Injury Law Blog

Aug 09, 2018 | Barry Chasen

Tort Reform Myths

$11 billion and $700 million. That’s almost $12 billion. These are the 2016 profits of the following publicly traded property and casualty insurance companies: Travelers, Allstate, USAA, Progressive, Liberty Mutual, Hartford, FM Global, Loews and Fidelity National.[1]

This does not include the twenty-four billion dollar profit that Berkshire-Hathaway, the owner of Geico, earned in 2016.

Nor does it include the 2016 profits of the larger mutual property and casualty companies in the United States: Erie, $210 million; Auto-Owners, $386 million; State Farm, $250 million; Nationwide, $910 million; and even the relative newcomer to TV advertising, Farmer’s, earned $148 million (or $37 million every three months).

And don’t get me started on the health insurance companies. Let’s look at their second quarter of 2017: United Health Group, $2.3 billion; Aetna, $1.2 billion; Anthem, $855 million; Cigna, $813 million; and Humana, $650 million. The top 6 health insurers reported $6 billion in adjusted profits in the second quarter of 2017.

What are the myths?

  • My insurance premiums are rising because of all the tort lawsuits.
  • If we restrict victims’ ability to bring medical malpractice suits, healthcare would improve and its costs would be reduced.
  • Because doctors are afraid of getting sued, they practice “defensive medicine.”
  • Frivolous lawsuits clog the courts.
  • Caps on damages would reign in “out of control” juries from awarding lottery-size sums to plaintiffs, cause malpractice premiums to fall and thereby reverse the doctor shortage caused by doctors fleeing the profession.
  • Punitive damages are awarded too often and are too high.
  • Juries are more likely than judges to award punitive damages.
  • Damage awards are escalating out of control. The tort system has been turned into a lottery system favoring plaintiffs.
  • Juries get caught up in the emotion of trial, ignore the law and find for sympathetic plaintiffs.
  • Tort plaintiffs are using the courts to cripple American businesses.

In an article titled “Malpractice Myths” written by Bob Herbert on June 21, 2004, Mr. Herbert says, “It may be hard to understand why ‘tort reform’ is even on the national agenda at a time when insurance company profits are booming [Barry’s note: just like today], tort filings are declining, only 2% of injured people sue for compensation, punitive damages are rarely awarded, liability costs for businesses are miniscule, medical malpractice insurance and claims are less than 1% of all healthcare costs in America and premium-gouging underwriting practices of the insurance industry have been widely exposed.” These observations are no less true in 2018.

To discuss these issues, I’m going to group the myths in three categories:

  1. Insurance rates go up because of frivolous lawsuits and lottery-sized awards.
  2. Without the worry about medical negligence, healthcare would improve, costs would go down and doctors will not leave the profession.
  3. The third myth involves the assertion that the jury system is broken. There are frivolous lawsuits, run-away juries giving lottery-sized awards, juries are stupid and these awards cripple American business.

Let’s talk about three examples: health insurance, medical malpractice and property and casualty insurance.

Health Insurance

The myth is that doctors who are afraid of being sued practice defensive medicine, thereby performing unnecessary tests, and thereby driving up health insurance costs. Let’s examine the facts: Three states, Texas, Georgia and South Carolina, passed tort reform laws that made it almost impossible to sue doctors or hospitals for emergency room treatment. Why emergency room treatment? The rationale was that ER doctors practice in an environment where information is scarce, the risk is high and technology is readily available. This is a confluence of factors that might lead to practicing “defensive medicine.” A major study, published in the New England Journal of Medicine of 3.8 million ER visits at almost 1,200 hospitals between 1996 and 2012 determined that doctors in the tort reform states, who were virtually immune to suit, ordered just as many MRIs and CT scans as doctors in the control states. Removing the risk of suit did not change behavior.

There is a second fallacy to the argument that tort reform reduces defensive medicine and thereby reduces health insurance costs. The Cleveland Clinic conducted a study, by Michael B. Rothberg, to measure how much defensive medicine exists and what it costs. The conclusion was that defensive medicine was 2.9% of the estimated $2.7 trillion US healthcare total (or $78 million). While not insignificant, that is a very small component of overall healthcare spending.

Medical Negligence

The attack here is two-pronged. The old standby, defensive medicine, is one. The second is that doctors are leaving the profession in droves and that smaller communities cannot get doctors to practice there. We have already debunked the “defensive medicine” argument. The argument for doctors leaving the profession is that frivolous suits clog the courts, so there is a need to make it harder for victims to file malpractice cases, and damage caps will reign in out of control juries who were awarding lottery-size sums to victims.

Let’s address doctors leaving the profession. Despite the claims of the AMA and state medical societies, the number of medical professionals in the United States continues to grow. And when it comes to access problems, the U.S. General Accounting Office finds those claims to be false or wildly exaggerated. Some rural and poor urban areas are underserved. Such areas often have trouble attracting other professionals too. In fact, the Counsel of Graduate Medical Education has opined that the relative shortage of health professionals in rural areas of the US is one of the few constants in any description of the US medical care system over the last half-century or more.

Let’s turn to frivolous lawsuits and out of control juries. Frivolous cases are cases that shouldn’t have been brought at all or that are rarer than most tort reform advocates admit. Studies have documented that the majority of such suits do not result in a payment to the plaintiff. And the contingency fee system helps weed them out. If a lawyer believes that he or she won’t get paid, they will not pursue the case. James Gattuso, then of the conservative Heritage Foundation, argued in an article for The Wall Street Journal titled “Don’t Rush to Condemn Contingency Fees,” that the contingency fee system ensures that injured persons who could not afford legal representation otherwise can obtain access to the legal system and also screen “baseless lawsuits” out of the system. The converse is the bigger problem—genuinely injured patients who can’t get redress because the courthouse doors have been shut to them.

Out of control juries are also a myth. A U.S. Department of Justice study found that the median medical malpractice award in a jury-decided case was $400,000. In bench trials where the judge serves as the trier of fact, the median award was $631,000. And judges are more likely to find in favor of the plaintiff. Plaintiffs win in tort trials 48% of the time. They are more likely to win in a court trial where the decision is made by a judge (57%). Here are the results of judge vs jury in selected types of tort trials:

  • Premises liability: judge 52%; jury 38%
  • Automobile cases: judge 63%; jury 57%
  • Medical malpractice: judge 38%; jury 23%
  • Products liability cases: judge 70%; jury 31%

Dr. David Studdert led a team of 8 from the Harvard School of Mental Health, Brigham and Women’s Hospital and the Harvard Risk Management Foundation in a study of 1,452 medical malpractice lawsuits. Ninety percent of the claims showed evidence of medical injury, which means they were not frivolous. Sixty percent of the cases were from physician wrongdoing. In a quarter of the claims, the patient died. When baseless medical malpractice suits were brought, the courts threw them out. In six cases where no injury could be detected, only token compensation was received. Where an injury resulted in treatment, but evidence of error was not clear, 145 of 515 (or 28%) received compensation. A bigger problem was that 236 cases, where there was evidence of error to patients by doctors, were thrown out of court. In the other 1,050 cases, the researchers found that the cases were decided correctly, with damage awards going to the injured and frivolous cases being dismissed.

Here’s what our nation’s trial judges think about the jury system. A 2000 survey sent to 1,000 trial judges, including every federal trial judge, revealed that:

  1. Judges have a high level of day-to-day confidence in the jury system;
  2. Only 1% of the judges who responded gave the jury system low marks;
  3. Nine out of ten trial judges, who work closely with the jury system, think the system needs only minor tinkering, at best;
  4. Overwhelmingly, state and federal judges have great faith in juries to solve complicated issues and
  5. 90% of the judges responding said jurors show considerable understanding of legal issues involved.

And finally, statistics show that juries are generally conservative and reasonable and their decisions rarely differ from what a judge would decide.

A word about punitive damages. This argument is a non-starter. Punitive damages are very rare. They are only awarded in 3.3% of all tort trials won by plaintiffs. And in 1996, the average punitive damage award was $38,000, not the millions of dollars alleged. Judges were more likely than juries to award punitive damages. Judges in 1996 awarded punitive damages in 8% of all tort trials decided by judges in 1996. As stated earlier, juries awarded punitive damages in only 3% of all tort jury trials decided.

What is really expensive in medical malpractice? It is shoddy medical care. The obsession with tort reform has slowed down patient safety initiatives. Let’s start with anesthesiology. In the 1980s, following many large awards against the specialty, anesthesiologists revamped their procedures, created compulsory monitoring, increased and improved training, limited the hours their specialists could work without rest, redesigned machines and added safety features. Within 10 years, the mortality rate went from 1 in 6,000 to 1 in 200,000. Malpractice insurance rates fell to the lowest of any medical specialty.

But the tort reformer’s success has diminished the need by other specialties to take other self-policing reforms. Continuing along this vein, hospitals are dangerous. In 1999, the Institute of Medicine at the US Academy of Science published a study entitled “To Err is Human.” This study concluded that between 44,000 and 98,000 patients were killed (and many more injured) in hospitals each year because of medical errors. That is more than in car crashes and workplace accidents combined, and does not include deaths in doctors’ offices or clinics. By 2011, a study in HealthAffairs estimated the number of avoidable deaths was probably closer to one million. Then there was the study done by Harvard Medical Practice of 31,000 medical records. The records were reviewed by practicing physicians and nurses, people who would, by and large, be sympathetic to the demands of medical practice. The records went through rounds of review and negligence was only found if two doctors working independently came to the same conclusion. Even with this conservative approach, the study found that doctors were injuring one out of 25 patients. Only 4% of those patients sued.

What is needed is a crackdown on malpractice. When the American Medical Association speaks of a malpractice “crisis”, they are referring not to the people injured or killed by medical errors or the widespread failure to discipline negligent doctors (including many repeat offenders), but rather to the doctors’ increasing malpractice insurance premiums. So, not only are they trying to get off the hook for what they’ve done, but they’re targeting the wrong group as the source of their ills. It’s time for the doctors to blow the whistle on the insurance industry and their exploitive practices, as well as on the members of their profession who violate the maxim, “First, do no harm.”

Let’s call it what it is. This is all about greed! Tort reform leads to additional profit for the insurance industry, which is precisely the reason that the insurance industry is sinking so much money into its unrelenting campaign for reform.

Property and Casualty Rates

The first paragraph in this article presented the obscene profits being generated by health and liability carriers presently.

How do insurance companies profit? Most of the profit comes from investment income. Insurance companies generate revenue in the form of premiums paid. They hold these premiums until they make a payout to or on behalf of the policyholder. Between those two events, the money being held is called the “float.” (Before people had so many options to carry money electronically, American Express made more money from the “float” on travelers checks, the time between purchase and redemption than they did from money generated from use of their credit cards.) So, the “float” is invested. When the market is strong and/or interest rates are high, the companies make a nice return on their investments. In times like these, the insurance companies may even reduce their rates to attract more premium dollars to invest. This scenario is called a “soft” market.

So, what happens when the market declines? Investment income falls. Then insurance companies raise their rates or reduce coverage. This is a “hard market.” The US economy has experienced several of those in the last 40 years. These hard markets occurred in the mid 70s, mid 80s, 2002-2003 and from 2007-2009. These were the markets where insurance rates for doctors skyrocketed. So while the insurance companies and other tort reform proponents argue that litigation, frivolous lawsuits and run-away juries are to blame for insurance premiums going up, these increases are being driven by the insurance companies’ responses to the broader economic cycle. In fact, claims and payouts stayed flat or declined in each of the “crises.” Since insurers target the civil justice system rather than the economic cycle, tort reform solutions failed to reduce insurance rates. And what was the response of the American Insurance Association when presented with this empirical data? “Insurers never promised that tort reform would achieve specific savings.”

So, what is the solution? The insurance industry needs stronger regulation. Stop the insurance industry from price-gouging their policy holders, especially when industry profits rocket upwards. Doctors should re-direct their anger at the insurance industry (How many times have we heard doctors bristle at what they consider to be “health insurers practicing medicine?” Surely, they know who the real enemy is!) and better police their profession to remove the subset of doctors who repeatedly commit malpractice. Or are the doctors, like their legal counterparts, powerless in the face of the massive donations being given to lawmakers, who are so willing to accept the largess so that they can stay in office?

Tort reform is a myth, perpetuated by greed. How can any intelligent person argue in favor of these sham laws that serve to abridge our constitutional rights? These proposed laws are just another attack on the rights of the average American citizen. Who do we want to speak for us, a jury of our peers or large companies earning obscene profits?

[1] Numbers based off the 2016 Annual Reports for these Insurance companies, which were calculated by Barry Chasen to equal a total combined net profit of $11.795B, which was rounded up to an even $12B.

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