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Time for Tort Reform in North Carolina?

North Carolina, like other states, is currently considering important modifications to its Common Law of tort, and especially to that subset of tort known as medical malpractice. This is because malpractice insurance premiums for North Carolina physicians are apparently increasing at a rapid rate, which allegedly imperils the quality of medical care for North Carolinians. Proponents of tort reform insist that such reform is the only way to ensure that quality medical care remains affordable in the Tarheel State. Opponents of tort reform respond that fluctuations in interest rates, and the “insurance cycle” in general, account for premium changes, and that tort reform would imperil the health of North Carolinians by “subsidizing” negligent physicians.

As with many political debates, there is some truth to all these claims, and the task at hand is to understand the nature of tort law, of insurance, and of the incentives provided by increasing claims.

To separate the myths from the reality about medical malpractice reform, Michael Krauss, professor of law at George Mason University, wrote a paper for the John Locke Foundation looking at medical malpractice reforms proposed in North Carolina. While Krauss was in Raleigh for speaking engagements to discuss his study, he was interviewed by Carolina Journal.

CJ: Let’s talk about first why people are debating medical malpractice reform. What makes this such an issue that people care about? Is it the associated costs with malpractice premiums? Is it the fact that there are mistakes that doctors make? I mean, what makes this issue so important?

Krauss: Well, there are several, I think, competing tendencies or thrusts that are at play here. The increasingly high cost of medical care worries people. It’s a political issue in every state of the country. The scarcity of doctors in some states, especially doctors in some specialties like obstetrics, also makes the headlines. There have been doctor strikes, doctors’ pickets in various states.

In addition, there’s a cultural phenomenon that, I think, is too often overlooked and that is that when something untoward happens, either an operation is not successful or a baby is born with some anomaly, people tend less these days to attribute that result to fate or to divine intervention and people often believe that somebody, somewhere must be to blame and go rush to see a lawyer to fix the issue.

CJ: Well, what I’ve noticed in North Carolina with the debates about medical malpractice reform is that very quickly devolves or evolves, depending upon your point of view, into a war of numbers and statistics. Both sides have their own claims on that.

I think it is safe to say, though, that over the last several years medical malpractice insurance premiums have doubled or greater in lots of specialties in North Carolina. I mean, that’s not really in debate. What’s debatable is why that’s happened.

Krauss: Yes, North Carolina has followed the national trend, exactly. Premiums have increased far above even the increase in liability. Generally, in the country medical malpractice aspect of tort is increasing faster than the rest of tort, which is increasing very fast. We… our… American doctors are something like 10 times more likely to be sued than Canadian doctors are.

CJ: Which should not be assumed that we are making 10 times as many mistakes in American medicine as in Canadian medicine. It has to do with the legal regime.

Krauss: Canadians rush here for their medical care, it’s unlikely that American doctors are 10 times worse than Canadian doctors.

CJ: Now a couple of explanations that have been offered by critics of medical malpractice reform for the rising premiums are: Number one, we went through a period in the ‘90s, for example, when we had a strong market and bond returns and, therefore, the insurance companies were earning good money and they didn’t have to charge high premiums and now they’re just sort of making up the difference because the market is weak. And the second argument is that — somewhat related — is that insurance are gouging doctors. The real problem is that insurance companies — it isn’t the tort system.

Krauss: The first argument has a grain of truth to it, but just a grain. The second argument has no truth to it whatsoever.

Let me address the first one which is more dangerous because it has a grain of truth to it. First of all, stock returns have very little effect on insurance premiums for the simple reason that all 50 states regulate their medical malpractice insurance companies and require them to invest the overwhelming majority of their premiums in bonds and not in stocks. So, the variance in stock returns is not terribly important.

The variance in bond returns does affect the income of an insurance company and it turns out that probably about 3 or 4 percent of the increase in premiums can actually be attributed to declines in bond returns. Now, that’s what the grain of truth is. There is a little bit of truth to this. A slight amount of the increase in premiums is due to investment returns. But there would…

CJ: Well, then the rest of it’s gouging. [laughter]

Krauss: That’s right. Then we get to the second argument and it goes something like this: “My gosh, company ‘x’ made a bad guess this last year and they didn’t charge enough in premiums and they lost a bundle so now they just are going to triple or quadruple or quintuple their premiums on the backs of the poor doctor to make up for losses last year.”

Basic economic reasoning indicates that that simply cannot happen for the following reason: If I decide to triple, it’s as if I had a gas station and under-priced my gas last week at 50 cents a gallon and decide to make up for it by charging five dollars a gallon this week, I can’t do it because other gas stations will price at the market rate and take the customers away from me.

Insurance is an incredibly competitive industry. The Department of Justice in Washington every year categorizes the various indices in the country according to their cartelization or their lack of competitiveness. And the most competitive industry is the insurance industry.

In North Carolina the overwhelming majority of physicians aren’t even insured by for-profit insurers. In other words, even if economic reasoning said the opposite of what I believe it says, the argument would not hold in North Carolina because the overwhelming majority of physicians are either insured by their own cooperative, which would not gouge them, or they are employed as employees of hospitals or big organizations that self-insure. So, that argument holds no water whatsoever.

The initial … the argument about returns, bond returns, explains a small amount of the change. But the amount of the change due to the bond returns is not what’s creating the crisis.

CJ: Let’s talk about the tort side of this, then. The legal issues. There are a number of proposals that have been put forward in North Carolina. There was a bill in the General Assembly last year that passed one chamber. Did not pass the other. And it had a number of items that had… one of them had to do with alternative dispute resolution. Could we move more cases into dispute resolution?

Could we move more cases into mediation or arbitration? What do you think about that?

Krauss: Actually, the bill, as it was initially presented in the North Carolina House, I think, in this respect was very promising.

Let me explain a bit. Many states require a non-binding mediation before a medical malpractice suit is launched. That has not been terribly successful.

The two states nearest my home, Maryland and Virginia, both require this. It doesn’t terribly deter lawyers who believe they have a legally weak claim, but an emotionally strong claim to present to a jury because they… after all the mediation is not binding.

You can’t make it binding because there are constitutional problems if you make it binding because of the right to a jury trial. And they believe they can get before a jury. It’s just a delaying issue for them. The North Carolina bill, as it was initially proposed had an additional wrinkle that I hadn’t seen elsewhere.

CJ: It was kind of like an English pay rules, in a sense.

Krauss: Exactly right. If you lost at the non-binding mediation and then you persisted in suing and you lost that suit then you had to pay the other party’s legal fees.

CJ: And that would seem to have strained out some of the more frivolous actions that would be taken forward.

Krauss: I believe so, because the plaintiff’s lawyer, who would not be able to recoup this from his client, would have to shell out the legal fees himself for all practical purposes and, I think, would be unwilling to take on a dubious case.

CJ: Let me ask you about two other quick issues. One of them is capping noneconomic damages. That was not in the legislation in North Carolina but lots of people proposed that. What is your view about the caps?

Krauss: The caps on noneconomic damages, I think, are vital, as opposed to caps on economic damages the some other states about which I have other feelings. On non-economic damages, which is also called pain and suffering, in most states, there is an incredible variance among jury awards. One jury may award 50 thousand for pain and suffering and another jury might award 50 million dollars for the…

CJ: Very subjective.

Krauss: And there’s no way to objectify it and, therefore, no way for a judge to say that this is an incorrect award that he’s quashing. And it’s this extreme variance that worries insurance companies that have got to provide for this… this… these mammoth awards that hikes up insurance premiums.

And so, states like Maryland, for example, have capped noneconomic damages at $500,000.

Krauss’s study on medical malpractice reform proposals in North Carolina can be read here.