An Alternative to Malpractice

About three decades ago, University of Chicago law professor Richard Epstein proposed a radical alternative to our system of malpractice liability. He called it “liability by contract.” The idea: let patients and doctors voluntarily agree in advance how to resolve things if something goes wrong.

In nonmedical fields, Epstein’s idea is actually quite commonplace. Contracts for performance often have provisions detailing what the parties will do if something goes awry. If the parties disagree, contracts often spell out dispute resolution procedures (such as binding arbitration).

One version of this idea in medicine has already been tried. For years, hospitals asked admitting patients to sign a form agreeing not to sue the hospital or the doctors, no matter how negligent they were. When these forms showed up at the courthouse, however, judges routinely dismissed them on the grounds that the patients were too sick, too scared and too uninformed for there to have been a true meeting of the minds.

My colleagues and I at the National Center for Policy Analysis believe we have found here and here. Let the state legislature decide on the minimum elements (including the amount of monetary compensation) that must be in such contracts in order to make sure patients are fairly protected. Then widely publicize these elements so that people generally understand (before they get sick) what will happen if they opt out of the malpractice system. Courts would be required to accept these contracts as binding.

Recently we have added a new element to the proposal, as a result of our work on hospital safety. Whereas the current system is absorbed with finding fault, for reasons explained below, we propose a system of voluntary, no-fault contracts under which patients and their families are compensated for deaths and injuries that arise from any cause other than the medical condition which caused them to seek care.

By voluntary, we really mean voluntary. If doctors and hospitals choose not to opt out of the tort system, they can practice under the rules of existing law.



In my last Alert, I reported on the general results of the hospital safety literature. Judging by the comments I received you would have thought I had joined an anti-medicine, left-wing conspiracy. Yet hospital safety is not a left/right issue. Betsy McCaughey, for example, is a valiant crusader for lower hospital infection rates and most people would put her well to the right side of the political spectrum. In fact there are very few people — regardless of politics — who have looked at this issue and concluded that the current system is satisfactory.

As things now stand, the only way a victim of an adverse medical event can get compensation is by filing a lawsuit, enduring its trauma and discomfort, and trying to prove malpractice. Yet only 2 percent of victims of malpractice ever file a lawsuit. Fewer still ever receive any compensation. On the other hand, 37 percent of lawsuits filed involve no real malpractice. To add insult to injury, more than half the money spent on malpractice litigation goes to someone other than the victims and their families.

Despite this poor track record, the system imposes a heavy social cost — as much as $2,500 per household per year, including defensive medicine, at today’s prices. And it may be making hospitals less safe than they otherwise would be.

As explained in our Health Affairs study and at a previous blog post, the malpractice system distorts the incentives of doctors and hospitals by encouraging them to make the malpractice events as rare as possible, even if they increase the number of other adverse events. For example, doctors may order more blood tests and other procedures in order to reduce the risk of a malpractice lawsuit, even though these procedures may put patients at additional risk.

Fortunately, there is a better way. For the money we are now spending on a wasteful, dysfunctional malpractice system, we could afford to give the families $200,000 for every hospital-caused death. We could give every injury victim an average of $20,000 — with the actual amount varying, depending on the severity of the harm.

How exactly could this work? We propose to allow patients, doctors and hospitals a voluntary, contractual, no-fault alternative to the malpractice system. In return for forgoing their common law rights to litigate, at the time of entry into the health care system patients would be assured that if they experience an adverse outcome for some reason other than the medical condition for which they seek care, the provider institution will write them a check — without lawyers, without depositions, without judges and juries — no questions asked.

This proposal would take quality-of-care issues out of the hands of the legal system and put it in the hands of people who are best able to do something about it. Providers would soon realize that every time they avoid an adverse death, they will save, say, $200,000. They would come to view every life as equally valuable — regardless of whether the cause of harm is negligence, preventive steps not taken or an “act of God.”

To pay off the claims, hospitals would probably purchase insurance just as they purchase malpractice insurance today. Insurers would become outside monitors of hospital quality and their premiums would reflect doctor and hospital experience. Those with higher adverse event rates would pay more. Those with lower rates would pay less. Further, if patients desired to pay an additional premium and top up their potential compensation — doubling or quadrupling the amount — they would have that option as well.

Under this proposal, state legislators would establish a commission to set the minimum compensation patients must receive for various adverse events. An independent commission (with patients, doctors and hospitals all represented) would regularly review hospital records and determine whether an adverse event has occurred in marginal cases. The decision to opt out of the malpractice system is a decision to accept these nonjudicial parameters.

Note that the minimum compensation for adverse events really is a minimum. Hospitals would be free to offer much better terms and no doubt many would. Geisinger Health System, for example, offers a “warranty” on its heart surgeries. Patients don’t pay for readmissions, regardless of whether there is an adverse event.

In addition to Epstein, Emory University economist Paul Rubin has proposed nonjudicial mechanisms for creating a market for resolving liability issues. Our proposal builds on the pathbreaking work of these scholars, and we believe it can make liability by contract a reality. It is an idea whose time has come.

Comments (26)

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  1. Bruce says:

    Makes too much sense to ever be adopted.

  2. Vicki says:

    What I like best about this proposal is that the trial lawyers don’t get a penny.

  3. Brian Williams. says:

    This is a fresh and new approach to tort reform. The old ideas of damage caps have never gone very far. I hope this gets some traction on The Hill, but like Bruce said, it probably never will.

  4. Devon Herrick says:

    There is an insurance company that works this way for medical tourism. People buy coverage in advance. The amount of coverage is determined by how much the patient is willing to pay for. The insurance company will only underwrite the risk if the patient is receiving treatment from a physician with the appropriate credentials. The contract spells out under what conditions the claim is paid. It doesn’t have to be negligence. It can be an adverse outcome that is nobody’s fault.

  5. Pam Villarreal says:

    I would think that most physicians would be on board with this type of arrangement. One of my doctor friends went through a lawsuit and it stretched out over a 3-year period, cost him time and money (even though he was found not guilty), and the family had to relive the death of their loved one in the court room. In the tort system, nobody really comes out a winner.

  6. Simon says:

    This is a very novel idea with many perceived benefits. Hospitals and providers will be incentivized to be proactive in reducing risk, favors increased quality, and it reestablishes a market for healthcare.

    However, could you elaborate on the relationship between providers and the provider institution in terms of liability and who pays more? No-fault is good, but there will still be an element of whom or what caused the adverse event. You mention “Those with higher adverse event rates would pay more” If a private practice physician with hospital rights has a patient that develops a post-op infection how do you determine who caused the adverse rate, and who’s rates go up? Everyone in the hospital system plays a part in patient safety from the janitorial staff to the physicians.

    Good Post!

  7. This plan would help change the medical culture. Not only does defensive medicine cost a fortune, it fosters the attitude, “order every test you can, do not bother to think about”.

  8. Pam Villarreal says:

    @Simon. Since most hospitals self-insure, this system would likely produce the greatest health care quality improvements if hospitals paid for adverse events that occurred under their room that involved staff or any physician with practice privileges. (Although physicians would also have to have their own insurance for patients they treat outside of hospitals). Hospitals would have a greater financial incentive to improve quality, and they could drop privileges for doctors who had a recurring or unusual pattern of adverse events.

  9. Brant Mittler says:

    John, I disagree with much of your analysis. As a physician- attorney who both sues doctors and hospitals ( medical malpractice )and represents doctors ( peer review and credentialing and Texas Medical board controversies) I think the issues are more complex than presented here — in terms of the realities of physicians and hospitals owning up to negligence. No fault or otherwise.
    In Texas, none of this will really matter after the current session of the Legislature gets through. The “losing attorney pays” legislation will essentially close the courts to any victim of medical negligence. And if big business friendly Governor Perry ever appointed a board to decide on what gets paid for medical errors, you can be sure that there would be no payments to victims. In fact, victiims would probably be fined for bringing the matter ot the board in the first place. And just who would prepare the case to present to this “independent” board? Who would pay for the experts and the case analysis.
    As for frivolous lawsuit, folks, go the the Bexar County Courthouse in San Antonio and take a look at the lawsuits I have filed against doctors and hospitals. See if you see anything “frivolous” about those lawsuits.
    As a physician of almost 39 years, a former president of our large county medical society, and an adjunct professor at Duke, I think I know negligence when I see it. And it’s getting more frequent, and less punished, as Republican judges at all levels side with doctors and hospitals.
    The public should be demanding protection from negligent doctors and hospitals not protection for negligent doctors and hospitals.

  10. Alexis says:

    All good points; however, I think dealing with tort reform across the board is an integral step to limiting costs and actually improving quality of care. For example, is negligence malicious or a a by-product of doctors and hospitals having to treat too many patients at a time? If it is malicious, is there perhaps a deeper incentive problem brought on by malpractice insurance and increased pressure on providers to cut costs and patient time? Regardless of the ultimate solution, tort reform must be an integral part of the conversation moving forward. I’m happy to see more discussion on the topic.

  11. Virginia says:

    I’ve been doing some research into this myself. It’s not a huge deal in Texas. I actually looked up the state statute that says how big the font needs to be in order to have an arbitration clause that is binding.

    However, from what I understand, some states have “right to waiver” laws whereby medical patients are limited in what they can waive in medical agreements. I’m not sure how this applies to this situation or which states are more stringent on the subject. But, I’ve been doing more research into the issue.

  12. Erik says:

    Mr. Jones, I have some good and bad news for you.

    First the bad news; the surgery was a success; we removed the wrong kidney but you should be okay for now.

    Luckily for us, you signed up for our Liability by Contract. Here is a coupon for a free movie and popcorn. See you later…

  13. Stephen C. says:

    Erik, you didn’t read this post very carefully, did you?

  14. One “check” for scheduled surgeries is to have the patient sign the arbitration agreement twice, with an appropriate period of time (e.g. one week) between signatures. Of course, this doesn’t work for emergency surgery, but I doubt there’s a good solution for that.

    Also, we have difficulty visualizing this because of the lack of consumer direction in health care in general. When people pay their own money directly, the providers offer warranties that clear the market. If we had normal price formation in health care, patients would have more incentive and initiative in this regard.

  15. Madhatter15 says:

    I tried suing a nursing home and couldn’t do it because it was now owned by the Carlisle group, no one would touch it, when I found a lawyer who said he would take it he lied and kept it for 10 months and then lied aob ut reading it, he said soe in emails ot his secretarty, she sent them to me, everyone lied, the nursing home and the only lawyer w3ho would take the case, and my Mother is dead. Now I need a legal Malpractice lawyer and in order for him to sue I have to be able to prove I could win the case, that si impossible and they know it, I’m not z mind reader so all fo this talk of reforming th esystem is falling on deaf ears. If I had spilled a cup of hot coffee in my lap because of my ow3n stupidity I probably would get a couple of million.

  16. John Goodman says:

    Brant, under this proposal no one has to own up to negligence. Patients get compensated, no matter whether anyone is at fault. Bad doctors won’t be able to survive because the economics of it all will drive them from the market.

    What’s not to like?

  17. Brant Mittler says:

    John,patients with serious injuries won’t necessarliy be compensated well. $20,000 for a bum ankle and lifetime pain and a spinal column stimulator for CRPS and lifetime disability? That’s one of my clients and no “independent board” is going to pay her unless she has a zealous advocate. Insurance companies will point out that there is no objective evidence of pain. That’s what insurance companies do. As for independent panels, well they’ll reflect the values and biases of the insurance industry, rich coroporate donors, and state medical societies. I don’t see much relief for the victims there. I do appreciate your attempt to make things less expensive and fractious. Why are you so afraad of jury trials? Right now conservatives basically own the courts in the U.S., and certainly in Texas. Victims have little recourse. And corporations love to sue their competitors when they think patents have been infringed. Now that kind of litigation is not too expensive for our society.

  18. Erik says:

    In California there is already a cap on pain and suffering of $250,000 to be determined in a court of law. If an agreement is reached were the settlement is less than $30,000 the negligence does not even have to be reported.

    The NCPA is advocating a $200,000 cap to be determined by the profession who created the loss and no reporting mechanism is required.

    I would say the intention behind this scheme is clear.

  19. Shirley Svorny says:

    An explanation for why few victims file suits is that few instances of malpractice have serious or permanently decapacitating outcomes. Many lawsuits are filed to find out if there was malpractice. When it is clear there was not, the claim does not move forward. So the oft-repeated claim that not enough claims are filed for real injuries and too many are filed when there is no negligence does not prove the system does not work. One problem is knowing when negligence or substandard care occurs, it is not that simple. Even the authors of studies of adverse events admit that the physicians that review the files don’t always agree on whether there was negligence.

    You suggest that “hospitals would probably purchase insurance just as they purchase malpractice insurance today. Insurers would become outside monitors of hospital quality and their premiums would reflect doctor and hospital experience.” How do you support the change from how things are now, where premiums reflect negligent experience, to the plan you propose where premiums would reflect the seriousness of the cases a doctor or hospital takes on? Today, claims against physicians are evaluated by medical malpractice insurance underwriters for validity. Under your proposed system, there would be no reason to do this.

    Liability protects consumers, so does experience rating. This plan moves us away from both. Medical malpractice insurance underwriters review physicians annually, they review every claim against them, they limit what malfeasant physicians can do. The industry penalizes physician malpractice with higher malpractice insurance premiums (up to 500% higher) or, in rare cases, by denying insurance altogether. Risk managment is rewarded with lower premiums. While physicians are gaining experience with new procedures, medical malpractice insurance underwriters monitor the process, evaluating whether a physician has sufficient training to take on procedures like the Lap-Band weight loss surgery.

    Courts are expensive, but judgments have an impact far beyond the few cases that make it to court.

    Finally, people say fears of malpractice claims make doctors engage in defensive medicine. Maybe doctors just say this but they really offer the services because they just want to make more money?

  20. LAURENCE BRODY, M.D. says:

    The problem has been of interest to me since I was offered insurance as a young doctor starting out. After a few decades of thought, I agree with John Goodman in general. Our current liability problem shifts penalty blame to physician and hospital.
    But it is the patient who has the liability, the reason for seeking medical care. I would propose a plan like buying travel insurance. If you are going in for brain surgery, you could buy a large amount, if you can afford it. If you are going into a hospital for an appendectomy you may decide to skip it. If you have no money, you may not be able to afford an occurrence insurance plan.

    For elective surgery there would be time for patient decision. For emergency admissions, the risk is already great. I would agree, as Goodman indicates, that amounts could be pre- determined. So patients would be looked at as economic “risks.” I am sure the insurance industry could make a profit on this type of scheme, as they are professionals at risk assessment. The doctor would just do his/her job and shift the whole blame game on to the insurance industry. The patient would also have to have the responsibility of selecting a physician in whom he trusts. I think the public would rather have physicians available to take the blame. There is a lot of money as John presents, available to the malpractice pot. The lawyers probably like it as is.

  21. Anyone who believes that claims which show no clear evidence of negligence or malpractice DO NOT move forward in the tort process hasn’t been paying attention.

    Defendant physicians “win” in court about 90% of
    the time. Juries make those decisions based on the evidence presented at a trial. If juries are choosing to believe there was no negligence 90% of the time, having seen and heard evidence and testimony of expert witnesses, etc., is it too much of a stretch to claim that it was possible to determine whether there was “clear evidence” of negligence earlier in the several year process?
    Of course it isn’t.

    Yet it costs physicians weeks, possibly months of time which could otherwise have been devoted to patient care and well over $100,000 in legal fees – not to mention what plaintiff’s counsel has spent – to have a jury determine what SHOULD have been determined far earlier in the process.

  22. Shirley Svorny says:

    @Donna: my understanding is that the reason physicians win in court is that the medical malpractice insurers review claims that they think will go against them in court and settle them. So, generally, it will be claims without merit go to trial. So you are right, they are able to settle most claims ahead of time. Few claims go to court. One way to think about this is that the system works most of the time. The courts send fairly clear signals about what will be considered negligence or substandard care and then the insurance companies use that information to avoid costly trials in most cases of negligence or substandard care.

  23. Brant Mittler says:

    @ Donna and @ Shirley:

    There are a myriad of reasons why doctors win at trial – other than there was no negligence. The first and foremost reason is that juries like doctors. They like nurses even more.
    If a doctor has a great appearance and cries while on the witness stand, juries will often give him/her a pass. John would probably say at this point: that’s why we need an indepedent panel to take the emotion out of it. But see below.
    Then there’s the matter of who the victim is. Racism and preconceived notions influence juries. Also, juries can be sympathetic to grieving spouses but not very sympathetic to adult children who bring a lawsuit. But second or third wives are suspect. And a young woman who dies after childbirth probably won’t be viewed favorably by a jury in many places if her medical record shows a prior abortion.
    Then there is the legal standard. For Emergency Room cases in Texas since 2003, the legal standard is wilful and wanton negligence. That means the doctor has to practically stab the patient with a scalpel intentionally to be found negligent. it’s virtually an impossible standard to meet at trial. And that’s why Texas emergency roooms are very dangerous places since there is virtually no way to hold the people who practice there accountable. Do you think it is negligent for a diabetic, dialysis patient with septic shock, chest pain,and a history of bypass surgery to lay in an ER in San Antonio for four hours without getting an antibiotic? The defense team in that case is paid to say it’s alright, and the doctors involved say there’s been no peer review. Not needed. No negligence. The facts don’t raise any question of quality. You should ok with that.
    Just another frivolous lawsuit. Don’t Google any guidelines for treating septic shock. It wouldn’t confuse your biases anyway.

    Do you think it’s ok for a 47 yo woman who comes to an ER with 10/10 crushing chest pain to be sent home with “indigestion” only to return 8 hours later with a massive heart attack and then end up on the cardiac transplant list? Would $20,000 be enough to compensate her and send her on her way to take care of her children who are still in college?

    Then there are defense arguments of contributory negligence: the patient didn’t stop smoking is a favorite one. ( So the doctor should get a pass on misreading the EKG and misdiagnosing the chest pain as indigestion.) And why did you leave the ER with chest pain if you thought you were having a heart attack? You should have demanded to speak to a supervisor! It’s always the victims fault. It is true that most med mal cases against hospitals settle prior to trial. Not so many against doctors settle in Texas. Texas juries have been educated by the business lobby that ALL med mal lawsuits are frivolous. And most of the jury pool in a city like San Antonio are either in the medical field or have
    a close relative who works in the medical field. But they all swear they can be fair and impartial.
    Still I would rather have victims take their chances with a jury of their peers than with a Rick Perry appointed “independent panel” of “experts.”
    Please open up your minds to the reality that just because a doctor wins at trial there must have been no negligence.

  24. Shirley Svorny says:

    @Brant: I’m sure you are right that juries rule in favor of physicians when they should not.

    But if it happens a lot of the time, why would insurance companies ever settle cases against physicians. You say not so many doctors settle in Texas, do you know what percent of cases go to court?

  25. Brant Mittler says:

    Shirley, no, I don’t know how many cases go to trial. It depends upon the carrier. You would have to ask each of them. Probably there are stats on that.
    In Texas, in terms of general litigation, about 85-90% of cases settle at mediation. But for carriers like the Texas Medical Liability Trust ( TMLT) like to go to trial.
    And I forgot to mention that when the victim — who manages to survive – does stand up to the doctor — the insurance carrier sends a private eye out to secretly film the victim to see how bad her limp is and to put her home under surveillance and to film her taking her minor child to school. And the private eye the carrier hires admits under oath that in med mal cases, he has filmed ministers and children who have had med mal claims. Now that’s Texas justice.

  26. Of course insurance carriers settle the cases they think they would lose in court. That’s just smart business. Why chance a multi-million dollar verdict if they think they might lose when they can settle for a couple hundred thousand? Of course, there are also cases in which the physician doesn’t get to determine whether there’s a settlement or not, and the insurance company determines that it would be CHEAPER to settle than to fight the claim in court. Since it costs over $100,000 to defend a doctor in court, it’s “good business” to settle claims that would cost LESS than that, despite the physician’s culpability or lack of same.

    The same Harvard study which determined that only a small percentage of genuine medical malpractice victims sue ALSO determined that roughly 40% of plaintiffs who receive payment via settlement or verdict WERE NOT victims of medical negligence.

    So….real victims of medical malpractice don’t sue or get compensation often enough….

    40% of people who DO get compensation didn’t deserve it…..

    Insurance companies sometimes settle claims over doctors’ objections because it’s cheaper, whether there was negligence or not….

    Doctors are found not negligent in court about 90% of the time, but spend millions in defense costs and lost wages…..

    And the current system benefits whom?

    Other than trial lawyers, of course?