Is the Legal System Killing Healthcare?

Thank you, Philip, for that kind introduction, and for your many efforts to bring common sense to the legal system and to advance this important issue to the forefront of national debate.

I would especially like to thank the Manhattan Institute and its president, Larry Mone for sponsoring this event. It's always a pleasure to visit the Harvard Club and to see how well so many of our applicants have done at their second choice school.

Larry Summers never believes me when I tell him that one either.

It is a special pleasure to come to New York, the world's preeminent city, and to have the chance to speak before a select group of thinkers and leaders in public policy. With so much happening in the world and here at home, I am especially thankful for individuals like Phil Howard and Larry Mone and many of you here today who have the ability to multitask, as we like to call it in the digital age. Yes, we've got a war looming, and serious threat of domestic terrorism and an economy in the doldrums. But there are other issues that call out for our careful attention, and for decisive action. One of them has been receiving a great deal of my time and energy lately. It involves a well-kept secret that shouldn't be secret at all. . Let me take a few minutes to tell you about it.

I'd like you to imagine for a moment that you are a typical American wage earner bringing home the national median salary of $25,110--that's about $2100 a month, before taxes. Now from that pre-tax salary, I want you to further imagine you were paying your own health insurance premium, again at the national average of $221 a month for single coverage according to a recent report. Right away you notice we have a problem here--your health insurance costs are about $2600 a year, more than ten percent of your pretax income. Okay, you understand the importance of responsible financial planning, so you stretch and save and economize and manage to meet the monthly payments.

Only, the next year, your premiums go up by 15 percent. And then another 20 percent the year after. Pretty soon, you're stretched so thin there's no place to go. Eventually, you may have to give up on health insurance altogether because the whole premise of insurance--making payments affordable by spreading risk across a large pool of policy holders--has failed. We are all familiar with this problem, which has left 41 million in our country--roughly one in seven Americans--without health insurance.

Across the nation, doctors and hospitals are facing a similar crisis in runaway insurance costs with their malpractice insurance. Only in this instance, the numbers are much higher--and the increases we are being asked to absorb genuinely stagger the mind. In Florida, malpractice premiums for obstetricians are averaging $143,000 to $203,000 depending upon locality. Statewide, that averages out to an added cost of about $2,000 per delivery. This year, malpractice insurance costs at The Johns Hopkins Hospital are up 33 percent and we consider ourselves relieved: last year, they increased by 50 percent. In West Virginia, surgeons staged a symbolic one-day walk out protesting increases in their malpractice premiums. Some simply chose to fold up shop and move elsewhere.

What's going on here? The problem we are facing is enormous. At a time when millions of Americans are without health insurance, we are devoting an ever-increasing amount of scarce health care dollars on malpractice and legal costs--last year alone it added up to more than $10 billion. As they say in Washington, that's real money. Consider it this way: with what we are spending on malpractice insurance at Hopkins Hospital alone, we could afford to supply that average American wage earner with a paid-in-full health insurance policy--and provide similar policies to 14,714 of his friends.

Malpractice premiums are out of control because the tort system that awards damages to plaintiffs has run amok. Median jury awards for medical malpractice doubled from 1995 to 2000, increasing from $500,000 to $1 million. Median out-of-court settlements were up significantly during that time as well, rising 40 percent from $350,000 to a half million dollars. And there doesn't seem to be any end in sight to this wild inflationary spiral.

Higher jury awards and higher settlements must invariably mean one thing: higher malpractice insurance premiums. We can fault the insurance companies if we wish, but the simple fact of the matter is that right now, even with these huge rate increases, malpractice insurers are losing money. Nationally, for every $1 of premium paid for malpractice insurance, it's now costing physicians and hospitals $1.50 to defend or settle medical malpractice cases. This is what is known as the insurance loss ratio. It indicates that insurance companies will either have to continue to raise their rates dramatically, or get out of the business altogether. Major carriers like the St. Paul Companies have taken this route, while others are limiting where they will sell insurance or have simply gone bankrupt.

Recently, there has been renewed attention to the idea of capping the awards that can be made for pain and suffering in malpractice suits. The President made this proposal during his State of the Union address, and legislation in Mississippi will do just that in a state particularly known for excessively high malpractice awards made by juries. Although I would personally welcome such legislation on a national basis, I have to be perfectly blunt with you this afternoon: that ain't gonna cut it. The patient is hemorrhaging and this is a band aid.

I say this for two reasons. The first comes from personal experience. In Maryland we have had a cap on pain and suffering awards for many years. Currently it's at about $600,000--too high, by my estimate, but if it were really doing what it's supposed to be doing--which is bringing some semblance of reality to the awarding of malpractice claims--I might be able to live with it. However, the simple fact is, in our experience it doesn't work that way. That's because it acts as a perverse incentive--rather than identifying the reasonable outer boundary, it instead becomes a target. This is what attorneys will aim for--especially in cases they have no intention of bringing to trial--and it then becomes a game of negotiating downward from there.

The second problem is that limiting pain and suffering awards is just like sticking your finger in a dike that's leaking like a showerhead. It can serve to just send the money out faster through some other hole. In Maryland that has meant the opening of economic damages. You would be amazed--or perhaps you wouldn't--at the so-called economic experts who will happily appear at trial with complicated formulas purporting to measure the future economic impact the alleged malpractice has had upon the plaintiff. Juries are all too frequently ready to concur.

So capping pain and suffering awards is of only limited utility in my opinion. That's because pain and suffering awards are really just the tip of the iceberg. Remember I said that one current estimate of the cost of malpractice insurance and claims is about $10 billion a year. That doesn't begin to tell the story. Because the ever-present and very real threat of lawsuits has created a uniquely American phenomenon known as defensive medicine. Many doctors--perhaps even most doctors--are doing it: they're ordering tests and procedures and even prescribing drugs far beyond what is reasonable or warranted. Do you have a headache? Let's order an MRI. A cold that's lasted more than a week? Let's do blood work. Breast cancer is increasing, so let's send a woman with no family history of the disease or unusual risk factors for an annual mammogram--even though it may be of dubious value. More and more, doctors are looking over their shoulders, afraid of lawsuits, in an atmosphere that can only be described as legal fear.

Not only is this wasting precious medical resources, it's also poisoning the doctor-patient relationship. Have you heard about the Florida plastic surgeon who was successfully sued for purportedly failing to adequately present the possible risks of a procedure? He's now installed cameras everywhere, and videotapes all interactions he has with his patients. He's even started a company to sell the system to other lawsuit-shy physicians and says he's had tremendous interest in the product. Think about it. The next time you sit down with your doctor and reveal some of your most personal worries and concerns--the next time your doctor gives you a complete, strip-to-your-shorts physical exam--do you want that permanently recorded on tape?

A good doctor-patient relationship depends on an element of trust. When doctors lost the power to make informed decisions to HMO medical gatekeepers, the public revolted. But are we now to allow the threat of medical malpractice to hamstring our doctors in a different way? It's a problem we dare not ignore, because it's a problem we simply cannot afford. Current estimates of the added costs of defensive medicine range anywhere from $50 to $100 billion per year. That's how much additional cost we're adding just trying to prevent lawsuits. Forty-one million uninsured Americans? There's the money to cover them right there, with funds left over to address truly pressing medical problems, like the need to develop a new generation of antibiotics, and to find a way to slow the frightening increases in chronic diseases like asthma and diabetes and lupus.

This culture of legal fear that is warping American medicine is not limited to fear of malpractice suits alone. In the last 50 years, the government has assumed a larger and larger share of our medical costs. Currently, the government picks up nearly half--45 percent to be exact--of the national medical bill, mostly through Medicare and Medicaid. At the current rate, unless there is significant reform, Medicare alone is predicted to consume a quarter of the total federal budget by the year 2030. As you would expect, as government has become more and more involved in financing health care, the numbers and complexity of rules and regulations has risen exponentially. Legal compliance is a huge issue, and consumes an equally huge amount of time and money within the health care industry. And as is so often the case, the best of intentions can have the worst kinds of results.

Take, for instance, the whole issue of patient confidentiality. This seems like a no-brainer. We all want our medical records to remain private to the degree that not just anybody can find out what medical problems we've had, what drugs we're taking, and the intimate details of our personal health. To that end, new federal privacy regulations that cover how personal health information is used and disclosed will take effect on April14, 2003. Also, new federal security regulations that cover how this information is electronically stored, secured and transmitted have been finalized and will take effect in 2005. We in health care are acronym-crazy, and this piece of legislation is no exception; HIPAA stands for--the Health Insurance Portability and Accountability Act. Some people have another name for this well-intended, but misguided piece of legislation. They call it APERRA--the Attorney Permanent Employment and Rich Retirement Act.

That's because these new regulations will open all sorts of doors to potential litigation. These new regulations are so vague and wordy and open to interpretation that one prominent attorney recently labeled them a honey pot for law firms that specialize in class-action lawsuits, and went on to predict that HIPAA could prove as lucrative--and here I quote--as "asbestos and breast implant litigation combined."

A honeypot as large as asbestos and breast implant litigation combined: in the well-intended desire to protect patient privacy, we are creating the possible means to bankrupt and even possibly close hospitals and medical centers across the country. Just who is going to pay for all this? For example, privacy regulations are so confusing and difficult to apply that providers are struggling to figure out how best to comply. Yet at the same time lawyers are bringing lawsuits in state courts alleging that providers have violated patients' privacy rights based on these new federal regulations. And talk about perverse incentives: at a time when the health care industry lags far behind the rest of the economy in the use of information technology, the security regulations actually serve as a further disincentive to the development of regional or national databases that could greatly enhance care for patients. The Leapfrog Group, a Washington-based consortium of business leaders interested in health care, has been working to encourage the use of computerized physician order entry systems that would, among other things, ensure that the right drug is delivered to the right patient, with built-in alarms to indicate any allergic reaction. They estimate that the adoption of such a system would eliminate half a million medical errors a year. But the sad fact is that many organizations may opt to stick with the current error-prone system of paper records rather than run the inherent legal risks now presented by HIPAA.

I'd like to conclude by telling you about that secret I mentioned when I first started talking. Hardly anyone seems to know this, although the facts are public record. I can even provide you a web site address for the Department of Health and Human Services, which published this report in July of 2002. Here's the scoop: malpractice litigation doesn't provide any relief whatsoever to the vast majority of persons inadvertently harmed by the medical system. That's right-- overwhelmingly, people harmed through medical mishaps are not compensated through the current tort system. Moreover, that same system does nothing to promote a better, safer system of health care.

Several years back the New York State Insurance Department studied the current system of malpractice litigation and found that 9 out of 10 malpractice victims ultimately go uncompensated. Nine out of ten. It further found that the system expends more than half its income in overhead and transaction costs; and it produces widely differing monetary awards for comparable victims.

The federal study done last year essentially confirmed these findings, and went on to conclude that our current system is unpredictable, slow, doesn't deter bad conduct and doesn't provide justice. One wonders, can we even refer to it as a system of justice when 90 percent of those aggrieved find no recourse?

Let me put this in more specific terms. Remember I told you that in Florida obstetricians are faced with malpractice premiums ranging from $143,000 to $203,000 per year? One reason these premiums are so high is that Florida, like many other states, has had a series of high-profile, high-settlement malpractice cases in which it has been alleged that the children delivered suffered injury or birth asphyxia resulting in what has been called birth-related cerebral palsy. Dr. John Freeman, a Johns Hopkins professor of Pediatrics and Neurology, and his son, attorney Andrew Freeman, took a closer look at those numbers and published their findings in an article out this month in The Forum, a Harvard Medical Institutions publication. They found that fully 60 percent of malpractice premiums paid by obstetricians go to cover suits for alleged birth-related cerebral palsy. Yet less than 10 percent of children born with CP receive any compensation whatsoever. I use the term "alleged birth-related cerebral palsy" deliberately. That's because recent research indicates that only in a very small percentage of cases--less than 8 percent, and probably much less-- does cerebral palsy occur due to malpractice. Increasingly, evidence suggests that most of these cases are due not to mistakes made by doctors in delivery, but to an intrauterine infection that is currently not detectable prior to the time of birth, and currently not preventable. No matter what the cause, the birth of a baby with cerebral palsy takes a tremendous toll both emotionally and financially. But if we love justice, we have to acknowledge that the more than 90 percent of children with CP who receive no compensation from the tort system have the exact same needs--and place the exact same burdens on their families--as the few children who receive multi-million dollar awards.

This is the real problem with our system of malpractice litigation. It randomly awards outsized payments to a lucky few, and fails to help in any way the far greater number whose needs are every bit as great, but whose luck or timing or ability to manipulate the system are not as finely honed. We must recognize that our current system simply does not work for the great majority, and it unduly punishes a few who may or may not actually be responsible. That's because fault is difficult, if not downright impossible, to determine in most cases. Our tort system determines fault by pitting my expert witness against your expert witness in an adversarial forum before lay juries with little understanding of exceedingly complex medical issues. It is both inaccurate and inefficient, and all too often, justice miscarries.

What is surely not a secret is the fact that medical errors do happen. We read about them in the newspapers frequently, sometimes on the front page. My predecessor at Johns Hopkins, Bill Richardson, chaired the 1999 Institute of Medicine study that estimated between 44,000 and 98,000 Americans die each year due to preventable medical errors in hospitals. Clearly, this is unacceptable, but how do we correct this problem?

I am convinced the only way to effectively reduce these needless deaths is to stop rounding up the usual suspects. We have to stop focusing on assigning blame through litigation. We need to recognize that in the vast majority of cases, it is a problem with the delivery system that is the chief culprit--not a problem with an individual doctor or nurse or even hospital. Improving medical safety means we will have to promote transparency and readily admit error so we can identify what went wrong and figure out how to fix it. It means learning to embrace a zero tolerance for defects, and not accept complications as a fact of illness and medical care. It means an absolute and total commitment to quality.

I'm pleased to say that Johns Hopkins Medicine is at the forefront of some of these very efforts. I will not take the time to go into them here, but would be most happy to describe them should any of you want to ask me.

But now it is time to conclude. I started by telling you about an average American who could no longer afford to buy health insurance. At first glance, this may be the person least likely to support the President's call for restrictions on malpractice payments. But I believe this is the person who is potentially our greatest ally in the fight to remove legal fear from the practice of medicine, if we can show him that legal fear is at least partly responsible for his plight. We need to systematically and thoroughly revise the adversarial relationship in which law and medicine currently are locked. There are going to be no winners in this fight, and we will all end up losers if we allow our health care system to be bankrupted. We cannot allow that, which is why it is in everyone's interest to address this issue now, and for the future.

Thank you for giving me your time and attention. I am eager to hear your questions.

The Health and Human Services report "Confronting the New Health Care Crisis" referred to in this speech is available here.