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Malpractice Reform: Five Steps to Liability by Contract

December 1, 2008
By John C. Goodman

Excerpt from The Handbook on State Health Care Reform, coauthored by John C. Goodman, Michael Bond, Devon M. Herrick, Gerald L. Musgrave, Pamela Villarreal, and Joe Barnett.

Excerpt from The Handbook on State Health Care Reform, coauthored by John C. Goodman, Michael Bond, Devon M. Herrick, Gerald L. Musgrave, Pamela Villarreal, and Joe Barnett.

In the mid-1980s, University of Chicago law professor Richard Epstein argued for replacing the tort-law malpractice system with a system in which liability would be determined by contract.

In 1993, Emory University professor Paul Rubin extended Epstein’s idea by describing a reasonable institutional environment for contracts. Insurance companies would contract with providers and then offer people insurance governed by different legal regimes.

While Rubin’s contribution is important, it does not go far enough. In general, market-based (contract) solutions should be encouraged for all medical malpractice claims—both economic and non-economic. The following discussion shows how most malpractice issues could be resolved better in the marketplace.


Step 1
Reform the Tort System

A reformed tort system is one that is governed by the principles of a rational tort system. This is the default system, and all cases of malpractice will be tried in this system unless patients and providers contract out prior to the occurrence of the alleged malpractice.


Step 2
Free the Patients

Under the traditional system, most hospitals and doctors ask their patients to sign a form at the time of treatment releasing the provider from any legal liability in case of negligence. In malpractice suits, courts have routinely dismissed such agreements. This has had an unfortunate side effect: Doctors and patients are unable to avoid the costs of the malpractice system through any contract whatsoever.

A reformed system could give patients and doctors other options while still protecting patients from making unwise decisions when they are least able to negotiate contracts. One answer is for the legislature (or a body designated by the legislature) to decide in advance what will constitute an enforceable contract. Patients would not be required to agree to such contracts as a condition of treatment, but if they voluntarily signed the agreement, it would be binding.

The following are some provisions that should be considered for inclusion in such contracts.


Compensation Without Fault

This provision obligates the provider to compensate the patient (or family of the patient) in the case of unexpected death or disability. In the case of an unexpected death, the amount could be set in advance and generally known to all patients. The amount could be varied by patient characteristics, including the patient’s age, the age of any surviving spouse and children, the patient’s income, and so forth. This is similar to the criteria the current malpractice system uses—but without judges, jurors, lawyers, and courtroom costs.


Adjustments for Risk

Not all medical cases are the same. Even if the probability of an unexpected death is low, complications in one patient may create risks twice as high as for another. There must be a way of adjusting for this, or providers would try to avoid all the harder cases. One possibility is to reduce the amount of compensation for the riskier patient or ask the patient (or the patient’s health insurer) to pay the extra premium needed to insure the event.


Full Disclosure

As a condition of waiving the patient’s legal rights to pursue liability claims under traditional tort law, providers should be required to make certain quality information public. For routine surgeries, for example, hospitals and doctors should post (case-adjusted) mortality rates, readmission rates, hospital-acquired infection rates, and so forth. Providers also should be required to disclose the use of safety measures designed to reduce errors and procedures designed to prevent hospital-acquired infections.


Patient Compliance

Even for simple surgery, patients must comply with certain provider directives, including diet restrictions, full disclosure of medications being taken, and so forth. For maternity cases, compliance in the form of prenatal care is more involved and extends over a longer period of time. Failure to comply in all these cases would result in a reduction in the amount of compensation and perhaps no compensation at all.


Additional Insurance Options

As explained above, legislatures will set minimum requirements for liability contracts. In most cases, insurance companies will then insure those contracts. However, once premiums for a doctor, patient, and procedure are set, patients could increase the coverage by paying an additional out-of-pocket premium.


Advantages of Liability by Contract

A liability-by-contract system along these lines would have a number of compelling advantages, including the following eight.

1. Under this proposal, insurers (rather than patients) would become the primary monitors of health care quality. However, a great deal more quality information would be available to patients than is currently available. If doctors could escape the costs and burdens of the liability system by compensating patients for unexpected outcomes, they would naturally want to insure against such payments. So instead of buying malpractice insurance, they would be purchasing what amounts to short-term life insurance on all patients, say, undergoing surgery.

Although there are currently no life and disability insurance products specifically tied to episodes of medical care, if the contract system becomes widely used, products specifically tied to such episodes are likely to emerge.

2. Medical providers would face strong financial incentives to improve quality. In addition to the fact that malpractice premiums are not closely related to the actual incidence of malpractice, premiums charged to doctors rarely reflect the quality of medicine being practiced.

3. Multiple parties on the medical side would have strong incentives to cooperate in improving quality. Under the current system, a patient undergoing surgery typically is not dealing with a single doctor who is responsible for the entire procedure. Instead, the patient is (implicitly) contracting with several doctors, each as an independent contractor.

4. Patients will receive cash compensation for unexpected outcomes without the stress or expense of a lawsuit. The loss of a loved one is traumatic but so is the prospect of filing a malpractice lawsuit. A better way of facing grief is to be given a check, without the need to talk to doctors or lawyers and endure unpleasant confrontations with an opposing party in litigation. The compensation system envisioned here would put doctors and patients on the same side.

5. Patients and their families could self-insure for additional compensation. The amount that a person would receive in the event of the untimely death of a spouse could be publicized in advance and broadly known. However, families could make adjustments to meet their expected needs. If the amount is too low, for example, families could buy additional life or disability insurance on their own—including (as described above) insurance under the provider’s insurance contract.

6. The social cost of a liability-by-contract system is likely to be much lower than the cost of the current system. Although the figure probably overstates the true number, the Institute of Medicine claims as many as 98,000 people die each year because of medical errors—primarily in hospitals. Suppose that the surviving family members of these patients each received a check for $500,000. The total cost would be less than $50 billion. The total cost of the current malpractice system is estimated to be as much as $200 billion, or four times as much.

Moreover, the current system involves a huge use of real resources—lawyers, judges, courtrooms, and so forth. By contrast, the check-writing solution involves very few real resources—other than monitoring and administration costs and moving money from some people to others.

7. Health care costs for patients would likely be reduced. Ultimately, the cost of any compensation system primarily will be paid by patients and potential patients. Just as the cost of malpractice premiums is embedded in the patients’ cost of care, the cost of a liability-by-contract system will also be passed on to patients (and their insurers).

8. Liability by contract is a socially better way of handling sympathetic cases. Some of the most heart-wrenching cases in malpractice law involve newborns facing the prospect of a lifetime of care. Even if the doctors and hospital personnel committed no error, the parents are confronted with an enormous burden in terms of both time and money. The tendency on the part of jurors, therefore, is to have great sympathy for the plaintiffs.


Step 3
Free the Doctors

A system of liability by contract will not work in all cases. Doctors are unlikely to want to pay the cost of cases with a high probability of death or disability, and it would be unreasonable to expect them to do so. Further, when patients seek care at emergency rooms, no one has time to evaluate the likelihood of death or permanent injury prior to the delivery of care. Even in these cases, an alternative to the current system would seem to be desirable.

Accordingly, medical providers should have the chance to escape the system themselves in cases where contracts are impossible or impractical. In particular, these providers would be able to insist as a condition of treatment that all malpractice claims must be submitted to binding (unappealable) arbitration except in cases of gross negligence.


Step 4
Free the Experts

All too often, expert witnesses in tort cases are “hired guns.” They are selected as witnesses precisely because their testimony can be counted upon to be overly generous to one of the two sides. Further, these witnesses are often handsomely paid, which gives them an incentive to continue the practice and become “professional witnesses.”

These witnesses would have no role in a properly run system of arbitration. The arbitrators would be free to call on real experts who would be agents of the arbitrator rather than agents of one of the two parties.


Step 5
Free the Courts

The reformed system described above should be available in all cases except gross negligence. Medical practitioners should be able to contract away responsibility for mistakes. They also should be able to insure against the consequences of their mistakes. There seems to be no socially defensible reason, however, to allow them to contract out of the consequences of gross negligence.


John C. Goodman (john.goodman@ncpa.org) is president of the National Center for Policy Analysis. His health care blog is at http://www.john-goodman-blog.com/.

For more information ...

More information about the State Health Care Handbook: http://www.ncpa.org/pub/special/20071112-sp.html

The State Health Care Handbook: http://www.ncpa.org/email/State_HC_Reform_6-8-07.pdf

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