A multi-installment policy paper on tort reform

Professor L. Lynn Hogue, Georgia State University College of Law; Chairman, SLF Legal Advisory Board

Tort reform is a large topic with many discrete parts. It is inconceivable that what reforms one part of the perceived problems may not fit other parts, that a “one-size-fits-all” solution is an impossible dream. Federal-level solutions, too, may be inappropriate for state-level problems. In legal parlance, a “tort” is a “civil wrong;” left unchecked, the world of tort litigation may itself become a civil wrong for which common-sense reforms are in order.

MEDICAL MALPRACTICE

The medical malpractice crisis, while not the only part of tort reform, is a significant one and a useful point of departure for examining tort reform.

Medical malpractice and the escalating jury awards for pain and suffering or punitive damages pit two powerful and politically sophisticated opponents in a high-stakes battle: doctors and their insurers squaring off against trial lawyers representing injured patients.

There is some merit in the positions on either side and no obviously correct textbook solution that easily solves the matter. Juries can bring in excessive awards that tax the ability of insurance companies to pay. To the extent that insurance is a pass-through, what insurance companies pay out has to be recouped through higher premiums, particularly in riskier areas of practice. (“Riskier” can mean medically riskier because of inherent limitations in medical science or exposed to legal risk because patient injury is more probably or because of a potentially long exposure to the possibility of litigation as in instances of pediatric injuries which may evidence themselves years later or be subject to litigation after the child reaches the age of majority).

If premiums become so high as to make the practice of medicine financially unrewarding, doctors can leave the state and go elsewhere or leave practice altogether. Likewise, insurance companies can withdraw from the insurance market in states where jury awards become onerous.

Insurance companies may seek profit by taking advantage of a perceived crisis as an opportunity to gouge prices, and they may have an incentive to do so to cover extensive investment losses in the equities market.

And there are the doctors. A handful – around whom much of the litigation controversy swirls – are inept and poorly policed by professional bodies charged with that responsibility. Bad doctors (and sometimes good ones) may make mistakes that seriously injure of kill patients. Those patients and their next of kin deserve compensation for medical expenses to repair their injury, along with other consequential damages or compensation for the loss of a loved one – breadwinner, child, etc.

One piece of this puzzle that must be accounted for is the jury. Juries determine negligence and award damages. They are a critical part of a state’s tort system, but juries can be moved to excess. Unless reined in, they can become a power unto themselves that precipitates a crisis in the system. Whether jury behavior is a problem in some states is controversial – certainly juries in Alabama, Mississippi, and Michigan, to name a few, have been problematic.

This is probably enough with which to start. Take insurance companies, since a proposed solutions is likely to prove the most controversial. The problem is this – even if some other part of the system were to be adjusted in order to protect insurance companies from steadily escalating or excessive jury awards, there is no guarantee that the insurance companies would respond by lowering premiums.

Addressing the problems of insurance company behavior is problematic. One solution is to require insurers to roll back premiums, a strategy followed in California. That state is famous for intrusive regulation of portions of markets (witness their disastrous electricity deregulation scheme that opened the state’s wholesale electricity market but prohibited passing costs through to retail customers). Enron and others gamed that system and clearly contributed to California’s woes, but the California legislature played the most prominent role by its inept micromanagement of a portion of the market. California’s mandated insurance premium rollback seems cut from the same bolt of flimsy cloth.

But if regulation is not promising, then what? It may well be that medical malpractice insurance represents a fixed market for a variety of reasons, e.g., too few competitors in the marketplace, too much ability to cherry pick as footloose insurers withdraw from states and leave physicians uninsured and patients unable to get care, too little oversight by state regulatory bodies, again, for a variety of reasons including lack of resources or competence.

If markets are unable to function, then public alternatives are warranted (lighthouses, fire protection, national defense are classic examples of functions better performed by government).

An alternative that should be considered is a state-run medical malpractice insurance pool that would supplant reliance on private insurance companies alone. Medical service providers would pay into a pool and awards can be paid out of that pool. The costs of administering the program would have to be paid (and administrative costs may well be higher than comparable costs in well-run private insurance companies), but there would be no profit taxed to the program. It could more clearly function as a pass-through in which premiums go for award damages.

Such a system would afford a number of incidental advantages as well. All medical providers would be required to participate and would be indemnified and protected by a single system.

Currently, most medical providers are subject to suit in the courts of other states utilizing state long-arm statutes and in federal court under diversity jurisdiction. A state-sponsored system would stand the greatest chance of enforcing a robust cap on damages. For one thing, such a program would benefit from recent developments in the doctrine of federalism by the Rehnquist-led U.S. Supreme Court that strongly protect states from lawsuits in a variety of contexts through immunity.

What about injured patients? They should be allowed actual medical expenses without limit. Awards for pain and suffering should be capped. $250,000 has been suggested widely as an appropriate cap; the actual number is perhaps best arrived at by political give and take in the various state legislatures.

A better way, if possible, would be a more flexible approach that would allow the state-run insurance pool administrator to set the cap within a prescribed range as an aspect of regulating the pool’s operation and preserving its fiscal integrity. Legislative cap-setting is necessarily less flexible since most state bodies meet less frequently and must focus the question of cap-setting in competition with other issues.

Medical service providers would be protected against malpractice awards and patients can be assured of medical care without perturbations produced by the legal system. Physicians who are too frequently sued successfully might be subject to review by the pool and perhaps should lose coverage. This would be a sanction on the negligent provider apart from censure by professional regulatory boards.

Lawyers would still ring case on behalf of injured patients. The stakes would be lowered by the cap and hence, the potential reward would be less. Perhaps some attention to paying for meritorious suits should be included. Replacing the American rule on legal fees and allowing recovery of fees where the plaintiff prevails would provide compensation for legal representation that would come from the pool rather than from the patient’s award. This would seem proper.

The journey toward comprehensive tort reform should properly begin with fixing the medical malpractice crisis. But it should not end there.

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