Malpractice, Insurance, and the Feds

June 1, 2005
Sloan: the injustice of caps

Sloan: the injustice of caps. Les Todd.

The U.S. spends $1.65 trillion a year on health care--15 percent of its gross domestic product. The culprits, says President Bush, are large medical malpractice awards. He has proposed legislation that would cap awards for noneconomic damages at $250,000. But plaintiffs' lawyers and consumer groups have raised questions as to just how effective such legislation would be in reducing costs. Frank Sloan, J. Alexander McMahon Professor of health policy, law, and management at Duke, comments on the dynamics of the debate and the complexities confronting a lay public.

On the one hand, you have President Bush and the American Medical Association blaming "frivolous lawsuits" and malpractice awards for the spiraling costs of health care. But we see studies, including a recent one by Duke professors looking at Florida, that suggest that it's not the lawsuits but market dynamics and the business practices of insurance companies. Which is it?

First of all, Bush doesn't know if they're frivolous or not because he hasn't looked at them. Secondly, let's assume that health-care costs are high because of medical malpractice. Let's pick a number. Let's say they're 25 percent too high. And let's put in anything you want to get these costs under control. Now what happens the next year? The next year, patients are not having the tests, the surgeries, they're not being hospitalized. Demand is down by 25 percent. You go by clinics, and they're boarded up. Boy, these guys are really altruistic! That they're actually advocating a loss of business? Now who would do that? Would the university? Would they say, we're in favor of something that would cut out a quarter of our students? No way. So there's some truth to both sides.

But awards are increasing?

Yes, but they're creeping up. And that's not consistent with the jerkiness in the pricing of coverage by insurers. At its outset, malpractice insurance was largely a state market. The idea of the enterprise was not to make a big business. It was to provide affordable and reliable coverage to the physicians in that state. But then, companies got the idea that business was so good they were going to go out of state and become big. It's sort of like what you see with the Baby Bells. And in order to get business, to get a physician to talk to them, they had to say, Hey, come to me, I can offer you a better price. They got aggressive, and they underpriced their coverage. And now they have to catch up. They spiked prices in 2002. But they probably should have been raising them all along.

Would the caps Bush is proposing be effective?

Caps will reduce premiums and reduce losses. There's plenty of evidence to support that. That doesn't mean they're just. But it means that if you want a tool to reduce premiums and losses, there's nothing like a damage cap. I feel very confident about that.

When would $250,000 not be a just award?

Here I am, a kid, and my brain was deprived of oxygen. And I'm not too smart. And I can't walk real well. And I need therapy my whole life; my family has to watch out for me all the time. Now, it's not that I didn't get into MIT, and therefore I'm suing. It's that I'm in bad, bad, bad shape. And I'm going to live as long as you are.

Basically, the little cases have little damage, and they're way below the cap. So you're talking about me. And if you cap it at 250, you're cutting me off. You could say, Well, you're getting all your economic loss. And you're only limited to $250,000 on the other side. But what I'm getting are nominal dollars. So I have this life of suffering. And I don't really have the money to take care of myself.

So when I look at the injustice of caps, I would say, they're not indexed for inflation. This is a real problem. Who would like to be in a business in which you said, 'Hey, buddy, this is your salary, and we're not increasing it'? If we wanted to apply that principle elsewhere, we could apply it to doctors. In fact, you know, that sounds like a great idea for cutting costs. Put a cap on their salaries. I mean, it's identical, right? It's public policy. Cap 'em. Federal cap 'em. No doctor should earn more than $300,000. You can raise your kid. Fine. We're paying more for health-care costs than any other country, so what's wrong with that? And you could say, But, people will be hurt. Well, we're not asking if people will be hurt by caps, are we?

How are doctors faring now? Are the higher premiums driving them out of business, as Bush has charged?

Let's say I'm a practicing doctor, and I'm having trouble with managed care. And I'm having trouble with the government, and nobody wants to raise my fees. And then along come the medical-malpractice insurers raising the premium 40 percent. Well, that really cuts in deep, cuts into my income. So, of course I cry out, and I look to the government to intervene.

But are doctors leaving? I've heard that so much. Everybody can tell you an example of a doctor leaving. And I don't think they're lying. But it's not the case across the board. In North Carolina, between 2002 and 2003, the number of doctors increased. Now, they may have increased more before. But I think if you were to look at other industries in the state, I don't think in any of them have we seen increases in employment. So it's awfully hard for me to turn an increase into a decrease. In Pennsylvania, for instance, they say that obstetrician-gynecologists are leaving. Now it could be that some of them aren't delivering babies, but the number of them actually went up between 2002 and 2003. So these numbers can be used any way you want to use them. It could be that a doctor left, and another doctor bought his practice and moved in. So the fact that he left doesn't mean that there's no new doctor. I mean, if you look at I-40 to Tennessee, there are people leaving the state and there are people coming in. If you just look at one lane, that might give you one impression, but if you looked at both lanes, you'd get a different impression.

But the public doesn't want to get into the details of what's going on. They're looking for a villain. So is the press. Things like regulation, reinsurance, profitability--these kinds of questions are not terribly interesting to them. But it really requires knowing that kind of material to understand the insurance industry, and people just aren't willing to invest the time. You talk to Congress, or you talk to the state legislature, and by the time you get there, they are so hyped up, so excited and lobbied that you can't even discuss it in a reasonable way.

In the public interest, in the interest of the doctors and the patients, we need to think about a balance. We need to consider the issue from all perspectives.