Tort Reform and Its Impact on Medical Malpractice Insurance
Will Non-Economic Damage Caps Help?
March 2003
The medical malpractice insurance industry
is definitely in crisis, with many insurers refusing to cover hospitals and
physicians. This scarcity along with skyrocketing costs are thought to be the
result of numerous professional liability claims and lawsuits. Tort reform proponants
list non-economic damage caps as the number one medical liability reform measure.
However, non-economic damage limitations have their greatest impact on lowering
hospital, and other institutions’, rates rather than those rates assessed to
physicians.
by Charles
Kolodkin
The Cleveland
Clinic
Very few observers of the medical malpractice insurance industry would disagree
that the situation today has reached the "crisis" stage in many jurisdictions,
with "crisis" being defined as an unstable or crucial time or state in which
decisive change is impending. Indeed, such change is already occurring. This
is evidenced by the scarcity of insurance carriers now interested in covering
hospitals and physicians. Many companies previously serving this industry no
longer do so, including St. Paul, MIIX, The Reciprocal Group, PHICO, and Frontier.
Those still actively underwriting this coverage are reducing the volume of their
business. The decrease in supply, that is, reduction in the number of carriers
offering malpractice coverage, coupled with several years of significant underwriting
losses, has produced unprecedented pressure on premium rates. As a result, most
healthcare providers are experiencing premium increases to levels never before
seen. The cost of professional liability insurance is reaching a point where
it is unaffordable to many healthcare providers.
Is there a solution? Where can a citizen (or doctor) turn to for help in
times of crisis? You guessed it: the legislature. But will the politicians do
anything? Absolutely. One thing that can be counted on is legislators will pass
laws designed to correct societal problems, in our case the medical malpractice
insurance problem. (Here, the term "legislature" refers to an individual state’s
lawmakers, but may also be applied to the U.S. Congress.) The degree of legislative
action will be directly influenced by the acuity of the particular state’s problem,
with states such as Pennsylvania, West Virginia, Texas, Florida, Mississippi,
and Nevada seeing more activity than the stable venues of California and Indiana.
Of course, the form of this legislative activity will be categorized as "tort
reform," but what does tort reform entail and what impact will it have? In the
following paragraphs, the most common tort reform provisions are identified
and briefly summarized. The article then focuses on perhaps the most talked
about, if not the most important reform measure: non-economic damage caps, and
offers commentary on the likely effect of these provisions on the medical malpractice
insurance industry.
Top 10 Medical Liability Reform Measures
The following initiatives have been frequently enacted by state legislatures
to attempt to stem the rising cost of medical malpractice insurance and assure
the availability of adequate coverage. Not all measures have been used by each
state and in fact, the specific provisions vary widely from jurisdiction to
jurisdiction.
| 1 |
Limits of non-economic damages |
| 2 |
Evidence of collateral source payments
is permitted |
| 3 |
Limits on attorney contingency fees |
| 4 |
Advance notice of a claim |
| 5 |
Statute of limitations |
| 6 |
Periodic payments of future damages |
| 7 |
Alternative dispute resolutions |
| 8 |
Good Samaritan provision |
| 9 |
Limitations on joints and several
liability |
| 10 |
Expert affidavits |
Limits on non-economic damages. Under such
initiatives, the amount of money a claimant may recover for "non-economic" damages
in a claim against a healthcare provider for medical negligence is limited to
a specific sum, for example, $250,000. Non-economic damages are sometimes called
"general damages" and refer to things such as pain and suffering, disfigurement,
and loss of consortium. Economic damages, such as lost earnings, medical care,
and rehabilitation costs, are not included and therefore, are not limited by
the cap.
Evidence of collateral source payments is permitted. Under this reform measure, a defendant in a medical liability action is able
to introduce evidence of collateral source payments (such as from personal health
insurance) as they relate to damages sought by the claimant. A jury informed
of the existence of collateral source payments then uses its discretion in determining
whether or how these sources influence an award of damages. Whenever a defendant
introduces such evidence, the claimant is usually allowed to introduce evidence
of the cost of the premiums for such personal insurance.
Limits on attorney contingency fees. This reform
measure enables a greater portion of a settlement or jury award to go directly
to a claimant by placing reasonable limits on contingency fees paid to plaintiff
attorney. In California, an attorney’s contingency fee is limited to 40 percent
of the first $50,000 recovered; 33 percent of the next $50,000; 25 percent of
the next $500,000, and 15 percent of any amount exceeding $600,000.
Advance notice of a claim. This is an often
seen, but modestly effective reform that is designed to further the public policy
of resolving meritorious claims outside of the court system. A claimant is required
to give some notice (for example 90 days) of an intention to bring a suit for
alleged professional negligence. Presumably the parties will agree to a resolution
of their dispute without the need for litigation.
Statute of limitations. The time limit a plaintiff
has to initiate his cause of action is proscribed by statute or case law. Debate
regarding statutes of limitation is usually not as contentious as other tort
reform measures. For example, in California, a claim for alleged medical negligence
must be brought within 1 year from the discovery of an injury and its negligent
cause, or within 3 years from the injury.
Periodic payments of future damages. This measure
enables a defendant-healthcare professional to elect to pay a claimant’s future
economic damages in periodic amounts. An annuity can be purchased by the defendant
to pay the cost of the judgment over time that is less expensive than making
a lump sum cash payment to the plaintiff. Importantly, the danger of a claimant’s
wasting of an award prior to actual need is reduced.
Alternative dispute resolution (ADR). This
is a statutory provision that requires the litigants to attempt to resolve their
case without a time-consuming and expensive trial. Arbitration, mediation, and
judicially conducted settlement conferences are types of alternative dispute
resolution processes. Binding arbitration, as opposed to non-binding, is highly
controversial since the jury trial is removed from the process and parties are
compelled to assent to the decision of the arbitrator. ADR activities are commonly
initiated by the parties or at the direction of the trial judge, so the need
for a legislative provision is questionable.
Good Samaritan provision. Good Samaritan laws
protect licensed healthcare providers who care for patients or provide services
gratuitously and without pay by not subjecting them to liability for civil damages
arising from the care rendered. The care must be provided in good faith and
not recklessly or wantonly. As its name implies, Good Samaritan provisions further
public policy by encouraging physicians and other healthcare providers to help
people in need without the fear of liability.
Limitations on joint and several liability. In many jurisdictions where a case involves multiple defendants, there are circumstances
in which a healthcare provider may become liable for more than his or her proportionate
share of a damage award. For example, assume a finding of equal liability between
a hospital and physician yielding total damages of $4,000,000; under many joint
and several statutes, a plaintiff could force the hospital to pay $3,500,000
and the physician only $500,000. An increasingly popular reform is to limit
each defendant’s liability to his proportionate share.
Expert affidavits. This provision requires
a claimant/plaintiff to furnish the defendant with a written report from an
expert giving opinion testimony that the defendant’s care or conduct departed
from accepted standards of medical treatment. These prerequisites are designed
to screen out frivolous or nonmeritorious lawsuits at the onset by forcing a
claimant/plaintiff to consult with a knowledgeable person prior to commencing
litigation.
Non-Economic Caps
Limitations or caps on the amount of non-economic damages that can be awarded
to plaintiffs are perhaps the most popular statutory provision advocated by
tort reformers. A principal rationale for caps on non-economic damages is to
remove the element of unpredictability from the process of evaluating damages.
Attempting to quantify a highly subjective concept such as pain and suffering
is inherently complicated, one that produces great disparity from jury to jury.
Accordingly, the valuation of the mental anguish resulting from a particular
event in the same community might generate a $5,000,000 award from one jury
and $50,000 from another.
Certainly an argument can be made that inconsistencies in damage awards are
to be expected and that the evaluation of such factual issues are within the
purview of a jury. In actuality, the principle for the establishment of limitations
on damages in civil cases by a legislature is similar to the one that allows
the same regulatory body to develop sentencing guidelines in criminal matters.
It is generally accepted that the legislature has the innate authority to establish
parameters for the awarding of damages for the overall good of the public. It
is an appropriate use of that power to limit non-economic damages. The central
question is what impact do damage caps have on medical malpractice insurance?
The purpose of non-economic damage caps is to lend some objectivity and uniformity
to the awarding of general damages, while at the same time attempting to remain
fair to all litigants. Statutorily imposed non-economic damage caps typically
vary from $250,000 to $500,000, so when this component is added to special damages,
i.e., past and future lost wages, past and future medical treatment expenses,
plaintiffs are still in position to assert and collect a substantial sum of
money. One only has to look so far as the proverbial brain damaged baby cases,
in which verdicts have traditionally been substantial, to understand multimillion
dollar claims remain, irrespective of the existence of caps on non-economic
damages.
Consequently when studying non-economic damages and the role of damage caps,
it is essential to keep a proper perspective: namely that these pain-and-suffering
payments represent just one piece of the tort cost pie. An estimate by Tillinghast
attributes 24 percent of overall tort costs to awards for non-economic losses,
as shown below. Conceivably, due to the very nature of medical malpractice claims,
a higher proportion of their claim costs may go toward non-economic damages
than in other personal injury claims, though it is unlikely more than one-third
of medical malpractice tort costs pay non-economic losses.
Where
Tort Cost Goes Graph
Will Damage Caps Help?
Notably, the limits of professional liability insurance coverage maintained
by most physicians are not that large, usually ranging from $200,000 per claim
to $1,000,000 per claim. Only a minority of physicians have policies that pay
more than $1,000,000 for each case. For example, in Texas it is common for physicians
to carry insurance policies with just $200,000 in coverage, while in Florida
many doctors have only $250,000 in protection. In comparison, hospitals in these
and other states have much higher coverage limits. Not surprisingly hospitals
customarily have more sophisticated insurance programs, containing substantially
greater financial protection, than physicians maintain. So, can healthcare providers
anticipate non-economic damages caps to favorably impact the affordability of
liability insurance? Yes and no.
In this commentator’s opinion, the consequences and benefits of damage caps
on insurance premiums will be felt by and large by institutions such as hospitals
and nursing homes, not physicians. Hospitals, through a combination of self-insurance
and commercial insurance, carry more coverage than physicians. For the most
part, hospitals maintain insurance programs with coverage limits of at least
$5,000,000 to $10,000,000 on up to over $100,000,000. These programs consist
of sizeable deductibles and several different excess or umbrella policies. Hospitals
are compelled to carry high limits of coverage for several reasons, not the
least of which being their substantial financial assets make them the "deep
pocket" and target of many cases. The effect of non-economic damage caps will
be to help lower the ceiling on court judgments and negotiated settlements.
This, in turn, will provide more relief to the hospital purchasing $25,000,000
in coverage than to the physician buying $500,000.
As is the case with physicians, for the past several years hospitals have
been experiencing rising premiums in both the primary and excess layers of their
liability programs. However in jurisdictions such as California and Indiana
with well-ingrained laws capping damages, hospitals have seen very modest premium
rate increases and a stable insurance environment exists. The reason for this
is damage caps mitigate the likelihood of the "runaway jury" verdict and give
more predictability to the litigation process. Medical malpractice awards of
$10,000,000 and $20,000,000 are simply rarities in states with damage caps,
but more frequent in those without damage caps. Allowing more certainty into
the evaluation process, as is provided by damage caps, in turn encourages settlements,
as the vagaries of a trial are reduced, and the parties can more objectively
negotiate. Removing the wild card nature associated with non-economic damages
narrows the differences between the "unreasonable" offer from the defense and
the "ridiculous" demand from the plaintiff yielding a result both parties can
be satisfied with. Moreover, promoting early resolution of cases has numerous
positive ramifications, not the least of which is the reduction in defense costs
involved in malpractice litigation. But one must not lose sight that $10,000,000
awards are still possible even with non-economic damage caps, although these
will be the result of quantifiable special damages rather than jury sympathy.
Notwithstanding, multimillion dollar cases will be infrequent, thereby creating
a favorable impact on loss costs and premium rates.
As alluded to above, it is questionable how much influence non-economic damage
caps will have on physician claim severity and subsequently, physician insurance
premiums. Today’s $500,000+ case against a physician will likely be a $500,000+
case, with or without non-economic damage caps. However, assuming arguendo that
non-economic damage caps could reduce today’s average $500,000 case, by 50 percent,
and that such caps will reduce frequency by dissuading frivolous claims, it
will likely take several years before malpractice insurance premium rates reflect
this favorable claims trend. Regardless of investment income returns or administrative
expenses, ultimately, premium rates are a function of loss costs. Until it is
demonstrated that loss costs are decreasing or stabilizing, meaningful physician
insurance premium rate relief will not occur.
It is useful to point out there is also a time lag between the enactment
of tort reforms and associated insurance rate relief. This has been the case
numerous times. Clearly the risk bearers want to gauge the degree of effectiveness
of the reforms on claims and litigation before they adjust prices. Often it
will appear there is meaningful reform, but on closer examination the actual
impact on loss costs is minimal. Physicians expecting immediate rate relief
will need to be patient or lower their expectations.
Recently (July 2002), Nevada passed a law that caps non-economic damages
at $350,000. Although it sounds beneficial, a more thorough reading of the statute
states "each plaintiff can be awarded up to $350,000 from each defendant." Thus,
for a single claim event non-economic damages alone might total over $5,000,000
for a father, mother, and child suing three doctors, a professional association,
and a hospital. In the end, appellate courts must render decisions interpreting
and clarifying the law’s true meaning. Healthcare providers and other interested
citizens will need to wait years to learn how these caps actually work, further
shedding light on why tort reforms take so long to make an impact. Politicians
are quick to take credit for solving a problem with the passage of a law, regardless
of its ultimate impact. In many instances, legislation, particularly tort reform
measures, must go through a process of judicial review in order to determine
its constitutionality and the statute's true implications.
Conclusion
The need for reducing the spiraling costs of medical malpractice insurance
is urgent, particularly in a number of states. The panacea most often touted
is enacting tort reforms in those problematic jurisdictions. There is a broad
array of legislative changes proponents of tort reform advocate. Some are more
meaningful than others. Imposing a cap on non-economic damages is the most popular
reform; used in conjunction with other reforms damage caps have proven effective
in lowering long term insurance costs. However, non-economic damage limitations
have their greatest impact on lowering hospital, and other institutions’, rates
rather than those rates assessed to physicians.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.