A "tort reform" measure was passed in Mississippi this month and was signed by Gov. Musgrove. The Mississippi law covers business liability reform and is a companion bill to the medical malpractice reform bill passed earlier in the month.

The new laws provide for:

• Caps on punitive damages in business liability cases of 4 percent of the net worth for businesses worth less than $50 million. with absolute limits of $20 million for larger firms.
  
• In medical malpractice cases, non-economic damages are limited to $500,000 in 2003 which will rise to $1 million by 2017. Higher punitive damages can be awarded if the plaintiff can prove malice and gross negligence.
  
• Lawsuits must be filed in the state court in the county where the injury occurred.
  
• Joint and several liability is abolished and each defendant is only responsible for his share of the damage award.
  

Similar variations of "tort reform" have been passed in Nevada and are under discussion or have bills pending in the state legislatures in Ohio, Texas, Tennessee, and Florida. These bills generally include some form of caps on non=economic damages, with some proposals (Ohio) capping total awards. Other features are limits on lawyers' fees, elimination of joint and several rules, requirements for disclosure of collateral sources, shortening of the time limitation for filing a suit, limiting and better defining who can testify as an "expert." In Tennessee, an interesting proposal has been made for all malpractice case to be heard in special courts with expert judges, similar to current Tennessee procedure for environmental cases.

Here in Florida, many of these procedures already exist. Before a suit can be filed, the plaintiffs must provide expert testimony that malpractice did occur and that damages resulted. The defendant must then provide expert testimony that such allegations are false. This pre-suit procedure was introduced during the last "malpractice crisis" and was designed to eliminate non-meritorious suits or to force settlement of obvious cases of malpractice. If the cases are settled in this phase, certain caps apply. Either party can offer to settle but, if the other party refuses, then the caps on damages do not apply.

In practice, however, it is no problem to get an "expert" to testify for either side. Experts have only to be licensed in Florida but do not have to practice in the same field and do not have to have the same recognized specialty or subspecialty training as the defendant. The same proportion of "frivolous" lawsuits still are filed (if one defines these as the fraction of lawsuits in which the suit is dropped or it goes to trial where there is a defense verdict). Net awards are gradually increasing. When the last "tort reform" as passed, the average verdict against an internist was less than $200,000, now 15 years later, it exceeds $850,000.

The major thrust, then, is the caps on non-economic damages. This has been proposed by the Florida Select Task Force On Healthcare Professional Liability Insurance. This is alleged, by proponents of current "tort reform" efforts, to reduce insurance premiums. As I have argued before (here and here), this does not make much sense. In business liability cases, the ridiculous punitive damage awards are well known, but these are rare in medical malpractice. The blockbuster awards in malpractice are generally those for "bad baby" cases or other injuries where the huge sums are the amounts needed to care for the injured party during a long period of disability. As cited previously, several studies have shown that so-called "non-economic" damages constitute only about 10% of awards and, thus, would be expected to have a minor impact on premiums. Further, there has been no explosion of massive awards in Florida in the last year which can pointed to as a proximate cause of the 40-120% increases in premiums we are experiencing.

One possible cause of the increased premiums is, as alleged by the Florida Academy of Trial Lawyers, that insurance companies which may be passing on the costs of bad business decisions to doctors and consumers. "When the stock market was so high, the underwriting losses were acceptable," said Timothy Bone, a Jacksonville-based insurance broker for Miami's Arthur J. Gallagher, quoted in Jacksonville Business Journal. "The only way to make a profit is to increase premiums at significant rates." Then, "No one was prepared for the Sept. 11 attacks, which wiped out a significant portion of the insurance companies' reserves and capital," said The Haskell Co. President Preston Haskell, who served on a state legislative committee that studied the issue in 1986. A similar explanation was provided to policy-holders by First Professional Insurance Co. in its mailings. Indeed, FPIC went into rehabilitation under Florida's Department of Insurance when it nearly went bankrupt in the 1980s. Insiders blamed bad real estate investments. However, this explanation is flawed.

"That's all bunk," said Lawrence Smarr, president of the Physician Insurers Association of America, based in Rockville, Md. "Medical malpractice insurers invest primarily in bonds, so the opportunity to lose a lot of money in the stock market is just not there." The [Florida Department of Insurance] restricts the types and amounts of investments insurance companies can make. Insurers typically invest at least 80 percent of their surplus in bonds and other "safe" investments, Smarr said. Today, [FPIC] invests 10 percent of its surplus in equities and 90 percent in bonds "because they're safer and more liquid," COO Bob White said. "Our cash flow needs vary with the settlement of claims."

In fact, insurance premiums vary according to the yield of the bond market and have little to do with the number of lawsuits or awards. This was reported by the Center for Justice and Democracy in a 1999 report. [The CJD touts itself as not affiliated with the trial lawyer's bar and is primarily supported by memberships and donations from attorneys and other groups opposed to tort reform]. More recently, similar conclusion were reached in a study commissioned by the "Americans for Insurance Reform". To quote:

Insurers make most of their profits from investment income. During years of high interest rates and/or excellent insurer profits, insurance companies engage in fierce competition for premium dollars to invest for maximum return. Insurers severely underprice their policies and insure very poor risks just to get premium dollars to invest. This is known as the “soft” insurance market.

But when investment income decreases — because interest rates drop or the stock market plummets or the cumulative price cuts make profits become unbearably low — the industry responds by sharply increasing premiums and reducing coverage, creating a “hard” insurance market usually degenerating into a “liability insurance crisis.”

A hard insurance market happened in the mid-1970s, precipitating rate hikes and coverage cutbacks, particularly with medical malpractice insurance and product liability insurance. A more severe crisis took place in the mid-1980s, when most liability insurance was impacted. Again, in 2002, the country is experiencing a “hard market,” this time impacting property as well as liability coverages with some lines of insurance seeing rates going up 100% or more.

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This graph shows the return on investments as a percentage of premium receipts by year. The dips occur when bond yields drop and exactly coincide with premium increases and liability "crises."

Further, If one plots actual payouts against premium income, the lack of influence of malpractice awards becomes clear. The 30-year trend of malpractice awards has tracked the rate inflation in medical costs.

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To quote from the conclusions of this report:

While insurer payouts directly track the rate of medical inflation, medical insurance premiums do not. Rather, they rise and fall in relationship to the state of the economy. Not only has there been no real increase lawsuits, jury awards or any tort system costs at any time during the last three decades, but the astronomical premium increases that some doctors have been charged during periodic insurance “crises” over this time period are in exact sync with the economic cycle of the insurance industry, driven by interest rates and investments. In other words, insurance companies raise rates when they are seeking ways to make up for declining interest rates and market-based investment losses.

Once again, review of the information available suggests that this crisis is largely manufactured. The caps on damages ultimately protect insurance companies from risk yet will not compensate the injured patient. Let's not fool ourselves. Doctors are human and do make mistakes. In the rush to solve this "problem," we need to remember our primary duty is to our patients.

UPDATE: Synchronicity. Kevin Drum has some additional thoughts on the issue.

Certain changes in procedure would have some impact. Disclosure of collateral sources and elimination of joint and several liability may allow juries to make more rational awards and to have the penalties fall on the guilty parties, not the "deep pockets." Institution of a fee schedule or sliding scale formula for attorneys' fees would deliver a larger proportion of th award to the injured patient. The Tennessee proposals for a more restricted definition of "experts" and trial in special courts seems promising and deserves careful consideration, but I am not aware of any state where this is occurring so there is no data on this topic.

The trial lawyers have made counter proposals. According to Debra Henley, deputy executive director of the Florida Academy of Trial Lawyers, "We encourage physician-owned insurance companies. If we can find incentives for doctors to form their own insurance companies, they would be not be subject to the extreme claims we've seen in recent years." That rather unbelievable statement is the latest in a list of proposals. The FATL has proposed opening up the Federal and state databases of malpractice lawsuits and awards to the public, which is not such a bad idea. The lawyers have also proposed a variation of the "three strikes rule" where any doctor who is found liable or settles three malpractice cases will forfeit his license. I might even be able to live with this if the same rules applied to lawyers who lost three cases.

All sides, if I can be said to represent physicians, agree that Florida needs to do a better job at cracking down on bad doctors. During testimony to the Select Task Force On Healthcare Professional Liability Insurance, Public Citizen provided evidence that 6 percent of practicing physicians in Florida are responsible for more than half of jury awards in malpractice cases. The elimination of this small number of physicians would have a major impact on this "crisis."