Enterprise medical liability and the evolution of the American health care system

Harvard Law Review

Volumn 108, Issue 2, 1994, Pages 381-435

  Abraham, Kenneth S ^a   Weiler, Paul C ^b  

^a UNIVERSITY OF VIRGINIA SCHOOL OF LAW   (United States)

^b HARVARD LAW SCHOOL   (United States)

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EID: 0001011413     PISSN: 0017811X     EISSN: None     Source Type: Journal    
DOI: 10.2307/1341896     Document Type: Article

References (214)

1. We had been studying and developing a systematic case for the concept of enterprise - we called it "organizational" - liability in our scholarly work for some time. First, the Harvard Medical Practice Study (HMPS), in which Professor Weiler was the principal lawyer participant, documented the failings of the current individual liability model of malpractice litigation. The findings of the HMPS are distilled in PAUL C. WEILER, HOWARD H. HIATT, JOSEPH P. NEWHOUSE, WILLIAM G. JOHNSON, TROYEN A. BRENNAN & LUCIAN L. LEAPE, A MEASURE OF MALPRACTICE (1993). Second, a major study by the American Law Institute (ALI) analyzed high-stakes tort litigation - not only litigation about medical injuries but also that concerning environmental, product, and occupational hazards. Professor Weiler served as Chief Reporter for the ALI Study and Professor Abraham was Associate Reporter. See 2 AMERICAN LAW INST., REPORTERS' STUDY: ENTERPRISE RESPONSIBILITY FOR PERSONAL INJURY 113-19 (1991) (analyzing and endorsing the concept of organizational medical liability). Third, a byproduct of these two projects was a book by Professor Weiler that included a detailed argument for imposing liability on hospitals rather than on physicians. See PAUL C. WEILER, MEDICAL MALPRACTICE ON TRIAL 122-32 (1991).
2. We had been studying and developing a systematic case for the concept of enterprise - we called it "organizational" - liability in our scholarly work for some time. First, the Harvard Medical Practice Study (HMPS), in which Professor Weiler was the principal lawyer participant, documented the failings of the current individual liability model of malpractice litigation. The findings of the HMPS are distilled in PAUL C. WEILER, HOWARD H. HIATT, JOSEPH P. NEWHOUSE, WILLIAM G. JOHNSON, TROYEN A. BRENNAN & LUCIAN L. LEAPE, A MEASURE OF MALPRACTICE (1993). Second, a major study by the American Law Institute (ALI) analyzed high-stakes tort litigation - not only litigation about medical injuries but also that concerning environmental, product, and occupational hazards. Professor Weiler served as Chief Reporter for the ALI Study and Professor Abraham was Associate Reporter. See 2 AMERICAN LAW INST., REPORTERS' STUDY: ENTERPRISE RESPONSIBILITY FOR PERSONAL INJURY 113-19 (1991) (analyzing and endorsing the concept of organizational medical liability). Third, a byproduct of these two projects was a book by Professor Weiler that included a detailed argument for imposing liability on hospitals rather than on physicians. See PAUL C. WEILER, MEDICAL MALPRACTICE ON TRIAL 122-32 (1991).
3. We had been studying and developing a systematic case for the concept of enterprise - we called it "organizational" - liability in our scholarly work for some time. First, the Harvard Medical Practice Study (HMPS), in which Professor Weiler was the principal lawyer participant, documented the failings of the current individual liability model of malpractice litigation. The findings of the HMPS are distilled in PAUL C. WEILER, HOWARD H. HIATT, JOSEPH P. NEWHOUSE, WILLIAM G. JOHNSON, TROYEN A. BRENNAN & LUCIAN L. LEAPE, A MEASURE OF MALPRACTICE (1993). Second, a major study by the American Law Institute (ALI) analyzed high-stakes tort litigation - not only litigation about medical injuries but also that concerning environmental, product, and occupational hazards. Professor Weiler served as Chief Reporter for the ALI Study and Professor Abraham was Associate Reporter. See 2 AMERICAN LAW INST., REPORTERS' STUDY: ENTERPRISE RESPONSIBILITY FOR PERSONAL INJURY 113-19 (1991) (analyzing and endorsing the concept of organizational medical liability). Third, a byproduct of these two projects was a book by Professor Weiler that included a detailed argument for imposing liability on hospitals rather than on physicians. See PAUL C. WEILER, MEDICAL MALPRACTICE ON TRIAL 122-32 (1991).
4. The Administration's recommendations were embodied in the proposed Health Security Act, S. 1775, 103d Cong., 1st Sess. (1993). We were delighted that the core concept of enterprise liability was about to be proposed as an important component of national health care reform, although we informed the President's Health Care Task Force of our reservations about its choice of the untested health plan rather than the well-established hospital as the institutional candidate for this new brand of malpractice liability.
5. See, e.g., Robert Pear, Changing Health Care; Clinton Advisers Outline Big Shift for Malpractice, N.Y. TIMES, May 21, 1993, at A1.
6. PIAA is the trade organization of physician-owned mutual insurance companies ("bedpan mutuals") that were formed in the 1970s in many jurisdictions to write medical malpractice liability insurance when commercial insurers became reluctant or unwilling to do so.
7. PIAA literally "descended," moving its headquarters from New Jersey to Washington, D.C. in the spring of 1993.
8. See Mark Crane, The Malpractice Reform Idea That Won't Go Away, 70 MED. ECON. 27, 27-34 (1993).
9. See CAL. Civ. CODE § 3333.1 (West Supp. 1990).
10. See George L. Priest, The Invention of Enterprise Liability: A Critical History of the Intellectual Foundations of Modern Tort Law, 14 J. LEGAL STUD. 461, 463-64 (1985).
11. See Kenneth S. Abraham, Medical Malpractice Reform: A Preliminary Analysis, 36 MD. L. REV. 489, 520-22 (1977); Myron F. Steves, Jr., A Proposal to Improve the Cost to Benefit Relationships in the Medical Professional Liability System, 1975 DUKE L.J. 1305, 1324-31. Although the idea of channelling did not come to legislative fruition in the ensuing years, something resembling it took shape in some teaching hospitals and closed-staff health-maintenance organizations (HMOs) that burgeoned in the 1980s. These hospitals and HMOs often took full responsibility for the purchase of malpractice insurance to cover their physicians, thus insulating them from malpractice liability economically, if not legally. See William M. Sage, Kathleen E. Hastings & Robert A. Berenson, Enterprise Liability for Medical Malpractice and Health Care Quality Improvement, 20 AM. J.L. & MED. 1, 17-18 (1994).
12. See Kenneth S. Abraham, Medical Malpractice Reform: A Preliminary Analysis, 36 MD. L. REV. 489, 520-22 (1977); Myron F. Steves, Jr., A Proposal to Improve the Cost to Benefit Relationships in the Medical Professional Liability System, 1975 DUKE L.J. 1305, 1324-31. Although the idea of channelling did not come to legislative fruition in the ensuing years, something resembling it took shape in some teaching hospitals and closed-staff health-maintenance organizations (HMOs) that burgeoned in the 1980s. These hospitals and HMOs often took full responsibility for the purchase of malpractice insurance to cover their physicians, thus insulating them from malpractice liability economically, if not legally. See William M. Sage, Kathleen E. Hastings & Robert A. Berenson, Enterprise Liability for Medical Malpractice and Health Care Quality Improvement, 20 AM. J.L. & MED. 1, 17-18 (1994).
13. See Kenneth S. Abraham, Medical Malpractice Reform: A Preliminary Analysis, 36 MD. L. REV. 489, 520-22 (1977); Myron F. Steves, Jr., A Proposal to Improve the Cost to Benefit Relationships in the Medical Professional Liability System, 1975 DUKE L.J. 1305, 1324-31. Although the idea of channelling did not come to legislative fruition in the ensuing years, something resembling it took shape in some teaching hospitals and closed-staff health-maintenance organizations (HMOs) that burgeoned in the 1980s. These hospitals and HMOs often took full responsibility for the purchase of malpractice insurance to cover their physicians, thus insulating them from malpractice liability economically, if not legally. See William M. Sage, Kathleen E. Hastings & Robert A. Berenson, Enterprise Liability for Medical Malpractice and Health Care Quality Improvement, 20 AM. J.L. & MED. 1, 17-18 (1994).
14. See infra Part I.
15. See Kenneth S. Abraham, Making Sense of the Liability Insurance Crisis, 48 OHIO ST. L.J. 399, 410 (1987).
16. See Health Security Act, S. 1775, 103d Cong., 1st Sess. § 5311 (1993).
17. See Symposium, Quality of Care and Health Reform, 20 AM. J.L. & MED. 1 (1994); Edward Felsenthal, Medical Plans Take on Greater Liability, WALL ST. J., Oct. 18, 1993, at B8.
18. See Symposium, Quality of Care and Health Reform, 20 AM. J.L. & MED. 1 (1994); Edward Felsenthal, Medical Plans Take on Greater Liability, WALL ST. J., Oct. 18, 1993, at B8.
19. The best scholarly treatments of the shifting allocation of liability are Diane Janulis & Alan Hornstein, Damned If You Do, Damned If You Don't: Hospitals' Liability for Physicians' Malpractice, 64 NEB. L. REV. 689 (1985), and Arthur Southwick, Hospital Liability: Two Theories Have Been Merged, 4 J. LEGAL MED. 1 (1983).
20. The best scholarly treatments of the shifting allocation of liability are Diane Janulis & Alan Hornstein, Damned If You Do, Damned If You Don't: Hospitals' Liability for Physicians' Malpractice, 64 NEB. L. REV. 689 (1985), and Arthur Southwick, Hospital Liability: Two Theories Have Been Merged, 4 J. LEGAL MED. 1 (1983).
21. The leading early case creating and justifying such immunity was McDonald v. Massachusetts General Hospital, 120 Mass. 432, 434-36 (1876), which held that a non-profit hospital was immune from liability for the potential negligence of an attending surgeon, provided that hospital administrators were not negligent in the selection of the surgeon.
22. See id. at 434-35.
23. 130 F.2d 810 (D.C. Cir. 1942).
24. See id. at 815-27.
25. The rule of charitable immunity has now been eliminated in a substantial majority of states. See, e.g., Ray v. Tucson Medical Ctr., 230 P.2d 220, 223-25, 229-30 (Ariz. 1951); Tunkl v. Regents of the Univ. of Cal., 383 P.2d 441, 448-49 (Cal. 1963); Durney v. St. Francis Hosp., Inc., 83 A.2d 753, 757-59 (Del. Super. Ct. 1951). See generally Janet F. Fairchild, Annotation, Tort Immunity of Non-Governmental Charities - Modern Status, 25 A.L.R.4th 517, 525-46 (1983) (finding that 29 jurisdictions have wholly abolished charitable immunity for hospitals and that a number of other jurisdictions have severely limited its scope and applicability). The doctrine does, however, retain considerable force in a number of states, including its place of origin, Massachusetts. For the story of the Massachusetts experience, see English v. New England Medical Center, Inc., 541 N.E.2d 329, 330-31 (Mass. 1989), in which the Supreme Judicial Court noted that charitable immunity was in full effect until 1971, when it was altered by legislative action to allow liability up to $20,000 for torts committed in the course of hospital activities - a flat dollar ceiling that has not since been adjusted for inflation, including the price of health care.
26. The rule of charitable immunity has now been eliminated in a substantial majority of states. See, e.g., Ray v. Tucson Medical Ctr., 230 P.2d 220, 223-25, 229-30 (Ariz. 1951); Tunkl v. Regents of the Univ. of Cal., 383 P.2d 441, 448-49 (Cal. 1963); Durney v. St. Francis Hosp., Inc., 83 A.2d 753, 757-59 (Del. Super. Ct. 1951). See generally Janet F. Fairchild, Annotation, Tort Immunity of Non-Governmental Charities - Modern Status, 25 A.L.R.4th 517, 525-46 (1983) (finding that 29 jurisdictions have wholly abolished charitable immunity for hospitals and that a number of other jurisdictions have severely limited its scope and applicability). The doctrine does, however, retain considerable force in a number of states, including its place of origin, Massachusetts. For the story of the Massachusetts experience, see English v. New England Medical Center, Inc., 541 N.E.2d 329, 330-31 (Mass. 1989), in which the Supreme Judicial Court noted that charitable immunity was in full effect until 1971, when it was altered by legislative action to allow liability up to $20,000 for torts committed in the course of hospital activities - a flat dollar ceiling that has not since been adjusted for inflation, including the price of health care.
27. The rule of charitable immunity has now been eliminated in a substantial majority of states. See, e.g., Ray v. Tucson Medical Ctr., 230 P.2d 220, 223-25, 229-30 (Ariz. 1951); Tunkl v. Regents of the Univ. of Cal., 383 P.2d 441, 448-49 (Cal. 1963); Durney v. St. Francis Hosp., Inc., 83 A.2d 753, 757-59 (Del. Super. Ct. 1951). See generally Janet F. Fairchild, Annotation, Tort Immunity of Non-Governmental Charities - Modern Status, 25 A.L.R.4th 517, 525-46 (1983) (finding that 29 jurisdictions have wholly abolished charitable immunity for hospitals and that a number of other jurisdictions have severely limited its scope and applicability). The doctrine does, however, retain considerable force in a number of states, including its place of origin, Massachusetts. For the story of the Massachusetts experience, see English v. New England Medical Center, Inc., 541 N.E.2d 329, 330-31 (Mass. 1989), in which the Supreme Judicial Court noted that charitable immunity was in full effect until 1971, when it was altered by legislative action to allow liability up to $20,000 for torts committed in the course of hospital activities - a flat dollar ceiling that has not since been adjusted for inflation, including the price of health care.
28. 21 See Bing v. Thunig, 143 N.E.2d 3, 15 (N.Y. 1957); Schloendorff, 105 N.E. at 94.
29. Several illustrations of debatable issues are presented in Bing, 143 N.E.2d at 4-5. For example, giving blood transfusions to the wrong patient was labelled an "administrative" error, but giving the wrong blood to the right patient was a "medical" error.
30. Id. at 8.
31. There have been numerous reported emergency room apparent-authority cases. See, e.g., Walker v. Winchester Memorial Hosp., 585 F. Supp. 1328, 1330-31 (W.D. Va. 1984); Jackson v. Power, 743 P.2d 1376, 1380-82 (Alaska 1987); Vanaman v. Milford Memorial Hosp., 272 A.2d 718, 720-22 (Del. 1970); Richmond County Hosp. Auth. v. Brown, 361 S.E.2d 164 (Ga. 1987); Gilbert v. Sycamore Mun. Hosp., 622 N.E.2d 788, 794-96 (Ill. 1993); Paintsville Hosp. Co. v. Rose, 683 S.W.2d 255 (Ky. 1985); Mehlman v. Powell, 378 A.2d 1121 (Md. 1977); Grewe v. Mt. Clemens Gen. Hosp., 273 N.W.2d 429 (Mich. 1978); Hardy v. Brantley, 471 So. 2d 358, 360-71 (Miss. 1985); Arthur v. St. Peter's Hosp., 405 A.2d 443, 446-47 (N.J. 1979); Mduba v. Benedictine Hosp., 384 N.Y.S.2d 527, 529-30 (N.Y. 1976); Albain v. Flower Hosp., 553 N.E.2d 1038, 1042-50 (Ohio 1990), overruled in part by Clark v. Southview Hosp. & Family Health Ctr., 628 N.E.2d 46 (Ohio 1994); Hannola v. City of Lakewood, 426 N.E.2d 1187, 1190-91 (Ohio 1980); Capan v. Divine Providence Hosp., 430 A.2d 647, 648-50 (Pa. 1981); Adamski v. Tacoma Gen. Hosp., 579 P.2d 970, 979 (Wash. 1978); Torrence v. Kusminsky, 408 S.E.2d 684, 690-93 (W. Va. 1991).
32. Courts in 20 or so states have confronted this question, and have relied on the Restatement of Agency or the Restatement of Torts in answering it. Section 267 of the RESTATEMENT (SECOND) OF AGENCY (1958) provides: One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such. Section 429 of the RESTATEMENT (SECOND) OF TORTS (1965) provides: One who employs an independent contractor to perform services for another which are accepted with the reasonable belief that the services are being rendered by the employer or by his servants, is subject to liability for physical harm caused by the negligence of the contractor in supplying such services, to the same extent as though the employer were supplying them himself or by his servants.
33. For a reflection of this changing image, see Kashishian v. Port, 481 N.W.2d 277, 282 (Wis. 1992).
34. See, e.g., Seneris v. Haas, 291 P.2d 915, 926-27 (Cal. 1955); Uhr v. Lutheran Gen. Hosp., 589 N.E.2d 723, 734-35 (Ill. App. Ct. 1992).
35. See, e.g., Beeck v. Tucson Gen. Hosp., 500 P.2d 1153, 1158-59 (Ariz. 1972); Pamperin v. Trinity Memorial Hosp., 423 N.W.2d 848, 858 (Wis. 1988). But see Milliron v. Francke, 793 P.2d 824, 827 (Mont. 1990) (rejecting a claim involving a radiologist who worked at a number of small hospitals in rural Montana).
36. See, e.g., Sharsmith v. Hill, 764 P.2d 667, 671-73 (Wyo. 1988).
37. See Kashishian, 481 N.W.2d at 281-87. But see Street v. Washington Hosp. Ctr., 558 A.2d 690, 692-93 (D.C. 1989) (rejecting a claim despite the fact that the patient selected a surgeon who just happened to have his office in a hospital-owned physicians' building located next door to the hospital itself).
38. In one of the few cases to scrutinize closely the assumption that apparent authority makes a difference, the Ohio Supreme Court held that agency liability must rest upon some kind of detrimental reliance by the patient on the hospital's representation, and that in the absence of tangible evidence to the contrary, the more plausible starting point is that patients do not pick hospitals on the basis of the employment status of physicians. See Albain v. Flower Hosp., 553 N.E.2d 1038, 1050 (Ohio 1990), overruled in part by Clark v. Southview Hosp. & Family Health Ctr., 628 N.E.2d 46 (Ohio 1994).
39. Cf. H. Ward Classen, Hospital Liability for Independent Contractors: Where Do We Go From Here?, 40 ARK. L. REV. 469, 501-02 (1987) (recommending that hospitals try to remove this basis of liability through signs in ER waiting rooms, identification badges on physician uniforms, and notices in patients' signed admission forms).
40. See Jackson v. Power, 743 P.2d 1376, 1382-85 (Alaska 1987).
41. The leading early case that is often regarded as having taken the first step toward corporate liability is Darling v. Charleston Community Memorial Hospital, 211 N.E.zd 253 (Ill. 1965), cert, denied, 383 U.S. 946 (1966). In Darling, however, the principal focus of the malpractice claim was the negligence of the hospital staff in failing to monitor and report on the deteriorating condition of the patient while he remained in the hospital for 10 days after the initial surgical procedure. See id. at 256, 258. Though Darling is regularly cited for its discussion of a hospital's liability for physician malpractice, see id. at 261, the case actually imposed vicarious liability on the hospital for the malpractice of its nursing staff, see id. at 258. Thus far, 21 states have adopted hospital corporate liability. See, e.g., Humana Medical Corp. v. Traffanstedt, 597 So. 2d 667, 668-69 (Ala. 1992); Tucson Medical Ctr., Inc. v. Misevch, 545 P.2d 958, 960 (Ariz. 1976); Elam v. College Park Hosp., 183 Cal. Rptr. 156, 165 (Cal. Ct. App. 1982); Mitchell County Hosp. Auth. v. Joiner, 189 S.E.2d 412, 414 (Ga. 1972); Darling, 211 N.E.2d at 257; Ferguson v. Gonyaw, 236 N.W.2d 543, 550 (Mich. Ct. App. 1975); Gridley v. Johnson, 476 S.W.2d 475, 484 (Mo. 1972); Foley v. Bishop Clarkson Memorial Hosp., 173 N.W.2d 881, 884-85 (Neb. 1970); Moore v. Board of Trustees, 495 P.2d 605, 608 (Nev.), cert, denied, 409 U.S. 879 (1972); Corleto v. Shore Memorial Hosp., 350 A.2d 534, 538-39 (N.J. Super. Ct. Law Div. 1975); Albain, 553 N.E.2d at 1044-46; Thompson v. Nason Hosp., 591 A.2d 703, 707-08 (Pa. 1991); Park N. Gen. Hosp. v. Hickman, 703 S.W.2d 262, 264-66 (Tex. Ct. App. 1985); Pedroza v. Bryant, 677 P.2d 166, 170 (Wash. 1984); Utter v. United Hosp. Ctr., Inc., 236 S.E.2d 213, 216 (W. Va. 1977); Johnson v. Misericordia Community Hosp., 301 N.W.2d 156, 170-71 (Wis. 1981). Kansas courts recently rejected corporate medical liability, but did so on the basis of restrictive state legislation passed in 1992. See McVoy v. Rich, 859 P.2d 399, 404-05 (Kan. Ct. App. 1993), aff'd, 874 P.2d 641 (Kan. 1994).
42. See, e.g., Johnson, 301 N.W.2d at 159, 173-74.
43. See, e.g., Insinga v. LaBella, 543 So. 2d 209, 210 (Fla. 1989).
44. See, e.g., Elam, 183 Cal. Rptr. at 158, 165-66.
45. To some extent, this evaluation process has been facilitated by the National Data Bank for Adverse Information on Physician Health Care Practitioners established under the Health Care Quality Improvement Act of 1986, 42 U.S.C. §§ 11101-11152 (1988). All payments made as a result of malpractice claims, all adverse licensing decisions by state medical boards, and all hospital suspensions or revocations of practice privileges must be reported to the National Data Bank, and this information is made available to any hospital considering whether to grant or continue privileges to members of its medical staff. See id. §§ 11131-11137.
46. See, e.g., Johnson, 301 N.W.2d at 164-71.
47. See Humana Medical Corp. v. Traffanstedt, 597 So. 2d 667, 668-69 (Ala. 1992) (reversing a jury verdict of corporate hospital liability because it was inconsistent with the same jury's finding that the treating physician had not committed malpractice).
48. The liability of the hospital in this situation can be significant because a settlement with the physician for a sum within the limits of a personal malpractice insurance policy does not preclude suit against the hospital for a larger sum. For example, in Uhr v. Lutheran General Hospital, the court refused to find excessive a judgment against the hospital for $1.87 million with a set-off of $300,000 for settlements the patient had reached with the physicians. See 589 N.E.2d 723, 727, 745 (Ill. App. Ct. 1992), vocated, 614 N.E.2d 319 (Ill. App. Ct. 1993). Similarly, in Campbell v. Pitt County Memorial Hospital Inc., the jury's verdict against the hospital was for $6.5 million even though the defendant physician had settled for $1.5 million prior to trial. (Part of the verdict was later set aside and the case was remanded for a new trial because of a finding that the verdict was excessive.) See 352 S.E.2d 902, 903-04 (N.C. Ct. App.), aff'd, 362 S.E.2d 273 (N.C. 1987), overruled in part on other grounds by Johnson v. Ruark Obstetrics & Gynecology Assocs., 395 S.E.2d 85 (N.C. 1990).
49. Another legal limitation on corporate liability is that although hospital negligence can arguably be the proximate cause of malpractice occurring outside the facility, some courts have held that the physician's malpractice must occur within the hospital. See, e.g., Pedroza v. Bryant, 677 P.2d 166, 171-72 (Wash. 1984).
50. See Purcell v. Zimbelman, 500 P.2d 335, 343-45 (Ariz. Ct. App. 1972) (discussing "the evidence of other claims").
51. Tucson Medical Center, Inc. v. Misevch reflects one court's effort to design rules of discovery in corporate liability cases to accommodate these competing objectives. See 545 P.2d 958, 960-62 (Ariz. 1976). For a discussion of the role of peer review in malpractice litigation, see Mitchell J. Nathanson, Hospital Corporate Negligence: Enforcing the Hospital's Role of Administrator, 28 TORT & INS. L.J. 575, 584-90 (1993).
52. This rule applies to HMOs as well. At university medical centers, once physicians have completed their residencies and become board-certified in their specialties, they are more likely to be employed (if they are not independent contractors) by HMOs than by hospitals. As a result, HMOs are clearly subject to vicarious liability for the malpractice of their employee-doctors. See Sloan v. Metropolitan Health Council, 516 N.E.zd 1104, 1109 (Ind. Ct. App. 1987).
53. It goes without saying that any such change in the allocation of malpractice liability must be accompanied by removal of the vestiges of hospital charitable immunity that remain in states such as Massachusetts (as described in note 19 above).
54. See PAUL STARR, THE SOCIAL TRANSFORMATION OF AMERICAN MEDICINE 24-29 (1982) (recounting the complex history of physician autonomy in detail).
55. For example, peer review and malpractice suits questioning the quality of services provided by physicians became more common, and the industry began to heed public calls for increased scrutiny and discipline of physicians for improper conduct. See, e.g., Robert C. Derbyshire, Medical Ethics and Discipline, 228 JAMA 59, 60-62 (1974) (describing the ineffectiveness of disciplinary procedures at the time and advocating an increase in both disciplinary vigilance and reporting); Steves, supra note 9, at 1312-17 (citing evidence of a steep increase in both the frequency and severity of medical malpractice insurance claims); Note, Federally Imposed Self-Regulation of Medical Practice: A Critique of the Professional Standards Review Organization, 42 GEO. WASH. L. REV. 822, 823-30 (1974) (detailing the expanded role of peer review after Congress mandated the creation of the Professional Standards Review Organization, which had the power to reject Medicare and Medicaid claims).
56. For example, peer review and malpractice suits questioning the quality of services provided by physicians became more common, and the industry began to heed public calls for increased scrutiny and discipline of physicians for improper conduct. See, e.g., Robert C. Derbyshire, Medical Ethics and Discipline, 228 JAMA 59, 60-62 (1974) (describing the ineffectiveness of disciplinary procedures at the time and advocating an increase in both disciplinary vigilance and reporting); Steves, supra note 9, at 1312-17 (citing evidence of a steep increase in both the frequency and severity of medical malpractice insurance claims); Note, Federally Imposed Self-Regulation of Medical Practice: A Critique of the Professional Standards Review Organization, 42 GEO. WASH. L. REV. 822, 823-30 (1974) (detailing the expanded role of peer review after Congress mandated the creation of the Professional Standards Review Organization, which had the power to reject Medicare and Medicaid claims).
57. See 42 U.S.C. § 1395ww(c)(I)(E) (1988); 42 C.F.R. § 405.1804 (1993). See generally J. Timothy Phillips & Don E. Wineberg, Medicare Prospective Payment: A Quiet Revolution, 87 W. VA. L. REV. 13, 28-35, 39-45 (1984) (predicting that the adoption of prospective payment and DRGs "is likely to have a profound effect on providers, patients, insurers, and federal expenditures" by encouraging hospitals to concentrate on economic efficiency rather than on resource utilization when delivering services).
58. See, e.g., 42 U.S.C. § 1395ww(d)(I)(A), (3)(D) (1988) (providing that DRG rates shall be set on a per-discharge basis). See generally David M. Frankford, The Complexity of Medicare's Hospital Reimbursement System: Paradoxes of Averaging, 78 IOWA L. REV. 517, 570-86 (1993) (explicating the process used to determine DRG rates).
59. 51 See Phillips & Wineberg, supra note 49, at 49-52.
60. DRGs, however, are procedure-based and therefore encourage use of the prescribed procedure.
61. See ROSEMARY STEVENS, IN SICKNESS AND IN WEALTH: AMERICAN HOSPITALS IN THE TWENTIETH CENTURY 322-27 (1989) (tracing the rise and effects of DRG-based payments and noting that "the system gave administrators an incentive to press doctors to give minimal service, justified on grounds of fiscal efficiency"). Notwithstanding these incentives, hospitals are prohibited from sharing their Medicare savings with physicians. See 42 U.S.C. § 1320a-7a(b) (1988). However, as hospitals become increasingly diversified, they are making greater efforts to align their interests with the interests of staff physicians. See Note, The Medicare-Medicaid Anti-Fraud and Abuse Amendments: Their Impact on the Present Health Care System, 36 EMORY L.J. 691, 709-10 (1987).
62. See ROSEMARY STEVENS, IN SICKNESS AND IN WEALTH: AMERICAN HOSPITALS IN THE TWENTIETH CENTURY 322-27 (1989) (tracing the rise and effects of DRG-based payments and noting that "the system gave administrators an incentive to press doctors to give minimal service, justified on grounds of fiscal efficiency"). Notwithstanding these incentives, hospitals are prohibited from sharing their Medicare savings with physicians. See 42 U.S.C. § 1320a-7a(b) (1988). However, as hospitals become increasingly diversified, they are making greater efforts to align their interests with the interests of staff physicians. See Note, The Medicare-Medicaid Anti-Fraud and Abuse Amendments: Their Impact on the Present Health Care System, 36 EMORY L.J. 691, 709-10 (1987).
63. See STEVENS, supra note 53, at 322-27.
64. See Mary A. Bobinski, Autonomy and Privacy: Protecting Patients from Their Physicians, 55 U. PITT. L. REV. 291, 307 n.52 (1994).
65. See Elisabeth Rosenthal, Doctors Slow to Join H.M.O.'s Now Often Find Doors Shut, N.Y. TIMES, June 25, 1994, at A1.
66. See Deloitte & Touche Survey: Many See Congressional Reforms in 2 Years . . . And More Rationing, PR Newswire, June 20, 1994, available in LEXIS, News Library, PRNEWS File.
67. See JOINT COMM'N ON ACCREDITATION OF HEALTH CARE ORGS., ACCREDITATION MANUAL FOR HOSPITALS xv-xxiii, 44 (1994); Timothy S. Jost, The Joint Commission on Accreditation of Hospitals: Private Regulation of Health Care and the Public Interest, 24 B.C. L. REV. 835, j 857-60 (1983); Andrew P. Schachat, Paul P. Lee & Wilson C-S Wu, A Quality Assurance Program for an Inpatient Department of Ophthalmology, 107 ARCHIVES OPHTHALMOLOGY 1293, 1293 (1989).
68. See JOINT COMM'N ON ACCREDITATION OF HEALTH CARE ORGS., ACCREDITATION MANUAL FOR HOSPITALS xv-xxiii, 44 (1994); Timothy S. Jost, The Joint Commission on Accreditation of Hospitals: Private Regulation of Health Care and the Public Interest, 24 B.C. L. REV. 835, j 857-60 (1983); Andrew P. Schachat, Paul P. Lee & Wilson C-S Wu, A Quality Assurance Program for an Inpatient Department of Ophthalmology, 107 ARCHIVES OPHTHALMOLOGY 1293, 1293 (1989).
69. See JOINT COMM'N ON ACCREDITATION OF HEALTH CARE ORGS., ACCREDITATION MANUAL FOR HOSPITALS xv-xxiii, 44 (1994); Timothy S. Jost, The Joint Commission on Accreditation of Hospitals: Private Regulation of Health Care and the Public Interest, 24 B.C. L. REV. 835, j 857-60 (1983); Andrew P. Schachat, Paul P. Lee & Wilson C-S Wu, A Quality Assurance Program for an Inpatient Department of Ophthalmology, 107 ARCHIVES OPHTHALMOLOGY 1293, 1293 (1989).
70. See Laura L. Morlock & Faye E. Malitz, Do Hospital Risk Management Programs Make a Difference?: Relationships Between Risk Management Program Activities and Hospital Malpractice Claims Experience, LAW & CONTEMP. PROBS., Spring 1991, at 1, 2 n.8 (noting that ten states require some form of risk-management program as a condition of obtaining a license).
71. See Stephen F. Jencks & Gail R. Wilensky, The Health Care Quality Improvement Initiative: A New Approach to Quality Assurance in Medicare, 268 JAMA 900, 900 (1992).
72. See generally DONALD M. BERWICK, A. BLANTON GODFREY & JANE ROESSNER, CURING HEALTH CARE passim (1990) (discussing different strategies for quality assurance).
73. For example, such terms as "quality assurance," "total quality management," and "continuous quality improvement," and their acronyms, continually appear in the literature. See, e.g., Donald M. Berwick, Continuous Improvement as an Ideal in Health Care, 320 NEW ENG. J. MED. 53, 54 (1989); Stephen B. Kritchevsky & Bryan P. Simmons, Continuous Quality Improvement: Concepts and Applications for Physician Care, 266 JAMA 1817, 1817 (1991); Mara M. Melum & Marie E. Sinioris, Total Quality Management in Health Care: Taking Stock, QUALITY MGMT. HEALTH CARE, Summer 1993, at 59.
74. For example, such terms as "quality assurance," "total quality management," and "continuous quality improvement," and their acronyms, continually appear in the literature. See, e.g., Donald M. Berwick, Continuous Improvement as an Ideal in Health Care, 320 NEW ENG. J. MED. 53, 54 (1989); Stephen B. Kritchevsky & Bryan P. Simmons, Continuous Quality Improvement: Concepts and Applications for Physician Care, 266 JAMA 1817, 1817 (1991); Mara M. Melum & Marie E. Sinioris, Total Quality Management in Health Care: Taking Stock, QUALITY MGMT. HEALTH CARE, Summer 1993, at 59.
75. For example, such terms as "quality assurance," "total quality management," and "continuous quality improvement," and their acronyms, continually appear in the literature. See, e.g., Donald M. Berwick, Continuous Improvement as an Ideal in Health Care, 320 NEW ENG. J. MED. 53, 54 (1989); Stephen B. Kritchevsky & Bryan P. Simmons, Continuous Quality Improvement: Concepts and Applications for Physician Care, 266 JAMA 1817, 1817 (1991); Mara M. Melum & Marie E. Sinioris, Total Quality Management in Health Care: Taking Stock, QUALITY MGMT. HEALTH CARE, Summer 1993, at 59.
76. One such journal is Quality Management in Health Care, in which the article by Melum and Sinioris, cited in the preceding note, appears.
77. See, e.g., Mark A. Hall, The Defensive Effect of Medical Practice Policies in Malpractice Litigation, LAW & CONTEMP. PROBS., Spring 1991, at 119, 121-26; Clark C. Havighurst, Practice Guidelines as Legal Standards Governing Physician Liability, LAW & CONTEMP. PROBS., Spring 1991, at 87, 88-94; Steven H. Woolf, Practice Guidelines: A New Reality in Medicine, 150 ARCHIVES INTERNAL MED. 1811 passim (1990).
78. See, e.g., Mark A. Hall, The Defensive Effect of Medical Practice Policies in Malpractice Litigation, LAW & CONTEMP. PROBS., Spring 1991, at 119, 121-26; Clark C. Havighurst, Practice Guidelines as Legal Standards Governing Physician Liability, LAW & CONTEMP. PROBS., Spring 1991, at 87, 88-94; Steven H. Woolf, Practice Guidelines: A New Reality in Medicine, 150 ARCHIVES INTERNAL MED. 1811 passim (1990).
79. See, e.g., Mark A. Hall, The Defensive Effect of Medical Practice Policies in Malpractice Litigation, LAW & CONTEMP. PROBS., Spring 1991, at 119, 121-26; Clark C. Havighurst, Practice Guidelines as Legal Standards Governing Physician Liability, LAW & CONTEMP. PROBS., Spring 1991, at 87, 88-94; Steven H. Woolf, Practice Guidelines: A New Reality in Medicine, 150 ARCHIVES INTERNAL MED. 1811 passim (1990).
80. See Alvin R. Tarlov, John E. Ware, Jr., Sheldon Greenfield, Eugene C. Nelson, Edward Perrin & Michael Zubkoff, The Medical Outcomes Study: An Application of Methods for Monitoring the Results of Medical Care, 262 JAMA 925, 925-27, 929-30 (1989).
81. The quality of care would have become an especially important focal point under the Administration's proposal for the nationwide development and dissemination of quality-of-care measures. See Health Security Act, S. 1775, 103d Cong., 1st Sess. §§ 5001-5013 (1993).
82. See generally Carl H. Hitchner, Clare Richardson, Judith E. Solomon & Charles B. Oppenheim, Integrated Delivery Systems: A Survey of Organizational Models, 29 WAKE FOREST L. REV. 273 passim (1994) (discussing the ways in which distinct health care services may be packaged together in "integrated delivery systems").
83. See 1 AMERICAN LAW INST., supra note 1, at 24-25.
84. See supra pp. 385-94.
85. In 1984, just under 75% of malpractice actions were filed against doctors, dentists, nurses, and other individual providers, while only 21% were brought against hospitals and 4% against HMOs and other health care institutions. See WEILER, supra note 1, at 6 n.22 (citing U.S. GEN. ACCOUNTING OFFICE, REPORT TO CONGRESSIONAL REQUESTERS: MEDICAL MALPRACTICE: CHARACTERISTICS OF CLAIMS CLOSED IN 1984, at 52-53 (1987)).
86. See FRANK A. SLOAN, RANDALL R. BOVBJERG & PENNY B. GITHENS, INSURING MEDICAL MALPRACTICE 23 (1991).
87. See WEILER, supra note 1, at 94-95 & nn.2-3 (discussing, inter alia, Tunkl v. Regents of the Univ. of Cal., 383 P.2d 441 (Cal. 1963), which involved the striking down of contractual waivers of provider liability by patients).
88. For discussions of medical malpractice policy that focus on considerations other than corrective justice, see 2 AMERICAN LAW INST., cited above in note 1, at 111-26; PATRICIA M. DANZON, MEDICAL MALPRACTICE: THEORY, EVIDENCE, AND PUBLIC POLICY 208-19 (1985); and Randall R. Bovbjerg & Clark C. Havighurst, Foreword to Symposium, Medical Malpractice: Can the Private Sector Find Relief?, LAW & CONTEMP. PROBS., Spring 1986, at 1, 1-3.
89. For discussions of medical malpractice policy that focus on considerations other than corrective justice, see 2 AMERICAN LAW INST., cited above in note 1, at 111-26; PATRICIA M. DANZON, MEDICAL MALPRACTICE: THEORY, EVIDENCE, AND PUBLIC POLICY 208-19 (1985); and Randall R. Bovbjerg & Clark C. Havighurst, Foreword to Symposium, Medical Malpractice: Can the Private Sector Find Relief?, LAW & CONTEMP. PROBS., Spring 1986, at 1, 1-3.
90. For example, physicians would have to be individually insured against liability for the "tail" of claims from treatment provided prior to the adoption of EML, and health insurance reimbursement rates would have to be adjusted downward for physicians and upward for hospitals. For a discussion of these transitional issues, see below pp. 429-32.
91. See infra pp. 404-06.
92. See SLOAN, BOVBJERG & GITHENS, supra note 71, at 166.
93. For example, in 1985, the year of the most recent malpractice insurance "crisis," there were less than 500 practicing neurologists and neurosurgeons in Florida, out of a total of just over 20,000 practicing physicians. See David J. Nye, Donald G. Gifford, Bernard L. Webb & Marvin A. Dewar, The Causes of the Medical Malpractice Crisis: An Analysis of Claims Data and Insurance Company Finances, 76 GEO. L.J. 1495, 1532 (1988).
94. For example, during both the medical malpractice "crisis" of the mid-1970s and the liability "crisis" of the mid-1980S, physicians and other potential defendants were often successful in persuading state legislatures to enact their favored tort reforms. For catalogues of the results, see Joseph Sanders & Craig Joyce, "Off to the Races": The 1980s Tort Crisis and the Law Reform Process, 27 Hous. L. REV. 207, 218-23 (1990), and Comment, An Analysis of State Legislative Responses to the Medical Malpractice Crisis, 1975 DUKE L.J. 1417 passim.
95. For example, during both the medical malpractice "crisis" of the mid-1970s and the liability "crisis" of the mid-1980S, physicians and other potential defendants were often successful in persuading state legislatures to enact their favored tort reforms. For catalogues of the results, see Joseph Sanders & Craig Joyce, "Off to the Races": The 1980s Tort Crisis and the Law Reform Process, 27 Hous. L. REV. 207, 218-23 (1990), and Comment, An Analysis of State Legislative Responses to the Medical Malpractice Crisis, 1975 DUKE L.J. 1417 passim.
96. For a discussion of the underwriting "cycle" explanation for these shocks, see Abraham, cited above in note 11, at 400-01. For a list of states that enacted caps on recoverable damages during the most recent "crisis," see Sanders & Joyce, cited above in note 78, at 220-22.
97. Caps on recoverable damages (even on particular damage categories, such as pain and suffering) affect recoveries of only the most seriously injured claimants, leaving untouched those with less serious injuries whose damages would not exceed the maximum awardable sum even absent a statutory ceiling.
98. Indeed, some physicians even decline to purchase any insurance. See SLOAN, BOVBJERG & GITHENS, supra note 71, at 70 & n.17. Instead, they "go bare," transfer their financial assets to relatives, and thus make it financially pointless for a patient to sue for malpractice.
99. The patients with the most serious and longest-lasting injuries are also those who are most likely to be entitled to the largest recoveries. Yet these are the claimants who are least likely to recover all of their losses when their physicians have purchased less malpractice insurance than is necessary to afford full compensation for catastrophic injuries.
100. This system also would provide a more efficient alternative to the present system's method of charging physicians the same premiums regardless of the number of patients treated or volume of particular procedures performed. The effect of the current system is that a physician cannot practice part-time or perform certain specialized procedures (for example, delivering babies) on a limited basis without paying a full annual premium for coverage. This phenomenon may account in part for the difficulty of finding certain medical services in rural areas. See 1 INSTITUTE OF MEDICINE, MEDICAL PROFESSIONAL LIABILITY AND THE DELIVERY OF OBSTETRICAL CARE 42-44 (1989); WEILER, supra note 1, at 85-86. The premium paid by the hospital, however, could more easily take such volume differences into account. Thus, the hospital could offer a better insurance product to part-time or low-volume practitioners than does the present system.
101. See SLOAN, BOVBJERG & GITHENS, supra note 71, at 70.
102. Although we believe that hospitals could more effectively plan and budget for the effects generated by these risk-classification practices than can individual physicians, the problems might simply shift from individuals to enterprises. Many hospitals have fewer affiliated physicians practicing in each specialty or subspecialty than comprise any current malpractice insurer's risk pool. Any self-insured hospital would face some of the same problems now faced by malpractice insurers providing coverage to small pools of specialists, and any hospital purchasing commercially sold malpractice insurance to cover enterprise liability would be vulnerable to the risk-classification practices that such insurers decided to employ in covering this new form of liability - practices that might replicate those currently in use.
103. For a detailed discussion of our views, together with citations to the literature, see 2 AMERICAN LAW INST., cited above in note 1, at 161-318. For a more recent synopsis, see Kenneth S. Abraham, Robert L. Rabin & Paul C. Weiler, Enterprise Responsibility for Personal Injury: Further Reflections, 30 SAN DIEGO L. REV. 333, 340-47 (1993).
104. For a graphic illustration of this phenomenon, see the table presented in Randall R. Bovbjerg, Frank A. Sloan & James F. Blumstein, Valuing Life and Limb in Tort: Scheduling "Pain and Suffering," 83 Nw. U. L. REV. 908, 937 (1989).
105. The other reasons for reforming malpractice damage awards, together with a systematic program for such reform, are spelled out in chapter 3 of WEILER, cited above in note 1, at 44-69.
106. See Sanders & Joyce, supra note 78, at 220-22.
107. There is no market for first-party insurance covering pain and suffering, at least in part because of very limited demand for this coverage. For a discussion of the adverse selection and moral hazard problems that contribute heavily to the limited market for disability insurance as a whole, see Kenneth S. Abraham & Lance Liebman, Private Insurance, Social Insurance, and Tort Reform: Toward a New Vision of Compensation for Illness and Injury, 93 COLUM. L. REV. 75, 102-04 (1993). In addition, it makes little sense to pay a premium today to protect against losses that may be suffered tomorrow unless those losses have a financial component. Otherwise, why should people bear the substantial transaction costs of "saving" through insurance dollars that could just as easily be spent and enjoyed now rather than at an uncertain date in the future? If people would not insure against their own pain and suffering, it is unclear why a litigation system should provide them with such insurance in the event they are injured by tortious activity.
108. For a detailed discussion of the pain and suffering damages scale, see WEILER, cited above in note 1, at 58-61. See also 2 AMERICAN LAW INST., supra note 1, at 221-23 (describing the scale approach). Such a scale could employ either mandatory damages guidelines or merely a set of examples given to the jury from which the jury could depart in extraordinary situations (subject to more meaningful judicial review than is available at present). At the top of the scale would be a range of pain and suffering damages to be awarded for very serious, long-term disabilities such as quadriplegia or blindness suffered by those with life expectancies exceeding 50 years. At the bottom of the scale would be the least serious category of pain and suffering for which damages could be awarded, linked to a dollar range awardable for that category. Below this floor no damages for pain and suffering would be recoverable. As an alternative to a floor, if all claimants were to be entitled to at least some pain and suffering damages, a mandatory cap on the amount of damages awardable for minor, short-term pain and suffering would be established. In the intermediate range of the scale, a series of profiles of cases involving pain and suffering of intermediate severity would be established, along with corresponding ranges of awards. All such ranges would be indexed to inflation, so that ranges that are reasonable when established do not become unreasonably low over time. The ranges of awards contained in the scale could be set directly by statute, or (preferably) established under legislative direction through a statistical calculation of historically "normal" jury awards for the different categories of injury severity and permanency in each jurisdiction.
109. These are the estimates of senior officials of New York's Federation of Jewish Philanthropy (FOJP) hospitals and of Harvard Risk Management, two of the pioneers in developing a form of enterprise medical liability insurance. Interview with Daniel Creasey, President of Harvard Risk Management, in Cambridge, Mass. (Oct. 9, 1992); Interview with Robert Markowitz, President of FOJP, in New York, N.Y. (July 30, 1992). In 1994, for example, CRICO, the Harvard insurer, offered coverage of $5 million per claim to its obstetricians and neurosurgeons in return for $30,000 in premiums, while the general Massachusetts carrier, the Massachusetts Medical Professional Insurance Association, charged its clients in these same specialties slightly over $50,000 in premiums for just $2 million of coverage per claim.
110. See, e.g., 1 AMERICAN LAW INST., supra note 1, at 30-33; STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW 7 (1987); George L. Priest, The Current Insurance Crisis and Modern Tort Law, 96 YALE L.J. 1521, 1553 (1987).
111. See, e.g., Howard A. Latin, Problem-Solving Behavior and Theories of Tort Liability, 73 CAL. L. REV. 677, 688 (1985).
112. For example, physicians sometimes order unnecessary tests or visits in order to reduce their risks of liability. See, e.g., OFFICE OF TECHNOLOGY ASSESSMENT, U.S. CONGRESS, DEFENSIVE MEDICINE AND MEDICAL MALPRACTICE 3-9 (1994); Roger A. Reynolds, John A. Rizzo & Martin L. Gonzalez, The Cost of Medical Professional Liability, 257 JAMA 2776, 2781 (1987); Laurence A. Tancredi & Jeremiah A. Barondess, The Problem of Defensive Medicine, 200 SCIENCE 879, 880 (1978).
113. For example, physicians sometimes order unnecessary tests or visits in order to reduce their risks of liability. See, e.g., OFFICE OF TECHNOLOGY ASSESSMENT, U.S. CONGRESS, DEFENSIVE MEDICINE AND MEDICAL MALPRACTICE 3-9 (1994); Roger A. Reynolds, John A. Rizzo & Martin L. Gonzalez, The Cost of Medical Professional Liability, 257 JAMA 2776, 2781 (1987); Laurence A. Tancredi & Jeremiah A. Barondess, The Problem of Defensive Medicine, 200 SCIENCE 879, 880 (1978).
114. For example, physicians sometimes order unnecessary tests or visits in order to reduce their risks of liability. See, e.g., OFFICE OF TECHNOLOGY ASSESSMENT, U.S. CONGRESS, DEFENSIVE MEDICINE AND MEDICAL MALPRACTICE 3-9 (1994); Roger A. Reynolds, John A. Rizzo & Martin L. Gonzalez, The Cost of Medical Professional Liability, 257 JAMA 2776, 2781 (1987); Laurence A. Tancredi & Jeremiah A. Barondess, The Problem of Defensive Medicine, 200 SCIENCE 879, 880 (1978).
115. See supra note 70.
116. See Sanford E. Feldman & Thomas G. Rundall, PROs and the Health Care Quality Improvement Initiative: Insights from 50 Cases of Serious Medical Mistakes, 50 MED. CARE REV. 123, 141-45 (1993) (discussing peer review organizations); Haya R. Rubin, William H. Rogers, Katherine L. Kahn, Lisa V. Rubenstein & Robert H. Brook, Watching the Doctor-Watchers: How Well Do Peer Review Organization Methods Detect Hospital Care Quality Problems?, 267 JAMA 2349. 2353-54 (1992).
117. See Sanford E. Feldman & Thomas G. Rundall, PROs and the Health Care Quality Improvement Initiative: Insights from 50 Cases of Serious Medical Mistakes, 50 MED. CARE REV. 123, 141-45 (1993) (discussing peer review organizations); Haya R. Rubin, William H. Rogers, Katherine L. Kahn, Lisa V. Rubenstein & Robert H. Brook, Watching the Doctor-Watchers: How Well Do Peer Review Organization Methods Detect Hospital Care Quality Problems?, 267 JAMA 2349. 2353-54 (1992).
118. The Data Bank documents all meritorious malpractice claims and disciplinary measures against individual physicians, and directs all hospitals to check the data for a "bad apple" practicing within their institution. A recent effort by the federal government to alter its injury-prevention focus is described in Stephen F. Jencks & Gail R. Wilensky, The Health Care Quality Improvement Initiative: A New Approach to Quality Assurance in Medicare, 268 JAMA 900 passim (1992).
119. A survey by the AMA found that less than three percent of physicians are
120. See WEILER, supra note 1, at 4.
121. A state-wide survey of a large sample of New York physicians, conducted as part of the Harvard Medical Practice Study, found that defendant physicians lost an average of six days of practice, and experienced substantial psychological distress from being sued. See WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 117-19, 126.
122. For a general discussion of defensive medicine, see OFFICE OF TECHNOLOGY ASSESSMENT, cited above in note 95, at 1-93.
123. See WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 71. The malpractice litigation system does a far better job than is popularly believed at sifting out the valid claims from the invalid, paying the latter either no money at all or only cents on the dollars that are paid for valid claims. See Frederick W. Cheney, Karen Posner, Robert A. Caplan & Richard J. Ward, Standard of Care and Anesthesia Liability, 261 JAMA 1599, 1602-03 (1989); Henry S. Farber & Michelle J. White, Medical Malpractice: An Empirical Examination of the Litigation Process, 22 RAND J. ECON. 199, 213-15 (1991); Mark I. Taragin, Laura R. Willett, Adam P. Wilczek, Richard Trout & Jeffrey L. Carson, The Influence of Standard of Care and Severity of Injury on the Resolution of Medical Malpractice Claims, 117 ANNALS INTERNAL MED. 780, 781-84 (1992). These three studies, which applied different methodologies to different claims samples, agreed in their basic findings that almost all meritorious malpractice claims receive payment by settlement or verdict; the majority of non-meritorious claims are either with-drawn or dismissed; and even the minority of likely unfounded claims that get some payment receive only a fraction of the amounts paid for valid claims involving similarly serious injuries. The benefits of this expensive process of sifting the litigation wheat from the chaff, however, largely accrue to the insurers (and their clientele) whose resources are protected from unjustified awards, rather than to the individual physicians who may have to live for years with the anguish of a pending suit that has impugned their professional competence and reputation.
124. See WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 71. The malpractice litigation system does a far better job than is popularly believed at sifting out the valid claims from the invalid, paying the latter either no money at all or only cents on the dollars that are paid for valid claims. See Frederick W. Cheney, Karen Posner, Robert A. Caplan & Richard J. Ward, Standard of Care and Anesthesia Liability, 261 JAMA 1599, 1602-03 (1989); Henry S. Farber & Michelle J. White, Medical Malpractice: An Empirical Examination of the Litigation Process, 22 RAND J. ECON. 199, 213-15 (1991); Mark I. Taragin, Laura R. Willett, Adam P. Wilczek, Richard Trout & Jeffrey L. Carson, The Influence of Standard of Care and Severity of Injury on the Resolution of Medical Malpractice Claims, 117 ANNALS INTERNAL MED. 780, 781-84 (1992). These three studies, which applied different methodologies to different claims samples, agreed in their basic findings that almost all meritorious malpractice claims receive payment by settlement or verdict; the majority of non-meritorious claims are either with-drawn or dismissed; and even the minority of likely unfounded claims that get some payment receive only a fraction of the amounts paid for valid claims involving similarly serious injuries. The benefits of this expensive process of sifting the litigation wheat from the chaff, however, largely accrue to the insurers (and their clientele) whose resources are protected from unjustified awards, rather than to the individual physicians who may have to live for years with the anguish of a pending suit that has impugned their professional competence and reputation.
125. See WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 71. The malpractice litigation system does a far better job than is popularly believed at sifting out the valid claims from the invalid, paying the latter either no money at all or only cents on the dollars that are paid for valid claims. See Frederick W. Cheney, Karen Posner, Robert A. Caplan & Richard J. Ward, Standard of Care and Anesthesia Liability, 261 JAMA 1599, 1602-03 (1989); Henry S. Farber & Michelle J. White, Medical Malpractice: An Empirical Examination of the Litigation Process, 22 RAND J. ECON. 199, 213-15 (1991); Mark I. Taragin, Laura R. Willett, Adam P. Wilczek, Richard Trout & Jeffrey L. Carson, The Influence of Standard of Care and Severity of Injury on the Resolution of Medical Malpractice Claims, 117 ANNALS INTERNAL MED. 780, 781-84 (1992). These three studies, which applied different methodologies to different claims samples, agreed in their basic findings that almost all meritorious malpractice claims receive payment by settlement or verdict; the majority of non-meritorious claims are either with-drawn or dismissed; and even the minority of likely unfounded claims that get some payment receive only a fraction of the amounts paid for valid claims involving similarly serious injuries. The benefits of this expensive process of sifting the litigation wheat from the chaff, however, largely accrue to the insurers (and their clientele) whose resources are protected from unjustified awards, rather than to the individual physicians who may have to live for years with the anguish of a pending suit that has impugned their professional competence and reputation.
126. See KENNETH S. ABRAHAM, DISTRIBUTING RISK: INSURANCE, LEGAL THEORY, AND PUBLIC POLICY 71-74 (1986).
127. See WEILER, supra note 1, at 76-77. The striking absence of experience rating from malpractice insurance did move the legislatures in New York and Massachusetts to mandate that insurers take account of individual claims experience in setting the premiums to be charged physicians within their states. See Lori L. Darling, Note, The Applicability of Experience Rating to Medical Malpractice Insurance, 38 CASE W. RES. L. REV. 255, 265-71 (1987). What the lawmakers ignored - caught up as they were in the malpractice crises of the 1980s - was the reason (explained in the text) why insurance companies had not voluntarily made experience rating a standard feature of their premium structures. After all, it would seem that the best way to attract the business of the safer physicians - an insurer's ideal customers - would be to offer them lower prices.
128. See WEILER, supra note 1, at 4-5, 76-77.
129. See WEILER, supra note 1, at 73-78. For recent empirical documentation, see Richard L. Kravitz, John E. Rolph & Kimberly McGuigan, Malpractice Claims Data as a Quality Improvement Tool: I. Epidemiology of Error in Four Specialties, 266 JAMA 2087 (1991), and Richard L. Kravitz, John E. Rolph & Kimberly McGuigan, Malpractice Claims Data as a Quality Improvement Tool: II. Is Targeting Effective?, 266 JAMA 2093 (1991).
130. See WEILER, supra note 1, at 73-78. For recent empirical documentation, see Richard L. Kravitz, John E. Rolph & Kimberly McGuigan, Malpractice Claims Data as a Quality Improvement Tool: I. Epidemiology of Error in Four Specialties, 266 JAMA 2087 (1991), and Richard L. Kravitz, John E. Rolph & Kimberly McGuigan, Malpractice Claims Data as a Quality Improvement Tool: II. Is Targeting Effective?, 266 JAMA 2093 (1991).
131. At the same time, there are far fewer suits filed in court than there are negligent injuries inflicted in hospitals. See WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 43-45, 55-56, 69-76.
132. cf. James F. Holzer, Liability Insurance Issues in Anesthesiology, 27 INT'L ANESTHESIOLOGY CLINICS 205, 206 (1989) (reporting that there were 6.7 malpractice suits per 100 physicians in 1987, but that 37% of American physicians - 57% of obstetricians and 50% of surgeons - had been sued at some point in their careers).
133. See Gerald B. Hickson, Ellen W. Clayton, Penny B. Githens & Frank A. Sloan, Factors That Prompted Families to File Medical Malpractice Claims Following Perinatal Injuries, 267 JAMA 1359, 1362-63 (1992).
134. See Frank A. Sloan & Mahmud Hassan, Equity and Accuracy in Medical Malpractice Insurance Pricing, 9 J. HEALTH ECON. 289, 311-18 (1990) (demonstrating that the liability experience of the entire medical staff at a hospital is, statistically, far more credible than the experience of a single physician). Systematic research about differences in adverse medical outcomes irrespective of whether a malpractice claim was filed has demonstrated that the hospital and its characteristics are a crucial injury-risk factor. Important recent studies include Helen R. Burstin, Stuart R. Lipsitz, I. Steven Udvarhelyi & Troyen A. Brennan, The Effect of Hospital Financial Characteristics on Quality of Care, 270 JAMA 845, 847-48 (1993), which analyzed data from the Harvard Medical Practice Study, and Emmett B. Keeler, Lisa V. Rubenstein, Katherine L. Kahn, David Draper, Ellen R. Harrison, Michael J. McGinty, William H. Rogers & Robert H. Brook, Hospital Characteristics and Quality of Care, 268 JAMA 1709, 1711-12 (1992).
135. See Frank A. Sloan & Mahmud Hassan, Equity and Accuracy in Medical Malpractice Insurance Pricing, 9 J. HEALTH ECON. 289, 311-18 (1990) (demonstrating that the liability experience of the entire medical staff at a hospital is, statistically, far more credible than the experience of a single physician). Systematic research about differences in adverse medical outcomes irrespective of whether a malpractice claim was filed has demonstrated that the hospital and its characteristics are a crucial injury-risk factor. Important recent studies include Helen R. Burstin, Stuart R. Lipsitz, I. Steven Udvarhelyi & Troyen A. Brennan, The Effect of Hospital Financial Characteristics on Quality of Care, 270 JAMA 845, 847-48 (1993), which analyzed data from the Harvard Medical Practice Study, and Emmett B. Keeler, Lisa V. Rubenstein, Katherine L. Kahn, David Draper, Ellen R. Harrison, Michael J. McGinty, William H. Rogers & Robert H. Brook, Hospital Characteristics and Quality of Care, 268 JAMA 1709, 1711-12 (1992).
136. See Frank A. Sloan & Mahmud Hassan, Equity and Accuracy in Medical Malpractice Insurance Pricing, 9 J. HEALTH ECON. 289, 311-18 (1990) (demonstrating that the liability experience of the entire medical staff at a hospital is, statistically, far more credible than the experience of a single physician). Systematic research about differences in adverse medical outcomes irrespective of whether a malpractice claim was filed has demonstrated that the hospital and its characteristics are a crucial injury-risk factor. Important recent studies include Helen R. Burstin, Stuart R. Lipsitz, I. Steven Udvarhelyi & Troyen A. Brennan, The Effect of Hospital Financial Characteristics on Quality of Care, 270 JAMA 845, 847-48 (1993), which analyzed data from the Harvard Medical Practice Study, and Emmett B. Keeler, Lisa V. Rubenstein, Katherine L. Kahn, David Draper, Ellen R. Harrison, Michael J. McGinty, William H. Rogers & Robert H. Brook, Hospital Characteristics and Quality of Care, 268 JAMA 1709, 1711-12 (1992).
137. The saga of the Harvard anesthesia experience is set forth in John H. Eichhorn, Prevention of Intraoperative Anesthesia Accidents and Related Severe Injury Through Safety Monitoring, 70 ANESTHESIOLOCY 572, 575-77 (1989); John H. Eichhorn, Jeffrey B. Cooper, David J. Cullen, James S. Gessner, Robert S. Holzman, Ward R. Maier & James H. Philip, Anesthesia Practice Standards at Harvard: A Review, 1 J. CLINICAL ANESTHESIOLOGY 55, 64-65 (1988) [hereinafter Practice Standards]; John H. Eichhorn, Jeffrey B. Cooper, David J. Cullen, Ward R. Maier, James H. Philip & Robert G. Seeman, Standards for Patient Monitoring During Anesthesia at Harvard Medical School, 256 JAMA 1017, 1020 (1986) [hereinafter Patient Monitoring]; and Holzer, cited above in note 109, at 209-10.
138. The saga of the Harvard anesthesia experience is set forth in John H. Eichhorn, Prevention of Intraoperative Anesthesia Accidents and Related Severe Injury Through Safety Monitoring, 70 ANESTHESIOLOCY 572, 575-77 (1989); John H. Eichhorn, Jeffrey B. Cooper, David J. Cullen, James S. Gessner, Robert S. Holzman, Ward R. Maier & James H. Philip, Anesthesia Practice Standards at Harvard: A Review, 1 J. CLINICAL ANESTHESIOLOGY 55, 64-65 (1988) [hereinafter Practice Standards]; John H. Eichhorn, Jeffrey B. Cooper, David J. Cullen, Ward R. Maier, James H. Philip & Robert G. Seeman, Standards for Patient Monitoring During Anesthesia at Harvard Medical School, 256 JAMA 1017, 1020 (1986) [hereinafter Patient Monitoring]; and Holzer, cited above in note 109, at 209-10.
139. The saga of the Harvard anesthesia experience is set forth in John H. Eichhorn, Prevention of Intraoperative Anesthesia Accidents and Related Severe Injury Through Safety Monitoring, 70 ANESTHESIOLOCY 572, 575-77 (1989); John H. Eichhorn, Jeffrey B. Cooper, David J. Cullen, James S. Gessner, Robert S. Holzman, Ward R. Maier & James H. Philip, Anesthesia Practice Standards at Harvard: A Review, 1 J. CLINICAL ANESTHESIOLOGY 55, 64-65 (1988) [hereinafter Practice Standards]; John H. Eichhorn, Jeffrey B. Cooper, David J. Cullen, Ward R. Maier, James H. Philip & Robert G. Seeman, Standards for Patient Monitoring During Anesthesia at Harvard Medical School, 256 JAMA 1017, 1020 (1986) [hereinafter Patient Monitoring]; and Holzer, cited above in note 109, at 209-10.
140. See Practice Standards, supra note 112, at 56.
141. See Eichhorn, supra note 112, at 573-75.
142. See Practice Standards, supra note 112, at 56-57. Equipment measuring and displaying the patient's respiration, circulation, and oxygen levels was to be installed; an alarm was to sound if the patient's condition dropped close to a danger point. See Patient Monitoring, supra note 112, at 1018-19. Trained personnel would be continuously present during an anesthesia procedure, able to respond instantly to an alarm and take steps necessary to prevent irreversible brain damage to the patient. See Practice Standards, supra note 112, at 57. Careful analysis demonstrated that the per-case cost to Harvard of this new equipment and additional personnel was much lower than the per-case cost of anesthesiologists' malpractice insurance. See Patient Monitoring, supra note 112, at 1020. This cost comparison did not take into account the much greater uncompensated harm suffered by brain-damaged patients and their families.
143. See James F. Holzer, The Advent of Clinical Standards for Professional Liability, 16 QUALITY REV. BULL. 70, 77 (1990).
144. See id.
145. See Holzer, supra note 109, at 210.
146. See id. at 211; Ellison C. Pierce, Jr., The Development of Anesthesia Guidelines and Standards, 16 QUALITY REV. BULL. 61, 62 (1990).
147. Indeed, at least until the recent emergence of managed care, widespread health insurance has encouraged both physicians and hospitals to increase the time and effort spent in providing care, however marginal the expected health benefits that may result. See WEILER, supra note 1, at 74.
148. See Mark F. Grady, Why Are People Negligent? Technology, Nondurable Precautions, and the Medical Malpractice Explosion, 82 Nw. U. L. REV. 293, 310-11 (1988).
149. In the Harvard study, for example, a systematic analysis of anesthesiology accidents during surgery revealed that continuous monitoring of breathing apparatus could have prevented over half of the injuries that occurred, even though the circumstances surrounding the incidents seemed largely unrelated. See Eichhorn, supra note 112, at 573-76; Patient Monitoring, supra note 112, at 1017-18.
150. For broader discussions of techniques for improving the quality of medical care, see D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role I, 304 BRIT. MED. J. 235, 238-39 (1992); D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role II, 304 BRIT. MED. J. 304, 304-08 (1992); Stephen B. Kritchevsky & Bryan P. Simmons, Continuous Quality Improvement: Concepts and Applications for Physician Care, 266 JAMA 1817, 1822-23 (1991); and Glenn Laffel & David Blumenthal, The Case for Using Industrial Quality Management Science in Health Care Organizations, 262 JAMA 2869, 2871-73 (1989).
151. For broader discussions of techniques for improving the quality of medical care, see D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role I, 304 BRIT. MED. J. 235, 238-39 (1992); D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role II, 304 BRIT. MED. J. 304, 304-08 (1992); Stephen B. Kritchevsky & Bryan P. Simmons, Continuous Quality Improvement: Concepts and Applications for Physician Care, 266 JAMA 1817, 1822-23 (1991); and Glenn Laffel & David Blumenthal, The Case for Using Industrial Quality Management Science in Health Care Organizations, 262 JAMA 2869, 2871-73 (1989).
152. For broader discussions of techniques for improving the quality of medical care, see D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role I, 304 BRIT. MED. J. 235, 238-39 (1992); D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role II, 304 BRIT. MED. J. 304, 304-08 (1992); Stephen B. Kritchevsky & Bryan P. Simmons, Continuous Quality Improvement: Concepts and Applications for Physician Care, 266 JAMA 1817, 1822-23 (1991); and Glenn Laffel & David Blumenthal, The Case for Using Industrial Quality Management Science in Health Care Organizations, 262 JAMA 2869, 2871-73 (1989).
153. For broader discussions of techniques for improving the quality of medical care, see D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role I, 304 BRIT. MED. J. 235, 238-39 (1992); D. M. Berwick, A. Enthoven & J. P. Bunker, Quality Management in the NHS: The Doctor's Role II, 304 BRIT. MED. J. 304, 304-08 (1992); Stephen B. Kritchevsky & Bryan P. Simmons, Continuous Quality Improvement: Concepts and Applications for Physician Care, 266 JAMA 1817, 1822-23 (1991); and Glenn Laffel & David Blumenthal, The Case for Using Industrial Quality Management Science in Health Care Organizations, 262 JAMA 2869, 2871-73 (1989).
154. See, e.g., Feldman & Rundall, supra note 97, at 129-30.
155. In one Harvard study case, an old anesthesia machine without an oxygen monitor was used in an x-ray suite with relatively poor lighting. During the medical procedure, oxygen to the patient was accidentally shut off, and the patient eventually died as a result. To prevent similar mishaps, the Harvard team recommended and installed devices that automatically sound an alarm if problems develop in the breathing apparatus used during anesthesia. See Practice Standards, supra note 112, at 57-59; Patient Monitoring, supra note 112, at 1018-19.
156. Although there are more non-meritorious than meritorious tort claims filed against physicians, the odds that a claim will be filed are significantly greater if the physician was at fault than if not. See WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 75-76. Physicians react to the prospect of being sued by adopting a host of defensive medical practices. Evidence from the Harvard Medical Practice Study reveals that these same defensive measures actually reduce the chances of negligent injury to patients, rather than just increase the size of the nation's health care bill. See WEILER, supra note 1, at 89; WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 133 (detailing accounts of the evidence, particularly from the Harvard Medical Practice Study, of the malpractice impacts mentioned in this note).
157. See William B. Schwartz & Daniel N. Mendelson, Physicians Who Have Lost Their Malpractice Insurance, 262 JAMA 1335, 1339-40 (1989); William B. Schwartz & Daniel N. Mendelson, The Role of Physician-Owned Insurance Companies in the Detection and Deterrence of Negligence, 262 JAMA 1342, 1344 (1989).
158. See William B. Schwartz & Daniel N. Mendelson, Physicians Who Have Lost Their Malpractice Insurance, 262 JAMA 1335, 1339-40 (1989); William B. Schwartz & Daniel N. Mendelson, The Role of Physician-Owned Insurance Companies in the Detection and Deterrence of Negligence, 262 JAMA 1342, 1344 (1989).
159. There are, of course, obstacles, both legal and practical, to the withdrawal or limitation of admitting privileges: on the practical side, physicians involved in the credentialing process may be reluctant to sanction their colleagues; on the legal side, the small but remaining exposure of hospitals and their peer review committees to antitrust liability may deter the withdrawal or limitation of privileges. See Health Care Quality Improvement Act of 1986, 42 U.S.C. §§ 11131-11134 (1988).
160. See 2 AMERICAN LAW INST., supra note 1, at 113-26; Kenneth S. Abraham & Paul C. Weiler, Organizational Liability for Medical Malpractice (Mar. 1993) (unpublished paper, on file with the Harvard Law School Library).
161. See Kenneth S. Abraham & Paul C. Weiler, Enterprise Medical Liability and the Choice of the Responsible Enterprise, 20 AM. J.L. & MED. 29 (1994); William M. Sage, Kathleen E. Hastings & Robert A. Berenson, Enterprise Liability for Medical Malpractice and Health Care Quality Improvement, 20 AM. J.L. & MED. 1 (1994).
162. See Kenneth S. Abraham & Paul C. Weiler, Enterprise Medical Liability and the Choice of the Responsible Enterprise, 20 AM. J.L. & MED. 29 (1994); William M. Sage, Kathleen E. Hastings & Robert A. Berenson, Enterprise Liability for Medical Malpractice and Health Care Quality Improvement, 20 AM. J.L. & MED. 1 (1994).
163. For example, the General Accounting Office found that "about 80 percent of the claims closed involved an injury that occurred in a hospital." U.S. GEN. ACCOUNTING OFFICE, supra note 70, at 24.
164. "Economic credentialing" is a colloquial term used to refer to hospitals' tendency to provide admitting privileges based on the capacity of physicians to generate revenue for the hospital.
165. For a recent and illuminating analysis of this problem, see Jonathan J. Frankel, Note, Medical Malpractice Law and Health Care Cost Containment: Lessons for Reformers from the Clash of Cultures, 103 YALE L.J. 1297, 1315-22 (1994).
166. See Abraham & Weiler, supra note 130, at 34-35.
167. Cf. id. at 34-35 (arguing that the hospital "is best placed to make decisions about how to assure medical quality and prevent patient injury").
168. See, e.g., Andrew H. Smith & John Rother, Older Americans and the Rationing of Health Care, 140 U. PA. L. REV. 1847, 1847 (1992) (noting the "broad consensus that cost containment efforts of the 1980s designed to stem the rising tide of health care expenditures were failures for the most part"); David S. Hilzenrath & Dan Morgan, Health Care Costs Continue to Rise Faster than the National Income, WASH. POST, Sept. 27, 1994, at A5.
169. See, e.g., Andrew H. Smith & John Rother, Older Americans and the Rationing of Health Care, 140 U. PA. L. REV. 1847, 1847 (1992) (noting the "broad consensus that cost containment efforts of the 1980s designed to stem the rising tide of health care expenditures were failures for the most part"); David S. Hilzenrath & Dan Morgan, Health Care Costs Continue to Rise Faster than the National Income, WASH. POST, Sept. 27, 1994, at A5.
170. See supra p. 398.
171. For example, certain day-surgery clinics may find it in their interest to bear liability, rather than to be relieved of liability but unable to operate with total independence from a local hospital.
172. For a discussion of the functions of default rules in contract law, see Richard Craswell, Contract Law, Default Rules, and the Philosophy of Promising, 88 MICH. L. REV. 489, 503-16 (1989); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 273-80 (1985); and Jason S. Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L.J. 615, 620-26 (1990). We should emphasize that our endorsement of contractual freedom to alter the initial allocation of tort liability applies to contracts between the enterprises that play different roles within the health care system, and not to enterprises outside this system.
173. For a discussion of the functions of default rules in contract law, see Richard Craswell, Contract Law, Default Rules, and the Philosophy of Promising, 88 MICH. L. REV. 489, 503-16 (1989); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 273-80 (1985); and Jason S. Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L.J. 615, 620-26 (1990). We should emphasize that our endorsement of contractual freedom to alter the initial allocation of tort liability applies to contracts between the enterprises that play different roles within the health care system, and not to enterprises outside this system.
174. For a discussion of the functions of default rules in contract law, see Richard Craswell, Contract Law, Default Rules, and the Philosophy of Promising, 88 MICH. L. REV. 489, 503-16 (1989); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 273-80 (1985); and Jason S. Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L.J. 615, 620-26 (1990). We should emphasize that our endorsement of contractual freedom to alter the initial allocation of tort liability applies to contracts between the enterprises that play different roles within the health care system, and not to enterprises outside this system.
175. See supra p. 396.
176. Some potential would remain for litigation over the connection between the negligently produced injury and the hospitalizing condition, but serious disputes over this issue would be far fewer than disputes over whether the injury was produced by negligence.
177. See Act of July 8, 1986, ch. 267, 1986 N.Y. Laws 506, reprinted as amended in N.Y. INS. LAW § 3437 note (McKinney 1994). There will remain some physicians (for example, some psychiatrists) who have no affiliation with any hospital or other institution. Probably the most sensible course with this group is to leave the individuals liable for their malpractice until they develop an enterprise affiliation.
178. See, e.g., United Air Lines, Inc. v. Wiener, 335 F.2d 379, 388-90 (9th Cir.), cert, dismissed, 379 U.S. 951 (1964); Cudney v. Braniff Airways, Inc., 300 S.W.2d 412, 417-18 (Mo. 1957).
179. See, e.g., Simpson v. James, 903 F.2d 372, 377 (5th Cir. 1990); Priddy v. MacKenzie, 103 S.W. 968, 972 (Mo. 1907).
180. See supra pp. 419-20.
181. See Carolyn S. Donham, Brenda T. Maple & Lekha Sivarajan, Health Care Indicators, 15 HEALTH CARE FINANCING REV. 202, 207-08 (1993) (finding that inpatient surgeries declined 31.8% from 1981 to 1991 and that outpatient surgeries increased 228.8% during the same period).
182. For example, certain physician group practices and day-surgery clinics are formally "enterprises" but in reality are small partnerships or corporations that differ little from groups of several individuals practicing under the same roof. These small "enterprises" do not operate like hospitals and cannot diversify their malpractice liability risk in the way that hospitals can.
183. See supra pp. 420-21.
184. Part of this evolution in relationships would also have to involve changes in the relevant law. For example, in some jurisdictions the de jure authority of a hospital to manage medical staff is limited by licensing laws and rules governing the unlawful practice of medicine by hospital administrators untrained in medicine. See, e.g., Mark A. Hall, Institutional Control of Physician Behavior: Legal Barriers to Health Care Cost Containment, 137 U. PA. L. REV. 431, 452-54 (1988); Jeffrey F. Chase-Lubitz, Note, The Corporate Practice of Medicine Doctrine: An Anachronism in the Modern Health Care Industry, 40 VAND. L. REV. 445, 451-52, 464-70 (1987). But the adoption of EML would only marginally exacerbate this problem, which hospitals already face in implementing cost constraints on medical staff members who are not legally under the hospitals' control. See Sanford L. Weiner, James H. Maxwell, Harvey M. Sapolsky, Daniel L. Dunn & William C. Hsiao, Economic Incentives and Organizational Realities: Managing Hospitals Under DRG's, 65 MILBANK Q. 463, 478-80 (1987).
185. Part of this evolution in relationships would also have to involve changes in the relevant law. For example, in some jurisdictions the de jure authority of a hospital to manage medical staff is limited by licensing laws and rules governing the unlawful practice of medicine by hospital administrators untrained in medicine. See, e.g., Mark A. Hall, Institutional Control of Physician Behavior: Legal Barriers to Health Care Cost Containment, 137 U. PA. L. REV. 431, 452-54 (1988); Jeffrey F. Chase-Lubitz, Note, The Corporate Practice of Medicine Doctrine: An Anachronism in the Modern Health Care Industry, 40 VAND. L. REV. 445, 451-52, 464-70 (1987). But the adoption of EML would only marginally exacerbate this problem, which hospitals already face in implementing cost constraints on medical staff members who are not legally under the hospitals' control. See Sanford L. Weiner, James H. Maxwell, Harvey M. Sapolsky, Daniel L. Dunn & William C. Hsiao, Economic Incentives and Organizational Realities: Managing Hospitals Under DRG's, 65 MILBANK Q. 463, 478-80 (1987).
186. Part of this evolution in relationships would also have to involve changes in the relevant law. For example, in some jurisdictions the de jure authority of a hospital to manage medical staff is limited by licensing laws and rules governing the unlawful practice of medicine by hospital administrators untrained in medicine. See, e.g., Mark A. Hall, Institutional Control of Physician Behavior: Legal Barriers to Health Care Cost Containment, 137 U. PA. L. REV. 431, 452-54 (1988); Jeffrey F. Chase-Lubitz, Note, The Corporate Practice of Medicine Doctrine: An Anachronism in the Modern Health Care Industry, 40 VAND. L. REV. 445, 451-52, 464-70 (1987). But the adoption of EML would only marginally exacerbate this problem, which hospitals already face in implementing cost constraints on medical staff members who are not legally under the hospitals' control. See Sanford L. Weiner, James H. Maxwell, Harvey M. Sapolsky, Daniel L. Dunn & William C. Hsiao, Economic Incentives and Organizational Realities: Managing Hospitals Under DRG's, 65 MILBANK Q. 463, 478-80 (1987).
187. For example, a volume adjustment would allow a physician who practiced only half of her time as an obstetrician to pay about half of the typical obstetrical premium. To the extent, of course, that the injury risk is greater among physicians who only occasionally perform certain procedures, the per-case charge should gradually fall to reflect the declining risk from specialization.
188. In the short run, the small number of hospitals in many markets might limit such competitive protection. Over the longer run, this problem would diminish through operation of the national market for physicians' services. New physicians would not be attracted to a community whose only hospital exploited its monopoly position by overcharging for the malpractice immunity it was providing.
189. Medicare accounts for about one-third of total hospital revenues. See Sally T. Burner, Daniel R. Waldo & David R. McKusick, National Health Expenditures: Projections Through 2030, 14 HEALTH CARE FIN. REV. 1, 1 (1992). Medicare accounts for a little more than one-fifth of physician revenue.
190. See PHYSICIAN PAYMENT REVIEW COMM'N, ANNUAL REPORT TO CONGRESS 71 (1991).
191. Part A is financed by payroll taxes and Part B both by premiums and by general revenues. See Nancy De Lew, George Greenberg & Kraig Kinchen, A Layman's Guide to the U.S. Health Care System, 14 HEALTH CARE FIN. REV. 151, 152-53 (1992). Because the method of financing the two forms of medicine differs, two adjustments would be required.
192. For an explanation of the DRG system, see notes 49-53 above and accompanying text.
193. See 42 U.S.C. § 1396 (1988).
194. Medicaid payments for physician services rendered by hospital employees such as emergency room physicians are accounted for as hospital expenditures rather than as physician expenditures and thus are not included in this figure. See Burner, Waldo & McKusick, supra note 152, at 26.
195. See, e.g., Kirk B. Johnson, Can Enterprise Liability Ease America's Malpractice Problem?, 8 ASLME BRIEFINGS (American Soc'y of Law, Medicine & Ethics, Boston, Mass.), Autumn 1993, at 1, 3.
196. A number of large, urban health care complexes have already developed "channelling" arrangements that resemble features of an EML system. See, e.g., FEDERATION OF JEWISH PHILANTHROPIES SERV. CORP., VOLUNTARY ATTENDING PHYSICIANS PROFESSIONAL LIABILITY INSURANCE PROGRAM (describing the channelling programs at five New York City hospitals). The experiments that might generate real insights into the effects of EML should occur in other kinds of hospital settings, because such innovations would involve economic and legal arrangements that differ radically from their current regimes.
197. See WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 55-59, 73-76 (describing the implications of the Harvard Medical Practice Study).
198. A related consideration involves the National Practitioner Data Bank. The "data bank" would likely continue to be used even after the adoption of EML. We consider the principle underlying the data bank to be salutary - hospitals and other enterprises considering whether to employ or affiliate with a physician should have a ready means of determining the physician's previous involvement in malpractice claims. Even were hospitals or other enterprises to assume complete control of malpractice litigation, however, physicians' interests would still be affected by the actions of enterprises in settling malpractice actions that may result in data bank reporting. It is necessary, then, to develop a fair method of determining when and what to report to the data bank. A number of different approaches seem plausible, and there is no reason that a single approach should be mandated. Enterprises and their affiliated physicians could fashion approaches that best suit their concerns, as long as the purposes of the data bank continue to be served. The model we favor would allocate to liability-bearing enterprises the authority in the first instance to determine whom and what to report to the data bank, subject to the right of any physician to "appeal" a proposed report of his negligence to a committee comprised of representatives of both the enterprise and its affiliated physicians. Such an approach would enable reports to be made routinely in cases not subject to dispute, but would help protect physicians' interests in fair and accurate reporting.
199. Hospitals would agree to indemnify participating health care providers against all liability for malpractice, and participating health care providers would pay surcharges to hospitals, representing the providers' savings on malpractice insurance resulting from hospital-provided indemnity. Alternatively, health insurers and other third-party payers would agree to adjust their reimbursement rates, and health care providers and hospitals would adjust their charges for services to take account of the shift in liability resulting from EML. Health care providers and hospitals would agree that patients receive clear notice, both prior to and at the time of admission to an EML hospital, of the expanded liability of the hospital and of the resulting indemnity provided to its affiliated health care providers. Each participating health care provider's malpractice insurer would agree to reduce the premiums charged the provider by at least the amount of the surcharge if full immunity were not elected, and each participating hospital's malpractice insurer would agree not to raise its malpractice insurance premiums by more than the sum of all the surcharges paid by participating health care providers to the hospital. Finally, participating health care providers would be subject to peer review mechanisms designed to assure the quality of care provided. Such peer review mechanisms would include procedures for revoking admitting privileges from health care providers who fail to comply with the standards of practice set by the hospital. For a more extended discussion of the EML-by-contract alternative, see generally William M. Sage & James M. Jorling, A World That Won't Stand Still: Enterprise Liability by Private Contract, 43 DEPAUL L. REV. 1007 (1994). For detailed analysis of the legal issues posed by adverse peer review decisions, see Charity Scott, Medical Peer Review, Antitrust, and the Effect of Statutory Reform, 50 MD. L. REV. 316, 322-403 (1991).
200. Hospitals would agree to indemnify participating health care providers against all liability for malpractice, and participating health care providers would pay surcharges to hospitals, representing the providers' savings on malpractice insurance resulting from hospital-provided indemnity. Alternatively, health insurers and other third-party payers would agree to adjust their reimbursement rates, and health care providers and hospitals would adjust their charges for services to take account of the shift in liability resulting from EML. Health care providers and hospitals would agree that patients receive clear notice, both prior to and at the time of admission to an EML hospital, of the expanded liability of the hospital and of the resulting indemnity provided to its affiliated health care providers. Each participating health care provider's malpractice insurer would agree to reduce the premiums charged the provider by at least the amount of the surcharge if full immunity were not elected, and each participating hospital's malpractice insurer would agree not to raise its malpractice insurance premiums by more than the sum of all the surcharges paid by participating health care providers to the hospital. Finally, participating health care providers would be subject to peer review mechanisms designed to assure the quality of care provided. Such peer review mechanisms would include procedures for revoking admitting privileges from health care providers who fail to comply with the standards of practice set by the hospital. For a more extended discussion of the EML-by-contract alternative, see generally William M. Sage & James M. Jorling, A World That Won't Stand Still: Enterprise Liability by Private Contract, 43 DEPAUL L. REV. 1007 (1994). For detailed analysis of the legal issues posed by adverse peer review decisions, see Charity Scott, Medical Peer Review, Antitrust, and the Effect of Statutory Reform, 50 MD. L. REV. 316, 322-403 (1991).
201. A retrospective premium would result in either an additional charge or a refund payment to the policyholder, calculated a number of years after the close of a policy period. Through retrospective premiums, malpractice insurers could protect themselves against any uncertainty that EML would create in the first few years after its adoption, but policyholders could ultimately receive refunds for the cost of their insurance if EML generated the cost-reducing effects predicted for it. Consequently, any statute authorizing EML should expressly permit insurers to rate retrospectively the malpractice liability insurance premiums that they charge health care providers and hospitals that participate in the system.
202. See supra p. 425.
203. Most malpractice premium rates are subject to "file and use" regulation, under which rates go into effect automatically unless disapproved by the Insurance Commissioner under the quoted standard. See KENNETH S. ABRAHAM, INSURANCE LAW AND REGULATION 104-05 (1990).
204. For example, suppose that a provider were covered under claims-made policies through December 31, 1994, and that EML were made effective on January 1, 1995. The provider's 1994 claims-made policy would not cover a claim made after December 31, 1994 arising out of treatment provided in 1994, but the hospital would have legal responsibility only for claims arising out of treatment provided beginning on January 1, 1995.
205. Each of these approaches would assure continuity of coverage, but at additional cost for the hospital or for each participating health care provider. Because this "transition cost" (at least, above what the physician would otherwise have paid) of assuring continuity of coverage would be a necessary part of any demonstration project, the federal funds or research grant supporting the demonstration project would have to include funds sufficient to allow the purchase of such coverage, either by the hospital or by individual providers.
206. Any disputes regarding the hospital's obligation to provide such coverage would be submitted to binding arbitration. Because this provision would entail additional cost to the hospital beyond the amount of the fees paid to it by physicians, the federal funds or research grant that would support the demonstration project would have to contain sums sufficient to reimburse the hospital for this potential expense.
207. See Paul C. Weiler, The Case for No-Fault Medical Liability, 52 MD. L. REV. 908 passim (1993) (discussing the broader promise and pitfalls of this more profound transformation of the medical liability regime).
208. The current malpractice regime provides compensation to only a tiny fraction of the actual victims of medical injury but awards substantial sums to the "lucky" winners in the litigation lottery. See generally WEILER, HIATT, NEWHOUSE, JOHNSON, BRENNAN & LEAPE, supra note 1, at 4-5, 73-76 (noting that only a small fraction of patients with potentially valid tort claims ever file a malpractice claim and that among those who do file such a claim, only about half ultimately receive some payment).
209. See id. at 54-55.
210. See, e.g., Jeffrey O'Connell, Neo-No-Fault Remedies for Medical Injuries: Coordinated Statutory and Contractual Alternatives, LAW & CONTEMP. PROBS., Spring 1986, at 125, 128-35; Laurence R. Tancredi, Designing a No-Fault Alternative, LAW & CONTEMP. PROBS., Spring 1986, at 277, 280-83.
211. See, e.g., Jeffrey O'Connell, Neo-No-Fault Remedies for Medical Injuries: Coordinated Statutory and Contractual Alternatives, LAW & CONTEMP. PROBS., Spring 1986, at 125, 128-35; Laurence R. Tancredi, Designing a No-Fault Alternative, LAW & CONTEMP. PROBS., Spring 1986, at 277, 280-83.
212. See, e.g., DANZON, supra note 73, at 216 ("With respect to prevention, the elimination of fault would reduce useful incentives to avoid negligence.").
213. See, e.g., Guido Calabresi & Jon T. Hirschoff, Toward a Test for Strict Liability in Torts, 81 YALE L.J. 1055, 1071 (1972); Steven Shavell, Strict Liability Versus Negligence, 9 J. LEGAL STUD. 1, 2-3 (1980).
214. See, e.g., Guido Calabresi & Jon T. Hirschoff, Toward a Test for Strict Liability in Torts, 81 YALE L.J. 1055, 1071 (1972); Steven Shavell, Strict Liability Versus Negligence, 9 J. LEGAL STUD. 1, 2-3 (1980).