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A Medical Mistake: Doctors and Insurers Say Malpractice Awards Must Be Capped.

By Christopher H. Schmitt
U.S. News

The case of Samuel Desiderio, while tragic, seems to give perfect voice to the complaints of many doctors who see a legal system gone wild. As a 4-year-old, he suffered brain damage following surgery at a New York City hospital. A state court jury awarded him a hefty $80 million for medical expenses and pain and suffering. In April, just two months ago, an appeals court approved boosting the award against his doctors and the hospital to an astonishing $140 million.

But then there's Joan Butsko, a retiree from a Reese's Peanut Butter Cup plant in Hershey, Pa. Her doctor missed a malignant lump in her right breast during a routine mammogram, she claimed. That allowed her cancer to surge beyond a more treatable stage; she now begins each day knowing she'll probably die sooner because of the delay. In May, a jury agreed she was wronged but awarded her only $250,000. "Juries are extraordinarily discriminating," says her attorney, Thomas Kline.

As doctors walk off their jobs around the country to protest the soaring cost of malpractice insurance, it is juries like Samuel Desiderio's that they blame. "We have a dramatic crisis," says American Medical Association President Donald Palmisano. Soaring awards, he says, have led to rocketing insurance premiums, which are even forcing some doctors to shutter their practices. Another president, who lives in the White House, agrees. "Because of excessive litigation, everybody pays more for healthcare, and many parts of America are losing fine doctors," President Bush said in his State of the Union address. So Bush, doctors, and their insurers are pushing a blunt remedy: Cap "pain-and-suffering" damages at $250,000, and thus hold down doctors' premiums. The House has passed cap legislation, and the Senate is expected to take it up shortly. Many states have already passed their own damage limit laws.

Wrong solution? But as Joan Butsko's modest award suggests, caps may not be the answer. Insurance costs are up, but it's not clear that juries or the courts are the culprits, or even that the crisis is as dire as it's being portrayed. The statistics don't line up as neatly as doctors and insurers would have them, and left out of the argument is recognition that ordinary market forces may be at work instead.

For starters, there's no explosion of cases that might drive up legal costs. The number filed each year has remained fairly steady during the past decade, according to the National Center for State Courts. Further, most malpractice plaintiffs never even see a jury--two thirds of their cases are dropped or dismissed--and when they do, it often isn't a sympathetic one. Only a tiny sliver of cases filed--just 0.9 percent of some 5,500 cases surveyed for 2002--produce jury verdicts for patients claiming injury. And even the size of that small wedge is down by half since 2000, according to the Physicians Insurers Association of America, the trade group for malpractice insurers owned or operated by doctors, which account for about 60 percent of the market.

Within that wedge, the number of payments that doctors' insurers make following jury verdicts has held steady in recent years, at around 400 annually, according to a U.S. News review of hundreds of thousands of payments of all kinds reported to the federal National Practitioner Data Bank. These payments total about $143 million each year. Malpractice insurers are required by law to report their payouts to the system.

Doctors and insurers say that frequency of claims aside, the prime issue is the size of awards. Indeed, the size of insurer payments stemming from jury verdicts has been increasing in recent years, U.S. News has found; in 2002 it reached a median of $295,000. But, that's far below the median jury award of $1 million the AMA and others often cite. Even assuming two defendants per case--a number insurers say is typical--plus other adjustments, the median payment remains hundreds of thousands of dollars short of the $1 million figure.

In fact, settlements, not jury verdicts, make up the real action in the relatively few malpractice cases that eventually produce awards. Overall, about 3 in 10 cases filed end with settlements. While these deals are agreements among the parties, doctors and insurers say juries still figure prominently, because fear of a big jury verdict drives many settlements.

But it's not clear that verdicts are really the whip behind settlements. Over time, the size of a typical settlement payment has grown somewhat faster than a typical jury verdict payment. And while the sum from jury awards has remained stable over the past decade, the total of payouts from settlements has soared, especially recently, when doctors say the crisis has emerged. Thus, it's harder to argue that wildly growing payouts from jury verdicts are propelling settlements.

In states that have already imposed caps, the results are surprising. Limits in 19 states have failed to prevent increases in premiums, according to Weiss Ratings Inc., a Florida firm that rates financial companies. But insurers have benefited--the caps have clamped down on payouts to patients. Looking at three high-risk medical specialties, Weiss found that in states with caps, malpractice premiums actually grew faster than in nearly three dozen states without them. One possible reason, Weiss Ratings says: In some cap states, insurers may have had more financial problems, which would create pressure for the caps and premium hikes. "The legislative push to ram through new caps is premature and dangerous," says Martin Weiss, the firm's chairman.

Ups and downs. It's not clear what is driving costs higher. According to Weiss and others, several forces are at work--chief among them the usual business cycle of insurance. Early in the cycle, competition or a desire to expand encourages low premiums. Later, losses clash with cheap rates, forcing premiums up. In addition, the number of malpractice insurers has declined, so there is less competition to keep rates low.

If things are tough now, malpractice insurers enjoyed good fortune during the 1990s. The American Academy of Actuaries, the mathematicians who crunch the numbers of losses and premiums, notes that losses were lower than expected, investment income gave a strong kick, and the industry's surplus--the amount available to cover losses--showed strong growth.

Standard & Poor's, a financial services industry research firm, likewise sees a cycle playing out. In a new report, S&P says malpractice insurers' loss ratio has been improving since 1998, and the industry should soon return to profitability and strengthening reserves.

"Doctors and insurance companies are all saying it's the dastardly lawyers, [but] nobody who really studies it seriously thinks it's a bunch of million-dollar verdicts exploding that's causing this," says J. Robert Hunter, insurance director of the Consumer Federation of America and a former regulator.

Doctors and insurers insist a jury-driven crisis is real. They say examinations like those by U.S. News or Weiss Ratings are flawed, and that they are hobbled by bad government data. State-based rate regulation is a failure, they say; caps work and will bring down costs for doctors, making healthcare more affordable and available. "It's amazing, we keep hearing these arguments against the caps, when we've got the science to show it," says the AMA's Palmisano.

Yet history, not science, hints at a different story. During an earlier malpractice crisis, 17 years ago, there was a little-noticed development in Florida. Legislators had enacted rules like those being pushed today, and one malpractice insurer, St. Paul Fire and Marine Insurance Co., told regulators what the changes would mean: no savings in payouts, hence no rollback of premiums.

There's little doubt premiums are up today, as obstetrician Darren Housel knows. His annual bill recently hit $100,000, so he fled Las Vegas for Utah, where it fell to $36,000. But, says Hunter, limits on damages won't resolve increases like the one Housel saw. "Caps don't work to cut costs," Hunter maintains. "And if they do, the money just goes to insurance company profits."

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