Different River

”You can never step in the same river twice.” –Heraclitus

March 8, 2005

Jane Galt on Medical Malpractice Reform

Filed under: — Different River @ 8:07 pm

Jane Galt has an excellent response to one of the arguments claiming that medical malpractice reform is unnecessary:

People who oppose reforming the medical malpractice laws often like to point out that most medmal cases are resolved in favour of the defendant. “See!” they cry triumphantly. “No crisis!”

But this is hardly a good sign. If the overwhelming majority are resolved in favour of the defendant, that means that a lot of weak cases are being brough to trial. Such cases are no less expensive to defend than cases in which the doctor is at fault. This represents an enormous cost to the system.

Assuming that attorneys are rational actors, and that on net the expected value of all verdicts in malpractice cases in a given year should not be less than zero (or a lot of medmal attorneys would go out of business), then this means that medmal attorneys are in effect playing the lottery: buying a lot of “tickets” that are unlikely to hit, in the hopes of a big payout.

She then points out in passing:

(This presumes, of course, that whether a case pays off is directly related to doctor culpability, rather than essentially random. But if the latter is true, then we need medmal reform more than ever).

But as I’ve pointed out before, whether a case pays off is essentially random (and consequently, as Jane says, we do need medmal reform more than ever).

If malpractice claims were the result of bad doctoring, then bad doctors would have higher claims (on average) than good doctors, and therefore would pay higher rates for their malpractice insurance — just as “bad drivers” (those with lots of accidents) pay more for auto insurance. This is called “experience rating” — your claims experience affects the rate you pay. But medical malpractice insurance is not generally experience-rateda given doctor’s premium depends only on his/her specialty and ZIP code.

There is no law or regulation that prohibits experience-rating in medical malpractice insurance. The lack of experience rating is an outcome of a market process. Surely, if past malpractice claims were a good statistical predictor of future claims, insurance companies could increase their profits by offering discounts to doctors with fewer claims, thus attracting more “good risks” into their pool (that is, more customers from whom they’d collect premiums but for whom they’d not have to pay claims). This would, in turn, force premiums up for “bad doctors” and encourage doctors to practice better medicine to avoid insurance rate increases.

However, this doesn’t happen — insurance companies have not found it profitable to take case histories (as they do for drivers) to determine which doctors are likely to be sued. This means that, essentially, malpractice claims are a random event, statistically unrelated to bad medical care. Sure, some claims are due to incompetent or negligent doctors or hospitals — but not enough, percentage-wise, to make it possible to identify bad doctors or hospitals through their malpractice claims, or to use that information to set insurance rates. This shows that the malpractice problem is systemic, and is the due to a faulty legal system rather than bad doctors.

11 Responses to “Jane Galt on Medical Malpractice Reform”

  1. Dave Schuler Says:

    While I agree with you that the entire malpractice system needs to be reformed and I also agree that number of claims is a poor metric for doctor or hospital performance, I’m still not sure that your argument that insurance premium levels demonstrate that malpractice claims are a random event is correct. Everybody pays the same price for a ticket in a movie theater. Does that prove that all the seats are equally good? What it proves is that theater owners learned that they could get away with it and make more money that way.

    Risks are high (relative to drivers); the pool is low (relative to drivers); the insurance industry is highly regulated (even if there is no law that prohibits experience-rating in medical malpractice insurance); cost of entry is high. Is there really a market in malpractice insurance?

  2. Different River Says:

    Let’s put it this way: Suppose malpractice claims are not random; that is, suppose that for a given doctor, the number of past claims (or some other observable variable(s)) enabled you to predict the number of future claims more accurately than just assuming the average for all doctors in the given doctor’s specialty and ZIP code.

    In that case, I find doctors with lower probabilities of future claims, and offer them insurance at lower rates than they are getting now (based on specialty and ZIP code), but still higher than the expected loss from those claims. They’d be willing to buy insurance from me because they’d save money relative to what they’re paying now, and I’d make huge profits, since I’d be charging them more in premiums than I’d pay out in claims. Furthermore, but pulling the relatively low-risk doctors out of the non-experience-rated pool, I’d force up expected claims per doctor, and thus premiums, in that pool. This would make my experience-rated insurance even more attractive, until I had all the doctors (except the absolute worst ones) in my pool. Then, I could charge each doctor a custom rate (like auto insurance), and they’d all (again, except the absolute worst ones) have a better rate from me than from whoever’s selling non-experience-rated insurance.

    The fact that no one is taking advantage of that huge profit opporunity is a good indication that the huge profit opporunity is not really there. The only thing we need to for that huge profit opporunity to be there is for malpractice claims to be non-random — and if it’s not there, that means that malpractice claims must be random.

  3. Dave Schuler Says:

    I still think that size of the risk and smallness of the pool in any given area has something to do with it, too. How many neurosurgeons are there in Eau Claire, Wisconsin?

    Something that would tend to support your claim is the reluctance of doctors to self-insure. I don’t mean “going naked” I mean actually banding together and self-insuring. If the docs won’t do that it suggests that it’s impossible to spread the risk enough.

  4. Different River Says:

    There don’t have to be — and presumably aren’t — different pools for each specialty and area. If you know the probability that a neurosurgeons in Eau Claire, Wisconsin will be sued (and the average damage award or settlement), then at the appropriate rate you can put them in the same “pool” with obsetricians in Kerrville, Texas. And if there are only 3 neurosurgeons in Eau Clair, Wisconsin (which there are — I checked!), you could use the same rate for “neurosurgeons in Wisconsin cities with population between 50,000 and 100,000)” — or whatever other demographic is appropriate.

    I’m not sure what difference it makes whether doctors band together and self-insure or not. A coalition of doctors still has to decide how much each member has to pay into the pool, and that means that coalition is subject to the same incentives as a for-profit insurance company. If malpractice claims were non-random, a coalition could reduce the payments of its members by measuring the probability of loss and letting in only low-risk doctors — or equivalently, letting in any doctor who wants to join, but using experience rating to set rates so low-risk doctors pay less.

    There actually are coalitions of self-insuring doctors, such as the Texas Medical liability Trust, but they do not experience-rate. They did cut their premiums recently, but that was not due to individual doctor experience, but to a change in state law limiting pain-and-suffering claims, so it applied to all doctors in the state.

  5. Asteroid Says:

    The fact that “a given doctor’s premium depends only on his/her specialty and ZIP code” is the best indication that the system is completely broken, because this does not measure doctors, it measures patients. Specifically, it measures the likelihood of the patient to sue (regardless of reason or merit).

    This will continue as long as any medical treatment other than absolute perfection is perceived as winning the lottery by the public. This will change only by a) somehow convincing an increasingly stupid public that the absolute perfection they demand from medicine (as in no other industry) is ultimately costing them worse, more expensive health care, or b) limitations on rewards from lawsuits and extreme punishments for frivolous claims.

    Until then, you can track doctors all you want. It won’t change anything.

  6. No Illusions Says:

    New Carnival of the Capitalists
    The Carnival is up, this week at Beyond the Brand. Here are a few recommendations from the dozens of entries:Abnu at Wordlab looks at the trouble with lawyers and advertising: lawyers don't have a clue about branding. I can relate to this. Lawyers…

  7. Different River Says:

    Asteroid: It may be tracking patients, or it may be tracking legal systems (e.g., in some states it’s easier to sue; in some ZIP codes people may be more likely to know where to find a lawyer). And the fact that they do rate differently by specialty indicates that bad outcomes — either due to actual incompetence or negligence, or due to bad luck — are different for different specialties. It’s still true that (for example) obstetricians are more likely to be sued than dermatologists, so some characteristics of physicians matter. Just not ones related to carefulness or competence.

  8. Nicholas Weininger Says:

    Are insurers consistently even *allowed* to experience-rate? Given the wide variety of “community rating” restrictions on health insurance providers, it wouldn’t surprise me if there were similar restrictions on malpractice insurers, to “protect the poor young inexperienced doctors from unaffordable rates” or some such. But I have no idea how to find out.

  9. Different River Says:

    Malpractice insurers are definitely allowed to experience-rate. They have experimented with it in the past, but have not been able to make it work, because, basically, the probability of a future claim is not substantially altered by knowledge of past claims.

    See this post by < a href="http://riskprof.typepad.com/tort">Martin F. Grace, Professor of Risk Management and Insurance at Georgia State University, quoting an article by Robert Quinn:

    Unlike many types of insurance, such as automobile insurance, medical malpractice insurance is generally not experience rated, but rather adheres to a type of community rating. For the most part, insurance companies set malpractice premiums according to a physicians’ specialty, type of practice, and geographical location. Although many insurance companies have experimented with experience rating at times, community rating continues to predominate (Sloan 1988).

  10. NZG Says:

    I think a really important part of this debate should be whether or not tort reform will actually reduce malpractice insurance costs, which is the goal is it not?

    Actual malpractice payouts, while certainly shockingly large and crazy in some cases, are actually not that large a percentage of insurance companies costs.

    The Congressional budget office did a really detailed study on this and concluded that malpractice reform probably won’t have much of an economic effect one way or the other.

    A more significant cause of the premium increase is probably the hard market created when The St. Paul Companies left the Malpractice business in 2001…which is precisely when rates skyrocketed.

    No competition + capitalism = high rates.

    my 2 cents,

  11. Thomas Sharon, R.N., M.P.H Says:

    Jane’s argument is interesting, but it’s based on an incomplete picture and assumption of facts not in evidence, so to speak. First, the number of cases that go to trial is but a minority of cases that former patients initiate, with the majority settling before trial.

    Second, a defense verdict does not prove that the lawsuit should never have been pursued, although the plaintiff’s attorney most probably regrets having gotten involved in it. However, there are many reasons for such outcomes, not the least of which is juror bias in favor of physicians.

    Third, the ideological concept of tort reform is not inherently evil because man-made systems are not perfect and we can always benefit from improvements to make things move along more expediently. On the other hand, the way this reform movement has manifested in the real world is trampling all over the rights of victims to seek justice and the courts are now knocking down the so called tort reform laws as being unconstitutional. The counter measures of forcing patients to sign liability waivers is nothing short of extortion, because people in pain and near death will sign anything and agreements signed under duress are usually not enforceable.

    Finally, the bottom line is that no matter which side of the argument that one takes up, we will never have a perfect world where lawyers file only meritorious lawsuits. If that were so, there would be little use for defense attorneys. The solution is that both defense and plaintiff camps need to work with the courts to make the whole process more expedient.

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