They have a higher probability of being sued because trouble seeks them out as the nature of their business.

The balancing would not only provide less chance of liability, but even if liability is found, the doctor is not liable for every dollar of loss just because of an eggshell skull circumstance. For example, if the probability of the problem is small and the magnitude of impact on the family of the patient (including the patient) is small, the liability limitation should be strict. If the probability of the problem is small and the magnitude of impact on the family is large in dollar terms, the liability limitation should be more generous to the family but not a goldmine. If the probability of the problem is higher and magnitude is high, the liability limitation should be almost unlimited.

In practical application, this would be done through negligence law, which is at the foundation of medical malpractice adjudication. In negligence, the patient has to show that the doctor had a duty, the doctor violated that duty (“breach”), the breach actually caused the patient harm measured in dollar terms (“damages”), and the breach was the legal cause of damages. (For those aspiring law students out there, actual cause and the damages are prototypically described separately, but in actual practice they are attached at the hip.)

My solution for medical malpractice would be a redefinition of the relationship of duty and damages. If the probability of an event is low, the statute should formally set that medically improbable circumstances do not give rise to a duty. Put another way, the probability of the event and its damages should be multiplied together. Cases not meeting a certain threshold should be thrown out of court as a matter of law without consideration of the rest of the elements of the case.

Since I do not possess my father’s University of Chicago Medical Center knowledge, bear with my example. Let’s say that the patient has a tumor that hard to identify in early phases but is easily treated cost effectively when it is. The cost of care increases the longer the tumor is unidentified. Even in good medical practice, failing to diagnose the tumor in the first stage is 1 in 10 or 10%. The cost to fix the problem is $10,000. The calculation is $10,000 x 30%= $1,000. 85% of the time the tumor can be identified in the second phase before it is terminal but the cost of care is $50,000. The calculation is $50,000 x 85%= $42,500. The remaining percentage are nearly impossible to find and are always terminal at $100,000 for cost of care or $100,000 x 5% = $5,000. Even in a completely thorough exercise of duty, the doctor’s failure to identify the problem could result in a weighted average cost of $48,500 in medical fees. I would suggest that any damages attributable to a doctor, including pain & suffering, mental anguish, loss of consortium, lost wages, etc., have the doctor be exempt from liability as a matter of statute. This means that in practice the $48,500 would not go to the patient or his family, the additional claim for pain & suffering that could amount to between $100,000 and $150,000 (conservatively), the additional claim for loss of consortium (which I believe would be $100,000 but I am not sure), the lost wages for the normal treatment (using the above weighted percentages) of a $50,000 a year worker could be removed for $20,000. This could mean that the value of the limited liability would conservatively be about $268,500.

This system would be difficult to implement initially. There is little data in the medical journals, I imagine, that would address these types of factors. And yet, this data would now have a practical imperative to be developed and scientifically debated before any litigation. Over time medical science through expert testimony would have these numbers established. As evidence, these percentages would change over time and not be locked in place, which statute would require. The damages would be relatively easy to establish given the standardized medical billing codes that currently exist, thanks to the Harvard University commissions mentioned earlier.

So what does this mean? If a particular patient would show at trial that he has $750,000 in from an incompetent physician’s failure to diagnose, the court would reduce the $750,000 by the standard risk that all patients have of not being diagnosed initially. The final judgment would be entered for $481,500.

The patient would be compensated for the egregious damage but would not be compensated for the risk that the average patient in his situation would bear without hope of recovery. The system would benefit because the physicians would have a larger window for damages which they are expected to pay nothing and settling nuisance cases would be less likely. This would make plaintiff’s lawyers less likely to file questionable cases or ones that have smaller value.

The problem with this is that it raises the stakes and combativeness of the cases that do more forward. Any system that limits nuisance cases is likely to be so. The lawyer must show how bad the doctor was just to keep the case alive.

Currently the system is based on a one-arm bandit system though. This system allows doctors to testify against doctors with laymen juries making decisions without really understanding that defendant doctors were not abusive but just using professional judgment as to diagnose. This proposal gives an objective measure to professional judgment and a legally proven means of shifting the risk of error.

The economic benefits of this are that the medical malpractice insurance companies would have fewer small cases to defend, an inexpensive and systematic defense to apply, a smaller amount to pay to settle the case early, and less worry about juries since the data is more universal so the juries would likely be better informed when they enter the courtroom. The insurance companies would also be able to give some practice management consulting and auditing in line with ISO 9000 thinking to make sure the standards set are in place and evidence of the standards compliance are done in advance of the litigation defense having arisen. This would have a potential increase in quality of care aspect.

The patient expense and government expense would benefit dramatically. The doctors would feel less need to do defensive medicine thereby driving down the per-patient/per-visit cost of medicine. The medical profession would do more studies that give explicit guidance on prudent practice to create better, admissible evidence (which would probably be funded by the malpractice insurance carriers). Bad apples would be more readily identifiable with better prosecution of license revocation, thereby reducing the risk of bad doctors over the entire insurance risk group. The government would have an incentive to set the Medicare compensation close to market value so that doctors would have increased liability protection (remember the defensive medicine costs) while having the counter-push to lower costs for coverage.



The real risk in these types of litigation are the unknown. Runaway jury awards get most of the attention. But the problem in this, as in most litigation reform issues, is that the system is poorly equipped to apply rules that dump nuisance cases early. This standard-setting proposal allows more malpractice cases to be determined as a matter of law long before a jury is involved. This increased predictability is one of the best means to provide a good and stable economic environment (as the US has long preached to countries like the USSR and China and other kangaroo court systems).

Doctors would have an easier time shifting their expenses away from risk protection and toward economically helpful activities such as investing in medical infrastructure, hiring staff to comply with clear standards, spending more time with patients because the per-capita cost of insurance and practice management have decreased, and taking more time off because the fixed costs of practice are lower.

This medical system is a mess being awash in unpredictability and lottery judgments for patients. Bad doctors deserve to be run out of practice. Doctors who make one error in a well run practice do not. Society needs to bear more of the risk of good doctors making mistakes but not by increasing costs. Lowering costs and simplifying high quality practices is the way.