Rethinking Patient Compensation
A seldom-discussed way of reducing the cost of healthcare
Healthcare is difficult. It is virtually impossible to provide affordable, universal care, while also maintaining sufficient innovation incentives. In America, the healthcare system leaves millions uninsured, costs far more per person than any other nation, and yet Americans aren’t living longer or healthier than their comparable developed-world counterparts.
There are many reasons for America’s healthcare deficiencies, but for today I will focus on one particular cause: the high cost of medical malpractice suits. In America’s litigious culture, doctors have to purchase expensive insurance plans for themselves, some costing over $200,000 a year, to protect them when sued. This cost is trickling down to you, your insurer, and your employer.
Why Malpractice Suits Cost So Much
In malpractice claims, there are typically three types of compensation or “damages,” Special, General, and Punitive. Special Damages are those that have a fixed dollar amount (like lost wages or medical bills). General Damages are those that are intangible (pain and suffering, emotional distress…etc). Finally, Punitive damages are intended to punish a defendant. Usually, a court will order punitive if the offender has been grossly or willfully negligent.
While we might pride our judicial system’s alleged presumption of innocence, in reality, the deck is stacked against defendants. Plaintiffs’ attorneys often work for free in exchange for a portion of the final settlement. Defendants, on the other hand, are forced to outlay huge amounts of money to defend themselves, with few avenues to recapture these funds…even if ultimately found not guilty.
Plaintiffs attorneys know this. They understand that even if their case’s merit is weak, they can likely win a settlement because the defense will pay tens of thousands to settle early. These settlements are based on the risk/cost analysis of going to trial. With no cap on recovery and increasingly explosive jury verdicts, this calculation is easy; open the checkbook wide and do it early.
More often than not, these verdicts have little connection to the facts of the underlying cases. They are also unpredictable, with some deserving claimants getting little or nothing, while other undeserving claimants getting life-changing sums of money. Either way, these costs are ultimately borne by the broader population in the form of higher healthcare premiums.
There are indirect costs too. To protect themselves against future lawsuits, doctors in America practice what is called “defensive medicine.” That is, they order duplicative/unnecessary testing and procedures for patients. They order these tests in hopes that it will bolster their defense should they be sued for malpractice. It is the “I did everything I could have” defense, and it’s expensive. It is estimated that about one in four dollars spent each year in healthcare is done so defensively…or an incredible $650 billion a year.
All of this is to say, shake-down settlements, attorneys fees, and defensive medicine is running up the cost of healthcare and taking a direct bite from your paycheck. This needs to change.
Tort Reform could ease the burden on defendants and lower malpractice premiums. Tort Reform is a broad term encompassing a number of actions, all intended to 1) Reduce the potential cost of lawsuits and 2) Reduce the incentive to file frivolous lawsuits. Here are some examples of Tort Reform actions:
1) Reduce the statute of limitations for filing claims. The evidence needed to defend lawsuits diminishes over time. Shortening the Statute of Limitations ensures that defendants are able to defend themselves and are not forced to settle.
2) Cap total General Damages that can be awarded. Jury verdicts can sometimes be in the millions of dollars for pain and suffering. These huge outliers are providing a perverse incentive to dramatically inflate accusations while forcing defendants to settle early to avoid losses. A cap would reduce this incentive and limit risk.
3) Amend Joint and Several Liability. In many states, plaintiffs can collect money from anyone found liable, regardless of their degree of liability. This results in lawsuits directed against the deepest pockets, even if that party is only tangentially connected to the claim. This is fundamentally unfair and should be abolished.
4) Amend the Collateral Source Rule. In many states, plaintiffs can double-dip on damages. If they have medical bills as the result of an accident, for example, but those bills were paid by their own health insurance, they can still sue for those damages and collect what their health insurance already paid. This is flatly wrong.
There is evidence that Tort Reform works to lower healthcare premiums. The American Action Forum found a statistically significant negative relationship with states that adopted Tort Reform, on insurance premiums, with some states seeing total premium declines of 2.7%.
This isn’t world-changing, but given the scale of the healthcare industry, even a few percentage points can save taxpayers and consumers billions of dollars. It is a fair bet, however, if Tort Reform were implemented on a national scale, the dividends would be considerably greater.
I believe that Tort Reform doesn’t go far enough because many doctors will still practice defensive medicine. To fully address this problem, we need to rethink and re-imagine patient compensation along the lines of the existing Workers’ Compensation System.
One idea is the aptly named Patient Compensation System, which would transfer the processing of claims from a judicial to an administrative one. As a condition of care, patients would waive their right to sue their doctors. Instead of juries and judges adjudicating claims, an independent board of specialists would determine if a claim has merit, while a separate compensation committee would determine the compensation due. My proposed local Medical Administration Boards, would be ideally suited to adjudicate these claims.
The intent is to reduce the time required to conclude claims from years to months, make compensation more predictable/fair, and eliminate the litigation expenses that greatly inflate costs, thereby discouraging defensive medicine and ultimately reducing healthcare premiums across the board.
The Bottom Line
If America is going to improve healthcare quality and coverage, it needs to first get the price under control. Tort Reform is but one arrow in the quiver that may get us closer to quality and affordable care for everyone. When combined with a risk-adjusted capitation model, we may be able to build an innovative, affordable system, that covers everyone.