Moore School of Business

Tort Reform: What Do We Really Know?

I Dr. Helen Doerpinghaus f you have turned on a television or visited your favorite news Web site lately, you are probably well aware of the national debate on tort reform.

Medical malpractice insurance has received most of the attention. Proponents of tort reform argue that runaway court awards have driven malpractice insurance premiums up, making it difficult or impossible for some physicians to stay in practice. Physicians are prescribing extra tests and treatments, simply to protect themselves in this litigious climate. Doctors and hospitals aren’t the only losers in the system. Everyone suffers since rising malpractice insurance premiums and defensive medicine practices drive up total health care costs.

Product manufacturers and other businesses complain of capricious court awards and rising liability insurance costs as well. Consequently, many states have enacted tort reform legislation in an effort to make it easier for doctors, manufacturers, and other businesses to operate. Among the various insurance tort reform initiatives we hear about today, perhaps the most highly publicized is the “cap” or limit on victim non-economic damages (such as pain and suffering).

Confusing Debate

Listening to the tort reform debate can be confusing. Proponents of tort reform claim that liability costs keep the United States from being competitive, make the health care system unnecessarily expensive and inefficient, and keep new and innovative products off the market. Opponents claim that imposing costs on the parties best able to prevent the loss encourages safety and provides compensation for those who have been harmed. What are we trying to achieve through our tort system? Are we trying to encourage safe behavior through imposition of liability? Do we believe that such liability will improve the quality of health care delivery? Will a cap on non-economic damages, the most common reform suggestion today, reduce liability and health insurance costs? Researchers have tried to answer these questions, and have come to some agreement.

First, everyone agrees there is very little solid data from which to draw our conclusions. This is somewhat surprising given the sophistication of our legal system and of the insurance industry. It is also surprising given the vehemence of the debate. We need data on how many tort claims are made, how many plaintiffs receive awards and under what circumstances, and how much is paid for economic and non-economic damages. We need information about how various legal rules affect the quality of care, the availability of care, and overall health care costs. Without data it is difficult to know how efficient or inefficient our current system is and to predict the extent to which particular reform initiatives may change the status quo.

Second, virtually everyone agrees that other factors besides rising court awards affect medical malpractice insurance price and availability. Insurance companies depend on investment income for profitability. Falling stock prices and low interest rates have hurt property-liability insurers in the last few years. Under-reserving for losses has adversely affected insurers, and increased premium revenue is required to shore up reserves.

Third, the insurance business cycle is also a factor. Property-liability insurers moved from a “ soft market” with low prices and ready availability to a “hard market” with rising prices and availability constraints, and businesses experienced significant rate increases as a result. Again, without good data, the effect of these and other factors cannot be measured, but there is no question that these drivers are significant, perhaps more so than the size of non-economic damage awards.

What Now?

Given the absence of sufficient data, should we fight “analysis paralysis” and push for a state or even a federal cap on non-economic damages anyway? Some evidence suggests that caps on damages reduce overall medical malpractice insurance prices, even though they do not seem to halt continued increases. This suggests that factors other than caps are at least as important as premium cost-drivers. Imposing caps requires us to answer the philosophical question of whether victims should get paid less than what a judge or jury estimates the appropriate loss to be. Further, do we believe that caps will affect the price of health care itself? Despite distrust among the many stakeholders in the tort reform debate, most share the overall goals of improving the efficiency and effectiveness of the health care system.

Acknowledging the need for reliable data, putting systems in place to collect the data, and investigating additional reform alternatives all make sense. Better information and a cooperative effort among all stakeholders—businesses, insurers, medical associations, bar associations, and consumer advocates—hold the most promise for efficient and fair tort reform in the long run.

—Helen I. Doerpinghaus, Professor
Moore School of Business

Faculty Essay

Dr. Helen Doerpinghaus