Fixing medical malpractice through health insurer enterprise liability

Harvard Law Review

Volumn 121, Issue 4, 2008, Pages 1195-1214

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EID: 40749090337     PISSN: 0017811X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (134)

1. Daniel P. Kessler, Evaluating the U.S. Malpractice System and Paths to Its Reform 2 (Dec. 2006) (unpublished manuscript, on file with the Harvard Law School Library).
2. Paul C. Weiler, Reforming Medical Malpractice in a Radically Moderate - and Ethical - Fashion, 54 DEPAUL L. REV. 205, 215 (2005) ("[T]here is just one paid malpractice claim for every twenty-one negligent medical injuries, and just one for every eight serious or fatal injuries."). Professor Richard Epstein provides a different take on Professor Paul Weiler's numbers, pointing out that there is no reason to believe that all, or even most, of the relatively few paid claims come from the pool of negligently injured patients, making the system not only undercompensatory but also inaccurate.
3. Richard A. Epstein, Contractual Principle Versus Legislative Fixes: Coming to Closure on the Unending Travails of Medical Malpractice, 54 DEPAUL L. REV. 503, 512 (2005).
4. See, e.g., Richard E. Anderson, Effective Legal Reform and the Malpractice Insurance Crisis, 5 YALE J. HEALTH POL'Y L. & ETHICS 343 (2005);
5. Michelle M. Mello, David M. Studdert & Troyen A. Brennan, The New Medical Malpractice Crisis, 348 NEW ENG. J. MED. 2281, 2281 (2003) (describing eighteen states as "in crisis");
6. Lindsay J. Stamm, Comment, The Current Medical Malpractice Crisis: The Need for Reform To Ensure a Tomorrow for Oregon's Obstetricians, 84 OR. L. REV. 283 (2005);
7. Kenneth E. Thorpe, The Medical Malpractice 'Crisis': Recent Trends and the Impact of State Tort Reforms, HEALTH AFF. WEB EXCLUSIVE, Jan. 21, 2004, http://content.healthaffairs. org/cgi/reprint/hlthaff.w4.20. A Westlaw search for "TI(malpractice & crisis)" yielded fifty-two results in the "Journals & Law Reviews" database as of November 9, 2007.
8. Thorpe, supra note 3, at W4-22 to W4-24.
9. See, e.g., Weiler, supra note 2.
10. See, e.g., Epstein, supra note 2.
11. Kenneth S. Abraham & Paul C. Weiler, Enterprise Medical Liability and the Evolution of the American Health Care System, 108 HARV. L. REV. 381 (1994).
12. David M. Studdert et al., Defensive Medicine Among High-Risk Specialist Physicians in a Volatile Malpractice Environment, 293 JAMA 2609, 2609 (2005).
13. Id.
14. Id. at 2612.
15. Id.
16. AM. MED. ASS'N, MEDICAL LIABILITY REFORM - NOW! 8 (2006), available at http://ama-assn.org/ama1/pub/upload/mm/-1/mlrnow.pdf.
17. Frank A. Sloan, Experience Rating: Does It Make Sense for Medical Malpractice Insurance?, 80 AM. ECON. REV. 128, 128 (1990).
18. Id. It is worth noting that all thirteen did so of their own volition and not because it was mandated by law.
19. Id.
20. Id. at 129.
21. Id.
22. Low-dollar-value and old claims were excluded because their relevance to current risk was unclear. Id. at 128.
23. Id. at 128-29.
24. Id. at 132.
25. Id.
26. Id. The comparatively astronomical increase in claims frequency since Professor Sloan wrote in 1990 can only fortify this point.
27. Id. at 129-30.
28. Id.
29. One could question whether physicians subject to frequent judgments ought to be forced out of business or into another practice demographic, and the answer would depend on the specificity of the court system. If malpractice judgments correctly target negligence on the part of the physician, then the answer is yes. If, however, judgments are highly correlated with other factors, such as the underlying risk of the patient, then the answer is more complicated; in that case, experience rating would remove cross-subsidization effects, which, while economically inefficient, might have equality or fairness effects that one may want to take into consideration.
30. See Abraham & Weiler, supra note 7, at 401-02.
31. Id.
32. David M. Studdert & Troyen A. Brennan, No-Fault Compensation for Medical Injuries: The Prospect for Error Prevention, 286 JAMA 217, 217-18 (2001).
33. Id. at 218.
34. This is a reference to the informational asymmetry problem in which healthy subscribers drop from a plan, which causes premiums to rise, which in turn causes more healthy subscribers to drop, which causes premiums to rise again, and so on.
35. Abraham & Weiler, supra note 7. Under their proposal, hospitals may contract with insurers to allow insurers to finance malpractice costs. Id. at 419.
36. Id. at 400.
37. Id.
38. Id.
39. Id. at 402-03. Some physicians decline to purchase any liability insurance at all, instead deciding to make themselves judgment-proof by transferring assets to relatives.
40. Id. at 403 n.81.
41. Id. at 403.
42. Id. at 402. The small size is the result of the fact that insurance pools are limited to a single state and subdivided by specialty. Thus, the maximum number of physicians in a pool would be the number of specialists in the state. Competition between insurers drastically reduces that number, so the end result is that insurance pools are small when compared with the size of an average hospital.
43. Id. at 401-02.
44. Id. Professors Abraham and Weiler believe that the damage awards for pain and suffering would have to be mitigated to compensate for the deeper pockets of the new defendants, though they prefer guidelines instead of caps.
45. Id. at 405. They figure that average damages would increase because jurors would be more inclined to deliver larger sums from an enterprise than from an individual physician and that this factor would outweigh jurors' disinclination to hold liable an enterprise that is a degree of separation away from the physician.
46. Id. What this reasoning does not take into account is that enterprise liability would involve a single defendant, whereas under the current system there are multiple defendants with divergent interests. This effect cuts in both directions; however, it is likely that the strength of a unified defense would outweigh the rare cases in which there is not enough evidence to find any particular defendant liable but it is clear that one of them did something wrong - a problem that the doctrine of res ipsa loquitur attempts to mitigate. In any event, this Note does not address the problem of differential damages because it assumes that juries can adequately assess the proper damages for pain and suffering. Capping these damages would lead to suboptimal deterrence, so it should be done only for a compelling reason. A desire to maintain the status quo in terms of damage awards is not a compelling reason.
47. Id. at 406.
48. Id. at 406 & n.92.
49. Id. at 410.
50. Id. at 411.
51. Id. at 411-12. The recommendations included mechanized monitors for the patients' respiration, circulation, and oxygen saturation; an alarm that sounded when vitals reached dangerous levels; and the presence of trained personnel at all times.
52. Id. at 411 n.115.
53. Id. at 412-13.
54. Id. at 410.
55. Clark C. Havighurst, Making Health Plans Accountable for the Quality of Care, 31 GA. L. REV. 587, 587-88 (1997).
56. Id. at 607.
57. Id. at 587.
58. Abraham & Weiler, supra note 7, at 435. It should be noted that enterprise liability is practically a predicate for no-fault liability; without enterprise liability, no-fault liability fails to realize deterrence gains.
59. Weiler, supra note 2, at 227.
60. Id.
61. Id. at 227-28. Professor Weiler notes that the wealthy would be able to purchase disability insurance.
62. Id. at 228. Without significant reforms, wage reimbursement in a no-fault regime would be regressive because the rich would not be charged more for care than the poor would be charged, even though their economic damages would be much larger. Even Professor Weiler's hospital enterprise liability system does not alleviate this problem, as hospitals have no way of charging the wealthy more for no-fault insurance. It should be noted that - though this Note does not advocate for a no-fault regime - holding the insurer exclusively liable in a no-fault matter could avoid regressive consequences, as the insurer can easily charge the wealthy more by tailoring premiums to salary or adjusting the reimbursement limit and, in this case, it would have a strong financial incentive to do so.
63. Id. at 228. Part of the reduction in administrative costs would be due to the increased willingness of physicians to admit their errors.
64. Id. But two factors cut against this benefit. First, causation is more difficult to determine in medicine than in worker's compensation.
65. Id. Second, overall reimbursement might increase drastically. If the sixty-twenty ratio is to be believed, overall costs would rise unless the value of compensated injures rose by a factor lower than three. Given the breadth of no-fault insurance, and the significant number of negligence injuries that currently slip through the cracks, overall compensation amounts would almost assuredly rise. However, Professor Weiler points out that the additional compensation might not be a large fraction of the U.S. healthcare budget, which is over $1.4 trillion.
66. Id. at 227.
67. See Studdert & Brennan, supra note 27.
68. Id. at 219. The funding source differs drastically among the countries. For example, New Zealand uses tax revenue, while Sweden uses premiums charged to "regional councils and physicians."
69. Id.
70. Id. at 220.
71. Id. at 221. It should be noted that Professors Studdert and Brennan acknowledge that experience rating attaches due to the enterprise liability portion of the no-fault regime,
72. id., though the increased number of claims would undoubtedly increase the statistical power.
73. Epstein, supra note 2. Professor Epstein's argument is a response to Professor Weiler's advocacy of no-fault insurance.
74. Id. at 519.
75. Id. at 520.
76. Id. Missed diagnoses also present a thorny issue, as some sort of "fault" must come into play unless the system is to compensate every illness.
77. Id.
78. Id.
79. Id. However, Professors Studdert et al. report a moderately successful outcome in an analysis of Florida's obstetric neurological injury no-fault regime, although they also note a significant number of concerns, primarily with patients' filing malpractice cases in addition to no-fault claims.
80. See David M. Studdert, Lori A. Fritz & Troyen A. Brennan, The Jury Is Still In: Florida's Birth-Related Neurological Injury Compensation Plan After a Decade, 25 J. HEALTH POL. POL'Y & L. 499, 516-20 (2000).
81. Epstein, supra note 2, at 519.
82. Id.
83. Id. at 520.
84. Id. at 509.
85. Id. at 508.
86. Id. at 512-13.
87. Id. at 513-14.
88. Richard Epstein, Medical Malpractice, Imperfect Information, and the Contractual Foundation for Medical Services, LAW & CONTEMP. PROBS., spring 1986, at 201, 205.
89. Id. at 207.
90. Id.
91. Id.
92. Id. at 209.
93. Id. (citing PATRICIA M. DANZON, MEDICAL MALPRACTICE: THEORY, EVIDENCE, AND PUBLIC POLICY 187 (1985)).
94. CAL. CIV. CODE § 3333.2 (West 2007).
95. Id. § 3333.2(b). The cap was a result of swift (perhaps hasty) action in response to a very sudden state malpractice crisis in which premiums more than tripled and doctors either stopped working or worked without any insurance at all.
96. See Amanda Edwards, Recent Development, Medical Malpractice Non-Economic Damages Caps, 43 HARV. J. ON LEGIS. 213, 216-18 (2006).
97. Thorpe, supra note 3, at W4-25.
98. Id. at W4-26.
99. See Mello et al., supra note 3, at 2283-84 (questioning whether the conclusion that damage caps reduce premiums is justified given that the relevant studies "are based on data from earlier eras and present mixed findings").
100. See id.
101. Kenneth S. Reinker & David Rosenberg, Improving Medical Malpractice Liability by Allowing Insurers To Take Charge (John M. Olin Ctr. for Law, Econ., & Bus., Harvard Law Sch., Discussion Paper No. 556, 2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 923424.
102. Id. at 5.
103. Id. at 20.
104. Id. at 17.
105. Id. at 16-17.
106. It should be noted that the difference between the second and third options is that, in the case of reckless or intentional conduct on the part of the physician, the second would not cover any liability, whereas the third would cover the compensatory but not the punitive damages.
107. Limits on noneconomic damages, for example, do not provide a reliable proxy because they remove liability altogether instead of shifting it from one regime to another.
108. James W. Childs, Jr., Comment, You May Be Willing, but Are You Able?: A Critical Analysis of "Any Willing Provider" Legislation, 27 CUMB. L. REV. 199, 199-200 (1997). Some any-willing-provider laws apply only to pharmacies.
109. Id. at 200 n.3. Laws so limited make more sense than laws that apply to all health providers, as pharmaceuticals are much more of a commodity than healthcare services are.
110. Id. at 212-13.
111. Id. at 213.
112. Id. at 200.
113. It is unclear whether a third party insurance market would even be viable in the face of a "lemon" stigma that would be associated with the search for supplemental coverage. Presumably, the health insurer is in possession of better information, so physicians with low coverage would be "lemons" and extremely expensive to insure. This would likely trigger the vicious cycle that unfortunately plagues many insurance markets where the premiums go up, causing the lower risk physicians to drop, which causes the premiums to go up, and so on. Alternatively, it might be more efficient for another company to insure the doctor. If this efficiency outweighs the benefits of placing the risk on the health insurer, then the entire regime advocated by this Note is inefficient; thus, this Note assumes that this is not the case.
114. Abraham & Weiler, supra note 7, at 419-20.
115. Id.
116. See supra p. 1194.
117. Abraham & Weiler, supra note 7, at 396.
118. See Havighurst, supra note 45, at 591.
119. See Abraham & Weiler, supra note 7, at 410.
120. See Studdert & Brennan, supra note 27, at 221-22.
121. Havighurst, supra note 45, at 610 ("[I]n most cases MCOs will be held liable for physician negligence only if the plaintiff makes an additional factual showing - which an MCO can make more difficult by distancing itself from its physicians and prominently disavowing any agency relationship with, or any warranty concerning, providers of any kind." (footnote omitted)).
122. Professors Abraham & Weiler say the solution to this problem is to determine with which hospital the physician is principally affiliated, a system which is currently used in New York for supplementary physician coverage. Abraham & Weiler, supra note 7, at 421-22. The danger of this idea is difficult to overstate. It makes physicians with principal privileges at other hospitals extremely desirable, and it could cause large hospitals to cross-subsidize small ones or eliminate multiple privilege rights altogether.
123. See supra pp. 1196-97.
124. One interesting inquiry is whether this would have a cross-subsidization effect, with low-risk specialties, such as dermatology, subsidizing the high-risk ones like obstetrics. The answer is probably not. In a competitive market, if one insurer is underpaying dermatologists, dermatologists will likely drop that insurer and seek one with a higher reimbursement. It does, however, seem paradoxical that the health insurer can better spread risk without spreading it between different specialties. Part of the solution may lie in the fact that there could be fewer health insurers than malpractice insurers, especially when the pools are separated by state lines. For example, in 1985 the number of neurologists and neurosurgeons in Florida, a relatively large state, was only about 500, see Abraham & Weiler, supra note 7, at 401 n.77 (citing David J. Nye et al., The Causes of the Medical Malpractice Crisis: An Analysis of Claims Data and Insurance Company Finances, 76 GEO. L.J. 1495, 1532 (1988)), so pools must have been very small when divided among the individual malpractice insurers. It should be noted that Professors Abraham and Weiler believe that enterprise liability would cause some cross-subsidization between specialties and that that may be a good thing, as the cost is spread among the patient population anyway.
125. Id. at 402. This argument is not convincing, however, given that subsidizing risky activities with safe ones seems inefficient per se.
126. Hence, the risk is optimally placed on health insurers, given the government's questionable ability to respond to financial incentives.
127. See supra p. 1199.
128. Abraham & Weiler, supra note 7, at 412.
129. Id. at 406.
130. Id. It is both unclear and unlikely that defensive medicine deterrents were taken into account when formulating this estimate. To the extent that deterring defensive medicine would reduce the number of defense witnesses, the effect of litigation savings may be even greater.
131. A third option is to mandate health insurance, eliminating the uninsured and this problem.
132. This would not be the case if physicians rendered inferior care to the uninsured; however, empirical research into differential treatment of patients based on HMO market penetration suggests that "the ability of physicians to modify their behavior when the patient population is heterogeneous may be severely limited." Sherry Glied & Joshua Graff Zivin, How Do Doctors Behave When Some (but Not All) of Their Patients Are in Managed Care?, 21 J. HEALTH ECON. 337, 352 (2002). The result is only strengthened when one assumes that the majority of innovations are going to be systematic.
133. See Jack Hadley & John Holahan, How Much Medical Care Do the Uninsured Use, and Who Pays for It?, HEALTH AFF. WEB EXCLUSIVE, Feb. 12, 2003, http://content.healthaffairs. org/cgi/reprint/hlthaff.W3.66v1 (estimating that the uninsured pay for only sixty-five percent of the care they receive).
134. A physician's only incentive is the desire to avoid reputational damage and wasted time in litigation. Though significant, this is substantially less than the penalty for negligently killing or disabling someone.