September 2003
Is Medical Malpractice Reform Good for Your Health?

With Congress and the Bush administration considering national medical malpractice reform in the near future, Jonathan Klick of the AEI Liability Project and Kathryn Zeiler of Georgetown University Law Center discussed their recent research on the various aspects of malpractice reform at the state level during a September 24 forum. Klick examined the effects of reforms on the choice of location by doctors and on patients' health. Zeiler looked at the effects of existing laws-requiring managed care organizations to disclose the provisions of their contracts with physicians-on the level of medical care provided and on subsequent litigation rates.

Jonathan Klick
AEI

Many states have passed medical malpractice reforms in efforts to attract and retain physicians. Although some of these reforms, particularly caps on non-economic damages, are effective in achieving this goal, some kinds of reform-such as abolishing joint and several liability, restricting attorney's fees, and establishing victims' compensation funds-are counterproductive.

While reforms might be an effective strategy for increasing the level of doctors in a given state, they also lower the standard of care provided. This is the case for infant mortality, where collateral source reform leads to a statistically significant increase in infant mortality rates. For the black community, however, reforms that increase the number of doctors practicing in a state have the potential to decrease infant mortality rates.

Future research should examine whether our results are peculiar to using infant mortality as a health metric. Different types of tort reform might have different impacts on various health outcomes and medical treatments. Research that uses the specific tort reform measures provides insights for future state and federal malpractice policy and might stimulate theoretical work modeling the various components of tort reform.

Kathryn Zeiler
Georgetown University Law Center

The purpose of this project is to examine the ways in which disclosure rules affect contracting between physicians and managed care organizations (MCOs), physician treatment choices, and litigation decisions by injured patients.  By analyzing a model of the interactions among actors in health care markets, I find that the relationship between the cost of compliant treatment and expected damages, as well as the contract disclosure rule (i.e. whether the patient can observe the contract terms) determine the MCO's contract choice. 

The model shows that, for any damage rule, regimes in which contracts are observable by patients will enjoy a lower rate of claims filed and a higher rate of compliant treatment than regimes in which contracts are not observable by patients.  When contracts are observable, the patient can infer the physician's strategy based on the outcome and the contract terms. Therefore, upon realizing a negative outcome, the patient will never file a claim if the contract is fee-for-service but will file a claim with certainty if the contract is capitated. On the other hand, if the patient is unable to observe the contract, he or she cannot discover whether the MCO induced compliant treatment.  When the cost of compliant treatment is low, relative to expected damages, the patient finds it necessary to sue with some positive probability, so that the MCO has an incentive to induce compliant treatment. Without the threat of a lawsuit, the MCO simply would never provide the physician with an incentive to meet the legal standard of care when making the treatment
decision. For these reasons, the claims rate is higher in a regime in which contracts are not observable compared to a regime in which patients are able to observe them.

Finally, the model provides insight into the effects of allowing the patient to sue certain parties. Treatment choices and litigation decisions do not depend on whether the court allows the patient to sue the physician only, the MCO only, or both. The expected costs of lawsuits effectively are built into the contract between the MCO and the physician. This result holds for any damage rule. Rules establishing potential defendants, however, might affect the type of contract the MCO prefers.

Paul Rubin
Emory University

It is worth noting that each of the reforms discussed in the Klick/Stratmann paper could be achieved by contract.  But for some reason, legislatures are perfectly willing to enact caps that they would not enforce as part of a contract.  Klick and Stratmann do well to separate the liability reforms where others have looked at reform as a whole, but their paper could benefit from a return to existing theoretical literature.  For example, while they suggest that doctors should be able to pass along the costs of non-economic damages, Jack Calfee and I have previously argued that consumers are not, in fact, willing to pay upfront for the cost of those later damage payments.  Klick and Stratmann might also consider taking a look at the number of insured in a state as another variable.

The Zeiler paper relies on a standard model that happens to be confusing-but that is the nature of the model.  In terms of her results, there is a bit more to look at in the relationship between disclosure laws and better patient care (and hence fewer lawsuits).  If contract disclosure leads to those beneficial outcomes-I have to ask-why wouldn't companies compete by voluntarily offering disclosure, whether or not the law requires them to do so?  That is, if Zeiler's results are true, why is a disclosure law necessary?

AEI Research/Staff Assistant Kate Rick prepared this summary.