|The Tort Reform Debate|
| The Medical Malpractice Insurance "Crisis"
|| Did You Know?
How real is the medical malpractice insurance crisis? We are being told that rising insurance rates are forcing doctors to stop practicing medicine. Jury verdicts are out of control. Frivolous lawsuits brought by greedy trial lawyers drive up the cost of medicine and this hurts everyone. We need caps (the usual proposal is $250,000 for pain and suffering) and limitations and attorneys' contingency fees.
Is there any truth to this? Let's examine each and every one of these claims, and see if we can make any sense out of all of it.
First, let's break these claims into their individual components.
Insurance rates are rising.
Doctors are leaving the practice of medicine.
Jury verdicts are out of control.
Frivolous lawsuits drive up the cost of medicine.
Caps on damages and contingency fees will solve the problem.
Insurance rates are rising. Let us assume this to be true. Put aside the fact that the generality of the assertion makes it meaningless, let's just assume it to be true. What does this fact in itself mean? Insurance is a business. While this seems self evident, it implies a number of truths that seem to get lost in the rhetoric. Like any business, insurance companies are driven by self interest, i.e., to make as much money as possible. They have no concern about the greater good of society. Directors and officers of corporations are duty bound to make decisions that maximize the profits to the shareholders of the corporation. This is just a fundamental fact about corporations, it is not disputed by anyone. I invite anyone who disputes this fact to post his or her disagreement in the forum, and we'll have an interesting debate on the subject.
Since insurance companies are in business to make a profit, they want to maximize their revenues. There are two sources of revenues for an insurance company - insurance premiums and investments. We hear about premiums all the time, but we never hear about investments. But if the revenues generated by investments fall, then the insurance company must raise premiums to make up the difference. Again, this is an accepted fact about insurance companies, and you won't find any real disagreement on this point.
So we know that falling investment income can cause premiums to rise. Yet we hear nothing in the debate about this subject. How important are investment revenues? Think about how insurance works. In year one, the doctor pays the premium. In some states he can be sued years later for malpractice committed in year one. In New York, its generally two and a half years after the last treatment for the condition in question. It can also takes years for the lawsuit to get to trial.
What this means is that the insurance company may collect the premium in year one but not pay any money out for claims incurred in year one for anywhere from three to ten years. During all this time the insurance company is investing the money. Insurance companies therefore must make certain assumptions about the revenue generated by investments in order to predict the amount of money that will be available in the future to pay claims. If those assumptions prove to be inaccurate, the only quick fix is to raise insurance premiums.
Another fact that is often obscured is the fact that insurance companies compete for business. Like all other business, insurance is cyclical, meaning it has good times and bad times. In fact, the insurance industry is notoriously cyclical, and during good times insurance companies engage in fierce price competition to sell policies. It is not unusual for an insurance company to sell insurance for less than the amount of claims they expect to pay. They do this to generate cash flow and one way they justify this is to make exaggerated assumptions about the investment income they will earn on the premiums. Invariably when the cycle snaps the companies are in a bind and must raise premiums.
Although this has occurred countless times, I have never seen an insurance company attribute its increase in premiums to its own irresponsible business practices. I can assure you that you will never see this. Who is going to buy insurance from a company that essentially engaged in speculation? Somebody has to be blamed, and the greedy trial lawyers are an easy target.
Where do insurance companies invest their money? If they are based in the United States they are regulated by state insurance departments and must invest "conservatively." They are not allowed to invest heavily in the stock market, and they typically buy safe interest rate securities such as government bonds. Insurance companies also are one of the largest sources of money for real estate loans, since this is considered a safe type of investment activity. Well, if you have any kind of saving or money market account, you know what has happened to interest rates in the past five years. They are at an all time low. You can check this out, but I believe interest rates have fallen by about fifty percent in the past five years. For insurance companies, this means a dramatic loss in investment revenue. Of course, there are other factors too. The stock market has tanked, and we have been in a recession or stagnant economy for several years. All of these factors have nothing to do with frivolous lawsuits, trial lawyers, out of control verdicts and the like.
Now, here is an interesting fact. Higher premiums mean higher profits for insurance companies. This is rather self evident, and you would think that insurance companies favor higher premiums. But the insurance companies all favor the so called tort reform initiatives. Why is that? Well, there can be only one reason they favor them, and that's because they expect to make more money if those laws are passed. It's as simple as that. The directors and officers of insurance companies are duty bound and legally obligated to promote the self interest of the insurance companies, and that can only mean that they can support these laws only if they expect to make higher profits as a result. You can be assured that insurance companies have a very effective lobby and do not hesitate to oppose laws that threaten their profits.
So if higher premiums mean higher profits, why do insurance companies favor these proposed laws? The answer is pretty obvious. These proposed laws guarantee that insurance companies will pay out less money in claims, but they don't require insurance companies to lower their premiums. It's as simple as that. Insurance companies are not forced to lower their premiums, and doctors are not forced to lower their fees. That would be "un-American," it would violate the basic principals of our free market system to impose limits on prices and income. Of course, it's perfectly alright to limit the rights of those injured by mistakes of doctors, and it's perfectly alright to limit the income of the greedy trial lawyers, but insurance companies and doctors should be free to charge whatever they can get and earn as much money as they can. Here you see a perfect illustration of one of the basic hypocritical tenets of the so-called conservative values: it is not the business of government to solve problems for individuals; but it is the business of government to solve problems for large businesses. It is not a proper function of government to ensure that all Americans have equal access to health care, but it is the government's duty to protect the profits of insurance companies and the incomes of doctors.
Doctors are leaving the practice of medicine because of malpractice rates. Where is the evidence of this? That is all I ask. Where is there any evidence of this at all? Let's not rely on radio talk shows and sound bites from politicians. Has your doctor stopped practicing medicine? Is it because of malpractice insurance? Have you or anyone you know been unable to find a doctor because we've just run out of doctors? We have all this hysteria in the news and media but I have yet to find a single individual who can say "I can't get medical care" because of the so called malpractice insurance crisis. The amazing thing to me is that it is a documented fact that we have millions of Americans who have no or limited access to health care because they cannot afford it, but the idea of a few dozen doctors not being able to afford malpractice insurance gives rise to a federal initiative to regulate malpractice lawsuits. This notion violates multiple principles of so called conservative values - free markets, small government, individualism, self reliance, states rights, etc. But as we see over and over again, there is enough hypocrisy in the so called conservative values to choke an elephant. The federal government mobilizes its forces to help doctors and insurance companies, but ordinary individuals get left out in the cold.
I have a proposal. Why not have the government hire any doctor who cannot afford malpractice insurance to provide health care to the public on a means tested fee basis? The doctor would be indemnified against lawsuits by the federal government. This solves the problem of the doctor and ensures that we don't lose any medical practitioners to the malpractice crisis, and it avoids punishing the victims of medical malpractice. The only problem it doesn't solve is the problem of the insurance companies, so it will never be seriously considered. Plus, it reeks of socialism because it provides government benefits to individuals. So instead of providing benefits directly to individuals, we provide benefits to large insurance companies and we call it capitalism. Well, in fact, it's really capitalist socialism. These are the true conservative values.
Jury verdicts are out of control. Again, I have to ask, where is the evidence of this? In fact, I don't even know what this means. What is an out of control jury verdict? I suppose it's one you disagree with. What would an "in control" jury verdict be? These are just nonsensical terms. Really, they're just rhetoric, propaganda.
There is no such thing as an out of control jury verdict. Every jury verdict is under the control of the trial judge. If a defendant believes that a verdict is unreasonable or outlandish, it can ask the judge to reduce or set aside the verdict. And if the defendant is unsatisfied with the trial judge's decision, it can take that decision to appeal. Therefore, before any defendant has to pay any verdict, the trial judge and the appeals court (typically three to seven judges) has to approve the reasonableness of that verdict. As every trial lawyer knows, jury verdicts are often reduced. Sometimes I think it is the judges who are out of control. So I have to ask, with these safeguards in place, where are the out of control verdicts?
Of course, we have all read reports of unbelievable verdicts in the newspapers. These verdicts are never paid. They are reduced. They are such an unbelievable minority of verdicts. That is what makes them newsworthy. Every day hundreds if not thousands of verdicts are rendered in courts across the country. How many verdicts make the news? Can you imagine the headline that reads "Jury reaches fair verdict" or "Jury awards modest damages for severe injury"? You will not read about this but it happens every day. So yes, it is true, that every once in a while there is a report of a jury verdict that baffles the reader. Even I am baffled from time to time by these stories. But these verdicts are never paid, and when they are reduced or reversed or settled for a modest amount of money, they don't make the news. So you may be left with the impression that there are out of control jury verdicts, and this is the impression that the huge propaganda effort of the insurance and medical lobby is reinforcing when it talks about out of control jury verdicts. But there are no out of control jury verdicts.
Frivolous lawsuits drive up the cost of medicine. The truth is that if all so called frivolous medical malpractice lawsuits were eliminated, it would not change the cost of medicine at all. This is because total malpractice premiums make up a very small percentage of the cost of medicine, and frivolous malpractice lawsuits make up a very small percentage of malpractice lawsuits.
Let's start with the concept of the cost of medicine. For most purposes, the cost of medicine is the cost of medical insurance, since that is how the majority buy health care. So where does the health care dollar go? Well, about half of the money spent on medical insurance actually goes to health care itself. That's right, about half. The other half goes to the insurance brokers who sell the insurance and to the administrative costs and profits of the insurance companies themselves. Now I'm talking about health care insurance, not medical malpractice insurance. We haven't even gotten to that yet. The medical malpractice insurance is paid by doctors and hospitals out of the fifty cents of the health care dollar that they get. So right away you can see that the half of the money spent on "health care" just goes to insurance companies and brokers.
If you doubt me, just ask an insurance broker. In New York the cost of medical insurance for family coverage is around $600 to $800 per month for a pretty basic type of coverage. How much of that goes to the broker? Would you be surprised to know that it is not uncommon for $30 or $50 a month, or more, to go to the broker? This is a huge amount of money and there are a lot of insurance brokers making fortunes selling health insurance. Broker's commissions are not regulated. In many cases, the broker itself can add whatever amount to the cost of the insurance that he wants in order to maximize his commission. There is no initiative to lower broker commissions. That would be "un-American."
So, out of the fifty percent of the health care dollar that actually goes to health care, how much is spent on malpractice insurance premiums? This is a hard number to get to. There is just so much misinformation out there, and both sides of the debate spin the numbers to bolster their arguments. For example, the insurance and medical lobby likes to include the cost of "defensive medicine" as part of the cost of malpractice suits. What is defensive medicine? It's generally defined as tests or procedures whose primary purpose is not to advance the health of the patient but to defend against allegations of malpractice. Well, this is awfully subjective. It's also a very convenient way for the industry to deflect criticism against the high cost of medicine.
Let's take the case of obstetricians. Most of the malpractice horror stories are about obstetricians. I have seen reports of obstetricians in some states paying as high as $250,000 per year for malpractice insurance. Case closed you might think. Well, let's look at this worst case scenario, and you can be sure it's being reported because it is the worst case scenario and not the typical situation faced by most doctors.
How many babies does an obstetrician delivery per year? Do you think one per day, or about five per week is about right? It seems about right to me. I'm trying to get some accurate information on this, so if anyone can point me to some reliable sources, I would be grateful. I estimate that at five per week, an obstetrician would see about 10 woman a day for office visits. At one half hour per visit, that's five hours a day for prenatal care and one delivery per working day. Intuitively this seems reasonable to me. But if I'm wrong, email me or post something in the forum.