Punishing the Victims
How doctors and insurance companies are hyping a manufactured crisis to justify a liability cap that would punish the victims of malpractice and provide a windfall for the insurance companies.
I. Malpractice, the Manufactured Crisis
This February, thousands of New Jersey doctors staged a three-day “strike,” taking to the streets in Trenton in their white coats to protest what they portray as a malpractice crisis. Blaming rising malpractice insurance costs on ‘frivolous litigation” and runaway jury awards, the doctors carried signs placing the blame for this crisis on the legal system, such as one held by an obstetrician saying “When your water breaks, call your lawyer.” Carbonara, Peter “Diagnosis: Premium Shock,” Money Magazine, May 2003. The Doctors, the AMA, and the New Jersey Medical Society, which organized the strike, are demanding a law which would cap jury awards in malpractice cases at $250,000.
This isn’t the first time; similar “malpractice crises” erupted in the late 1970s and again in the mid 1980s. Each time, the crisis is precipitated when malpractice insurance companies raise their rates drastically, blaming frivolous lawsuits, rapacious lawyers, and runaway jury awards. The insurance companies blame the lawyers and the courts and then the AMA and the doctors join them in demanding “tort reform.” Sullivan, Kip, “Malpractice Myths,” In These Times, March 31, 2002. This year the AMA has mounted a concerted effort to achieve this “tort reform” solution, lobbying congress and declaring a “malpractice crisis” in 18 states, including New Jersey. Center for Justice and Democracy, www.centerjd.org.
This effort has been successful in convincing the administration of President Bush, who, in his state of the Union address, set forth the insurance industry position, blaming the high overall cost of healthcare on “frivolous litigation:”
To improve our health care system, we must address one of the prime causes of higher cost: the constant threat that physicians and hospitals will be unfairly sued. Because of excessive litigation, everybody pays more for health care, and many parts of America are losing fine doctors. No one has ever been healed by a frivolous lawsuit; I urge the Congress to pass medical liability reform.
The current wave of tort reform seemed to have gathered some momentum. Urged on by President Bush, on March 10th the House of Representatives passed a $250,000 cap on malpractice pain and suffering awards. However, the debate changed somewhat when a tragic news story raised public awareness of the other side of the story, the side of the victims of medical malpractice. On February 7, 2003, a 13-year-old girl, Jessica Santillan underwent a heart-lung transplant at Duke University. Only after her doctors had removed her heart and were nearly finished implanting the donor heart and lungs did they discover that the donor organs were of the wrong blood type, a fatal error. The media picked up the story and America watched as Jessica lingered for 13 days before a second donor was found, but by then it was too late, and she died on February 22. The story served as a harsh reminder that not all suits are frivolous, and not all allegations of malpractice are baseless.
Mistakes such as that which killed Jessica Santillan are not an isolated occurrence in medicine. A recent survey conducted by the National Patient Safety Foundation and Harvard University found that 24% of patients and 18% of Doctors reported experiencing a medical mistake which resulted in severe injury or death. A more comprehensive, objective study performed in 1990, the Harvard Medical Practice Study, found that 4% of hospital patients studied suffered an injury due to a medical error, and that 14% of those injured died, suggested that medical mistakes may be a contributing cause in about 180,000 deaths each year, over four times the number that die each year in automobile accidents. A highly publicized study released in 1999 by the he Institute of Medicine, part of the National Academy of Sciences, estimated that medical mistakes cause the death of between 44,000 and 98,000 people each year. This number should be contrasted with the total number of malpractice lawsuits filed each year, only about 20,000, and the total number of jury verdicts each year, nationwide, at only about 2,000.
The “tort reform” proposals championed by the insurance industry, the AMA, and the New Jersey Medical Society will punish the innocent victims of medical mistakes and malpractice and reward the negligent doctors and the insurance companies. It is simply unfair and unjust to punish the victims. It is also fundamentally flawed from a logical point of view. The insurance companies and the doctors say that the problem is “frivolous litigation.” Yet if the $250,000 cap on jury verdicts is enacted, it will only apply where plaintiffs have proven their case to a jury. It will not punish those who bring frivolous lawsuits, instead it will punish plaintiffs who have proven that their case is not frivolous. The AMA is asking that the victims who have been harmed by negligent physicians be punished in order to protect insurance company profits. It would be the wrong solution even if there really were a “malpractice crisis.” Given the true facts regarding medical malpractice, which show that insurance rates are rising not because of frivolous lawsuits but instead because of investment losses and poor business decisions by insurance companies, it would be legislative malpractice to enact the caps pushed by the AMA.
II. The Facts Behind the Hype
The AMA and the insurance lobby portray the malpractice “crisis” as the result of “frivolous lawsuits,” a “litigation explosion,” and unreasonable, multimillion dollar jury awards for minor injuries. President Bush adds to rhetoric, speaking of “junk lawsuits.” Among the doctors who organized the February “strike” in New Jersey, the rhetoric is even more heated; in e-mails obtained by the press, lawyers are referred to as “prostitutes” and “Bloodsuckers.” Jacobs, Andrew, “Anatomy of a Strike: Doctors' E-Mail Shows Depth of Anger” The New York Times, March 10, 2003.
For a nation with a tendency to view lawyers and lawsuits negatively, it is a compelling picture. Unfortunately, the facts reveal it to be completely false. Despite all the evidence that medical mistakes are widespread, the number of malpractice suits filed has been stable or declining for the last decade. Jury awards are up little, if at all. Only a handful of suits are ever brought to trial, and of those the majority are won by the doctor. Among the small number of successful suits, fewer still, less than 5 last year, result in a verdict of $2 million or more. Comparison to the tale of “The Emperor’s New Clothes” is more than apt in this situation. The fact is, on close examination, the AMA’s case is revealed as baseless.
Facts about Medical Malpractice:
· The number of malpractice suits is declining. Although the doctors and insurance companies want you to believe there is a litigation explosion, the fact is that malpractice suits are declining. In 1994, 2,200 malpractice cases were filed in New Jersey’s courts. In 2001, 1,613 cases were filed, a decrease of 25%. Brown, Abbott, “What Malpractice Insurance Crisis,” New York Times, April 26, 2002. Another study of state court records found the number of suits to have declined from 1,971 in 1997 to 1,656 in 2002. In 2002, only 200 malpractice cases went to trial in New Jersey and the doctor won 74% of the time, with only 54 verdicts in favor of the plaintiff throughout New Jersey for the year. Carbonara, Peter, “Diagnosis: Premium Shock,” Money Magazine, May, 2003.
· Multi-million dollar jury verdicts are rare and only awarded in the worst of cases. In 2002, a total of 1700 malpractice cases were completed in New Jersey. Of these, 628 were dismissed, 732 reached settlement, and only 200 went to trial. Of the 54 verdicts in favor of the plaintiffs, only 4 verdicts were in excess of $5 million, and of those, two were reduced by the court. The average claim paid in a medical malpractice case in New Jersey from 1990 to 2000 was only $115,000. A study prepared for New Jersey’s largest insurer concluded that “the amount of the payment correlated closely with the severity of the injury” and that “unjustified payments were uncommon.” Brown, Abbott, Supra.
· Only a small fraction of the people injured by medical mistakes even file a claim. The facts make it clear that there are far more people who are injured by medical mistakes who never file a claim, than the number of fraudulent claims. According to the Harvard Medical Practice Study, published in the New England Journal of Medicine in 1991, only 1.5% of patients injured by malpractice ever filed a claim, while another study of patients in Utah and Colorado published in 2000 found that only 2.5% of malpractice victims brought a claim. Sullivan, Kip, “Malpractice Myths,” In These Times, The Institute for Public Affairs, March 31, 2003.
· Insurance company payouts for all claims have not increased in 10 years. According to Public Citizen, a patient’s rights group, the total amount paid out in malpractice claims in New Jersey in 1992 was $231 million, while the total paid out in 2001 was $235 million, an increase of less than 2% in ten years. Booth, Michael, “Medical Malpractice Reform Measure Fails as Neither Side Wants to Bend,” 171 N.J.L.J. 571, February 17, 2003.
· Malpractice insurance premiums make up only a small fraction of the cost of health care. A report issued by a congressional advisory committee in 2002 found that nationwide, the average doctor spends only 3.2% of his or her annual gross revenues on malpractice insurance. Even obstetricians, the specialty with the highest premiums, paid only 6.7% for insurance premiums. This compares with an average of 12.4% for staff salaries and 11.6 percent for office expenses. “Survey Says Malpractice “Crisis” Misrepresented,” Gannett News Service, The Olympian, March 5, 2003.
· Capping pain and suffering awards will have only a negligible effect on malpractice insurance rates. A study commissioned by the Medical Society of New Jersey, the same group which orchestrated February’s “strike” estimated that placing a $250,000 cap on pain and suffering would barely make a dent in malpractice rates, resulting in a saving of only 6%. Jacobs, Andrew, “Anatomy of a Strike: Doctors' E-Mail Shows Depth of Anger” The New York Times, March 10, 2003.
· The “tort reform” solution has been tried before, and it failed. Blaming the victims by capping pain and suffering awards at $250,000 has been tried before, and it failed completely to rein in malpractice insurance rates. In 1975 doctors in California went on “strike” just as New Jersey’s doctors have done, seeking the same remedy, a $250,000 cap on pain and suffering awards. They were successful, California adopted such a cap in 1975, and yet malpractice insurance rates continued to increase by over 20% per year for the next 13 years, rising a total of 450% between 1975 and 1987. Rosenfield, Harvey, testimony before the House Energy and Commerce Committee Subcommittee on Health, February 27, 2003, internet publication by The Foundation for Taxpayer and Consumer Rights (consumerwatchdog.org).
III. The Real Cause of the Insurance “Crisis:” The “Insurance Cycle” and the Impact of the Economy and Interest Rates on Premiums
In its annual report for 2002, one of New Jersey’s largest medical malpractice insurance companies, Princeton Insurance, bragged about having just finished three years of “stellar” profits. As the facts reveal, medical malpractice claims in New Jersey have been declining for a decade, and total payouts by insurance companies, whether in settlements or the rare jury verdict, have been stable over that time. So why are doctors seeing their rates increased dramatically, why are we seeing doctors picketing in the streets and insurance companies claiming they are losing money? The real answer is that it’s the economy, not the lawyers, and not frivolous litigation.
Insurance companies are required to keep “reserves” on hand to cover expected losses. A portion of every premium dollar paid is put into these reserves, invested in order to provide a source to pay for future claims. These reserves are invested in stocks and bonds so they can earn interest for the insurance company. The problem facing the insurance companies is not a malpractice crisis, it’s an economic crisis. With the dramatic fall in stock values over the last three years and interest rates falling as well, to their lowest rates in decades, insurance companies have seen the value and the earning power of their reserves decrease dramatically. And so they are forced to bump up rates to make up for their losses in the stock market.
This has happened before, and it has become so predictable it has acquired a name, the “insurance cycle.” The “malpractice crises” of the mid 1970s and mid 1980s were a result of the insurance cycle, and this latest “crisis” is as well. When interest rates are high and the stock market is strong, the insurance industry enters what is called the “soft market” phase, in which premiums are relatively low and insurance companies are able to make up the difference from earnings on investments. When the stock market declines or interest rates go down, premiums are increased sharply. Rosman, Brian, “Medical Malpractice in Crisis: Health Care Policy Options,” Council on Health Care Economics and Policy, available at
http://sihp.brandeis.edu/council/Malpractice(3-03).htm.
Most insurance companies resist giving out information about the performance of their portfolios, but there is some information available about how the economic downturn has affected insurers. The Physician Insurers Association of America, which represents doctor-owned malpractice insurers, says that investment income made up 47% of insurance company revenues in 1995, but this had fallen to only 31% in 2001, representing a loss of one third. Eiseler, Peter, Appleby, Julie, and Kasindorf, Martin, “Hype Outraces Facts in Malpractice Debate,” USA Today, March 5, 2003.
IV. Insurance Company Mismanagement in New Jersey
In addition to the economic downturn which is affecting the insurance market all across America, there is another problem which has had a particular impact on the malpractice market in New Jersey. Last year, New Jersey’s largest malpractice insurance provider went out of business as the admitted result of poor business decisions.
Until May of 2002, MIIX was New Jersey’s largest malpractice insurance provider, insuring over 37% of New Jersey doctors. The company was originally operated as a self-insurance program created by New Jersey doctors. It eventually went public, but it continued to operate out of an office shared with the New Jersey Medical Society, and physicians made up half of its board of directors. Treaster, Joseph, “New Jersey Insurer is Leaving Many Doctors Scrambling,” The New York Times, May 10, 2002.
By its own admission, what killed MIIX was not a litigation explosion, it was the insurance cycle and poor business decisions. MIIX lost over $200 million in the 15 months before it was forced by the New Jersey Insurance Commission to stop issuing new policies. New Jersey insurance regulators placed a large part of the blame on an over-ambitious expansion plan under which MIIX tried to expand into other states. Treaster, Joseph, “Patching Together Help as Doctors Insurance Unravels,” The New York Times, May 16, 2002. The Company’s own statements make it clear that the cause of its troubles had little to do with any “malpractice crisis” and more to do with poor business decisions. In its reports, MIIX blamed its losses on operations in other states and said it intended to focus on New Jersey, where it had a “history of profitability.” Brown, Abbott S., “What Malpractice Insurance Crisis,” The New York Times, May 26, 2002.
To make matters worse, MIIX was not the only New Jersey insurer to fail because of poor business decisions. In August of 2001, PHICO, another physician-owned company, failed after undertaking an ambitious 20-state expansion program. Thorpe, Kenneth, “The Medical Malpractice “Crisis:” Recent Trends and the Impact of State Tort Reforms,” Council on Health Care Economics and Policy, available at
http://sihp.brandeis.edu/council/Malpractice(3-03).htm. At the time it failed, PHICO insured 9% of New Jersey doctors. Treaster, May 10, 2002, Supra. Thus in one year the two insurance companies covering 46% of New Jersey’s physicians, almost half, went under as the result of mismanagement. It is easy to see how the failure of one half of the market could result in price increases.
V. Conclusion
Nationwide, medical malpractice rates rose 11.3% last year, less than the rate at which medical insurance rates rose, and less than the rate at which medical costs rose. It was even less than the 25 year average annual increase for malpractice premiums. Eiseler, et al., Supra. This increase is in line with increases in all kinds of insurance, as the result of the impact of the stock market and interest rates on insurance reserves.
In New Jersey, the medical malpractice market has been adversely impacted by the failure of New Jersey’s largest insurer as a result of bad business decisions. As predicted when MIIX failed, some doctors have seen large increases, not as the result of frivolous lawsuits, not as the result of huge jury verdicts, but because of mismanagement which left one third of New Jersey doctors looking for a new insurance company.
Yet the solution which has been proposed is to punish the victims, to limit the compensation of those who have proven that they were the victims of medical malpractice. This proposal is as unjust as it is unwarranted. It would only insulate negligent doctors and incompetent insurance executives from the consequences of their mistakes at the expense of the only innocent parties involved. Limiting the compensation of those who have been injured isn’t going to prevent insurance executives from making poor decisions, and it won’t encourage doctors to be more careful. The lesson from the states which have adopted similar measures is that it won’t even result in a decrease in premiums. The only thing it would accomplish would be to give an undeserved windfall to the insurance companies.
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