The Malpractice Crisis

Some solutions


A crisis in medical malpractice insurance is spreading throughout the United States, which threatens the demise of the private practice of medicine. The problem has resulted from the escalating rate of malpractice actions and higher jury awards, which has not only caused malpractice premiums to soar, but also has reduced the availability of insurance coverage because of losses experienced by malpractice insurers. Many doctors don't earn enough to pay the new premiums—which go up to $36,000 per year for surgeons in California, and higher yet in the future.

Legislation has recently been enacted in some 25 states to try to deal with the crisis. The problem is so serious in California that many Los Angeles-area physicians have begun a "work action" and have closed their offices to dramatize their plight. Their object is to pressure the legislature to come up with some relief. Governor Jerry Brown has responded to a demand that the state create a malpractice insurance fund—with limits on rates—by proposing that doctors fulfill their "social obligation" in the form of providing free medical services to the needy (for 20 days a year) as the price of the state "bailing out" the doctors.

Although Brown has previously recognized that, instead of solving a problem, government intervention "might make it worse," his approach to the malpractice crisis reveals his willingness to expand state involvement. In a sense, it is good that Brown demands what he calls a "sacrifice" from doctors as a condition to the state's guaranteeing a maximum insurance premium (which means nonconsenting taxpayers will be forced to finance a doctor's cost of doing business)—because this helps teach a swift lesson about the costs of statist remedies.

There are no easy answers to this complex problem. We fear that many "cures" which are being advanced are worse than the disease, and we comment below on some of the diverse proposals before proceeding to outline a program which we support.

• Statutory limitations on contingent fees and insurance rates? Price controls on contingent fees and insurance rates would be both ineffective and foolish. Reducing the fees charged by attorneys in malpractice cases would allow the injured patient to retain a larger portion of the award, but wouldn't lower the award itself, so that the costs of malpractice would remain the same unless the fee be forced so low as to inhibit smaller cases (even if meritorious) from being filed. On principle, any doctor who advocates statutory limits on fees charged by lawyers or insurers should be prepared for similar constraints on physicians. Since a main concern of government is to keep medical costs down (it has been estimated that federal, state and local governments either purchase or provide about 70 percent of the approximate $120 billion spent annually in the U.S. for health services), the easiest statist approach would be to nationalize medicine and limit the income of doctors.

• Strengthening of state licensure powers? Included in the current debate are proposals to put more "teeth" in regulatory boards and strengthen laws to suspend or revoke licenses to practice medicine. Exactly the opposite is called for. In Capitalism and Freedom, Milton Friedman persuasively demonstrated how licensure has reduced both the quality and quantity of medical services, resulting in higher costs to consumers. The AMA cherishes its monopoly control on access to the profession, but it is germane for doctors to now reevaluate the paternalistic arguments supporting licensure and, instead, consider the system of certification by private, voluntary associations (see "Editorial," REASON, October 1974). In any event, the argument to strengthen licensing is a red herring, since incompetent doctors need not affect the cost of malpractice insurance if insurers engage in selective underwriting and reject undesirable risks.

• Impose statutory ceiling on malpractice awards? There is no rational way for legislators to determine how much injured patients should recover from negligent doctors. Presently, the law in many states prevents doctors from entering into enforceable agreements with their patients to voluntarily limit liability. Eliminating legal barriers to the enforceability of private agreements to limit liability is the best single step a state legislature could take to alleviate the malpractice crisis. In this context, it is important to distinguish between private, consensual limits on liability, and limitations which are imposed by the state (which are analogous to a law restricting the number of hours a physician may work).

• Compulsory arbitration? Proposals for compulsory binding arbitration would substitute an arbitration panel instead of a jury trial as the forum for determining malpractice claims. Government courts are obviously costly and inefficient, but there is insufficient experience to expect that arbitration would help the situation. While doctors and patients should be free to voluntarily contract for arbitration of malpractice claims (and legislative reform is necessary where private arbitration agreements are unenforceable), they should not be required to arbitrate against their will. As a tactical matter, arbitration has numerous pros and cons, which make it a two-edged sword. Doctors presently win a high percentage of the cases which go to a jury, and it is quite possible that binding arbitration would aggravate the malpractice problem.

• Shortening the statute of limitations? This proposal would clearly reduce the costs of insuring doctors, at the expense of depriving patients of a remedy if they are unaware of the doctor's negligence within the specified limitations period (e.g., one or two years). The entire subject of statutes of limitations, which prevent the bringing of actions after passage of a specified time period (even if no prejudice results to the defendant from the delay), merits further analysis. Rather than arbitrary limitations periods set by statute, we favor the use of private agreements between doctors and patients to voluntarily limit the time in which an action may be brought.


Here's a brief summary of our program for reform:

1. Recognize the validity of agreements between doctors and their patients to voluntarily limit liability for malpractice, and to voluntarily limit the time in which a patient may file a claim. (These agreements can be drafted to cover some, but not all, emergency cases.)

2. Eliminate monopolistic, anticonsumer restrictions on the right of individuals to practice medicine without a government license (e.g., nurses and paramedics) and restrictions on the right of doctors and lawyers to advertise their fees, to allow market forces to reduce the cost of professional services.

3. Deregulate insurance carriers to allow innovative market approaches, such as doctor-owned insurance companies and the sale of malpractice insurance coverage directly to patients, so that patients may decide for themselves (just as they now do for life, disability or hospitalization insurance) whether they desire to bear the cost of insurance premiums.

4. State and federal income tax credits (not merely deductions) should be allowed for the full cost of insurance coverage.

Pending the enactment of these reforms, if malpractice premiums are unmanageable, it may be prudent for doctors to "go bare"—practice without malpractice insurance coverage—plus enter into agreements with patients to limit liability (even if not clearly enforceable), and take appropriate steps to protect their assets from potential claimants. Depending on availability and cost, uninsured doctors also might join a plan for prepaid legal defense (to insure against the costs of legal defense only).

In short, to prevent the malpractice crisis from turning into a disaster, the soundest approach lies in reducing—not increasing—governmental intervention in the practice of medicine.