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Medical Malpractice: An Economist's View

Published online by Cambridge University Press:  27 December 2018

M. W. Reder
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Extract

The sharp increase that occurred in 1975 in premiums charged doctors and hospitals for medical malpractice insurance raises a number of issues of concern to economists. This paper attempts to survey some of the more important. At first glance the various sections may appear unrelated to each other and without a unifying theme. However, this disunity is superficial. Sections III-V, the bulk of the paper, are repeated applications of a central proposition of economic theory: purposive behavior is to be explained as the rational pursuit of a set of competing objectives by individuals who are constrained by limited resources and must therefore allocate these resources among alternative uses. This proposition is used in section 111 to explain differences in malpractice claim payments among states and changes over time; in section IV, to analyze the effect of different legal arrangements for distributing the cost of iatrogenic injuries on the behavior of patients and doctors; in section V, to show the effect of different methods of compensating lawyers upon their fees and the volume of litigation they undertake; and in section VI, to consider the unresolved question of “who bears the cost of malpractice claim settlements?” As will be seen, the nature of the argument reflects an economist's outlook; its viewpoint is different from that of doctors, lawyers, or “concerned citizens.”

Type
Research Article
Information
American Bar Foundation Research Journal , Volume 1 , Issue 2 , Spring 1976 , pp. 511 - 563
Copyright
Copyright © American Bar Foundation, 1976 

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References

1 For brevity, “malpractice” will always be used for “medical malpractice” and “premium” for “premium charged for insurance against medical malpractice liability”.Google Scholar

2 In 1975, 25 states enacted changes in civil practice laws aimed at reducing the expected claim payments of malpractice insurers. See Steven A. Grossman, An Analysis of 1975 Legislation Relating to Medical Malpractice, in David G. Warren & Richard Merritt, eds., A Legislator's Guide to the Medical Malpractice Issue 8–11 (Washington: Health Policy Center, Georgetown University, 1976).Google Scholar

3 “During 1975 at least 41 states authorized or were proceeding with formal study of the malpractice situation in their state.”Id. at 4.Google Scholar

4 The various premium rates appearing in the news media are of uncertain reference and are often cited to make a particular point: usually to show that the proposed increases are very large. However, these rates may have been proposed merely as the initial offer in an intended bargaining sequence, with no serious expectation of approval.Google Scholar

Moreover, accuracy aside, comparing premium rates over time involves serious conceptual problems. Inflation and the increase in size of expected claims, after correcting for changes in the general price level, reduce the degree to which a given policy protects a doctor from loss due to malpractice claims. Consequently, to obtain a measure of the change in the price (i.e., premium) for insuring a given doctor to the same extent against his possible malpractice loss, it is necessary to construct an appropriate price index and massage the premium data into conformity. Such an index was constructed by Mark Kendall & John Haldi, The Medical Malpractice Insurance Market, in Department of Health, Education, and Welfare, Appendix: Report of the Secretary's Commission on Medical Malpractice 535–38 (DHEW Pub. No. (OS) 73–89; Washington, 1973) thereinafter cited as Appendix: DHEW Report], and is presented in table 1. However, so far as I am aware, no comparable figures have been prepared for later years.Google Scholar

A large collection of up-to-date figures on malpractice premiums paid, average dollar amount per claim settlement, etc., may be found in Malpractice in Focus (Chicago: American Medical Association, 1975). However, the meaning of these data is not clear, and the recent figures are greatly affected by the disturbances arising from anticipated changes in the law.Google Scholar

5 I discuss this largely peripheral issue in a forthcoming article: M. W. Reder, An Economic Analysis of Medical Malpractice, 5 J. Legal Studies (June 1976).CrossRefGoogle Scholar

6 Throughout the paper I speak of doctors or organized medicine and, except for a few places, ignore hospitals, which have an important stake in the malpractice issue. However, in this, as in many other matters, the interest of hospitals parallels that of their medical staffs.Google Scholar

7 Legislative intervention in the premium rate-setting process is “natural,” since insurance is a regulated industry. A carrier dissatisfied with the premium it is allowed to charge traditionally has the option of refusing to write the policy in question. The threat to exercise this option caused fear of total loss of malpractice coverage in a number of states.Google Scholar

8 This is not to suggest that the concern of doctors with their legal status is in any sense irrational or even nonpecuniary. The special legal position of doctors is a source of great pecuniary and nonpecuniary advantage to every member of the profession.Google Scholar

9 For the moment, I assume that injury from medical malpractice is an accident from the patient's point of view; i.e., he can do nothing to avoid it. This assumption is relaxed below, pp. 543–44.Google Scholar

10 N.B. the suggested criterion does not imply that damage awards should be equal to losses. Such a judgment would involve deciding some theoretical questions regarding compensation for risk bearing that are no part of the present problem.Google Scholar

11 Angelo Mirabella, Thomas I. Myers, & Melvin H. Rudov, Medical Malpractice Insurance Claim Files Closed in 1970, in Appendix: DHEW Report, supra note 4, at 1–25.Google Scholar

12 H. Laurence Ross, Settled Out of Court: The Social Process of Insurance Claims Adjustments chap. 5 (Chicago: Aldine Publishing Co., 1970).Google Scholar

13 Out-of-court settlements and jury awards are, of course, strongly correlated since it is the expectation of the latter that causes the former. However, the relationship is probably not one of constant proportionality, and the causes of variation in the ratio of one to the other is of great interest, though not considered here.Google Scholar

14 Mirabella et al., supra note 11, esp. The Survey Instrument, at 22–25.Google Scholar

15 This specification restricts the suggested study to cases where the defendant is insured. This limits the range of possible comparisons; however, to include uninsured defendants would greatly increase the difficulty of gathering appropriate data.Google Scholar

16 Allowance could be made, where appropriate, for an earnings prospect of a particular individual that was above or below average by relating his history of prior earnings to the history of the average individual in his class. Usually it will suffice to assume average earnings.Google Scholar

17 For a good illustration of this type of calculation see Jacob Mincer, Schooling, Experience, and Earnings (New York: National Bureau of Economic Research, 1974).Google Scholar

18 Older persons would receive less for a given injury, if other circumstances were the same.Google Scholar

19 I.e., as argued on pp. 531–35, malpractice claim losses are higher in states where per capita earnings (and human capital) are greater.Google Scholar

20 Department of Health, Education, and Welfare, Report of the Secretary's Commission on Medical Malpractice 10 (DHEW Pub. No. (OS) 73–88; Washington, 1973) [hereinafter cited as DHEW Report]. This is slightly higher than the 45 percent of all claims receiving (some) payment. The commission stated that “cross tabulations are not yet available to establish any possible correlation between claims paid and claims judged to be meritorious.”Id.Google Scholar

21 The data generated by the NAIC Medical Professional Liability Insurance Uniform Claims Report will generate much of the needed information. 1 NAIC Malpractice Claims 7 (Dec. 1975).Google Scholar

22 Reder, supra note 5.Google Scholar

23 This is a standard proposition of economic theory; its well-known qualifications are not important here. However, one misunderstanding of frequent occurrence should be anticipated: it is not asserted that every lawyer or even that most lawyers are indifferent as between one branch of practice and another. Differences of taste for different branches of practice are recognized and allowed for in the theory; all that is required is that there should be a willingness of some lawyers, given reasonable time, to shift from one branch to another in response to variations in relative earnings between the branches.Google Scholar

24 The relevant data, although scattered and inconclusive, suggest that the value of lawyers' time (in the post-World War II period) was increasing more rapidly than that of most other professionals and, a fortiori, than that of the average member of the labor force. Thus, the earnings of self-employed lawyers increased more, in percentage terms, than those of self-employed physicians or engineers or full professors in land grant colleges and universities. See Margaret S. Gordon, The Changing Labor Market for College Graduates, in Margaret S. Gordon, ed., Higher Education and the Labor Market 53 table 2–5 (New York: McGraw-Hill Book Co., 1974).Google Scholar

25 C. Bruce Baird, G. Thomas Munsterman, & Julian P. Stevens, Alternatives to Litigation, I: Technical Analysis, in Appendix: DHEW Report, supra note 4, at 259–63, report data indicating that jury awards in malpractice suits were higher where the result was severe permanent injury than in suits where the victim died; the data come from the files of Jury Verdict Research, Inc. Unfortunately, the description of the sampling method used and the other characteristics of the data is inadequate. A similar finding (that malpractice recoveries are greater in cases of severe permanent injury than of death) is reported in Stephen K. Dietz, C. Bruce Baird, & Lawrence Berul, The Medical Malpractice Legal System, in id. at 106. This report is based on responses in two surveys of lawyers engaged in malpractice litigation.Google Scholar

Still further, Ross reports that in a sample of settlements of claims resulting from automobile accidents, recoveries in cases involving fatal injuries were less than in nonfatal cases of severe injuries. Ross, supra note 12, at 186–87, esp. table 5.2.Google Scholar

26 Reder, supra note 5.Google Scholar

27 Since this was written, but too late for further statistical work, the first data from the NAIC Medical Professional Liability Insurance Uniform Claims Report have been reported (supra note 21). The data reported, perhaps after some adjustments, should make possible a measure of Xd by individual states, that will reflect indemnities paid rather than premium rates charged. If the theory is correct, use of this data to measure Xd will substantially improve the statistical “fit” of the equations presented in table 3.Google Scholar

28 Kendall & Haldi, supra note 4, at 539–43.Google Scholar

29 For further description of ISO and these premium rates see Reder, supra note 5, and the underlying source, Kendall & Haldi, supra note 4, at 533–39.Google Scholar

30 The premium rates for surgeons are three to four times those for physicians but their correlation across states is almost perfect, being in excess of +.99. Consequently, any regression that explains the premiums of physicians will explain those of surgeons equally well, and vice versa.Google Scholar

31 These data and those pertaining to other variables are discussed in detail in Reder, supra note 5. Also see note 27 supra.Google Scholar

32 These data were collected for the 1970 Census, but the published data on earnings of lawyers by state has an open-ended upper class of £15,000; in most states this includes well over half the lawyers. Thus we are unable to estimate either the median or mean earnings of lawyers in most states.Google Scholar

33 These “doctrines” are described elsewhere; Reder, supra note 5. The underlying tabulation classification of judicial decisions was taken, without alternation, from data reported in Dietz et al., supra note 25, at 134 table 111–62.Google Scholar

34 The t-ratio of a regression coefficient is the ratio of its estimated value to its estimated standard error. The t-ratio is a widely used measure of the sampling variability of regression coefficients. Its theoretical rationale is presented in most textbooks that discuss linear statistical models. Given certain assumptions that are broadly applicable and are assumed to apply here, if a t-ratio of a regression coefficient is less than 2, it is considered too small to provide an adequate reason for rejecting the hypothesis that the independent variable had no effect upon the dependent variable.Google Scholar

R 2 is a measure of the extent to which the “best” linear combination of the independent variables accounts for the variation in the dependent variable; R 2 may take values between 0 and +1; R 2= 0 implies that the regression equation is of no use in “explaining” the variation among observations on the dependent variable; R 2= 1 implies that the equation explains all the variation in the dependent variable and no alternative equation–no matter what variables are included–could do better. As a matter of practice, R 2 is almost always between 0 and +1 and almost never equal to either extreme value.Google Scholar

For a good elementary exposition of these statistical concepts, the reader may consult Thomas H. Wonnacott & Ronald J. Wonnacott, Introductory Statistics for Business and Economics chaps. 11–14 (2d ed. New York: John Wiley & Sons, 1972). For a more advanced discussion see John Neter & William Wasserman, Applied Linear Statistical Models chaps. 7–11 (Homewood, Ill.: Richard D. Irwin & Co., 1974).Google Scholar

35 Richard A. Epstein, Medical Malpractice: The Case for Contract, 1976 A.B.F. Res. J. 87.CrossRefGoogle Scholar

36 Almost never are doctors paid on an explicit incentive basis; thus unusually good performance is not rewarded with unusually large compensation. If incentive pay were instituted in medicine–like the contingent fee in law–the malpractice issue would be considerably transformed. However, consideration of this point would take us far afield.Google Scholar

37 I base this statement upon the views of several colleagues at the University of Chicago Law School: R. A. Epstein, S. Kimball, B. Meltzer, and R. A. Posner. In Tunkl v. Regents of the University of California, the California Supreme Court held void the agreement of a patient “not to sue his physician” as contrary to public policy. 60 Cal. 2d 96 (1963). However, through acceptance of various informal arbitration tribunals, the courts may have permitted some de facto waiving of rights of recovery.Google Scholar

38 Doctors might also feel that to negotiate for malpractice waivers was beneath their dignity. Moreover, the mere request for a waiver might subvert patient confidence in the physician and be inimical to the treatment process.Google Scholar

39 Obviously, and unavoidably, the argument of the next few paragraphs is speculative.Google Scholar

40 It will be argued below, pp. 541–45, that doctors, like others, try harder to avoid mishaps the more that a mishap costs them. Illustrative examples immediately relevant to this point are given to indicate how doctors might reduce the frequency of events that cause malpractice claims.Google Scholar

41 I assume that a style of medical care that involves less risk of malpractice claims, with expected recovery remaining constant, implies superior medical care. While I think this assumption is appropriate, many doctors would dispute it.Google Scholar

42 Epstein, supra note 35, at 96–98, argues that “customary standards within the profession” should determine liability, absent individual contracts. But if standard contract forms were adopted, the legislature could designate one of them as the “implied contract” to be applied in the absence of contrary agreement.Google Scholar

43 An example of what I have in mind is the Ross-Loos Medical Group of Southern California, whose master contracts–usually negotiated with labor unions acting on behalf of their members–contain provisions for “binding arbitration” of malpractice claims; these provisions have been upheld in the California courts. For details see David S. Rubsamen, The Experience of Binding Arbitration in the Ross-Loos Medical Group, in Appendix: DHEW Report, supra note 4, at 424–49.Google Scholar

44 Epstein, supra note 35, at 97, argues that doctors of different levels of skill should not be expected to offer the same quality of service or to receive the same level of compensation. As a description of what would result from individual contracting in competitive markets, his argument is correct. As a normative judgment, it will meet with resistance.Google Scholar

Consider: the same economic analysis that demonstrates that sellers of higher quality services will receive higher prices will also show that doctors capable of rendering two or more qualities of service will charge higher prices for the better qualities. Would any court accept as a defense against a complaint of negligence a plea that the degree of care exercised met the customary standards for patients paying the agreed fee level, though this degree of care might be inferior to the standard prevailing for patients paying more? Moreover, opinions will surely differ as to whether a doctor who treats patients for diseases of which he has only limited knowledge, though charging appropriately lower fees, should be held to a lower standard of care than a high-priced specialist. The courts and public will accept that poorer men should have cheaper and lower quality clothes; they will not consistently accept (or reject) that poorer men should have poorer medical care.Google Scholar

45 Indeed, in the special case where there are no costs of transacting to shift risk of loss, the ultimate distribution of risk of injury will be entirely independent of what liability rule is adopted, i.e., any change in the location of liability for an injury will lead to a change in prices so as to leave all individuals buying and selling the same quantities of all goods and services as before the change. This is an important implication of the Coase Theorem; see R. H. Coase, The Problem of Social Cost, 3 J. Law & Econ. 1 (1960).Google Scholar

46 The term “expected loss” refers to the mathematical expectation of loss as the term is used in statistics. Roughly, it means the average loss that would arise due to chance variations in a large number of situations like that being considered.Google Scholar

47 Of course, information about the different probabilities that each of a number of doctors will cause iatrogenic injury under various circumstances is extremely limited, both among doctors and among patients. (But, see pp. 544–45 infra.) However, it is assumed throughout that the adjustments to avoid iatrogenic injury will be made primarily by doctors, since they are the “less uninformed” parties.Google Scholar

48 This case is discussed in detail by Epstein, supra note 35, at 108–13.Google Scholar

49 The concept of defensive medicine is not precise, though widely used. A good discussion of the doctor's concept of defensive medicine is given in the DHEW Report, supra note 20, at 14.Google Scholar

50 Be it noted that these incentives to avoid accidents are “marginal” and reinforce other incentives that operate independently of the location of liability. Few patients would be indifferent as to whether a doctor committed malpractice merely because he (the patient) could obtain substantial pecuniary compensation for injury. Nor would many doctors be heedless of the injuries inflicted upon their patients because they were not liable for malpractice. The reason is that, despite insurance and large recoveries, victims of iatrogenic injury are not fully compensated, and that the loss of reputation and other uninsurable losses to the doctor are appreciable.Google Scholar

51 However, I am not aware of any relevant empirical studies that could be cited as support.Google Scholar

52 Examples of how doctors would reduce malpractice risk by varying their style of practice include the standard examples of defensive medicine: avoiding treatment of patients in areas other than one's specialty, especially surgery (unless appropriately specialized); diverting more time from current patient care to retraining; avoidance of overcommitting one's time.Google Scholar

While a narrowly specialized style of practice might not be in the interest of patients in an area with few doctors, nonetheless it might reduce malpractice claims. Where situations of this type exist, appropriately drawn waivers of malpractice liability might well be socially beneficial.Google Scholar

Hospitals have more opportunity than doctors to vary styles of treatment to limit malpractice claims. To a substantial degree, they can improve service quality by using more and better trained nurses and technicians at an increased expense per patient day. The tradeoff between higher expenses per patient day and reduced cost of malpractice per patient day may be quite responsive to changes in the locus of the risk.Google Scholar

53 I have discussed only the alternatives of placing malpractice liability entirely upon the patient or entirely upon the doctor and have ignored intermediate possibilities. Sharing of liability may be accomplished, in effect, by limiting the maximum amount that can be awarded a plaintiff under given circumstances (see infra), or of providing additional defenses against liability.Google Scholar

54 I abstract from the value of the time of the injured party and of the defendants, doctors and hospital staff used in the litigation process. These costs are not neglible, but I know of no available measures. In any case, their neglect does not affect the argument.Google Scholar

55 Reder, supra note 5. The basis for the estimate of plaintiff's adjudication cost are the figures in Dietz et al., supra note 25, at 114–16; data on insurance company (defendant) adjudication cost are from Mirabella et al., supra note 11, at 8.Google Scholar

In discussion, it has been suggested that my estimate may be too low. While this may well be true, it would not weaken the argument of any part of the paper.Google Scholar

56 The fields of practice most nearly resembling medical malpractice are personal injury, including auto accident, and product liability. Successful practice in any of these requires specialized knowledge of medico-legal problems. Consequently, as the volume of medical malpractice claims is very small relative to personal injury claims (including auto accident), I assume that the value of an attorney's time in malpractice cases is, to a first approximation, determined by its value in personal injury work.Google Scholar

57 What little information there is for lawyers engaged in malpractice litigation comes from Dietz et al., supra note 25, at 114–16. Faute de mieux, I make the usual assumption that the supply function of lawyer hours per annum is the same in all competing fields of activity.Google Scholar

58 Of course, there are “obstacles” to attracting lucrative cases; the existence of these obstacles is implied by the value of a professional reputation. However, such “obstacles” are common to all fields of legal activity, and are not special to malpractice litigation.Google Scholar

It should be noted that the proposition that earnings of comparable lawyers are approximately equal in all fields of application may not apply in periods when the relative net advantage of working in alternative fields has undergone recent unexpected change. This is because there may be delay in recognizing that such change in relative earning prospects has occurred and/or in adjusting to it. Thus, it is possible that the market for malpractice attorneys was, in 1975, in temporary disequilibrium because the rapid rise in the volume of malpractice claims, coupled with a decline in opportunities for litigation of claims from auto accidents, might have caused a discrepancy in expected earnings between these two fields (i.e., auto accident and medical malpractice). If this was the case, one would expect a movement of lawyers from one field to the other and a subsequent equalization of earnings.Google Scholar

While the relevant facts are not now known, it is to be emphasized that what has been alleged provides no basis for inferring impeded entry to the field of malpractice litigation; indeed, the allegation is that too many lawyers are entering this field. In the last two years the adoption in a number of states of no-fault auto insurance may have reduced the attractiveness of this field of practice to plaintiffs' attorneys. If so, one would expect that it would have led to an increase in the supply of attorneys available for malpractice cases. Although this inference is plausible and has been strongly alleged in Physicians Crisis Committee Court Docket Survey 6–10 (available from Physicians Crisis Committee, 1930 Buhl Building, Detroit MI 48226), I consider it too early to make confident assertions.Google Scholar

59 For example, in New Jersey there is a maximum percentage of the (gross) recovery that a plaintiff attorney is permitted to accept as a contingent fee. This percentage diminishes with the amount of the recovery. Dietz et al., supra note 25, at 114.Google Scholar

60 See id. at 95–97. Murray L. Schwartz & Daniel J. B. Mitchell, An Economic Analysis of the Contingent Fee in Personal-Injury Litigation, 22 Stan. L. Rev. 1125, 1140 (1970), make a similar observation.Google Scholar

61 Dietz et al., supra note 25, at 95–97.Google Scholar

62 Id.Google Scholar

63 That is, an attorney of given “quality,”i.e., quality measured by ability to earn at a given hourly rate in alternative fields of practice.Google Scholar

64 Thus in the study of claim files closed in 1970, it was found that 60 percent of all malpractice claims settled were closed without payment. Mirabella et al., supra note 11, at 13.Google Scholar

65 Estimates of cost savings (as compared with litigation) achieved under various types of tribunals are presented in Baird et al., supra note 25, at 276 et seq. (esp. fig. 38), 309–14 appendix B.Google Scholar

66 For a summary of experience with nonformal tribunals in malpractice matters, see id. at 214–314; also see Rubsamen, supra note 43, at 424–49.Google Scholar

67 I.e., lawyers may have the effect of increasing total recovery by more than their fees and hence benefit their clients. The facts of this matter are obscure. For bits of evidence and relevant discussion see Ross, supra note 12, at 193–98, and Rubsamen, supra note 43, esp. at 447.Google Scholar

68 See Mirabella et al., supra note 11, at 12–16.Google Scholar

69 Id. at 14 table 3.Google Scholar

70 Id. at 14 table 2.Google Scholar

71 Dietz et al., supra note 25, at 116. While the sample data on which this statement is based are unreliable, the numbers are not implausible and in any case are all that are available.Google Scholar

72 Id. at 116–18 present a good arithmetic illustration in support of the reasoning underlying this argument.Google Scholar

73 It is worth noting that permitting a long time interval between injury and date of filing suit facilitates avoidance of misdirected preparation by permitting a plaintiff attorney to await the outcome of similar cases scheduled for trial. Therefore, shortening the statute of limitations in malpractice cases tends to lessen this opportunity for risk avoidance and to increase the plaintiff's cost of recovery.Google Scholar

74 Mirabella et al., supra note 25, at 12.Google Scholar

75 In Europe, such insurance is quite common; see Werner Pfennigstorf, Legal Expense Insurance: The European Experience in Financing Legal Services (Chicago: American Bar Foundation, 1975). The economic implications of such insurance are interesting but beyond the purview of this paper.Google Scholar

76 The price elasticity of demand is defined as the percentage change in the quantity purchased divided by the percentage change in the price charged, assuming that buyers remain on a given demand curve. The elasticity of demand is always negative, i.e., quantity always varies inversely with price. The elasticity of supply, which normally is positive, is defined analogously assuming that sellers or producers remain on a given supply curve. In most cases, the elasticity of a curve varies from one point to another. Hence, when speaking of the elasticity of a curve it is essential to indicate the point to which reference is made. In this discussion, the elasticity of a curve is always defined at the point of intersection with some other curve.Google Scholar

The reader should recognize that the argument presented here refers to the long run under competitive conditions. In the short run many complicating circumstances may arise. Moreover, the exposition even of the long run is very sketchy and omits many relevant details.Google Scholar

77 For a recent investigation with numerous references to other studies see Joseph P. Newhouse & Charles E. Phelps, Price and Income Elasticities for Medical Care Services, in Mark Perlman, ed., The Economics of Health and Medical Care (New York: John Wiley & Sons, 1974).Google Scholar

78 My hunch on this matter is consistent with the findings of Frank A. Sloan, A Micro-analysis of Physicians' Hours of Work Decisions, in id., at 323. However, empirical work on this subject is still at an early stage.Google Scholar

79 For further discussion of this matter, see Reder, supra note 5.Google Scholar