Announcement: SOA releases April 2022 Exam PA passing candidate numbers.
Announcement: SOA congratulates the new ASAs and CERAs for June 2022.

The Actuary Magazine October 2004 - The Medical Malpractice Crisis: A Top-Down Solution

The Medical Malpractice Crisis: A Top-Down Solution

by Allen Elstein

Could a macro system be the answer to a reduction in medical malpractice costs? Information in this article points in that direction.

Top down solutions are simple: you decide how much money you need, you find a way of getting that money from the payers and you create an allocation of that money to the recipients. Sort of like playing Robin Hood. The curse is, of course, in the details. The frustration, of course, is that the players will change their behavior to defeat the details-a perpetual game of cat and mouse.

Until recent years, the issue of malpractice has been outside the average person's field of interest. However, with employees now paying a good portion of each year's increase in medical costs, it is a good time to get them to focus on the fact that they have a stake in the costs associated with malpractice awards. Stated more broadly, the central issue is we have only so much money to spend on medical care, including malpractice. And we need to figure out how to allocate it wisely.

First Things First

The first piece of a top down malpractice payout model is how much money to spend each year on awards in total. We will assume a manageable geographic area-not so big that results get lost nationally, but big enough to be somewhat statistically stable. In order to get at this question, one must consider how to ask for input. If I ask a jury how much of other people's money should be spent to compensate the parents whose child cannot talk after a tonsil complication, I will get a lot larger number than if I ask each member of the jury how much each person on their block, including themselves, should pay that family.

For the moment, assume that the average cost of medical care is $3600 per year, and that currently $600 goes indirectly to pay for malpractice and that $1000 goes into defensive medicine practices. Said more simply, suppose I told you that without malpractice awards the average insured is paying $3000 for medical costs for the year. Question: How much would you want to pay for insurance that would allow you and others who are injured to be part of a pool that could collect if malpractice occurred-the larger the premium, the larger the pool. Framed in this way, a community might come up with an answer of 10 percent, or $300 a year. Note this is quite different from the implication in the above example where the jury system implicitly is charging 20 percent.

So now, at $300 a person, lets say the malpractice system over some population of doctors and patients generates $120 million. We can then ask the question, how much should go to economic loss and how much to pain and suffering? One can suppose that most should go to economic causes. So, for this example we split it $100 million for economic loss and $20 million for pain and suffering.

It should be noted that while the $300 could be directly paid by the insured, we will assume for accountability that the system would work as it does today with the doctor paying the premium. If we base the premium on a percentage of medical income, we have the advantage of keeping lower income and part time doctors actively at work. In doing so, however, care needs to be taken to define what is income from practicing medicine and what comes from the doctors ownership of things like the x-ray machine, and how much income the doctor can siphon off to a spouse who is serving as the part-time office manager.

Making A Point

Obviously, some medical specialties are more claims prone than others. Suppose that we start out with a basic structure of 6 percent of income for the better specialties to 12 percent for the worst specialties, where the 12 percent cap implies some subsidy, and that some type of five year experience rating for bad claims history gets us to an average of 10 percent, i.e., we have a point system for actual experience depending mostly on the level of malpractice and the amount of the award.

For example, the level of malpractice might go from zero to three points, with zero being no malpractice and three being a really bad medical process. And we will add to that an extra point per $1 million of award. Points would be carried for, say, five years. Thus, an award of $5 million with a level two negligence would translate to seven points. If each point were worth a 1 percent premium, this would translate to 7 percent. For a doctor currently paying 6 percent, that person's premium would increase to 7 percent. For a doctor in a specialty already paying 12 percent, no additional premium would be payable since 12 percent is bigger than 7 percent.

Other examples might be more sensitive to actual claims, especially if the doctor and patient's lawyer were allowed to come up with an out of system settlement, subject to review, but paid by the pool. The key is to keep the system fairly simple. As most dieters can tell you, the most sophisticated point system is often not the most effective.

Money Matters

So, now we have $100 million to potentially parcel out for a year's worth of economic claims. Let's assume that we do it by the year the claim is filed and try to parcel out the money over a short period of time (say, the end of the next year), so that we know the total amount theoretically to be parceled out. If the total is less than $100 million, then the excess could be divided by five and spread to the next five years. If the total is more than $100 million, then each person would get a pro rata of the initially determined amounts-knowing this would impose some discipline on those deciding awards. Similarly, we can parcel out the pain and suffering funds. More complicated variations could allow a surplus in one fund to make up for a deficit in another fund.

How will the awards be decided? Instead of a clogged judicial system, one possibility is to have panels, of say, five persons each. Each panel would have persons of different backgrounds. The process would be abbreviated from the time and expense of a trial. A simple system would be to first determine whether negligence has occurred. If it has, then the panel would have to determine a score of between one and 1,000 separately for economic loss and for pain and suffering. Each economic loss point would be worth $10,000 and each pain and suffering point would be worth $2,000. So, in this hypothetical example, the maximums in this system are $10 million for economic loss and $2 million for pain and suffering.

As an example, suppose a claim had a score of 300 for economic loss and 400 for pain and suffering. This would give an economic award of $3 million and a pain and suffering award of $800,000.

There are, of course, as many refinements and variations as there are stars in the sky. Instead of only taking excesses and spreading them to future years, a system might take a portion of any annual excess and look back to see who in the last four years did not get their full award. This would smooth years of poor and good experience. Also, points in excess of 1,000 might be allowed, but would only be paid as a secondary award if there was excess money. This would get rid of the hard maximums on awards.

To help defray the cost of the panel and prevent frivolous suits, each potential claim would have to pay a filing fee. The fee would need to be high enough to be meaningful to the person, but not so high that it would be a true barrier to entry.

Do's and Don'ts

What does such a macro system do? It imposes a discipline on the total percentage of medical dollars spent on malpractice, and maybe reduces the "someone is looking over my shoulder" defensive medicine a bit. (We want some such behavior, but not a ton of it.) It is, in effect, a balancing act between keeping medical malpractice costs reasonable while keeping high-risk doctors practicing, and getting money to those who are wronged. What is described here may impact trial lawyers, but in ways that both increase and decrease needs for their services. Legal expertise in presenting complex medical situations in a clear fashion will increase, while at the same time skills relating to jury trials will decrease.

Equally important is what such a system does not do. It does not get at one of the key portals to better medical care-mainly aligning patient needs with provider rewards. Specifically, it does not get rid of the factors that arguably contribute to a lower quality of certain medical care today. For example, impersonal care with the shortest possible time-slice given to the patient does not lead to optimum diagnostics or getting to know the patient as a whole. As long as the patient has no quarterback, such as the old time General Practitioner, the ball will sometimes be dropped. Said differently, when the patient is not the direct payer of the bill, the care a patient receives may sometimes be altered by how the medical service provider is rewarded by an insurer (and punished by the legal system), and not necessarily for the better.

System Requirements

Ultimately, for this (or any) system to work, it needs to be kept streamlined. The evolving area of arbitration as a substitute for the court proceedings should be a lesson learned. As arbitrations have become increasingly loaded with things we usually associate with courtroom trials and become less basic, the cost and time advantage disappears. If the process is not politicized and bureaucratized or lined with rules, what we'll have is the potential for a system that just might be a better mousetrap. If so, the 1980s urban legend of the California woman with the slightly imperfect tummy-tuck getting a $20 million jury verdict, causing her health insurer to raise rates by $20 a person, will not be replaced with a water cooler story about the insane quirks of the new system.

Are there softer solutions that do not involve some type of quasi-government oversight? Absolutely. And many have been around for a long time. In looking at some material I wrote in 1981, such a description can be found. There, the idea was some kind of voluntary system, whereby a person could elect (prior to claim) an arbitration path in exchange for lower insurance premiums or copayments and quicker awards. ("Toward a National Health Plan," Transactions of the Society of Actuaries, 1981, pages 476, 483, 484). Recent experiences of some professional mediators indicate, however, that when certain insurance companies and their lawyers have come into voluntary arbitrations with superior resources and a clear objective of minimum costs (starting with a low-ball initial offer), it is hard to get to a fair settlement. The same 1981 article discusses a universal system not too dissimilar to the macro solution above, as well as the high cost of defensive medicine. If nothing else, the problems have been around a long time.

A Final Word

Is the malpractice solution outline presented above ideal? Of course not. There is no magic formula and there is no easy consensus among the players, as perhaps we should have learned by now. However, we need to get people focusing on categories of solutions that just might have a chance of improving the current downward spiral. A part of the process is to reframe the problem so that the public sees the real, but often hidden cost that they, more than so-called "rich" doctors or "profit oriented" insurance companies, are paying for the protection they get in the malpractice resolution process. This means making sure people are aware of the dollar-cost effectively passed on to them by the system, and the trade-off between how extensive the coverage is and what an insured is implicitly paying as a premium to protect against malpractice.

Allen Elstein, FSA, is a life and health actuary at the Department of Insurance, State of Connecticut.

The views expressed in this article are solely those of the author and do not represent the express or implied opinion of the Connecticut Insurance Department.