Improve Medical Malpractice Law by Letting Health Care Insurers Take Charge

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.

Tillinghast-Towers Perrin, U.S. Tort Costs: 2008 Update, Trends and Findings on the Costs of the U.S. Tort System (2008), at 16–17.

Congressional Budget Office, Medical Malpractice Tort Limits and Health Care Spending, Background Paper No. 2668 (2006), at 1–4.

Windt A. D. , Insurance Claims & Disputes: Representation of Insurance Companies and Insureds, 5th ed. (Eagan, Minn.: West, 2007): At § § 10:5–10:10

Abraham K. S. , Insurance Law & Regulation, 4th ed. (New York: Foundation Press, 2005): At 244–252, 401–407.

Rinaldi E. M. , “Apportionment of Recovery between Insured and Insurer in a Subrogation Case,” Tort and Insurance Law Journal 29, no. 4 (1994): 803–817, at 804–805.

Viscusi K. W. , “Pain and Suffering: Damages in Search of a Sounder Rationale,” Michigan Law and Policy Review 1, no. 1 (1996): 141–177, at 159–161. Our rendition is somewhat stylized to underscore the operational essence of current limitations on subrogation. In practice, insureds often prosecute the entire malpractice claim and insurers enforce contractual or equitable rights to recover their outlays (minus litigation cost) from the judgment or settlement proceeds, or, absent suit by insureds, insurers prosecute the entire claim to recover their outlays, paying over any surplus (minus litigation cost) to insureds. Either way, the economic and non-economic components of recovered damages are split respectively between insurers and insureds. We ignore other practical as well as legal limitations on subrogation as their treatment would complicate but not change the substance of our argument.

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.

Danzon P. M. , “Liability for Medical Malpractice,” in Cuyler A. J. Newhouse J. P. , eds., Handbook of Health Economics, vol. 1B (2000): 1340–1404, at 1370–1371

Brennan T. A. Sox C. M. Burstin H. R. , “Relation between Negligent Adverse Events and the Outcomes of Medical-Malpractice Litigation,” New England Journal of Medicine 335, no. 26 (1996): 1963–1967, at 1963

Baker T. , The Medical Malpractice Myth (Chicago: University of Chicago Press, 2005): At 1–2.

See id. (Brennan et al.), at 1966–1967

see Weiler , supra note 1, at 5

Thaler R. H. Sunstein C. R. , Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven: Yale University Press, 2008): At 208–214

Kessler D. McClellan M. , “Malpractice Law and Health Care Reform: Optimal Liability Policy in an Era of Managed Care,” Journal of Public Economics 84, no. 2 (2002): 175–197, at 175–77, 186–194

Havighurst C. C. , Health Care Law & Policy (Westbury, NY: Foundation Press 1988): At 941 et seq, 1127 et seq.

Id. (Danzon), at 1370–1371

id. (Baker), at 19–21

id. (Weiler et al.), at 6

Peters P. G. , “What We Know about Malpractice Settlements,” Iowa Law Review 92, no. 5 (2007): 1783–1833, at 1787–88, 1817–1818.

Id. (Danzon), at 1369–70

id. (Weiler et al.), at 5

Studdert D. M. Mello M. M. Gawande A. A. Gandhi T. K. Kachalia A. Yoon C. Puopolo A. L. Brennan T. A. , “Claims, Errors, and Compensation Payments in Medical Malpractice Litigation,” New England Journal of Medicine 354, no. 19 (2006): 2024–2033, at 2031.

Tillinghast-Towers Perrin, U.S. Tort Costs: 2008 Update, Trends and Findings on the Costs of the U.S. Tort System, at 17

see Danzon , supra note 8, at 1369–1370

id. (Studdert et al.), at 2026–2027, 2031

Cohen T. H. , Medical Malpractice Trials and Verdicts in Large Counties, Bureau of Justice Statistics, Civil Justice Data Brief, NCJ 203098 (2004), at 1.

“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.

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.

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).

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.

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.