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Improve Medical Malpractice Law by Letting Health Care Insurers Take Charge
Published online by Cambridge University Press: 01 January 2021
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The general consensus is that reform of medical malpractice law should be part of the health care system's overhaul. Medical malpractice litigation results in the expenditure of tens of billions annually, largely paid out of health care insurance funds and mostly (roughly two-thirds) paid to defendants' and plaintiffs' lawyers. By all accounts, this tort law regime ill serves the basic deterrence and compensation goals of civil liability. The causes and magnitude of these failings are disputed, and many typical reform proposals sidestep the basic problems and may do more harm than good. In contrast, we advance a straightforward way to improve both deterrence and compensation. Essentially, the proposal is to remove current legal limitations on the scope of insurance subrogation that bar private and public health care insurers from “buying” the whole of their insureds' potential medical malpractice claims in exchange for lower premiums and taxes and expanded insurance coverage. Our proposal’s benefits accrue regardless of the cause and magnitude of the failings of malpractice law or the further reforms that might be adopted.
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- Copyright © American Society of Law, Medicine and Ethics 2011
References
See, e.g., Stawikci, E., “Obama's Health Care Olive Branch to GOP Addresses Malpractice Reform,” MPRNews, March 4, 2011, available at <http://minnesota.publicradio.org/display/web/2011/03/04/health-courts/> (last visited May 19, 2011); Savage, D. G., “Obama's Talk of Medical Malpractice Reform Surprises Both Sides,” Los Angeles Times, January 28, 2011, available at <http://articles.latimes.com/2011/jan/28/nation/la-na-medical-malpractice-20110129> (last visited May 19, 2011); Weiler, P. C. Hiatt, H. H. Newhouse, J. P. Johnson, W. G. Brennan, T. A. Leape, L. L., A Measure of Malpractice: Medical Injury, Malpractice Litigation, and Patient Compensation (Cambridge: Harvard University Press, 1993): At 10–12.Google Scholar
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By eliminating fortuitous factors such as whether treatment-related injury stems from malpractice or non-tortious medical accident, UIS promotes the interest of risk-averse insureds in minimizing variance in the amount of insurance coverage for a given type and severity of loss. Shavell, S., Economic Analysis of Accident Law (Cambridge: Harvard University Press, 1987): At 186–199. For example, under UIS, an injured insured would receive the same amount of first-party insurance coverage for the cost of treating a bacterial infection regardless of whether it arose from malpractice or circumstances unrelated to medical care.CrossRefGoogle Scholar
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“Tort premium” refers to the increase in health care prices generated by potential malpractice liability and passed through to health care insurers. In other words, the potential malpractice recovery is not free: Patients, through their health care insurers, are legally compelled to pay for this tort coverage upfront, despite its failure as a mode of insurance.Google Scholar
Such recovery might be viewed as a form of supplementary insurance that can fill a gap in the patient's standard coverage. For analysis of this argument and the unlikely nature of the hypothesized gap, See Polinsky, A. M. Shavell, S., “The Uneasy Case for Product Liability,” Harvard Law Review 123, no. 8 (2010): 1437–1492, at 1465–1469.Google Scholar
Thus, for example, if there is a 10% chance of losing $100 from malpractice, then, all else equal, an injured patient could recover $100 in tort damages or $100 in health care insurance benefits under UIS. UIS achieves parity with tort by enabling insurers to convert the expected malpractice recovery of $10 ($100 × 10%) into the premium (or tax) that funds insurance coverage of $100. Obviously, all else is not equal: No individual fearing catastrophic loss from serious personal injury caused by malpractice or otherwise would, or in fact does, rely on the “tort insurance” A plaintiff might “strike it rich” in tort – an unlikely prospect given the less than 30% chance of winning at trial and the over 30% charge against the recovery for attorney fees and other litigation costs – but because risk-averse patients must pay the “tort premium,” they are made worse of where “tort insurance” (or any insurance) covers more (or less) than the full loss. See Shavell, , supra note 7, at 186–199 (explaining the theory of optimal insurance coverage and its substantiation by insured behavior).Google Scholar
This expectation should also hold when the health care provider has an employment or other agency relationship with the insurer. As in the many similar situations where principals are concerned about loss due to agent mistake or misconduct (e.g., banks bearing the risk of teller error or embezzlement), insurers would adopt methods to reduce the risk and require providers to secure indemnification against loss by obtaining liability insurance Price competition from other types of insurers will drive the subgroup that supplies medical services through employees or agents to reduce premiums by requiring liability insurance coverage for both economic and non-economic harm from malpractice.Google Scholar
Nor does our proposal preclude the post-accident sale of accrued malpractice claims, although we believe such ex post market transactions would be decidedly inferior to those fostered by UIS in the ex ante, pre-accident market for potential claims. Among the major comparative advantages of the ex ante market is the relatively low cost of claim acquisition. If sales occurred ex post, the parties would have to estimate and haggle over the particulars regarding actual malpractice conduct, liability, and damages. In contrast, pricing potential claims when coverage commences involves a straightforward calculation based on the insureds' risk-profile information (which insurers normally possess for purposes of determining premium and tax charges and projecting insured losses) and on the average probability of medical accident resulting from malpractice.Google Scholar