The costs associated with these unmeritorious lawsuits are significant, representing
a substantial burden to healthcare providers who must absorb these higher costs
through rising malpractice insurance premiums. Plaintiff attorneys and other
self-proclaimed protectors of the public assert that frivolous lawsuits are
the exception, rarely result in awards, and point to the prevalence of medical
errors and/or miscreant insurance companies as the cause of high medical malpractice
insurance premiums.
In its May 11, 2006, issue, the New England
Journal of Medicine (NEJM) published an article, "Claims, Errors, and
Compensation Payments in Medical Malpractice Litigation," based on research
conducted by the Harvard School of Public Health, that may not settle the tort
reform debate but does provide a fair-minded evaluation of the validity of medical
malpractice claims. The aim of the study was "to measure the prevalence, costs,
outcomes, and distinguishing characteristics of claims that did not involve
identifiable error." The Harvard researchers studied a random sample of 1,452
closed malpractice claims from 5 medical malpractice insurance companies and
assessed their merits to determine whether the claims were appropriately resolved
by the medical malpractice system.
The Harvard study is a good attempt at bringing objectivity to the medical
malpractice litigation debate; however, it will hardly end arguments on the
issue of whether frivolous lawsuits are stifling the legal and healthcare systems.
The authors make these three points in their conclusion:
- "Claims that lack evidence of error are not uncommon, but most are denied
compensation."
- "The vast majority of expenditures go toward litigation over errors
and paying claims associated with errors."
- "The overhead costs of malpractice
litigation are exorbitant."
We take issue with the last two points in the authors' conclusion.
Meritless Claims Are Hugely Expensive
In their study, the authors determine that in over 33 percent of the claims,
there was no medical error, and readily point out in most of these, the claimant
did not receive any compensation, either in the form of a settlement or court
judgment. According to the authors' findings, defense costs represent less than
20 percent of the total direct expenditures associated with medical malpractice.
Therefore, defending meritless cases can be a nuisance, but relatively speaking,
is not a particularly expensive nuisance.
The economic costs of claims lacking clinical errors are significantly understated
by the authors. The huge costs to society of the practice of defensive medicine
are viewed as "indirect costs" by the authors and were therefore not captured
in the study. The study also did not consider the incalculable personal and
professional costs of being named as a defendant or co-defendant in the typical
shotgun approach of the trial bar to malpractice litigation. These costs are
difficult to quantify, but cannot be ignored.
To be fair, in the context of malpractice litigation, the term "frivolous"
is not very precise and is often used by people to make a point. A better term
is the word "meritless." In other words, no indemnity was due the patient given
the facts of the case.
Meritless cases must be investigated and defended resulting in the outlay
of what is known as allocated loss adjustment expenses (ALAE). According to
information from the Physicians Insurers Association of America (PIAA), an organization
consisting of many of the physician-owned liability insurers, of the more than
10,000 claims closed in 2005, only 24 percent of these cases had an indemnity
payment. Yet, the ALAE paid for those claims totaled more than $172 million,
averaging almost $21,000 in expenses per meritless claim.
The PIAA statistics are in line with data from a recently released study
from ASHRM/Aon that found an average of $17,400 of paid ALAE on each case closed
with no indemnity. The Ohio Department of Insurance similarly found in a report
released in November 2006 that almost 80 percent of malpractice cases closed
in Ohio during 2005 resulted in no indemnity being paid, but each case incurred
an average of over $24,000 to defend.
One of the very best published databases (as well as one of the only existing
and ongoing databases) for closed medical malpractice claims is the PIAA Data
Sharing Project. The PIAA Data Sharing Project began in 1985 and is now a cumulative
study of 20 years of closed claims against physicians comprising over 230,000
closed claims as of December 31, 2005. Member companies of the PIAA contribute
the data on closed claims against physicians. It tracks such data elements as
loss experience by specialty, loss causation, and expense and indemnity payments,
among others.
In the PIAA cumulative study, the ALAE associated with claims closed without
an indemnity payment ($2,112,632,512) exceeded
that of claims closed with an indemnity payment ($1,836,577,204) by more than
$275 million. This directly contradicts the authors' contention in their conclusion
that in most malpractice litigation, expenditures are driven by errors and the
payments for them.
Whereas these authors believe most dollars spent during litigation are used
appropriately for the payment of errors, the Government Accountability Office
(GAO) concluded otherwise in 2003, finding that the results of the litigation
system "are largely random and unpredictable." The example used by the GAO as
an illustration was obstetricians and hospitals being sued for babies born with
brain damage despite strong evidence in the medical literature that the causes
often occur in utero and are not controllable
by the attending physician. Probably the most often asserted breach of the standard
of care in catastrophic delivery cases is failure to timely perform a cesarean
section (C-section). It is not surprising then that the C-section rate in this
country has steadily increased, although to reiterate, the authors did not consider
the indirect costs such as defensive medicine in their analysis.
What Drives "Exorbitant" Malpractice Litigation Costs?
Are the "exorbitant" overhead costs of malpractice litigation attributable
to greedy, high-cost malpractice insurance companies? We think not, as we seek
to demonstrate below.
Administrative costs for most malpractice insurers are much lower than the
property/casualty insurance industry average. In the most recent medical malpractice
insurance crisis, some needed stability was provided by the fact that 60 percent
of the commercial medical malpractice insurance market was controlled by provider-owned
companies as are the member companies of the PIAA. This is significant, because
unlike stock companies, the provider-owned companies typically have lower expense
ratios, which is at least partly attributable to their lower expectations for
return on equity (ROE), typically in the 4-5 percent range versus 10-20 percent
for stock companies.
The aforementioned PIAA cumulative study indicates that the ratio of expense-to-indemnity
dollars paid for all cases is 31.6 cents per indemnity dollar. In the
NEJM article, the authors identify $72,617,594
as defense-related administrative expenditures and, when coupled with the $376,473,069
in indemnity payments, reflects a ratio of about 20 cents spent on defense for
each indemnity dollar paid. This is consistent with, and indeed less than, the
PIAA findings.
However the NEJM study authors are
somewhat misleading when they state that "For every dollar spent on compensation,
54 cents went to administrative expenses (including those involving lawyers,
experts and courts)." They do correctly cite plaintiff attorneys' contingency
fees as a major contributor to overhead costs. Nonetheless, this point is oftentimes
downplayed by the advocates of alternative medical tort systems.
If the purpose of the tort system is to compensate the victim, there is no
justification for excessive contingency fees, which in most medical malpractice
cases consume anywhere from one-third to one-half of any award or settlement.
These contingency fees remain unregulated in most states thanks to the intensive
lobbying of the trial bar. We believe the injured would be much better served
by a move to a sliding scale in plaintiff attorney contingency fees, e.g., attorneys
would receive 33 percent of the first $500,000 of settlements; 25 percent of
the next $500,000; and 10 percent of settlements or awards greater than $1 million.
Consumer advocates and other champions of reform are encouraged to pursue this
change.
Self-Insurers Not Included
One other potential flaw in the NEJM study is the lack of data from self-insured
healthcare entities. Self-insureds constitute a large subset of the medical
malpractice insurance universe. The majority of hospitals maintain a deductible,
at a minimum, and more often, a significant retention of at least $1 million
per claim. Although extremely difficult to calculate, a significant amount of
money is expended on claims (often asserted prior to litigation) against hospitals
that lack evidence of error but are resolved with a monetary payment and/or
a bill write-off. This is done for many reasons but primarily for public relations
and the avoidance of even more expensive formal litigation. The money expended
here comes out of operations budgets or self-insurance funds set aside for malpractice
exposures. These expenditures are material but frequently overlooked in calculating
the cost of the malpractice problem.
Conclusion
The NEJM study authors conclude improvements in the medical malpractice system
depend on improving its efficiency, which will generate substantial savings,
and hint that tort reform is the solution. We agree and believe an increased
utilization of expert affidavits—more than any other tort reform measure, including
non-economic damage caps—will have the greatest impact on combating the problem
of frivolous or meritless lawsuits. We also support limitations on plaintiff
attorney contingency fees in order for appropriate compensation to ultimately
reach the injured.
Paul Greve,
JD, RPLU, is currently senior vice president/senior consultant in the Willis
Healthcare Practice. In this role, he monitors national and state malpractice
trends as they affect insurance and risk management. Mr. Greve has held risk
management and general counsel positions in major hospitals in Ohio and has
worked for two malpractice insurers. He has been a board member of both the
Ohio and Indiana Societies for Healthcare Risk Management, is the past president
of the Ohio Society for Healthcare Risk Management, has co-chaired symposiums
for the Professional Liability Underwriting Society, and testified before Florida
Governor Jeb Bush's Select Task Force on Healthcare Professional Liability.
He received his bachelor of arts degree from Ohio Wesleyan University and juris
doctor from Capital University School of Law. A frequent author of articles
and textbook chapters on risk management and medical-legal subjects, Mr. Greve
can be reached at