Medical Malpractice Litigation and Tort Reform: It's the Incentives, Stupid

Abstract:     
Health care providers and tort reformers claim that the medical malpractice litigation system is rife with behaviors that are irrational, unpredictable, and counter-productive. They attack civil juries, asserting that verdicts are skyrocketing without reason, are highly variable, and bear little or no relation to the merits of plaintiffs' claims. They complain about patients, arguing that the few with valid claims sue rarely, while the many who receive non-negligent treatment sue all the time. They attack greedy lawyers, alleging that they rake in obscene profits by routinely filing frivolous complaints.

Many of the preceding claims are facially implausible. The medical malpractice liability system is an enormous market whose principal trading partners - trial lawyers and liability insurers - are sophisticated, economically-oriented repeat players. They run the system, and they have the knowledge and incentives to select efficient means to accomplish their respective ends. Given this backdrop, their behavior and the behavior of the system they administer should not be random, or even particularly hard to explain. Nor, given the absence of market power and barriers to entry, should attorneys earn more than market-driven returns on the services they provide.

Most of the preceding claims are also inconsistent with empirical studies of the medical malpractice liability system. These studies depict a system that is stable and predictable, that sorts valid from invalid claims reasonably well, and that responds mainly to changes in the frequency of errors and the cost of dealing with them. The system does have a number of pathologies, however, including its loading costs, the snail's pace at which it processes claims, and its failure to compensate patients injured by medical negligence as fully and as often as it should.

It is possible to reform the liability system to address these shortcomings, but tort reform proposals like caps on non-economic damages and attorneys fees will not do so. The goal of these proposals is to reduce insurance prices by making the system less remunerative for claimants. If implemented, these measures will predictably worsen the problem of under-compensation, and weaken providers' incentives to protect patients from avoidable perils.

Keywords: malpractice, tort reform

JEL Classifications: K13, K41

Accepted Paper Series