American Enterprise Institute

April 24, 2006

[Edited transcript from audio tapes]

2:45 p.m.	Registration
3:00	Introduction:	Ted Frank, AEI
3:10	Panelists:	Michael S. Greve, AEI
		George L. Priest, Yale Law School
		Stuart L. Weinstein, M.D., Doctors for Liability Reform,University of Iowa
	Moderator:	Ted Frank, AEI
5:00	Adjournment

Proceedings:

TED FRANK: My name is Ted Frank. I’m a resident fellow here at AEI and director of the AEI Liability Project. Though it is a small part of the total liability picture, one of the leading liability issues that comes up in the political form is the question of medical malpractice and medical malpractice reform in particular. There have been bills that have been coming up in the Senate pretty consistently over the last few congresses and equally consistently not passing. There is yet another attempt that Senator Frist has indicated will be coming to the floor some time next week, and with that short notice, we rushed together a panel.

Senator Frist is bringing a bill to the floor next week for Senate debate on the medical malpractice issue. The word I have heard is that what is going to come to the floor is a version of HR 5 which passed the House, slightly modified to make the caps $750,000 rather than $250,000, and there are other possibilities floating around but we will be discussing HR 5 and the idea of federal medical malpractice reform in general.

Leading off, we have Dr. Stuart Weinstein, who is the Ignacio V. Ponseti professor of orthopedic surgery at the University of Iowa and the current president of Doctors for Medical Liability Reform, and he is going to obviously have a position on this. We will follow that up with Dr. Greve here, the John G. Searle scholar at AEI. He will be discussing the federalism implications of the bill. And George Priest, who needs no introduction, but is the John M. Olin professor of law and economics at Yale Law School, will discuss what Michael discussed as well as some of the law and economics of the bill. Starting off with Dr. Weinstein.

STUART WEINSTEIN: Mr. Frank, ladies and gentlemen, it is a pleasure to be here today. As you heard, I work at the University of Iowa. I’m a practicing orthopedic surgeon. My specialty is pediatric orthopedics and spinal deformity surgery in children. I have the distinction of being chairman of Doctors for Medical Liability Reform.

Doctors for Medical Liability Reform was formed in 2003, originally by the American Association of Neurological Surgeons and the American Association of Orthopedic Surgeons and subsequently grew to an organization representing over 200,000 high-risk physicians. Our goal as a coalition is to educate and inform patients, physicians, business leaders, and legislators about the destructive effects of the medical liability crisis is having on the nation’s health and the national economy.

The two problems this crisis results in are decreasing access to care in a growing number of states and increasing healthcare costs. The cost of the crisis is the availability and affordability of medical liability insurance caused by increased judgments, not increased frequency.

This is not a crisis in malpractice but in cost and availability of medical liability insurance. If you look at the average jury awards for medical malpractice cases from 1994 to 2001, you can see they tripled in seven years. If you subsequently look in 2001-2002, you can see a dramatic jump in the average jury award in medical liability cases. If you segregate that to economic versus non-economic damages, you can see the marked increase in the non-economic damages during this escalating period.
 
As I think most of you know, 74 percent of the suits that are filed are found meritless, about 5.8 percent go to trial, with 86 percent of the jury finding the physician non-negligent, yet they still cost anywhere from $25,000 to $90,000 to defend. One percent of the verdicts are for the plaintiff. If you look at this report from the Joint Economic Committee from this past year showing a 47 percent increase in medical liability cost over five years to a total of about $27 billion, it is pretty clear to anyone who looks at the system that it is not better at compensating negligently injured individuals. The time from injury to verdict is about five years, and only about three percent of victims of medical malpractice actually even file a claim. More than 80 percent of the liability claims do not have a negligent injury and more than half do not have an injury at all. Well, the problem has resulted in greater pay-outs, fewer carriers, and higher premiums for physicians. In some cases there have been over 500 percent increases over a relatively short time, and this has then driven carriers out of the market, the most notable of which was St. Paul which left 41,000 physician without coverage after sustaining over a billion dollars in losses.

When I began working with Doctors for Medical Liability Reform in March 2003, there were 13 states that were so-called crisis states. By June of 2004, that number had increased to 20 crisis states and this year, in February, Tennessee became the 21st crisis state. What is a crisis state? Well, it is a crisis state because it has lack of access to care for important services. Out of Tennessee’s 95 counties, 81 of 95 have no neurosurgical coverage; 49 no orthopedic coverage; 47 no emergency physician coverage; 42 no residing OB coverage. Yet at the same time, liability premiums have increased by as much as 200 percent in the 10-year period. Hawaii is on the verge of becoming another crisis state, with shortages in obstetrics and orthopedic surgery because of the rising cost of medical malpractice insurance.

If you look at the rising cost and take the 2003 year, you see anywhere between 28 and 80 percent increases across the board for physicians in a sampling of the United States. If you take 2003 or 2004, and here I have listed internists, general surgeons, and obstetrician-gynecologists, you see again an escalation of premiums just in one year, in some cases up to 100 percent increases in one year for liability coverage. Now all physicians are affected. It does not matter whether you are in primary care, pediatrics or high-risk specialty. However, the high-risk specialties are affected disproportionately. Such specialties as orthopedic surgery, neurosurgery, obstetrics, gynecology, emergency physicians, surgeons, and cardiologists, and the problem is [reduced] access to care in a growing number of states, these crisis states.

Why is access to care affected? Well, it is affected because physicians change their practice. They begin to limit high-risk services, eliminating high-risk procedures. They stop emergency room coverage. They stop taking care of trauma patients. They close their practice and move to a better liability climate. Emergency rooms across this country are closing at an alarming rate.

Now the individuals most affected – and I’ll come back to this in just a moment – are women and rural Americans. Here is a sample of our members. This is in four high-liability states and what is [the physicians’] response to the crisis? Well, more than half stopped taking emergency room coverage. Thirty-three percent no longer do high-risk spine surgery. Thirty-three percent eliminate other high-risk procedures, including complicated trauma care. And this has resulted in an increased referral to our already-overburdened academic medical centers.

In this study done by the Pew Charitable Trust in the state of Pennsylvania where the crisis has been studied extensively, they show that physicians are becoming dissatisfied with practice and hence wanting to change their practice. Over 40 percent of physicians dissatisfied with the practice of medicine. Here in Washington, D.C., this is a survey by the Washington, D.C. Medical Society, 30 percent to retire early, 21 percent to stop practicing in the district, 31 percent to move out of the district, 29 percent stopped performing high-risk procedures, 27 percent lay off employees, 56 percent plan to or already have dropped out of Medicaid, and 40 percent of the OB-GYN doctors in this city no longer deliver babies.

Pennsylvania has lost more than 1,400 physicians. They have lost 600 general surgeons and more than 160 orthopedic surgeons in the last five to seven years.

This is from the Tucson newspaper just about two weeks ago, talking about their difficulty in recruiting physicians to Arizona because of the liability crisis. As you know, the state is growing in population, particularly the elderly, yet they cannot attract physicians because of the high liability insurance cost. Arizona is reporting just over 200 physicians per hundred-thousand individuals where the national average is 283. The American College of Emergency Physicians ranked Arizona 42nd out of 50 in their ability to cover emergency trauma.

Two-thirds of the emergency rooms in this country are at risk because of the availability of on-call specialists, a very frightening fact. Take Illinois, a state highlighted by President Bush after he was just re-elected. He referred to the circled area of St. Claire and Madison Counties as the judicial hellhole of the United States. As of last year, there was no neurosurgical coverage south of that yellow line [across the middle of the state] and you could see how many counties [are in] that large geographic area that is effectively without neurosurgical coverage.

This has tremendous ramifications as one looks at in EMTALA laws, as you look at the next major center, which is St. Louis, Missouri, just across the Mississippi River and you see the tremendous influx of Illinois patients going across to Missouri to get needed care. Washington University reported a 30 percent increase in trauma care patients and a 34 percent increase in neurosurgical cases from Illinois. St. Louis University reported the fact that they are taking care of patients who should be easily managed in a local community. They do not need to come to [St. Louis], so it is affecting the access to healthcare. It is also affecting, putting strain on resources, in this case Missouri, which should be taking care of Missouri patients.

Kentucky lost a third of their OB-GYNs in the last four years, with 70 counties without obstetrical care. One out of seven obstetricians no longer delivers babies because of the medical liability crisis and of those who remain in practice, about 20 percent to 25 percent will not consider taking on a high-risk OB patient because of the liability crisis, and I have already given you the Washington DC statistics.

Again, women are profoundly at risk, not only in the obstetrical area but in mammography. You all know that mammography saves lives by early detection of breast cancer. You cannot find a radiology resident who would be willing to specialize in mammography and experienced mammographers do not want to read mammography reports or assess a mammography examination because of the high liability risk, so again this is another area where women’s health is an issue.

Neurosurgery: 50 percent of neurosurgeons are sued every year. Now this, [a story of a boy who died for lack of an available neurologist], is just an anecdotal case. You can say it is a one-time thing but I can tell you as a physician in an academic medical center, this happens all the time. There are many such anecdotes. It is fine as long as it is not your child but here the neurosurgeons in Chester County, Pennsylvania closed up shop because the premiums were $383,000 a year, incompatible with the practice. Hence, no emergency care, the golden hour is lost and the patient dies, and if you think it is just an anecdotal example, I can promise you that it happens all over this country every single day. Here are the stats: Neurosurgeons, 50 percent sued every year; OB-GYNs, 76 percent are sued once, 57 percent twice, 42 percent three times; orthopedic surgeons, one-third are sued every year; emergency physicians, one-third every year; trauma surgeons, one-third every year.
 
As a lifelong educator working in a medical school, teaching medical students and residents, the saddest thing about all of this is the changing doctor-patient relationships, with physicians now viewing every patient as a potential lawsuit, a very uncomfortable relationship, I think, for a physician, and I would think the same if I were a patient. It affects the future of healthcare because of the effect on medical students. They obviously realize the crisis exists, it affects their choice of specialties, and it affects their location of practice. Here, 1,200 medical students in the state of Pennsylvania wrote to Governor Rendell saying, “The liability crisis is such in Pennsylvania that if it is not fixed, we cannot practice in our home state. We cannot practice in Pennsylvania. With medical students coming out of medical training with debts up to $200,000 and sometimes $300,000, it is impossible for them to consider a practice in a high-liability climate state. Here are the stats in OB-GYN and what medical students choose. A third of the positions were left unfilled during the last three years. Another bad sign for women’s health issues in the next three to five years.
 
Now I have practiced orthopedic surgery. It is still very attractive to students. We have no shortage of applications for our residency training program, but none of the students will go to any of the high-risk states. Here is Pennsylvania again: eighty positions were open this year in orthopedic surgery, 39 individuals graduated the five-year training program beyond medical school, and only one stayed in Pennsylvania; 79 vacancies were left unfilled.
Here is a startling statistic that was in June of 2003: Only three orthopedic surgeons under 35 years of age are in private practice in the state of Pennsylvania.

Now what that crisis has done is make physicians angry. None of us went to medical school to be sitting here like I am today, arguing this point. We went to medical school to take care of patients, to learn skills that could restore function, save lives, but not to be marching on the State Capitol because we cannot practice our craft, what we have learned. Across this country, physicians are becoming angry because of the inability to provide care to patients who need it because of this medical liability crisis.

Now you can say that there have been some positive changes over the last two years, with some states achieving medical liability reform to varying degrees of success. With each state you could debate whether it is successful or not. But the key about state reform is if you look at the state of Wisconsin which has always been a white state, if you will, on the medical liability crisis map. It is a white state because it has had medical liability reform for a long time, but state liability reforms are not safe, as you can see in the summer of last year. The Wisconsin State Supreme Court overturned the non-economic damages caps and determined them to be unconstitutional. And right away, as soon as that cap is overturned, there was an $8.4 million suit with $4.2 million in pain and suffering awarded. This led the state legislature to realize, we have got a crisis on our hands. We have a good quality healthcare state with access being provided. Are we willing to lose that? So they stepped up to the plate and they brought in a $750,000 liability cap. It passed by a supermajority, which made it impossible for the governor to veto and hence the governor signed the bill, but here you can see that the trial lawyers vowed to challenge this limit in court. So there is no safe state.

What about rising healthcare costs? Well, this is a very well-done study by the Harvard School of Public Health, Harvard Law School, and Columbia University Law School, again sponsored by the Pew Charitable Trust, again looking at Pennsylvania, which is a model for the crisis state if you will, and what they found is that over 93 percent of physicians practice defensive medicine. Ninety-two do what they call assurance behavior. They order tests, particularly imaging studies, performed diagnostic procedures, and refer patients for consultation to make sure that they “done everything possible in every case.” The other behavior that they found was avoidance behavior and this affects access to care: physicians restricting their practices, eliminating high-risk procedures or procedures prone to complications like trauma surgery, pediatric surgery, vaginal deliveries, cancer surgery, spine surgery, cranial surgery, aneurysm surgery; or avoiding patients with any complex problems or patients perceived as litigious; a very sad state of affairs, I would offer to you.

So their conclusion was that defensive medicine is highly prevalent among physicians in Pennsylvania who pay the most for medical liability insurance with potentially serious implications for cost, access, and both technical and interpersonal quality of care. And as a practicing physician and traveling this country for my own association, I can tell you this applies not just to Pennsylvania. It applies everywhere. It is a culture that is being ingrained in medical students and residents regardless of specialty. And here is [a report] from the Common Good website, which many of you are familiar with, which talks about emergency room physicians ordering tests not within the best interest of the patient. It is that, plus how do I show that I did everything possible and these are just three statements. You can go on the Common Good website run by Philip Howard and get plenty of evidence to show how defensive medicine is the norm as opposed to the exception.

Hospital costs: this [slide] is from the American Hospital Association. In states where liability reform is in existence, the professional liability expense per staff bed is about $4,000. In crisis states, it is three times that much. You can just imagine what this adds to our healthcare costs. Now the solutions that have been put forth both in the House and the Senate and hopefully will be coming next week in the Senate are caps on non-economic damages, nothing restricting economic damages and I would offer to you that this is a solution which has a proven track record in keeping premiums down, addressing manpower needs and improving access to care.

Look at premiums. Here is California. This is obstetrics-gynecology. The standard one million per occurrence, three million aggregate. In Los Angeles, where MICRA reforms have been existent since 1975, you have increase in premiums, of course, from $52,000 to 63,000 over a four-year period. Look at Miami, Florida; $147,000 in 2000 to 277,000 in 2004 and I showed you neurosurgical rates approaching just under $400,000 a year for liability insurance. But this is a state where you have proven track record.

Here is Mark McClellan, administrator of CMS talking about if there were caps on non-economic damages, his calculations would show five to nine percent decrease in hospital expenditures.

Let’s look at Texas, a state which was a crisis state but which had the constitutionality of medical liability reform sustained in September of 2003. Prior to reform, you can see that the jury awards in 1989 were $472,000 on average. By 1999, there was $2 million average. There were 13 carriers departed from the market by 2003, despite the fact that 85 percent of the suits were dismissed without judgment. After liability reform was constitutionally sustained in September of 2003, 3,000 new physicians have set up practice in Texas, particularly the high-risk specialties – orthopedics, neurosurgery, emergency physicians. Twenty-two new carriers came in when this Texas Tech Law Review of the outcome of this reform was [published] and malpractice rates were continuing to decrease. If you monitor the situation, read the Texas newspapers, you will see this is [continuing] this year. One of the companies is lowering their rates another six percent. Another is lowering their rates 18 percent, and now there are 30 new carriers of liability insurance, writing medical liability insurance in Texas since the law reform in 2003. Medically underserved communities in Texas now have impressive gains in primary care physicians who are going to these medically underserved areas. Look at the drop-off in lawsuits after the medical liability lawsuits. This is Harris County, which is Houston, after the reform.
 
The Joint Economic Commission in 2003 talked about a $19 billion savings to remind you again. This year they talked about $27 billion. Agency for Healthcare Research and Quality showed that states that have liability reform had 12 percent more physicians per capita than states without a cap on non-economic damages. Health Affairs last year showed increased numbers of primary care physicians and rural obstetricians in states with caps on non-economic damages versus non-reform states.

And lastly, the issue of patient safety. Every physician group and the Institute of Medicine have been pushing for patient safety. All of us are concerned with patient safety and fixing the system errors which are responsible for many deaths each year. The problem is, without medical liability reform, you do not have a system of transparency which is necessary to fix system errors or to solve the patient safety issues which we are all concerned about. There are other solutions that are proposed and I will not dwell on those. I will just mention Mr. Philip Howard because the Common Good website gets a lot of traffic, and there is a lot of press for medical courts and just to let you know, the American Bar Association, over the objections of its Health Law Committee opposed any pilot projects on special healthcare courts.

So the problem is decreasing access to care, increasing healthcare costs. The President has always supported [reform]. In his State of the Union message last year, in 2004, he spent a great deal of time talking about the medical liability crisis, access to care, and rising healthcare costs. This year he clearly outlined the obstetrical issues or women’s healthcare issues. The House of Representatives, as you have heard, has passed it this year, passed it twice in the last session, and passed it seven or eight times, usually modeled along the California MICRA legislation.
 
Any public opinion survey you look at, whether it is the Kaiser Family Foundation or the Harvard School of Public Health, shows the public is aware that the liability problem is affecting their healthcare and it leads to rising medical healthcare costs. The obstacle to any reform has been the lack of the 60 votes needed in the Senate to even get the debate moving forward. So next week, as many of you heard and was alluded to by Mr. Frank a moment ago, the Senate is scheduled to vote, we hear, on Medical Care and Access Protection Acts of 2006. This will be, we think, proposing a proven solution that increases the access to care and decreases healthcare costs.

I appreciate your attention today and thank you very much.

MR. FRANK: Dr. Weinstein, we had Professor Tom Baker her a few months back and in his book, The Medical Malpractice Myth, what he emphasizes was the Institute of Medicine Study that claimed that there are tens of thousands of deaths from malpractice, and that the real problem is not enough malpractice liability rather than too much malpractice liability. Would you have any thoughts on that?

DR. WEINSTEIN: Yes, I would say, first of all, the Institute of Medicine [study] was an excellent report. It reported 98,000 deaths; it did not say 98,000 deaths due to malpractice. The issue is that most of those deaths were from system errors. Any of you who may practice medicine realize that the delivery of healthcare is done by a complex system, and when system errors occur, those can be a mislabeling of drugs, they can be in two vials, one a benign drug and another a drug, which has serious side effects labeled very similarly. It could be programming a computer wrong that puts medications in, it could be a surgical error, et cetera. There are complex delivery systems and they need to be addressed, the system errors that are pointed out in that report. But in the face of the current medical liability crisis, and without a transparent system to allow physicians and others in the healthcare arena to address the problem, it makes it very difficult to even address those fundamental issues.
 
MR. FRANK: Thank you. Dr. Greve?

MICHAEL GREVE: I should preface my remarks by saying that I’m extremely sympathetic to the objectives of liability reform. Nonetheless, I count myself among the skeptics about the proposals I have seen in Washington and now I’m particularly skeptical and nervous about the political dynamics of this process. I would just give you my basic reasons, which extend to some extent well beyond the medical malpractice context.
 
The basic argument, it seems to me, for making do with decentralized regulatory systems such as the one that is in existence currently in the medical malpractice area, is information disclosure. First, we find out in that context what we would not find out in a centralized setting, which is we find out what works and if we make mistakes, they are bound to be lower cost mistakes. Then those beneficial effects of decentralization are accentuated where there is a healthy amount of competition among states for valuable citizens and enterprises and doctors, by all means count among those all that work, so long as states have the right incentives.

Now I’ll be the first to admit that those kinds of theoretical models of federalism or decentralization do not work in all settings. So for example, they do not work at all with respect to the sale of pharmaceutical products in the country. There, if you have a state liability regime that is excessive, the cost of that regime will be incurred all across the country by consumers, by shareholders, by workers, without regard to where exactly that particular verdict came from and it is particularly acute in the pharmaceutical context, of course, because you cannot modify the product in response to liability verdicts. It is there or not.
So there is a section in HR 5, Section 7C as it currently stands, which provides that there shall be no punitive damages against FDA-compliant products. I’m all in favor of that. I would go further, I think there should be no verdict at all against FDA-compliant products but I will take what I can get. Also there is a provision that says that doctors and pharmacies cannot be named in suits that are basically over pharmaceutical labeling and product safety. What that gets you in effect is sort of a block against these diversity jurisdiction-defeating measures, where plaintiff’s attorneys just nominate the local pharmacy to keep the suit in one of these hellhole jurisdictions. I think that is also a good thing.

But, of course, none of these things are technically speaking what we normally mean by medical malpractice reform, and with respect to those traditional areas, I think the system works more or less. There are price differences among liability insurance among states. Doctors do exit, as you just heard, in droves. They are very, very sensitive to changes in the liability system on the margin. And it seems to me it is important to preserve that kind of a system, A) if the level of ignorance about reform proposals is relatively high; and B) if the political risk of central intervention is high.
 
I think in the medical malpractice areas, both our level of ignorance is remarkably high still, and the political risks that attend to central intervention are particularly high. I think it is still fair to say that we do not really know what works. I think there is still a continued dearth of responsible econometric studies in these areas but I will, for the rest of my remarks, concentrate on the political risks. I will start with the obvious risks, and then move on to some that I think have been widely ignored.

The most obvious risk is this: The question in proposing federal reform is not can we, the doctor’s associations, write a sensible bill that will take care of the most acute problems? Of course we can. The problem and the appropriate focus point is what is the price of the 60th vote [in the Senate]? That is really what you are talking about and the constituencies, the pro-reform constituencies unfortunately rarely ask themselves that. And even if they did ask themselves that, it seems to me they could not pre-commit to pulling the plug as the process unfolds and turns out to be excessive, because by that time, everybody is so invested in this process that the thing drones on, and you make one concession after another until the end product is worse than what you started with.

I think the asbestos reforms have had that tendency over the past few years, and the only reason why that has not become a train wreck is that there are reform constituencies on the other side who say, “We do not want this reform.” The industry is very badly split over that particular piece of legislation, and that is the only reason to my mind why this nefarious process has not unfolded in that context. If you do not have that split on the industry side, there is a real risk that things go awry.

The second generic problem I want to mention, a political risk inherent in these things, is that the lobbyists on these matters in Washington are very imperfectly monitored. The lobbyist standard, with respect to reform, is not success. That is the last thing they want because that would make the issue go away. The principal objective is continued access and continued action, something that is around forever. That makes you the king of torts, not winning. And those risks are exacerbated because lobbyists for constituencies that are multi-issue are bound to be worse on any given issue than single-issue lobbyists, and the single-issue lobbyists in this context are the trial lawyers, who know exactly what they are doing, and the multi-issue lobbyists are all on the other side, and they do not always know what they are doing.

And I think HR 5 gives you several examples of this, and I’ll just give you two because I believe that they will resurface in any kind of bill that might or might not come forward from the United States Senate. There are two aspects of this bill, HR 5, currently that I think are sort of the classic products of K Street. The first is this. This bill and any plausible reform effort, it seems to me, has to apply to all courts – state and federal courts. And most of this is obviously a state court problem. Now if you are nervous about state courts, there are any number of things you can do. You can remove more disputes, or more kinds of disputes into federal courts, and that gets you around the problem, especially with elected local judges. You can preempt state laws and say no state law shall have the following effects. And HR 5 does preempt some state court matters and state legislative matters, although it does not do so particularly well, and I’ll get to that. But what it does for the most part is it tells state courts how they have to run their cases in actions and causes of actions arising under state law.

I’ll give you few examples just to rattle this off. “For purposes of applying the limitation in subsection (B), future non-economic damages shall not be discounted to present value. The jury shall not be informed about the maximum award for non-economic damages and an award for non-economic damages in excess of $250,000 shall be reduced either before the entry of judgment or by amendment of the judgment after entry of the judgment and such reduction shall be made before accounting for any other reduction and damages required by law. If separate awards are rendered for past and future non-economic damages and the combined awards exceed $250,000, the future non-economic damages shall be reduced first,” and so it goes on and on and on. This bill tells state courts in great detail how they must handle motions, what they must do at any given moment, and how these state court cases, state law cases shall proceed.

There is only one problem with that, and that is, it is unconstitutional. The federal government cannot commandeer state courts in that fashion. You can have a long and difficult debate about how far short of the congressional authority extends in that regard, but those kinds of provisions are clearly beyond the pale to my mind. I have raised this not because I want to be high-minded about the United States Constitution. The notion that this government, this Congress might pay the slightest attention to the Constitution strikes me as absurd. I mentioned this because if you cannot do this, and if this is legally vulnerable at the tail-end, you might be worse off than with no bill at all, and you are certainly not going to be any better off.

The second aspect, to the extent that this bill does not tell state courts how to handle their own business and their own laws, it does preempt state law, especially with respect to the damage caps but it is a curious preemption regime. So the way it looks, and this is section 11 in this bill, there is first an express preemption provision, that is to say, it preempts state law: “all the provisions of this bill shall preempt state law.” But that express preemption provision is extremely weak. It says, “It shall prevent state law to the extent that state law would prevent the application of these federal provisions.” Prevent does not mean “conflict with,” or “might be inconsistent with.” You give me 10 minutes, I’ll litigate my way around that and I’m not even a lawyer.

In addition to that provision, the preemption provision is then followed by very, very broad savings laws which basically say that, “Hey, anything that we did not just regulate in this bill is thereby not preempted. Any issue is preserved.” And then at the final end, there is an opt-out for state legislatures, that is to say, if the state legislature of any given state does not like the damage caps or any other provision on this bill, it can always legislate around it and provide for something else.

Now you might say, well, at least that regime saves the states where the courts, like Wisconsin, have gone berserk. It saves those states from themselves. But I do not think that is actually right because the very same courts that have gone crazy in those states are also the courts that will have to decide whether federal law is preemptive here or not. And these provisions, I can assure you, will not hold up in any kind of court.

What you have to realize is preemption is not like a football game, where if you can get a preemption provision, you won. It is more like an inducement to interest-group migration, that is to say if you beat them in Washington, they will go back to the states, and the question is how are we going to perform in those kinds of theaters and there I hate to disappoint you—this is an issue I actually know something about outside the medical malpractice area—even when preemption provisions are crystal clear, they will be contested. So for example, federal law is absolutely positively clear, states cannot have fuel efficiency standards that deviate from the federal rules, with the exception of California. Except of course now, states are cheerfully implementing or trying to implement carbon dioxide standards. It turns out that is just a fuel efficiency standard by another name. We will call it a global warming standard, and so the states argue, “Hey, if we just call it something else, then it is no longer a fuel efficiency standard.” And so therefore it costs billions of dollars to just litigate that one issue to get it right in the federal agencies. There is no preemption standard that you could conceivably write that blocks everything. And that problem, of course, gets much, much worse where the provisions get much worse here, and you have these expressed savings clauses that you have in this particular legislation. 

My colleague Jon Klick and I have done a study of preemption provisions and actually tried to look, where do they hold up when the preemption regimes tend to be stable? Those regimes generally satisfy two conditions: First, if the federal standard is sort of a golden mean regulation, that is to say it is not just the minimum floor for state action. It is also not a unilateral federal clampdown on states, but it is a risk benefit analysis. We, the federal government, realize there are risks on erring in either direction – too little regulation or too much regulation.

Perhaps the best example of that are indeed FDA standards. The FDA says our standards are not just a minimum standard when we approve a product. We mean to say it is safe and effective and there is a real risk in terms of accessibility and innovation and so forth, if we have stricter standards and therefore our federal regulations have both a ceiling and a floor. It is a golden mean. And that is the argument which the FDA is throwing into court. There are other examples of that; federal car safety standards function like that, for example.

And that leads me to the second condition for the stability of preemption regimes, and that is when there is a credible federal agency with the incentive and resources to sustain and defend the preemption regime. The Office of the Comptroller of the Currency defends the banking system like that. The Food and Drug Administration defends the drug regime like that. Who would defend this regime? This looks like a unilateral federal clampdown on states that cannot help themselves and do not know any better. And with respect to the medical malpractice provisions, to my knowledge, there is no federal agency nominated here that could defend these standards reliably in case after case, in court after court. And if there is not somebody like that around, the preemption regime will crumble. At the very least, you get much less than initially you hoped for.

What is the conclusion of all of this? I have absolutely no idea, but I will leave you with two sort of quick conclusions about the atmospherics. One is that I think one ought to be a little nervous, at least I’m a little bit nervous that the defeat of something like this legislation might be taken as a signal that there is no longer a need for tort reform, there is no longer a need for med-mal reform, that the effort is fizzling. I think all of those conclusions would be catastrophic because I think emphatically, there is that need and that leaves me to my final remark. Please do not think my diffidence with respect to this particular enterprise as a sign of signaling my disagreement on the basics and on the principle here. Thank you.

MR. FRANK: Michael, is there a solution? Is there something for the federal government to do here?

MR. GREVE: No. There is no “a solution,” I do not think so. I mean one of the things that strikes me is that when you are dealing with medical practice, let alone malpractice, you are now dealing with a very convoluted and complicated system that is not only naturally complicated but that is also regulated by many different agencies in many different ways, many of which have counterproductive effects, and the synergies and conflicts and confusions among them are very poorly understood. That is my basic point.

I think one of the things that you could look to is what are the effects, including the liability effects, of the programs that the federal government itself already runs, and I do not know the answer. I’m not an expert in this area. I should say why I’m so diffident and mealy-mouthed, uncharacteristically mealy-mouthed.

MR. FRANK: Michael, you are never mealy-mouthed. Professor Priest.

GEORGE PRIEST: Thanks, Ted. Yes, that was quite a show, a presentation, Michael, and I have to say, in considering liability reform, one of the most difficult conceptual questions that has to be addressed is how do we know what the appropriate level of liability is, or should be. Few, I think, would argue that we should have no tort liability, whether in the medical liability field or in any other field. I think it is widely accepted that it is at least plausible that the liability system serves as some type of deterrent to harmful practices. And we also know, especially in the absence of a general social welfare program in the United States, that the liability system satisfies a demand for compensation of the injured, which might not otherwise be filled. We can argue over that but I would say few would disagree with those values entirely.

Now there are some who say we ought to have absolute liability, and there are a number of people—actually, some of them former students of mine, I’m sorry to admit—who have advocated absolute liability, but that is not so attractive either. That is, absolute liability makes the party that has caused an injury, in essence, [liable]. And I think almost everyone that has worked in the field or thought about the field admits that the liability system that we have, our system of trial by jury and our adversary system is not an effective mechanism for providing insurance or for delivering insurance. And so we have to decide how are we going to define, how we are going to know when the liability imposed by our tort system is appropriate and when it is not.

In general, from an economic standpoint, the role of the liability system in this regard is to internalize the costs of harmful behavior to the parties that cause them. And the idea, again, the simple economic idea of cost internalization is that if a manufacturer or if a service provider is forced to bear the cost of those that are injured by the product or by the service, that manufacturer’s service provider will take those prospective liabilities into account and change its behavior so that the product will be redesigned or the service will be reorganized in a way that less harmful behavior occurs. That is essentially the deterrent justification for our liability system.

It also follows from that proposition and that economic point of view that where products or services are generating injuries that are excessively high, they are going be priced out of the market. So that if the product is excessively harmful or if the service is excessively harmful, it will be unsustainable to continue to sell that product or to provide that service and to pay the liability cost at the same time. Perhaps Vioxx is a modern example of that ambition, although actually the history of Vioxx was that it was withdrawn from the market prior to any finding of liability, but that is a basic idea, that if a product is too harmful or if a service is too harmful, it will be priced out of the market.
 
Now, where does medical liability fit within this general economic structure? It seems to me that there is clear evidence, and Dr. Weinstein has provided a good deal of it, that the liabilities have extended much too far, much too excessively in the medical field and that the country is harmed as a result. And the best example of that, the best economic proof of that point consists of the vast range of evidence that Dr. Weinstein has provided, and that is available in other studies, too, that show, as he emphasized, the reduction in the provision of medical specialty services at various points around the country. The reduction in the availability of OB-GYN specialists, of neurosurgeons, of emergency physicians, of orthopedic surgeons; that those services are being withdrawn from the market, I think, is indelible economic proof that our medical liability system is excessive.

And why is that? Well, because these provide OB-GYN services, not Vioxx. It is not a product or a service that is too dangerous for the society. Indeed, the compelling point that Dr. Weinstein made is that these services, difficult though they are, and attended by medical complications in many contexts, are crucial to the provision of medical service and to the saving of lives in the country. So for them to be priced out of the market because of liability judgments, and by priced out I mean through, as he has pointed out, the exodus of doctors from jurisdictions where they provide those services from the reluctance of physicians to provide particular services for which they are trained, such as delivering babies, from early retirements, as he has pointed out. For those individuals and for those services to be priced out of the market by our liability system represents, I think, an unambiguous harm to the society because these are not products or services too dangerous for the society.
 
Dr. Weinstein mentioned it only once, but a second indelible and uncontroversial element of proof of excessiveness of medical liability in this society is the very peculiar behavior of insurers in providing medical malpractice insurance. Ten years ago the dominant carrier of malpractice insurance was St. Paul’s. As Dr. Weinstein pointed out, St. Paul’s within the last two years has decided to leave the market entirely, has decided despite its extraordinary previous market share and expertise in the field that the risks of medical liability were simply too great for it. Again, this is not different as a point of economic evidence than the withdrawal of the OB-GYN specialists, neurosurgeons, emergency physicians, and the like from providing the service themselves. It is exactly of the same nature and exactly follows from the same general economic effects.

Now, just as an aside, Ted mentioned that Tom Baker, a friend of mine and a former colleague of mine, has recently written a book called The Medical Malpractice Myth in which he claims that there is too much malpractice and we need greater liability. I’m sorry I was not at this conference but that claim, which is based on a number of studies—after the fact hindsight studies of medical procedures—is irreconcilable with the evidence that Dr. Weinstein presented, and that all of us have seen in other contexts of the withdrawal of specialists from providing complicated and high-risk medical procedures. The withdrawal of insurers in some jurisdictions from providing any insurance coverage whatsoever, there is no explanation in Baker’s book of those phenomena, and without an explanation of them, his general conclusion cannot stand.

Now we all, I think, accept the proposition that it is costly when we observe that specialists withdraw from the market or withdraw from providing particular services in the market. Those are only some of the costs, however, of our medical liability system as Dr. Weinstein has presented. We have, and I think it is voluminously documented, substantial increase in defensive medicine, which increases health costs for really no gain to the society. We have, because of these increases in premiums, some of which have been dramatic, a general increase in healthcare costs.

Now this is not simply a cost point. The increase in healthcare costs is something that affects Americans and more severely affects those workers who earn lower incomes than those that earn higher. There has been, again, a documented shift in the American workforce in recent years, especially among small businesses from providing fulltime work for workers with health benefits, to providing part time work without health benefits, again, is a response and as an effect of the medical liability system.

We have other changes that Dr. Weinstein has pointed out: A shift from rural provision of care to urban provision of care; indeed, a decline generally in the provision of rural care. Doctor Weinstein’s map of Illinois, which I had only seen for the first time today, was startling in that regard, that there is basically no medical service in the entire southern half of the state of Illinois. This is also a problem, however, with federalism, and here I do want to address to some extent some of Michael’s points, though not all of them. Michael has made the point and we are all aware of it. Those of us who attend events here at AEI are aware of at least the conception of competition among states.

Michael made the argument that it is valuable to have competition among states, and competition for high-level professionals such as high-risk doctors that provide high-risk specialties, may be a form of that competition. And we see that competition occurring with the evidence that has been presented here of the decline in the provision of services in various states, the high-risk states of Pennsylvania, examples that he gave. There are other examples, too. He mentioned, although he did not have time to give a lot of detail on it, that Texas recently introduced a form of medical liability reform very similar to what is being proposed before the Senate as I understand it.
 
Now, there have been some recent studies that show that Texas was losing doctors and losing high-risk specialists prior to the introduction of tort reform, that trend in the reduction of physicians has reversed since tort reform. What that means, however, is people are moving from other states, doctors are moving from other states into Texas as they have moved into California, and as they have moved from high-risk and high-liability states into other reform states like Colorado in response to the cost of medical liability in their home states, but we should not under-emphasize the cost of that form of competition.
 
The competition in human capital, which comes in the form of uprooting or abandoning a previously established medical practice, moving one’s family across the country in order to make a living in a different state, re-establishing a new practice is quite a different form of competition than that that we usually imagine in a market for goods, where goods can be redirected from Illinois to California or from Pennsylvania to Texas at very low cost. The cost of preserving that form of federalism and that competition for human capital, in the context of how human capital, individuals such as physicians, is substantial.

Let me finally just address, modestly really, some of the points Michael made about the legal features of the bill. He was talking about HR 5, though I think it relates to the other proposed Senate bills as well. I think it is too strong to regard those provisions of the bills that try to effectuate the cap on non-economic damages as commandeering state courts in the way Michael has. It is maybe a little much to prevent the state courts discounting the present value. That seems a hard one but otherwise, these are mechanisms for enforcing the caps which I’ll discuss in a minute. And I think, although Michael indicated these caps of this nature might be unconstitutional. I think probably not. That is, we have had some experience with federally imposed liability caps in the context of nuclear liability, in the context of black lung, in the context of the September 11th compensation fund, I think the constitutional problems associated with these bills are no greater than those.

Finally, I want to add one point. Michael perhaps makes a good point that because of the nature of lobbying, because of the nature of litigation that will follow to test and evaluate the constitutionality of the statute, that we may not be gaining much. That may well be true. That is, a cap of $750,000 on non-economic damages, in my mind, is not much of a cap. That is, we have no cap on economic damages, lost income, medical expenses, future medical expenses. The only cap is on pain and suffering and where that cap is $750,000, it is not a very substantial cap.

On the other hand, it is true empirically that we have seen from the experience of California, from the recent experience in Texas, and the experience in Colorado, that caps of even high levels of that nature can be effective and can have some influence on the provision of medical services, especially high-risk medical services. It seems to me, given that empirical evidence that it is worth a try, but that we should really view the caps that are currently being proposed as initial steps, not as final steps. But I think the introduction of caps of this nature can help in a modest way, but perhaps in a slightly less modest way in reducing what I think is an unambiguous harm to society, the expansion of medical liability in a way that has reduced the supply of medical services to the American public. Thank you.

MR. FRANK: Professor, why can’t Texas say, “We agree with George Priest,” and Pennsylvania say, “No, we agree with Tom Baker and think lawyers are more important for public health than doctors,” and just let the two states have their own public health system in that way? And if Tom Baker is right, then Pennsylvania will have better health and if you are right, Texas will reap the benefits of its foresight.

MR. PRIEST: Well, we can do that, but when you see a clear public harm, as I think we see here with the consequences of expanded medical liability, there is some advantage in doing something about it. I view it to be a national, maybe perhaps the argument is let Pennsylvania simply suffer the fact that they have no doctors, all the doctors are leaving, all the residents are leaving and maybe they will come to their senses, but I think this is a national problem. The costs that the system is imposing on physicians in terms of relocating their practices and more importantly on victims who do not have less extensive access to high-risk medical specialties, [create] a real national cause. And so I think if they can be solved on a national basis without regard to the political dynamics of Pennsylvania versus Texas, I think we should do so.

MR. FRANK: Did Dr. Weinstein or Dr. Greve want to respond to anything they have heard?

DR. WEINSTEIN: Well, I think if you let the situation play out as you just proposed, Pennsylvania will not have any doctors and have no healthcare, and I think it would be a disastrous situation because it is heading in that direction right now. I think for me as a physician, the politicization of this issue is very distressing because it is easy to talk about this in academic terms or party terms, et cetera, but I think the fact of the matter is I see it everyday in my practice. I see patients being denied healthcare. I see patients who are transferred to my tertiary care medical center who, had the physician been available at the primary site of injury, would have survived or had a lesser injury. So these are real problems and they happen to real people everyday, so I’m a bit distressed at the politicization of this, the partisan nature of the debate that occurs in the senate now.

MR. FRANK: Michael?

MR. GREVE: Just very briefly. I do not think on the law we have any big disagreement, and I want to clarify something I said. I believe that caps themselves, to the extent that they are the core of this bill, are clearly constitutional, and the reason is that they worked like a clean preemption, that is to say: no state or no court of any description shall award a damage award in excess of X amount.

The glitch is that this law does not stop there, and when you think about it, it cannot really stop there because if you cap non-economic damages, the first thing that a state court will do is manipulate the economic damages so that it arrives at the same number that you have started out before. And that is one of the reasons, I think, why the authors of this bill or whoever cranked this out thought. No, let’s block that first evasive maneuver, and then you have to block the next one after that, and that is what you see in a lot of tort bills now.
I mean going back a decade where Congress instructed state courts to handle things in a particular way up to the discount rates, and the reason is that once you preempt them, they will start evasive maneuvers and you have to block them and the only way to block them effectively is to deprive them of their authority to decide these issues in the first place. And if you are not willing to do that, that is to say extend the federal form as a real alternative to beleaguered defendants in these cases, then you do eventually start to micro-manage courts and that is really, I think, constitutionally deeply problematic and vulnerable. That is the only extent of our disagreement, I think.

MR. PRIEST: Could I ask one thing? Another way in which – and it is quite striking –we can see this really as a national problem is the evidence that Dr. Weinstein presented about the migration of southern Illinois residents to St. Louis, Missouri to get healthcare. I think that is a striking phenomenon, and I would imagine that it is a phenomenon we will see in other states across other jurisdictions. Which is a serious federal problem that I think requires federal attention, especially in the context of the complicated healthcare system that we have in which a great deal of healthcare in essence provided to low-income individuals is provided by state-run or state-supported hospitals, in which case the free-rider problems are really quite serious.

I should say one other thing. I think we should not, although again I’m quite attracted to the competition among jurisdiction metaphor and idea, and I’m all in favor of competition as anyone who has seen me here before at AEI will know, we pretty much federalized our healthcare system already. That is, for the most part, this state-by-state tort liability is the last island in what is otherwise a sea of federal control over the provision of healthcare, so again, I do not view this, I think it is Michael that used these terms, that some that have opposed this legislation have. This is not a federal invasion of state priorities in any serious way, given the federal control over healthcare in so many other ways that already exist.

MR. GREVE: Yes. Let me clarify my views on that, too, because I think your objections are quite forceful. I’m not dogmatic about this at all. My concerns over federal versus state here are entirely pragmatic, with the proviso of these provisions that I think are unconstitutional. Here are some reasons why I am still, for all its costs and unwieldiness and untidiness, willing to give sort of continued and sustained state legislation in this area a shot.
 
What I meant is not that state competition eventually sort of gives you an optimal allocation of high-risk doctors or doctors in these high-risk provisions. I think the opposite is quite likely to be the case. I did not mean to say there are no external costs, obviously, there are, and those are substantial and more than enough of a warrant for federal intervention if we wanted to go that route.

My misgiving here is precisely the sort of politicization that Dr. Weinstein talked about, and what I mean by that is this. I’ll give you an example outside the medical malpractice area. Also an issue that was demagogued to no end, it is called subprime lending, that is say, mortgage loans on unconventional terms, and you have precisely the same coterie of interests there against the banks and financial institutions that you have in this particular area, that is the self-appointed consumer groups, the trial lawyers, and everyone screamed that this is exploitation. We need more liability, they are trampling on poor people… And there you actually have a vibrant state regime. And then the state of Georgia regulated these subprime mortgages, and they dried up overnight, the entire market in Georgia collapsed and within half a year, the Georgia State Legislature had to repeal that law that they had just enacted.

What people learned is there is no free lunch. There is a cost to all of these regulations in terms of availability, in terms of access, in terms of cost, and we are trying to do the best we can. There is such a thing as over-deterrence, and if you do not watch it, the entire market collapses and if we do not watch the entire healthcare market in Pennsylvania, it might collapse, too. That is a very, very bitter lesson but the harsh fact is that if you have all of this in one central debate, you deprive yourself of those harsh experiences and it is sort of a Washington bailout and we demagogue to no end because no wonder what passes there, it will be portrayed as sort of a bailout for the insurance companies, a bailout for the AMA, a bailout for the doctors who earn too much money anyhow. I really do want people to have the political experience of saying, “Oops, that was a real Pareto-optimal regulatory debacle, because everything moved to the next state and now we have to see how we fix it.” It is a political learning process.

Now, you can argue that maybe in the medical markets you cannot have that learning process any longer because the system is so integrated and so unwieldy and the money flows every which way. Maybe, and if somebody made that argument, I would be persuaded the other way, but I’m not yet. 
     
MR. FRANK: We have plenty of time for audience questions and right up in the front we have one.

MR. BRAZDA: My name is Jerry Brazda, I’m a long-time healthcare reporter. I have been in Washington reporting since 1965 when it all began down here and I know the people very well and I have questions, one of which is you say this bill would be put in next week, but who is sponsoring it? Second question is, Dr. Weinstein, do you favor this bill? The other two experts do not seem to be very enthusiastic about it.

MR. FRANK: I know it is Senate Bill No. 22. I do not know who is sponsoring it.

MR. WEINSTEIN: With respect to the second question, I think it offers a solution if it comes out to be modeled after the Texas medical liability solution. It has a proven track record over the last three years that has improved access to care, kept liability premiums down, and it is lowering healthcare costs in the state of Texas because it is changing the climate or the environment and the doctor-patient relationship in Texas right now.

MR. BRAZDA: But is this not the bill? Is the bill not going to resemble what we have in the past bill?

MR. WEINSTEIN: I have not seen the bill, but it is reported to resemble the Texas legislation.

MR. FRANK: I have heard that it resembles HR 5. I also heard that they are thinking of a brand new bill. When we scheduled this, we assumed that we would have a bill in hand for this conference and that did not actually happen, so there is a little bit of guessing going on here.

MR. MILLER: Tom Miller, Joint Economic Committee. Michael alluded to it briefly and then did not flush it out, which is whether we can do something through the federal side participation without it being all comprehensive, and that is the standard argument in favor of a national solution saying, we are paying to this, these federal taxpayers, primarily Medicare, 45 percent of all healthcare costs are paid for by the federal taxpayers more or less.
So we need this national solution because it is already embedded in the cost. They are older proposals to try to have a contract-based variation in liability where you get what you pay for. It is a little hard to do that like card-like flight insurance where you go in for a procedure and decide what your liabilities stated with these. So it would probably have to happen through insurance. George and Michael in particular, what do you think about saying, let’s get partly in, but not entirely, is it possible to have the condition of participation for a Medicare program? (Medicaid is kind of a split-level financing, you could argued about that and some other provisions.) Where you are not doing this across the board but saying, if the payer wants to set up these rules and decide where the people will go by it, that will be our liability. That is a little harder for the doctor to practice two different ways depending upon where the bill is coming from, and I suppose that is the countering argument.

MR. GREVE: On the surface, it sounds to me as, it sounds eminently plausible to me, but I reserve judgment. I would have to think about it.

MR. PRIEST: Oh, I think it sounds perfectly plausible in theory, but whether it could practicably be adopted, I just cannot imagine it. That is, it seems to me that, as I have said here, I think the cap that is being considered now is we just do not know what kind of effect it will have. It does not seem to be, it is not a tight cap like the California cap is at $250,000 but it is… but again we see this effect in Texas that even a cap that high has had some effects so maybe there is something to it. I would think, though, that those interests that oppose any form of liability reform would be even more vociferous for a liability reform that allowed the individuals to choose their liability regimes.

Tom, we have been talking about this with Paul Rubin and the like for years and years and years, and it has never gone anywhere probably because it makes so much sense, and that many individuals would choose liability regimes much more restrictive than it could possibly be enacted by Congress or by any of the reform states. That is probably why the opposition is so great to it, but it makes perfectly a good sense.

MR. FRANK: The one empirical data point we do have is New Jersey auto insurance, the one place where consumers to get to choose whether or not they want the full spectrum of liability options or whether they are willing to surrender their pain and suffering damages in exchange for lower insurance rates. And we are talking $400 to $800 a year lower and 90 percent of the consumers opt to say, “We do not want the non-economic damages,” which I find it fascinating because the whole trial lawyer argument says we need this to protect consumers and patients. And when consumers and patients were actually given the option, this is how much it costs for you to have this sort of protection, they say, “We do not want it.” But conceptually I’m all for giving people that sort of choice, and to the extent people who oppose reform say, “Well, the non-economic damages caps do not make that much of a difference,” you know what, some doctors advertise, “I’ll waive the caps.” I’m the doctor who will waive the caps because I’m so convinced that I do not commit malpractice and have competition that way.

MR. GREVE: Yes, I share George’s sentiment. I’ll just add this to it. There is, so far as I can see, extreme resistance to contractual elements in everything that affects healthcare. And if I have to introduce or reintroduce contractual elements into the insurance doctor-patient relation, I’m not all that this where it would start.

MR. FRANK: Other questions? In the back.

MR. OLDMIXON: Seth Oldmixon with Public Citizen, and my question is, I was wondering if you could talk a little bit about what role, if any, economic difficulties within the malpractice insurance industry itself play in rising premiums, [since] the outlooks for payouts and things are much longer than with other types of insurance like automobile. You have like a five- to nine-year in your outlook to put together reserves and things for payouts. And then, following up on that, (and I believe it is Ensign that is sponsoring S. 22), whether or not S. 22, if it is based on the Texas Bill, Prop. 12, I think it was in 2003, whether or not there has been enough time following the implementation of Prop. 12 to really have any statistical evidence as to the impact of that bill on premiums and the healthcare costs in general.

MR. PRIEST: Let me start with that. It is a good point of that what we know about Proposition 12 in Texas and how good the empirical information is. The early returns, I think, are quite impressive and they show a reversal, as I have mentioned before, in the provision of services especially in rural areas, the provision of high-risk specialties, so there has been a reversal from a decline and a withdrawal of those services to the now, as Dr. Weinstein pointed out, 3,000 new doctors in Texas since then.

MR. OLDMIXON: Is there enough to show causality there?

MR. PRIEST: Yes, I agree with you. I’m an academic and so if I were a referee for a paper, I would say, “Of course not.” From the standpoint of the evidence on which Congress typically relies for making judgments, I think there is evidence in spades to support the reform, but that is slightly a different story. But I appreciate if we have more time then we learn more.
 
Your first question about insurance and the character of the insurance industry: malpractice is obviously harder to predict and harder to rate than auto insurance or homeowner’s insurance. On the other hand, the time periods here do not always resemble those that are faced with regard to environmental losses or certainly asbestos, although Dr. Weinstein was telling me before the session began about the case in which he testified last week in which the alleged malpractice occurred 25 years ago when the child was born and is only manifesting itself now. So we have got long-tail problems with regard to medical practice, too.

One of the major things of Tom Baker’s book called The Malpractice Myth is his claim that the problems with regard to medical malpractice insurance are a feature of the property casualty insurance industry itself and of capacity problems that are related to the so-called insurance cycle of moving from hard markets to soft markets. There may be some evidence for that with regard to the malpractice insurance crises that were suffered during the mid-'70s and even more severely during the mid-'80s.

The difference now, though, is we have, and I think Dr. Weinstein provided a great deal of evidence for it, what might be called a "crisis," although I hate to use the word, with regard to medical malpractice insurance, we see the spike in premiums and various areas we have seen, as I say, valuable service is being priced out of the market on insurance grounds, insurers withdrawing coverage. We do not see that in other industries, though. But what was different that during mid-1980s is there were number of industries that faced insurance problems at that time. I wrote all about that, about the daycare centers, physicians too. But there are municipal liability problems, lots of problems associated with liability that were [shown to be], I think by the studies that were done then and have been done since, not totally but partially attributable to insurance financial features rather than to the expansion of liability, though only partially and a lot of it was expansion of liability, too.
 
We do not see that here with regard to the medical malpractice now. That is, we do not hear or see daycare centers going out of business or municipalities forming municipal insurance pools. We see doctors forming their own mutual insurance pools because they cannot get coverage in an insurance market, but we do not see the other phenomena that had been associated in the past with crises that result from, or spikes in insurance premiums that result from, insurance financial phenomena as opposed to the underlying liabilities. So that is why I think it is a real phenomenon and that Tom Baker’s explanation and those of others that have opposed any type of reform really do not hold water.

DR. WEINSTEIN: Just to amplify, Professor Priest just reminded me of [an anecdote].  I live in Iowa, and we never send residents to Texas. They never go to practice in Texas. But anecdotally, out of last year’s five who finished, two went to practice in Texas specifically because it was a state where the liability crisis have been solved and there were plenty of job opportunities, and this was a wonderful opportunity for them.

But the area we never talked about today in the liability issue was statute of limitations because in orthopedics, I mentioned to you, there is still 600 folks a year or plus who apply for orthopedic residencies. We have adequate applicants, but where they go afterwards is to the states which have the crisis solved. But what I do, pediatric orthopedics, the statute of limitations in many states lasts two years beyond the time the child reaches the age of 21. Hence, the case he was alluding to, a malpractice suit was filed 23 years after the actual alleged event. And so out of the 650 graduating orthopedic residents last year, only 12 went into pediatric orthopedics, a huge access-to-care issue for children who have musculoskeletal conditions in the very near future.

MR. FRANK: Going back to the insurance question—we actually have a Liability Outlook coming out on this in the next week or so that Martin Grace and I wrote—but there has been a huge shift in medical malpractice insurance, who has been providing it over the last 15 years. And it has gone from the for-profit industry to what is now a majority doctor-provided mutual insurance, and you would have to believe that the doctors are essentially conspiring to charge themselves too much to think that this is really insurance motivated.

And indeed the national statistics show that, for example in 2003, the cost of claims, including claims and defending claims and administrative costs, was 138 percent of the premiums actually taken in that year. And while they do not need that number to be less than 100 percent to make a profit because as you noted, the five- to nine-year lag time and the opportunity to invest that and these investments tend to be fairly conservative investments in bonds and the like. But at 138 percent, that is very definitely money-losing and then very definitely a problem that reflects the fact that premiums are not covering what the cause of the medical liability system is.

MR. GREVE: Just to ask. I mean, because I’m puzzled about this, too. Maybe I’m just confused here. Three years is particularly short considering the lag time, right? So because you do not have any guarantee against the future erosion of the reforms that have just been enacted, right, you are basically taking a gamble on the future. Yes?

MR. FRANK: The advantage of these reforms were… they previously had legislative reforms that were struck down by the Texas Supreme Court, so they moved it to a constitutional referendum. And so the Texas reforms that were passed in 2003 are pretty iron-clad unless they get a new referendum that throws them out, but that will…

MR. PRIEST: Michael, the best… can I just add one thing? This way, you can notice, though, is Dr. Weinstein presented some of the evidence about Texas, the premiums have been going down. So you have insurers that are making productions about what this long tail is going to be, and over the last two years they have been dropping premiums. So that is a pretty good, I think pretty good economic evidence.

MR. GREVE: And the thrust of my question was simply that seems to be a very, very large marginal effect that is attributable or seems to be attributable to the reforms that have been enacted. I think Ted’s answer is probably right. That is to say, that those reforms have a level of entrenchment that created a sufficient degree of reliance that this stuff would not be overturned by some gonzo Supreme Court decision 15 or even two or three or four years later. That would be actually be an interesting thing to look at.

MR. FRANK: Dennis, yes?

MR. COYLE: Dennis Coyle from AEI. Great presentation range, really enjoyed this, and excellent set of data there. It is very persuasive that there is substantial problem and currently paying suffering damages are often perverse and caps make a lot of sense. And, while I agree there are causation issues, it is a very significant evidence that reform does in fact have a positive effect and that is very viable. But I’m sitting here and this maybe a little bit too far from my field, perhaps politically in left field, but there are two quite different problems going on, I mean, and one is perverse effects of excessive damages on medical care.

But the other is perhaps more the Baker concern that there should be more litigation, not less, but why? Because I think even in your figures did not suggest that there are only three percent of victims of malpractice actually sued. And so then I start to wonder whether the problem is not a larger one of having a system that is not so much producing excessive imposition of cost related to malpractice, but a maldistribution of those costs. If you have excessive penalties being imposed on a few, but then you have a lot of victims that are not going compensated whether it is time to think about it entirely different to your system that will provide for more effective compensation, detecting whom victims are and getting them compensated at lower overall cost and not imposing excessive cost on a few and unfortunate doctors who get stuck with the suits.

DR. WEINSTEIN: I’m going to refer to Professor Priest in a moment to address the three or four studies that were done where those figures came from. They are recorded in the Joint Economic Commission’s paper this year, but they have been widely quoted in the literature one from New York data, California, Colorado, I think, or Utah.
 
But I think the issue is that physicians would say, there definitely is malpractice that occurs and patients need to be compensated but unfortunately each of us in our own disciplines and each hospital, each department, each setting has morbidity and mortality conferences to address all the problems that have occurred over a certain period of time. Under the current system, we cannot lessen the number of individuals who are harmed, and I think that that number is, Professor Priest will address, that is probably not realistic. But the fact of the matter is we all want to address patient safety issues and improve systems and make sure that patients who are harmed are compensated, but also prevent harming others in the future. And the current system in our morbidity and mortality conferences prevent any of that data being used because it is discoverable, and any physician who has even one suit against them may be unable to practice again in that state, get additional coverage—so when a physician looks at that, it is not worth the risk to not be able to practice medicine.

MR. PRIEST: I have got a slightly different answer. I have looked at these studies. There had been a number of studies starting with the Harvard study in the late ’80s, as I recall, and a couple of other studies that have been post-event studies that have generated the statistic, only three percent sued, only 10 percent sued in one of the other studies. I’m a little suspicious of these studies. I mean, basically they appear well-designed, that is, they have professionals that are reviewing medical records, but they are very much after-the-fact hindsight studies where a doctor will read a record, find out what the complication, what happened.

First of all, they only looked at people that suffered medical complications. If you walked out the hospital and you are fine, you are not in the study. We are only looking at people that had to stay in the hospital, or had to come back, something like that, or died. And then they have a doctor look at the medical record and say, “Could we have done something different that might have not led to this particular complication?” If they find there is something that could have been done differently to have avoided this adverse complication, that is called malpractice. Now, that is not exactly the way lawyers, at least, think the negligence system ought to operate, that is, you have to put yourself in a position of the physician making the decision.

What was the range of alternatives of that physician faced? Was the choice of the physician made a reasonable choice under that circumstance? I think you would get different results if it were designed a different way, but I have thought about but have never executed a study based upon my theory of how the study should be done. So I’m suspicious of them.

I’m suspicious in another sense, too. That is and this relates to Tom Baker, who uses this three percent statistic a lot in his book. If we have so few people that are filing malpractice claims that are suffering malpractice, why do we get this withdrawal of specialty services, why do we get insurers dropping out, market insurers dropping out of business? The business of a market insurer like St. Paul’s is to provide liability insurance. If we have an increase in liability, that should be an increase in the market for those insurance services.

Now maybe you are right, though, in a different sense, that is, that in the context of the provision of medical care our conception of a liability system, which is placing selective incentives on those parties that create more harm than others, just does not work. It may just not be effective in terms of either creating incentives for the reduction of harm or, as you say, appropriately distributing among those that have suffered harm, the insurance proceeds or insurance receipts that have been provided in the market. It just may be a field in which we ought to scrap the tort system altogether and think about some other way of dealing with the problem.

That, I think, remains to be seen. Surely, if those studies are correct and a very small proportion of people are bringing liability claims, there is a real question what we are gaining by using the liability system at all, which I do not think it is a left field viewpoint at all. I think it is a very good point.

MR. GREVE: I could just augment it for five seconds. Let’s assume those numbers, the three percent number or 10 percent number, suppose that is true. What the hell does that prove? I’m persuaded if you looked around the millions of contracts in America that are breached everyday, I’m quite sure that there are lots and lots of law firms that goof and “malpractice” everyday. Do we really think it would be efficient if we had much, much higher level of breach of contract litigation in America? Do we really think it will be efficient and sensible if everybody who in fact suffers from malpractice ran to court? Do we really think that low-volume, high-transaction cost, suits, and then let’s litigate our way to prosperity! That is the ticket. I mean that is just crazy to me. The only two questions you can ask yourself here is either you worried about slow, I mean the low-claim rate because people are not compensated, right? But there the ready answer is “no.” I mean the system as a mechanism of compensation is crazy to begin with, and the more extensive the litigation, the crazier the system gets.

And the other question is, does the system as a whole create an efficient level of deterrence? That, to my mind, is a sensible question, but there I agree with George Priest. The system already overdeters, so that to the extent that you improve the claim rate, you will create, if anything; if you do not do anything at the award level or the compensational level so to speak, create even more over deterrence. So one way or the other, I think that this is nothing to these numbers.

MR. PRIEST: Think of some of the other statistics that Dr. Weinstein presented. I wrote this down: 50 percent of neurosurgeons are sued every year. One third of orthopedic surgeons and emergency physicians are sued every year. Now if we only have three percent of malpractice claims brought, that means that we really want 30 times more litigation than we are getting here and that cannot be true. I mean we cannot want 100 percent of neurosurgeons to be sued three times every year. I mean that is just not a sensible system of liability or of healthcare. So either this number is way off, or again we should be applying this economic conception of tort liability to this field.

MR. FRANK: In the back and then right.

MR. CAMPBELL: Doug Campbell. I’m just a consultant on his own behalf. I have no client in this area.

A couple of points, one of them is back on the distribution issue and I think this relates to the deterrence issue. I think it is reasonable to suspect that the three percent, if you want to call them that, or the 10 percent or whatever it is, those cases are chosen not based on the egregiousness of the conduct, but on the severity of the outcome. And I have personal experience with that. My father-in-law was a victim of some malpractice in a hospital setting, where both the hospital and the physicians were at risk. He could not find an attorney to take his case and this is in Florida. This is in your worst-case state. And the reason was a number of attorneys that he counseled with said, “I’m sorry but unless you are dead or unless you are younger and have some severe disability as an outcome, and it was not just that you lost all but a foot of your colon,” which was the case in this particular outcome, “We are not going to handle your case. We have too many other more lucrative cases on our docket.”
 
Now that has implications for the deterrence factor in the system. I think people intuit that if it is not the subject of some study. And in one sense that makes them throw up their hands and resort to the insurance system as a cost-spreading, risk-spreading mechanism. But it would almost prompt me to say that we may have too much litigation, but it under-deters the kind of conduct and the kind of actors that need to be deterred, and that leads into a question that I would like to put. Most people really do not care so much. The man on the street does not care so much about the adequacy of the redress mechanisms that the legal system or the legislative system provides for them. They care much more about not getting injured in the first place if you put that to them.
 
Reducing therefore the incidence of malpractice or deterrence would seem to be prime social good that we hoped to secure by whatever system we put in place. If that is not sufficient, and you can argue then that among those 97 or 90 percent are often the most egregious cases by people who really should not be practicing, then why not couple this initiative, which seems to be completely reasonable, with things that promise to perhaps beef up doctors' regulation of themselves? I’m operating on the basis that doctors who are incapable have proven themselves essentially incapable of regulating themselves, just as lawyers have in this country, why not sweeten the political pot by coupling those two measures? I think you would undercut a lot of the advocacy groups’ misgivings about this kind of thing if they were a quid pro quo on the other side still focus on what is good for the public. Any comment?

MR. WEINSTEIN: Yes, I will address a couple of those. First of all, I think you are correct in the sense that the extent of the award (and the chance of getting a settlement) is usually determined by the extent of the injuries as opposed whether there is negligence or not.

Now you make a very good point, which we 100 percent agree with, that we need to police our own to get rid of bad doctors, and every single one of our associations that belongs to Doctors for Medical Liability Reform has taken great steps to do that. But number one, state licensing boards are usually understaffed and underfunded, that is one. Number two is the entire liability crisis makes it very difficult for a physician to turn against another physician to try and get rid of them without sacrificing themselves. I talked to another attorney about this at one time and they said, “Well, it just takes a few physicians to sacrifice themselves.” Well, physicians are not going to sacrifice themselves, but each of our associations is working with state medical boards, with the certification boards that belong to the American Board of Medical Specialists to try and get rid of the bad doctors because we realize that the statistics show that about five percent of physicians are responsible for more than 50 percent of the claims. But I could not agree with you more about getting rid of bad doctors, and we are trying to do that but I think that the current liability system impedes any efforts of doing that and also in improving systems that prevent patients from getting harmed.

MR. FRANK: I want to add in. I think that five percent leading to 50 percent of the claims is a little bit misleading because I do not think it is five percent of the neurosurgeons leading, 50 percent of the neurosurgery claims. I think it is neurosurgeons who are mostly found in that five percent and not because neurosurgeons are more incompetent. But I certainly agree on the underdeterrence versus overdeterrence and the sort of randomness we have in the medical liability system.

I would like to point out there is a very recent case in Dallas where a hospital tried to discipline one of their doctors. Precisely because they suspected that he was one of the doctors who should not be practicing and revoked his privileges, and he turned around and sued them, and got an award of tens of million of dollars. A lot of cases of hospitals find themselves in a damned-if-they-do, damned-if-they-don’t situation.
MR. LEHMANN: Ray Lehmann, AM Best. I can just state briefly to the Texas situation. I mean you are correct that there were number of insurers who had pulled out and said specifically that they would return if this passed. If you wanted to look at this empirically, though, at the end of 2003 when this passed is also the end of the hard market that kind of started with September 11th. You lost a lot of reinsurance capacity, interest rates were zero, and so that has an effect as well, and it is hard to segregate to those effects.

But talking not about the number of malpractice incidents that leads to claims but there is another set of numbers that Dr. Weinstein was using, most of those suits that are filed are dismissed, about three quarters are dismissed as meritless and most of those that proceed or settled, and of those that actually reach a verdict, only a tiny portion actually go to the plaintiff.

So all of those things accumulate cost along the way. There are defense costs, and those all go into the cost of malpractice insurance, but is it fair to solve that problem, to choose those cases that theoretically would be most likely to cause egregious harm are those with large awards? If you are going to just cap those, is that a fair way of solving the problem of too many meritless cases being filed, which seems to be a big part of what the malpractice crisis is.

MR. PRIEST: Well, looking at these statistics of plaintiff success rates and numbers of percentages of cases that go to trial and the like is a little complicated because it is necessary to understand what the settling strategies of the various parties are in order to appreciate those statistics. One of the reasons that the plaintiff success rate in medical malpractice is relatively low compared to other fields is because of the reputational harm to physicians from suffering an adverse verdict, which leads them to encourage their insurers to settle the case, and again on terms based on what would be expected if they were to litigate the case so that it is not quite fair for us here to say that the effect of these proposed reforms is simply on a merit where the cases, the effect is going to be on all settlements, and even it will have an effect in reducing the number of meritless cases, too.

I do, though, want to emphasize again. It is a pretty modest reform. I mean a limit of 750,000 in pain and suffering, that is a lot of pain and suffering. Where there are no limits, again, on compensatory damages are question, I presume that there is in some of these bills suggestions of limits on punitive damages. I presume those will not survive. They never have survived in most of this congressional legislation. So it is a pretty modest reform, and that it - I appreciate your point about Texas and the point this gentleman made. We need to know more about Texas, but it is, we do not know enough but it is pretty striking they get any effects in a short period for with the reform as limited as it is. So again I think that is encouraging.

MR. FRANK: Other questions? In the back.

MR. KAUFMAN: David Kaufman from the Senate Finance Committee. You mentioned models outside of the traditional tort system and there have been some proposed that I have, to some extent, in existence I believe, with respect to having a judge with health expertise and taking it to some extent out of the hands of a traditional jury and letting the judge who is an expert arbiter decide on what constitutes a reasonable judgment. Sometimes it can be combined with something that involves a little bit more disclosure from the physician, and thus help some of the medical community. So with respect to Dr. Weinstein, does this seem like a viable model that would enable more sharing within the medical community through the mortality/morbidity conferences to perhaps reduce simply the rate of medical errors? And with respect to the health courts, is that perhaps a viable model?

DR. WEINSTEIN: Well, from Doctors for Medical Liability Reform’s standpoint, we are not advocating a particular solution which is educating and informing the public and policymakers about the effects of the crisis. I think that there are lots of different solutions. There is a no-fault that is in play in New Zealand which works well for that country, which has more of a socialized system. As I think I mentioned in my last slide, the health court model, which has been touted by Philip Howard, maybe that is another solution, I’m not sure. But as you saw the American Bar Association came out against even trial projects or pilot projects to look at that model. So there may be many other solutions. The one that is on the table has a track record that has been alluded to.

MR. PRIEST: One of the problems with professional courts is constitutional. It has been attempted. Illinois had a medical malpractice reform in the 1970s that attempted to institute professional courts that was found unconstitutional. And in some sense we just do not know what the answer would be with the medical professional court.

What I think would be another attractive reform, however, and this follows what Tom was saying and was asking about, would be to, and I have not thought about how it has to be achieved legally, although I’m not sure it has to be constitutional, would be to authorize patients and doctors to agree to arbitration with respect to any malpractice claimants. It is a variation on the contracting for a different liability regime.

MR. KAUFMAN: [inaudible]

MR. PRIEST: But authorizing arbitration would be a way of achieving a professional court in a slightly different way. That is, typically in these arbitrations, one party, the plaintiff chooses an arbitrator, the defendant chooses an arbitrator, and then two get together to choose someone else, not always, but typically will choose someone that has some expertise in the field. I think that will be a very worthy experiment to see how that worked. But again, I do not know that it is on any reform agenda. It is not on any that I ever seen yet, but I think it is a worthy proposal.

MR. FRANK: If I can throw a question to Dr. Weinstein, one of the examples that we are seeing a bit in the press now is the American Society of Anesthesiologists and I may have the name slightly wrong there, but as the story goes, they got together and devised a set of standards to improve the way they deliver healthcare and what technology was required and what practices they should be using, and they reduced their death rate from anesthesiology accidents 95 percent over some stretch of time and over the same time reduced their malpractice cost 50 percent in real terms. Now that 95 percent, 50 percent difference to me shows a bit of how random the malpractice liability system is, but I’m wondering whether you think the anesthesiology example is a special case or whether that is something that can be generalized other practices.

DR. WEINSTEIN: No, I think anesthesiology has been a model because they were at the forefront of the patient safety movement and did indeed do the things that you are talking about, and all of our various specialties had been involved with the patient safety movement before there was a patient safety movement. In our own specialty, for example, we initiated the “sign your side” to eliminate wrong-side surgery which has been adapted by JACO [??] as a standard and all of us are working on the patient safety initiative to try to improve the quality of care we deliver to patient so, yes, the anesthesiologists are, I think, the most notable example. All of us are working on that. We have talked with different insurance companies about pilot projects that we might be able to do, but I think again we are impeded every step of the way by the current liability crisis.

MR. FRANK: We have time for one more question if there is one. Go ahead.

MR. : [indiscernible] to quote that it is sometimes attributed to Rumsfeld but is actually from Eisenhower, “If you cannot solve a problem, enlarge it.” Rumsfeld is doing that in Iraq but we will get to that in a second. In terms of the undercompensation or the under-deterrence, we are looking at just kind of what is legally actionable and the flaws of the malpractice system. We have a larger problem in our healthcare system, which is it is not delivering what we want to have happen, which is better outcomes. Would a different route at a lower level of radioactivity, although it is hard to accomplish, but at least it is feasible, if you think far enough down the road to change the reimbursement structure, so we are paying for better outcomes and better performance, as opposed to going to court over the extreme case. And then in the aggregate, you would be getting better results out of your healthcare and fewer actionable incidents, because in effect the overall system would be asked to perform better rather just whether this is just an extreme enough case and a big one, as opposed to kind of how it does everyday in broader ways since you got smaller signals to improve performance in smaller ways.

MR. FRANK: That may be beyond the scope of most of the people in the panel, but Dr. Weinstein…

DR. WEINSTEIN: Well, I think you raised an interesting point. I think we are all concerned about the quality of the healthcare we get, and that is what you see in the Medicare debate and the payment formula and what you hear about pay-for-performance or value-based purchasing, and I think we are all in favor of developing guidelines which improve the outcome of patient care, so the patients are better cared for. What is critical on that debate is that these guidelines are developed by the individuals who provide the care, that they are risk-adjusted, that they are pilot-tested, and that they do indeed improve the outcome of care. But the issue of liability reform and how that impacts on physician payment, which is a whole other debate here, is also a big effect, because the one of the reimbursement costs of Medicare is the liability, it is more than part of the formula. It is only listed as a small percentage out of proportion to what the actual cost to deliver that care are. So it is another debate about there, but I would think that you can safely take away from the fact that every single physician group is interested in improving the quality of care by developing measures which indeed do improve performance and outcome of patients.

MR. FRANK: I would like to thank the panelists for what has been a marvelous discussion and thank the audience and call this adjourned.

This transcript was edited by AEI Research Assistant Philip Wallach.