Why Tort Reform Needs to Be Part of Health Care Reform

Authors: SCPC and Geoff Pallay

At the mention of tort reform at any one of the recent health care town halls across the state, crowds cheered with delight. Virtually no one — whether conservative or liberal — opposes the idea of tort reform. And why should they? This popular initiative could reduce health care costs by as much as 10 percent and provide more health care options for uninsured patients. Yet the 1,000-plus page health care bill before the U.S. House (HR 3200) doesn’t even mention tort reform.

In its purest form, tort law is meant to deter wrongdoers while at the same time compensating those who are unjustly injured. Here, we are speaking of medical malpractice tort reform, which seeks to obtain a better balance between holding doctors accountable for mistakes and protecting physicians from frivolous lawsuits. In practice, medical tort reform seeks to cap the amount of monetary damages awarded in medical negligence cases. The impetus for this is escalating costs for doctors and insurance companies, on the heels of multimillion dollar settlements to individuals and multibillion dollar settlements to states.

Estimates of the cost total of medical malpractice civil cases range from $252 billion (by the Tillinghast-Towers Perrin actuarial firm) to $865 billion by the Pacific Research Institute (PRI). PRI’s estimate includes $589 billion in wasteful spending that accounts for lost future productivity and lost sales ($367 billion) caused by less innovation. While not all tort costs are wasteful — tort law is imperative in a free market system to maintain the rule of law — there is plenty of room for reform.

In 2005, the South Carolina General Assembly passed S 83, which capped noneconomic damages at $350,000. While this bill addressed some aspects of tort reform, South Carolina has fallen behind other states. According to the U.S. Chamber of Commerce, South Carolina ranked 43rd overall in 2008 — 6 spots lower than last year — in terms of state liability systems rankings. Neighboring Georgia and North Carolina are ranked 28th and 21st, respectively.

Such ratings matter because businesses use them to determine whether to relocate to one state or another. Mississippi (ranked 48th), for instance, suffers from a jackpot justice system that has caused many doctors and insurance companies to flee the state. In 2004, Toyota even pulled the plug on an $800 million auto plant — based on information about the state’s unfavorable litigation climate.

Although the costs of frivolous lawsuits are one way of measuring the damage done by South Carolina’s lack of tort reform, a more important consideration is what medical malpractice fears are doing to health care costs overall. In short, doctors feel they must practice defensive medicine in order to avoid being sued. This practice entails prescribing tests or treatments for patients whose symptoms would not ordinarily require such procedures.

Dr. William Jackson, a radiologist at Beaufort Memorial Hospital, says most people would be amazed at how many defensive medicine lab tests are ordered every day. Take CAT scans. In most cases, a CAT scan would not be thought necessary for a minor head injury. But owing to the practice of defensive medicine, doctors will often order one anyway — even though a scan of the head typically costs $4,000. The same goes for X-rays, MRIs and other such tests.

Of course, doctors are not the only ones to blame. The practice of defensive medicine is another side effect of a lack of transparency in health care costs. Most patients simply don’t care — much less know — how much a particular procedure costs. That’s because the costs — in the form of higher insurance premiums or, in the case of Medicaid/Medicare, higher taxes — are indirect or shifted to others. Every test ordered for a patient who might not need it, though, takes away from the availability of scans for other patients and indirectly increases costs for everyone.

Ideas for Reform

Doctors are not infallible. While 25 percent of doctors are sued each year, only 10 percent to 20 percent of those suits ever reach trial. In 2008, out of 991,066 total doctors, there were only 11,025 total malpractice claims in the U.S — that represents about 1.1 percent of all doctors. In essence, the majority of malpractice cases are concentrated in a small percentage of doctors — and yet all doctors are paying excess premiums as punishment for a few of their colleagues. An appropriate reform would be to place more emphasis on penalizing doctors who do not report errors, while at the same time protecting doctors trying to avoid practicing defensive medicine. One such option, supported by the American Medical Association, is to provide a legal safe harbor for physicians who follow medical guidelines in prescribing and not prescribing certain tests.

Another area of reform centers around who is responsible for paying for the costs of civil suits. Currently, if a doctor is sued and loses, the doctor must pay the claimant’s legal fees and damages.

If the doctor wins, on the other hand, the loser is not responsible for the winner’s legal fees. This has created a system where some patients hope to win the medical lottery by prevailing in a frivolous, or minor, suit. If the claimant loses, he’s not out anything.

A recent Manhattan Institute study concluded the following about a loser pays system of tort reform:

• Almost every economist who has studied loser pays predicts it would reduce the number of low-merit lawsuits.
• A loser-pays rule would encourage business owners and other potential defendants to try harder to comply with the law. Doing so would lead to fewer injuries.
• Loser pays would deter ordinary low-merit suits, but would not discourage low-merit class actions to the same extent because the risk of enormous losses, rather than the costs of legal defense, is the primary source of pressure on defendants to settle.

During the 2009 session, state senator Ray Cleary (R-Murrells Inlet) sponsored several bills pertaining to tort reform and medical regulation. One of these, S 168, passed the Senate and is up for consideration in the House in 2010. This bill would remove liability for medical malpractice for licensed health care providers who voluntarily and without compensation provide services in an emergency or (with prior consent) nonemergency situation.

If S 168 is passed next spring, it could provide immediate benefits for the uninsured. This is because the bill would protect doctors who provide free health care. Absent this protection, doctors are usually unwilling to provide such services out of fear of being sued.

Another tort reform bill introduced in 2009 is S 350. According to Sen. Cleary, the passage of this legislation would improve health care for all South Carolinians. As proof, Sen. Cleary mentioned that some hospitals in South Carolina no longer permit spinal surgery. The risks are simply too high. Thus patients who need such care must be airlifted to the Medical University of South Carolina (MUSC) in Charleston. This is because MUSC doctors are state employees and so their liability for malpractice suits is capped.

Cleary said tort reform needs to take place at the state level, but he worries about the General Assembly’s ability to enact change. Quipped the senator, we’ve got lots of lawyers in the legislature.

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation. Copyright 2009. South Carolina Policy Council Education Foundation, 1323 Pendleton Street, Columbia, South Carolina 29201.