Medical Malpractice: The High Cost of Meritless Claims

Meritless Claims Are Hugely Expensive

In their study, the authors determine that in over 33 percent of the claims, there was no medical error, and readily point out in most of these, the claimant did not receive any compensation, either in the form of a settlement or court judgment. According to the authors' findings, defense costs represent less than 20 percent of the total direct expenditures associated with medical malpractice. Therefore, defending meritless cases can be a nuisance, but relatively speaking, is not a particularly expensive nuisance.

The economic costs of claims lacking clinical errors are significantly understated by the authors. The huge costs to society of the practice of defensive medicine are viewed as "indirect costs" by the authors and were therefore not captured in the study. The study also did not consider the incalculable personal and professional costs of being named as a defendant or co-defendant in the typical shotgun approach of the trial bar to malpractice litigation. These costs are difficult to quantify, but cannot be ignored.

To be fair, in the context of malpractice litigation, the term "frivolous" is not very precise and is often used by people to make a point. A better term is the word "meritless." In other words, no indemnity was due the patient given the facts of the case.

Meritless cases must be investigated and defended resulting in the outlay of what is known as allocated loss adjustment expenses (ALAE). According to information from the Physicians Insurers Association of America (PIAA), an organization consisting of many of the physician-owned liability insurers, of the more than 10,000 claims closed in 2005, only 24 percent of these cases had an indemnity payment. Yet, the ALAE paid for those claims totaled more than $172 million, averaging almost $21,000 in expenses per meritless claim.

The PIAA statistics are in line with data from a recently released study from ASHRM/Aon that found an average of $17,400 of paid ALAE on each case closed with no indemnity. The Ohio Department of Insurance similarly found in a report released in November 2006 that almost 80 percent of malpractice cases closed in Ohio during 2005 resulted in no indemnity being paid, but each case incurred an average of over $24,000 to defend.

One of the very best published databases (as well as one of the only existing and ongoing databases) for closed medical malpractice claims is the PIAA Data Sharing Project. The PIAA Data Sharing Project began in 1985 and is now a cumulative study of 20 years of closed claims against physicians comprising over 230,000 closed claims as of December 31, 2005. Member companies of the PIAA contribute the data on closed claims against physicians. It tracks such data elements as loss experience by specialty, loss causation, and expense and indemnity payments, among others.

In the PIAA cumulative study, the ALAE associated with claims closed without an indemnity payment ($2,112,632,512) exceeded that of claims closed with an indemnity payment ($1,836,577,204) by more than $275 million. This directly contradicts the authors' contention in their conclusion that in most malpractice litigation, expenditures are driven by errors and the payments for them.

Whereas these authors believe most dollars spent during litigation are used appropriately for the payment of errors, the Government Accountability Office (GAO) concluded otherwise in 2003, finding that the results of the litigation system "are largely random and unpredictable." The example used by the GAO as an illustration was obstetricians and hospitals being sued for babies born with brain damage despite strong evidence in the medical literature that the causes often occur in utero and are not controllable by the attending physician. Probably the most often asserted breach of the standard of care in catastrophic delivery cases is failure to timely perform a cesarean section (C-section). It is not surprising then that the C-section rate in this country has steadily increased, although to reiterate, the authors did not consider the indirect costs such as defensive medicine in their analysis.

What Drives "Exorbitant" Malpractice Litigation Costs?

Are the "exorbitant" overhead costs of malpractice litigation attributable to greedy, high-cost malpractice insurance companies? We think not, as we seek to demonstrate below.

Administrative costs for most malpractice insurers are much lower than the property/casualty insurance industry average. In the most recent medical malpractice insurance crisis, some needed stability was provided by the fact that 60 percent of the commercial medical malpractice insurance market was controlled by provider-owned companies as are the member companies of the PIAA. This is significant, because unlike stock companies, the provider-owned companies typically have lower expense ratios, which is at least partly attributable to their lower expectations for return on equity (ROE), typically in the 4-5 percent range versus 10-20 percent for stock companies.

The aforementioned PIAA cumulative study indicates that the ratio of expense-to-indemnity dollars paid for all cases is 31.6 cents per indemnity dollar. In the NEJM article, the authors identify $72,617,594 as defense-related administrative expenditures and, when coupled with the $376,473,069 in indemnity payments, reflects a ratio of about 20 cents spent on defense for each indemnity dollar paid. This is consistent with, and indeed less than, the PIAA findings.

However the NEJM study authors are somewhat misleading when they state that "For every dollar spent on compensation, 54 cents went to administrative expenses (including those involving lawyers, experts and courts)." They do correctly cite plaintiff attorneys' contingency fees as a major contributor to overhead costs. Nonetheless, this point is oftentimes downplayed by the advocates of alternative medical tort systems.

If the purpose of the tort system is to compensate the victim, there is no justification for excessive contingency fees, which in most medical malpractice cases consume anywhere from one-third to one-half of any award or settlement. These contingency fees remain unregulated in most states thanks to the intensive lobbying of the trial bar. We believe the injured would be much better served by a move to a sliding scale in plaintiff attorney contingency fees, e.g., attorneys would receive 33 percent of the first $500,000 of settlements; 25 percent of the next $500,000; and 10 percent of settlements or awards greater than $1 million. Consumer advocates and other champions of reform are encouraged to pursue this change.

Self-Insurers Not Included

One other potential flaw in the NEJM study is the lack of data from self-insured healthcare entities. Self-insureds constitute a large subset of the medical malpractice insurance universe. The majority of hospitals maintain a deductible, at a minimum, and more often, a significant retention of at least $1 million per claim. Although extremely difficult to calculate, a significant amount of money is expended on claims (often asserted prior to litigation) against hospitals that lack evidence of error but are resolved with a monetary payment and/or a bill write-off. This is done for many reasons but primarily for public relations and the avoidance of even more expensive formal litigation. The money expended here comes out of operations budgets or self-insurance funds set aside for malpractice exposures. These expenditures are material but frequently overlooked in calculating the cost of the malpractice problem.

Conclusion

The NEJM study authors conclude improvements in the medical malpractice system depend on improving its efficiency, which will generate substantial savings, and hint that tort reform is the solution. We agree and believe an increased utilization of expert affidavits—more than any other tort reform measure, including non-economic damage caps—will have the greatest impact on combating the problem of frivolous or meritless lawsuits. We also support limitations on plaintiff attorney contingency fees in order for appropriate compensation to ultimately reach the injured.