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OCR for page 115
Market and Regulatory Approaches to
Medical Malpractice: The Virginia
Obstetrical No-Fault Statute
RICHARD A. EPSTEIN, LL.B.
l he question of medical malpractice
and its legal consequences has long been of concern to lawyers and
physicians. For years, however, it seemed to be a problem that was well
under control, given the array of doctrines and practices that has grown
up around it. Today, medical care on average is probably better and more
sophisticated than it has ever been before. Yet since roughly 1975,~ the
medical profession has regarded itself as under siege by a set of legal
developments that both lawyers and judges have defended as merely the
regular and traditional application of the ordinary rules of civil respon-
sibility to physicians, who are, after all, no more special than anyone
else.
Everyone cannot be right, but everyone can be wrong. With respect to
medical malpractice, I think this second possibility is too close to the
truth. There are essentially two general questions that must be decided
in fashioning any system of medical malpractice responsibility. First,
who should decide the applicable norms for a given transaction? Second,
what should those norms be? The traditional view ofthe subject has been
that the first of these questions is easy to answer, whereas the second is
more difficult. On the initial question of the allocation of power, the
applicable standards should be set up either by courts or by legislatures,
under a system in which the latter can override the judgment of the
former unless and until the constitutional rights of individual patients
are infringed. With the locus of power thus established, the debate then
switches to the choice of collective standards that are applicable across
115
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116 MEDiC~P~FESSiONALLi~:VOL~EU
the board. What are the rules for informed consent, for setting the
standard of care, for proving breach of duty, for measuring damages, or
for taking collateral sources of compensation into account? The number
of permutations within the framework of a tort medical malpractice
system is legion. The set of possibilities is augmented yet again by more
radical proposals that jettison the "fault" standard and proceed on
wholly different fault principles.2 Generally, obstetrics and gynecology
are not regarded as requiring special rules—and justifiably so. The
Virginia Birth-Related Neurological Injury Compensation Act (Injured
Infant Act),3 which is discussed in greater detail later in this chapter,
applies only to a limited class of obstetrical injuries and is therefore a
clear, and ominous, exception to the general approach.
The common mistake of the modern system of medical malpractice
responsibility is its facile answer to the first question. Why is it assumed
that some outside collective body—court or legislature should have
the last word on the design of systems to deal with medical malpractice
or medical maloccurrences? The rival system of private contracts be-
tween patients and physicians, who can then decide these questions for
themselves, is typically given very short shrift.4 Yet once this possibility
is taken more seriously, the pressure for unanimous or substantial
agreement on the substantive issues is removed. If physician A and
patient B structure their arrangements one way, physician C and pa-
tient D are free to imitate them or to disregard that arrangement if they
choose. The dominant question is no longer what single set of rules shall
govern all transactions but who shall decide which rules are applicable
in any individual case. The first function of legislatures is to make clear
that ordinary freedoms to contract may be exercised. The function of
courts is reduced to the modest one of enforcing contracts as drafted.
Thereafter, the legislature should simply stay its hand.
This last condition of legislative inaction explains why it will be so
difficult to implement contract solutions: markets always operate at the
mercy of legislative intervention. Moreover, there is today sustained
and decisive political objection to any return to a marketplace for medi-
cal goods and services. Putting aside, for a moment, these practical
political objections, I think that it is possible to find reasons why a
system of contracts and markets works for most goods and services. This
general solution can then be extended to the specific problems of obstet-
rical care.
THE LOGIC OF MARKETS: WHY CONTRACT?
The basic logic of contracting is simple and appealing. Everyone
generally starts with individual endowments in wealth, intelligence,
and skills. Physicians have their labor; hospitals, their resources; and
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VIRGINIA OBSTETRiC~NO-FA=T STATUTE 117
patients, their wealth and natural talents. (For these purposes at least,
we can put aside the question of how anyone comes by any particular
entitlement in the first place.) Contracting parties also have a certain
measure of self-interest, but that self-interest should not be too nar-
rowly defined; parents, for example, have a deep concern for the welfare
of their children and will generally contract on their behalf. All parties
are allowed to exchange their endowments for others they do not possess.
The exchanges can take place on whatever terms they see fit. Force and
misrepresentation, however, as well as contracting with infants and
incompetents, are ruled out as improper forms of advantage taking.
At this point, the logic of self-interest takes over, to the public good.
Each side to the transaction will surrender those things that it values
only if it receives in exchange things to which it attaches a greater
value. Each voluntary exchange leaves both sides better off then they
were before. Because there are no obvious negative externalities (who is
hurt because A's children get better care?), the private gains to the
parties are also translated into social gains. An extensive system of
contracts, in which all contracts share this feature of mutual gain,
should and would lead us toward an improved social state of affairs.
Each individual exchange has led to an improvement of the welfare of
the parties to the exchange. As that process is repeated many times, the
impact of the improvements is cumulative. At the end of the process, each
person should be better off than he or she was at the outset, with nobody
being left worse off. Because everyone is better off in the final state of the
world than in the original one, there is a social optimum, which can even be
measured by the exacting standards of Pareto optimality.5
In practice, matters will not be perfect, of course, because contracts
are costly to negotiate, to draft, and to enforce.6 There comes a point at
which the transaction costs of making new bargains exceed the gains
that anyone could hope to derive from them. The system will therefore
reach equilibrium before all potential gains from trade are exhausted.
'transaction costs will prevent some worthwhile exchanges from occur-
ring. Nevertheless, this limitation on social welfare is a fact of life that
can be overcome only by devising cheaper modes of contracting (for
example, group contracts), which allow more bargains to go forward. It is
hardly a reason for striking down those contracts that have been able to
emerge in the face of these transactional obstacles.
The Limitations on Contract
Imperfect Information
The critical issue is this: Is there any reason why this system of
bargaining is inappropriate for medical malpractice cases, both gener-
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118 MEDiC~ P~FESSiONAL CITY: VOICE ~
ally and in the special case of obstetrics and gynecology? Several reasons
can be offered. It could be argued that individuals do not have sufficient
information to decide which bargains are in their best interests. There is
surely reason for concern here, but the problem may be overstated.
Initially, the difficulties operate in both directions. If individuals have
imperfect information, then so do regulators, administrators, juries, and
judges. To treat the question as though imperfect information runs only
in one direction is to misstate the universal problems with imperfect
information. Both forms of imperfect information that of the consumer
and that of the regulator are critical. Furthermore, where public regu-
lation is involved, a single set of rules must work for all those affected,
notwithstanding any individual differences in taste and demand. The
rules, moreover, will be prepared by persons who have no real informa-
tion about the subjective preferences of the people whom they wish to
protect.
Looking then to consumers, we can assume that they make decisions
with imperfect information. That is not the same, however, as their
having no information at all. Moreover, in the case of consumers the
incentive structures are more favorable than for others involved because
the individuals who seek to get information are obtaining it for them-
seIves, not for the public at large. People can make inquiries, rely on
systems of public certification, do business with institutions that have
substantial reputations, and hire intermediates to make certain deci-
sions about who shall provide what kind of health care. The rise of
health maintenance organizations (HMOs), group insurance, employer
and union plans, and medical advertising represents increased efforts to
close the information gap at a reasonable costs Surely, no one believes
that the problems of information are so great that patients should
be denied the right to choose their own physicians because patients do
not have medical degrees (or because they doff. Furthermore, no one be-
lieves that the right is valueless because the choice is at best
random.
In general, imperfect information is a cost. Just as with other costs,
market institutions that are designed to reduce those costs will arise to
the extent that these institutions are cost justified. Typically, individual
patients will decide to trade offsome measure of independence and some
resources to get some but not all of the information they need. Even
today, patients use the patchwork system to select hospitals and physi-
clans, if only because it is better than any alternative that can be
devised. It is far from obvious, therefore, that a contract system must
founder badly in choosing the rules to govern malpractice. Why allow
freedom in the selection of physicians but not in the choice of malpractice
rules?
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VIRGINIA OBSTETRICS NO-FA=T STAT=E 1 l9
Medical mishaps are a common occurrence, and the issue has been
widely addressed in the press. People therefore contract with the expec-
tation of gain but with the knowledge of possible loss, especially in the
medical setting. A set of rules for allocating the loss of that failure is not
currently negotiated because there is no freedom of contract in that
domain. Let that freedom be guaranteed, and the subject will not be
some idle afterthought to the basic negotiations. Very serious attention
will be given to the types of terms that can and should be imposed with
respect to the potential loss. Any institution must have terms favorable
enough to attract patients, yet the terms cannot be so one-sided as to
bankrupt those patients at the back end if and when something goes
wrong. Whenever contracts are used, both sides have to trade off gain
against Toss, benefit against inconvenience. For large institutions, the
fact that some level of medical malpractice will occur should be accepted
as a social given. There are too many cases for all to be handled correctly,
no matter what level of care is taken. The task of contracting is not only
to reduce these bad cases but also to see that the handling of bad cases
does not overwhelm the system as a whole.
Today, there is extensive competition for the provision of medical
services. That competition need not be confined to matters of price,
thereby holding the minimum level of acceptable services constant by
government edict. There can also be competition over the level of com-
pensation that will be provided in the event of a medical mishap. Terms
that regulate liability for medical mishaps do not have to be kept apart
from the general market processes by which agreements for medical and
hospital services are formed. Experimentation and innovation are possi-
ble here. The critic who thinks that an adoption of contractual freedom
automatically means that medical providers will exclude all liability for
all untoward consequences should ask himself how he would respond
when a rival provider offers some package of benefits to persons injured
during the course of medical treatment. Surely, such a medical provider
would not remain idle as market share and profits shrink.
In the abstract it is hard to determine the precise set of optimal terms
for all medical situations. Nevertheless, it is fairly clear that the present
set of legal rules is not optimal, given the decision of many professionals
to leave the market,8 the incentives for excessive care that liability rules
can create, and the enormous litigation costs of the system at large. The
fine tuning that is needed to improve the rules cannot be done by juries
and courts who are years behind the times and who totally lack the
hands-on experience necessary to make the relevant trade-offs. Contract
solutions, on the other hand, lead to decentralization and to the quick-
er dissemination of successful practices and business arrangements
throughout the medical profession.
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120 MEDiC~ P~FESSiONAL CITY: VOILE ~
Binding the Child
There is one important qualification that applies to obstetrical (but
not gynecological) care: the physician-patient relationship is between
the physician and the woman, yet the Tosses may be suffered by a third
party, the unborn child, who may be condemned by poor medical treat-
ment to lead a life of diminished capacity and chronic pain. The presence
of this third party provides an obvious challenge to the contract model,
with its central tenet that two parties cannot bind a stranger through
their own agreement. It is plausible, therefore, that no contract between
a medical provider and a woman (with or without the child's father)
could bind the infant, who surely has not given any consent of his or her
own.
A moment's reflection, however, should be sufficient to dispel any
illusion that the prohibition against binding strangers by contract ap-
plies to the parent-child context. It is true that small children, not to say
unborn children, cannot contract on their own behalf; nor have they
consented to the tort rules or their no-fault substitutes. The way to
escape the difficulties of consent, however, is not with an elaborate
network of state decrees. Rather, the institution of guardianship solves
the consent problem, primarily by ensuring that the people with the
right incentives contract on behalf of the young. Parents, by virtue of
their status, have obligations not to abuse or neglect an infant and,
furthermore, incur affirmative obligations of support. These obligations
surely begin with the labor and nourishment that parents should pro-
vide their offspring, but they are not so limited. Parents may also
contract with third parties for the benefit of their children, just as they
do when they buy their children food at the supermarket or provide for
their education at a public or private school.
The role of guardianship is Reemphasized by those who are unsym-
pathetic to contract solutions. Atiyah writes accordingly, "Babies and
children are also consumers of health care, and it is a serious question
whether the law should allow the rights of children to tort standards of
medical care to be bargained away on their behalf by adults."9 The
argument loses its emotive force when it is made clear that not just any
"adult" has the power to so bargain. The real question is whether
children are better off under the present tort regime, created by judges
and legislators, than they would be under the alternative contract reg-
ime, in which their parents would determine what is in their best
interests. If parents are willing to accept the same terms that are
applicable to their children, then there is good reason to think that the
contract rules will be superior to the tort rules now said to protect the
children. It is very hard to see how parents can systematically exploit
their children when they agree to the same types of legal risks that their
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VIRGINIA OBSTETRICS NO-FA=T STAT=E 121
children must face. But even in cases in which the contract terms are
different (because the medical procedures are different), we should be
very slow to condemn the variation as a parental sellout of the child's
interest. Calling the issue of parental control a "serious question," as
Atiyah does, only reaffirms that the issue is important, a point on which
everyone can agree. It does not indicate, however, how the question
should be resolved. The greater conflict of interest is between the child
and the state, not between the child and the parent.
As a matter of sheer necessity, the guardianship arrangement domi-
nates issues of medical care. There is little doubt, for example, that
parental consent is what energizes the selection of and payment for
medical services. It can also work for liability. If parents can make all
other fundamental decisions about the provision of medical care, then
why should one element of that set of choices—the terms of compensa-
tion if matters go awry be immune from parental choice? Under the
current medical malpractice system, parents are entitled to choose any
contingent-fee lawyer to bring suits on behalf of their minor children.
Why, then, should they be powerless to contract out of that tort system
for the benefit of their children? After the fact, some parents may regret
that choice, just as they regret other decisions made on other matters.
Yet here, as elsewhere, liability rules should be fashioned with an eye
not only to compensation ex post but also to ensuring the access of
medical services at affordable prices ex ante. The only variation re-
quired in the traditional scheme of contracting with regard to medical
liabilities to newborns is the recognition of the guardianship relation.
That is hardly an innovation of modern legal theory.
To be sure, there are occasions when the state will override the
preferences of parents with regard to their children. These cases, how-
ever, fall rather clearly within the traditional area of abuse or neglect.
How else should we view a decision to refuse surgical treatment to
remove intestinal blockage of a Down's syndrome child or (of only some-
what more difficulty) to refuse to give to a child medical treatment that
is inconsistent with the religious beliefs of the parents? Again, the
ordinary decisions on how to seek medical care are today most emphat-
ically within the province of the parents, whose natural instincts pro-
vide the best shield that most children can ever hope to obtain. Likewise,
parents are in the best position to address liability issues on behalf of
their children.
Access for the Poor
It may be argued that these contract arguments work for the middle
class but do not begin to address the question of access to medical care for
indigent families and their children. The concern is that indigent per-
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122 MEDiC~ PROFESSIONS A: VOGUE ~
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VIRGINIA OBSTETRiC~ NO-FA=T STAT=E 123
protection (10 + 4 > 101. These numbers are chosen for illustrative
purposes; one cannot have any confidence that the rate of failure will
necessarily be greater with liability rules firmly in place. In principle,
the errors could run in either direction. It is quite possible that with a
medical malpractice system the amount of negligent treatment will not
be cut by more than half; it may be cut by less. It is also possible that
many more than 10 percent of people who are not treated will develop
some serious complications. Thus, just as this scenario may be too grim,
it may also be too optimistic.
It is doubtful, of course, that we shall ever obtain reliable data on the
relative strength of the two effects. Nonetheless, three observations can
be made about the current state of affairs. First, the concern about
impaired access to medical care is a constant theme of health profes-
sionals and administrators who work with indigent patients. They re-
port clinics closing or restricting access to service, and they cite the cost
of medical malpractice insurance as one reason for the current distress.
It is doubtful that they are grossly wrong in their empirical estima-
tions.~2 Second, the leading legal decisions that deny the right of hospi-
tals to release themselves from medical malpractice do not even address
the interaction between the quality of care required and the resulting
amount of care that hospitals can then provide. There is no reason,
therefore, to think that they have made the correct trade-offs when they
did not identify these trade-offs in the first place.~3 Third, there is little
reason to think that the hospitals have any perverse institutional incen-
tives on the liability question. The profit motive is surely not dominant
in any area in which the institutional purpose is to give away services at
some positive cost to itself. Charitable hospitals hardly fall into the class
of fast-buck operators, fly-by-night sharpies, or gougers of the poor. It is
hard to imagine that prominent donors to medical research would op-
pose use of their funds for medical malpractice litigation and damage
costs if those expenditures produced any aggregate improvement in the
overall medical care provided. There is a very large number of charitable
hospitals; to the extent that these hospitals once adopted a uniform set of
provisions, the set is probably based on the sensible observation that a
liability regime does more harm than good to its intended beneficiaries.
There is good reason to believe that they may have been right.
The advent of increased public expenditures on medical care for the
poor has changed the situation. Services that were once provided for free
are now (at least in principle) paid for by direct government funds. In
this context poor people do not have to bargain for themselves any more
than middle-class people must bargain when represented by their em-
ployers. Public officials who supply the funds can bargain on their behalf
to obtain the best mix of medical access and malpractice protection. It is
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124 MEDICO P~FESSiON~ I: VOILE ~
possible that they might want to purchase some malpractice protection
for women and children, unborn and born, who are covered by their
plans. These agencies face budget constraints that force them to make
choices between how much money they wish to spend on preserving
access and how much they wish to spend on ensuring compensation
when medical care turns out to be inadequately provided. They are, of
course, subject to the same bureaucratic limitations inherent in all
public agencies, but if we are prepared to accept their role in other
aspects of medical care, then I am hard pressed to see why they could not
be allowed to contract as agents for their beneficiaries on tort liability.
Yet how would they proceed? Welfare agencies also face heavy budget
constraints and must make the same trade-offs between access to the
system and the level of protection afforded those lucky enough to make it
into the system. The official involved might make the same decision
desired by middIe-cIass persons and therefore stipulate for some particu-
lar malpractice compensation scheme. There seems to be no reason why
public agencies could not insist that all malpractice disputes go to
arbitration, as can now be done by private employers.~4 Indeed, there is
no reason to tie the fortunes of the poor to the tastes of the middle class.
The desire for greater legal protection against medical malpractice may
well reflect middIe-cIass patients' greater willingness and ability to pay.
There seems to be no reason to assume that poor people have the same
preferences, given their far lower incomes; hence, poor people should not
be forced to enter into exactly the same kind of contracts. I would
therefore allow public officials virtually complete contractual freedom
in the kinds of medical services contracts they negotiate for the poor. The
argument here is not that the "no liability solution" of bygone days is
necessarily best. It is that the persons in charge of the programs have
better information about the optimal set of contract terms than do
legislatures or courts, or even (dare one say it?) public policy analysts
and law professors.
THE VIRGINIA NO-FAULT STATUTE
The Political Setting
My defense of contractual regimes for medical malpractice certainly
does not represent today's dominant opinion~uite the opposite. The
first question who should decide what the rules arc is answered
routinely in favor of plenary state authority. Political action focuses on
the second question: what rules the state should impose. Given this
particular framework, it is quite clear that the legal solutions that arise
will no longer have the same type of generality, efficiency, and (if it
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VIRGINIA OBSTETRiC~ NO-FA=T STAT=E 125
matters) elegance of the contractual solution. The pattern of behavior
will be quite different because it will now be necessary to contend with
the dynamics of interest-group politics, as life-and-death questions en-
sure that both emotions and stakes will be high.
The first rule of politics is that general solutions are often very hard to
achieve because there will be no sponsors to introduce them. Political
action does not start with overarching philosophical theories. It is gal-
vanized by crisis, by dramatic incidents, and by the sense of dire neces-
sity. The Injured Infant Act, providing for no-fault insurance in certain
obstetrical cases, is illustrative of the general process. Over the years,
there have been a large number of attempts to formulate comprehensive
medical no-fault proposals,~5 and these proposals have routinely foun-
dered on the inability of anyone to define the universal class of compen-
sable events—that is, those for which the new liabilities would be im-
posed- with a degree of precision that would make the system workable
in the broad run of cases. There have been, however, many well-
publicizedjudgments or settlements against individual obstetricians for
huge verdicts, beyond the levels of insurance they carry and perhaps
beyond their net worth.~7
Initially, there is something very wrong with a system that says to a
physician: "Thank you for saving by timely and courageous intervention
99 children from terrible fates and ruined lives. You have earned your
fee"; yet when the 100th child suffers one of those terrible fates (even
because of negligence), we say, "Pay the full costs." The score card that
summarizes the results looks odd indeed: the net benefit to society is 99
lives spared a terrible fate; the physician's routine fees in 99 cases are
wiped out by the huge losses from the last case. There is a manifest
divergence between the private loss that the physician bears and the net
social gain that the physician's activities produce. Actions that, on
balance, everyone would favor ex ante—for example, having the physi-
cian do medical procedures that succeed 99 percent of the time and
negligently fail 1 percent of the time—generate financially ruinous
results for the physician. The source of the gap is clear. The medical
malpractice system does not explicitly credit the physician for the bene-
fits provided in the 99 cases of successful medical intervention. Yet
individuals in making private decisions of whether to accept or reject
medical care will regard that benefit as more important than whether
compensation will be forthcoming ex post for the tiny fraction of cases
that go wrong.
The question that emerges in the legal system is this: Once the
medical malpractice system puts the wrong rules for compensation in
place in the obstetrical area, what can be done to undo the damage?
Private responses are surely possible, although not ideal. Fees can be
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126 MEDiC~ PROFESSIONS I: VOILE ~
raised to cover the mishaps, but they are limited by the wealth of the
patients, a dominant concern for many indigent patients. Moreover,
patients' wealth limits the purchase of additional safety precautions. If
the situation gets bad enough, the movement will then be for legislation,
which is what apparently prompted the passage of the Virginia Injured
Infant Act.~9 A close look at this novel statute reveals some of the
compromises that had to be made to secure its passage and some of the
serious defects in its basic structure.20
The Statutory Design
The Virginia Injured Infant Act is restricted to one class of major
· .
nJury:
"Birth-related neurological injury" means injury to the brain or spinal cord of an
infant caused by the deprivation of oxygen or mechanical injury occurring in the
course of labor, delivery, or resuscitation in the immediate post-delivery period
in a hospital which renders the infant permanently nonambulatory, aphasic,
incontinent, and in need of assistance in all phases of daily living.2t
The statute provides measures to collect and distribute the funds neces-
sary to handle this important class of cases. First, the disposition of
claims is taken out of the tort system (with its jury trials) and placed
before the State Industrial Commission,22 whose usual responsibility is
to hear workers' compensation claims, which themselves often raise
substantial medical issues. Second, there is a network of substantive
provisions. Most notably, funds for the program are raised by a per
capita flat fee of $5,000 for individual obstetricians who choose to partic-
ipate in the program.23 This fee is fixed by statute for the first yearn and
cannot be raised in subsequent years, apparently even for inflation.25
The fee for hospitals is $50 per delivery per year, subject to an overall cap
of $150,000 per hospital.26 Physicians who do not participate in this
program are nonetheless required to contribute $250 per year to the
fund.27 If the funds raised from these three sources are insufficient to
cover the obligations of the program, the resultant shortfall will be
covered by taxes levied on all insurance companies within the state,
whether or not they are in the business of providing coverage for medical
malpractice.28
As to the distribution of benefits from the plan, the patterns of com-
pensation that have been adopted parallel those used in workers' com-
pensation plans. The statute provides no compensation for pain and
suffering;29 it provides limited compensation for lost earnings, based on
50 percent of the average weekly wage, as well as compensation for
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VIRGi~A OBSTETRiC~ NO-FA=T STATE 127
medical and other support services over the life of the program, with
setoffs, dollar for dollar, for collateral sources under the plan.30
Participation in the program is not mandatory for physicians or hospi-
tals. They are permitted to opt into the system at will. If they agree to
participate, however, the quality of services they provide is subject to
review by a board of directors, which administers the Injured Infant
Act.3i The physicians and hospitals must also agree to participate in
developing a program to provide obstetrical care to indigent patients.32
Curiously, neither physicians nor hospitals seem to be required to
disclose to their patients their decision regarding participation in the
plan.
It is instructive to compare the political solution reached by the
Injured Infant Act with the solution that might be reached under mar-
ket arrangements. The analysis is conveniently divided into two parts:
coverage and funding.
Coverage
The coverage provisions here are restricted to only one class of serious
injuries. Why is only this class included when other types of injuries
might well be as serious? From the point of view of an outsider, one
possible answer is that the problems arising in this class of cases were so
pressing that the legislature was forced to take it specifically in hand,
leaving the others to the malpractice system. Indeed, if there are an
estimated 40 such cases per year,33 the sums involved are in fact quite
large. Each case under the program could easily generate present lia-
bilities of several million dollars. Another explanation, with perhaps
more descriptive power, is that the compromise was necessary to get the
bill through the Virginia legislature. Trial lawyers form a powerful
interest group in all states, and they could well have blocked the more
general removal of all obstetrical cases from the medical malpractice
system (after all, they do not want a precedent that ends malpractice
suits altogether).
A contract solution would doubtless be more general in its coverage.
Ex ante, the dominant question is whether both sides are better off by
taking cases out of the tort system and providing some alternative
system for compensation. Costs of prevention, needs for compensation ex
post, and administrative costs of the system are likely to control that
inquiry. If that is the case, then there seems to be little reason to
differentiate by source within the class of severe injuries. Although it
may not be clear exactly how all severe injuries would be covered, it is a
good guess that they would all be covered in the same way.
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128 MEDiC~ PROFESSIONAL CITY: VOICE ~
There is also a question as to whether this choice of compensable
events to be covered by the statute makes sense. Here, the definition on
its face appears quite narrow, being restricted to "injury to the brain or
spinal cord of an infant caused by the deprivation of oxygen or mechani-
cal injury occurring in the course of labor, deliver, or resuscitation."34
The operative concern is not semantic because the meaning of the terms
is as clear as good legal draftsmanship can make it. Instead, the issue is
an empirical one: What is the percentage of all birth defect cases that
will be contestable under the definition? To answer this question, one
must know a great deal more about medicine than any outsider to the
profession knows. Nonetheless, it is possible to at least note two sources
of concern that might be raised about this warranty.35
First, it is often difficult to distinguish serious injuries caused at or
before birth from those caused by birth defects. The ultimate physical
condition that results is often the same in either case (for example, brain
damage), although the medical evidence is not reliable enough for any-
one to make an accurate determination of causation. Second, it may be
that certain serious fetal injuries can be caused by intermittent drug (for
example, cocaine) use, which could not be distinguished from the com-
pensable injuries covered under the statute. Here, the problem turns out
to be especially acute because there now seem to be ample data suggest-
ing that even a single "hit" of cocaine in the first trimester of pregnancy
can cause massive neurological damage, even though it might be very
difficult to trace the results thereafter.36 Moreover, the incidence of
maternal use of illegal drugs, including cocaine, during early pregnancy
is very high: it is estimated to be as much as 11 percent.37 Under a
system of negligence liability, it is unlikely that even a tiny fraction of
these cases would create a colorable case for liability. Under the Virginia
statute, however, all of them do, especially if there is no trace of cocaine
or any other illegal drug left in the child's system six months later when
birth occurs. It seems most unlikely that the Virginia no-fault plan was
intended to be a compensation program for victims of maternal drug
abuse—yet that is the risk it creates.
The Injured Infant Act seeks to handle these problems by using
rebuttable presumptions: "A rebuttable presumption shall arise that
the injury alleged is a birth-related neurological injury where it has
been demonstrated, to the satisfaction of the Industrial Commission,
that the infant has sustained a brain or spinal cord injury caused by
oxygen deprivation or mechanical injury."38 The initial presumption
appears to be set in favor of the physician until the commission makes
the critical finding (which should not be made in drug cases) that the
brain or spinal cord injury is attributable to oxygen deprivation or
spinal injury. Yet that question of fact can be highly controverted, and
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VIRGINIA OBSTETRICM NO-FA=T STAT=E 129
although presumptions can shift burdens, they do little to reduce total
error. At most, presumptions only determine whether the large residual
errors that uncertainty creates are borne mainly by plaintiffs or defen-
dants. The drug cases could still arise with sufficient frequency to
inundate the entire system. If the gray area under the statute turns out
to be very large for medical reasons, then clarity of draftsmanship will
offer no refuge from an administrative nightmare or from the strategic
maneuvers of both sides.
Other complications may also arise. Thus, the claimant who thinks
negligence is clear will try to keep the case outside the statute, whereas
the defendant will try to bring it within the statute. Yet nothing in the
statute deals with this reversal of roles, which is familiar to lawyers who
work in workers' compensation cases. Ironically, a negligence standard,
for all its flaws, may turn out to be more desirable, if only because fewer
cases straddle the negligence-no negligence line than straddle the
iatrogenic injury-birth defect or drug usage line. Under the statute, we
have no market information and hence no capacity for incremental
adjustments in the basic rules. There will have to be another obstetrical
crisis before corrective action can be taken.
Fading
Equally striking are the provisions of the statute that address the
funding of the system as a whole. In market settings any contract must
work for the joint benefit of the parties. There may be an uneven
distribution of the gains from trade, but each side will garner at least
some portion of those gains. Ex ante, there should be no losers. Legisla-
tion must not satisfy that constraint, especially as the constitutional
safeguards to economic liberties and property today are set at a very low
level indeed.39 Hence, we should expect to see large amounts of wealth
redistribution take place within the system.
Initially, the fees charged do not begin to approximate the risks
covered. The Injured Infant Act does not reveal a budget estimate as to
the total likely expenses, which is then made the target for the total
charges imposed on the participants in the system. Quite the opposite:
the statute contemplates that any shortfall that may develop shall be
covered by all insurance carriers within the state, regardless of the lines
of business they write. Here, the physicians as a group are able to impose
huge contingent (but very real) liabilities on insurance carriers who
write only other, unrelated lines of business. The provision that insu-
lates plan participants from any historically justified rate increases
makes it clear that the real question is not whether but when the
contingent liability will kick in. This financing decision is not without
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130 MEDICAL PROFESSIONAL LIABILITY: VOLUME II
its negative allocative consequences. The imposition of taxes always
distorts market decisions in the goods or commodities that are taxed.
When unrelated lines of insurance are subject to taxes, they become less
available to the consumers who benefit from them because the tax drives
from the marketplace all transactions in which the difference between
the buyer's gain and the seller's cost is less than the tax in question.40
Large taxes therefore tend to produce large misallocations. Insurance
companies are an easy populist target for attack, and their customers
are too diffuse to protest. The statutory financing scheme therefore
exports misery it does not eliminate it.
The usual somber conclusion of the public choice literature holds
here.4i Efforts in the political process to correct one distortion, such
as the medical malpractice tort rules, only create other distortions in
other markets. The wisest sage cannot hazard a guess as to which
set of distortions is greater. The ordinary analyst can say with confi-
dence that competitive markets in both sectors yield a better social
solution.
The redistribution provided by the statute works in more than one
direction. To extract profits from insurance companies, the obstetrician
groups had to make deals with other legislative interest groups, and
they did. With which groups the deal was made is hard for an outsider to
determine. But surely welfare and children's rights groups and some
segments of the medical and insurance industries are likely candidates.
The evidence appears on the face of the statute. The definition of a
participating physician or hospital includes only those willing to partic-
ipate in developing programs to assist the poor: limited public service
has become the quid pro quo for reduced tort liability. I do not wish to
quarrel with public assistance as such. But why should it be funded from
special taxes on obstetricians and hospitals?
In a sense the odd funding of this statute is a quid pro quo for getting
out of the tort system, which obstetricians and hospitals never should
have entered. The new principle is that bad common law rules are
corrected only if the losers pay tribute to the legislature that relieves
them oftheir pains. (It is as if justice is done when the thiefagrees to sell
back stolen property to its owner at a below-market price.) The Byzan-
tine system of indirect payments that emerges results only in public
mischief because no one must ever make an explicit public reckoning of
what resources should go to welfare generally, or why. The political
system thus generates a set of hidden taxes and off-budget appropria-
tions with which no citizen can keep pace.42 How ironic it is that private
contracts are attacked on the ground that consumers have imperfect
information! The Virginia statute is drafted in a way to keep its real
costs hidden from public view.
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VIRGINIA OBSTETRICAL NO-FAULT STATUTE 131
Not only does the redistribution worked by the statute take place
between sectors but it also occurs within the medical sector. Physicians
are forced to contribute to the plan, whether or not they benefit from
participation; yet in ordinary private insurance markets, there are
powerful incentives to differentiate costs of coverage for different in-
sureds.43 The insurance company that can identify low-risk providers of
medical services and offer them premiums to match those services will
eliminate any implicit subsidy of inefficient producers by efficient pro-
ducers. The legislated insistence on a flat fee prevents this particular
program from having its desired effect. Now, physicians with routine
practices are forced to subsidize their colleagues who specialize in high-
risk pregnancies. Moreover, the same implicit redistribution can take
place, for example, between small community hospitals that do not
derive any benefit from the hospital cap and large university hospitals,
with a far riskier patient mix, that do. In principle these subsidies are all
inefficient, and, at least with respect to institutions, the plan should be
modified to allow experience rating if the data proves reliable enough to
sustain it.
What about the consumer of medical services? In one sense, the
statute in question does not mark a move to consumer consent. The
physician or hospital can opt into this system at will, but it appears that
the statute does not even require them to inform their patients of the
choice. At the very least, a provision that requires clear disclosure would
be some improvement, because medical providers would have to gauge
the effect of their choices on their ability to maintain their practices.
Even if the patients should unanimously approve the abandonment of
the malpractice system, however, one could not be confident that the
system represents a social improvement, given the huge implicit sub-
sidies (especially from insurers and less so from nonparticipating physi-
cians) built into the plan.
CONCLUSION
It is not clear whether in the aggregate this no-fault situation is better
or worse than the malpractice situation it replaced. That malpractice
system tended to make every serious birth injury a tort suit, so that the
skilled specialist physicians and large hospitals suffered disproportio-
nate Tosses. This no-fault system hopes to correct that set of distortions,
but in the process creates another, equally serious, if not more serious,
set of distortions. The point here is not that the no-fault system is not
perfect; no system is. Rather, it is that the system, especially with active
legislative intervention, is more politically charged, and more imper-
fect, than it need be.
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132 MEDICAL PROFESSIONAL LIABILITY: VOLUME II
Relative to Virginia's Injured Infant Act, markets have two great
strengths that are often underappreciated. First, they allow some exper-
imentation for ideal contractual terms, which could provide for solutions
better than those of either the medical malpractice system or its limited
no-fault alternative. Second, markets weed out all the implicit subsidies
that legislatures and interest groups are routinely able to work into
their deals. These advantages are not simply abstract or theoretical.
They increase the capacity of the society to provide needed goods and
services for all its citizens. In the clamor for short-term reform, the
overall social effects are often ignored in favor of more insistent, and
more parochial, considerations. Two wrongs do not make a right. State-
mandated no-fault statutes are not the right response to the blunders of
the present malpractice system. Markets are.
REFERENCES AND NOTES
1. This was the year of the first major physician revolt against malpractice insurance
premium increases in such major states as California, Illinois, and New York. See
Kotulak, R. 1975. Malpractice Suits Growing sickness. Chicago Tribune. May 11, p.
1; Malpractice: MD's revolt. 1975. Newsweek. June 9, p. 59.
2. See Havighurst, C.1975. Medical adversity insurance: Has its time come? Duke Law
J.75:1233; Havighurst, C., and L. Tancredi.1974. Medical adversity insurance: A no-
fault approach to medical malpractice and quality assurance. Insur. Law J. 613:69.
3. Va. Code Ann. §§ 38.2-5000 to 38.2-5021 (Supp. 1987).
4. I have defended this system more fully in Epstein, R. 1977. Contracting out of the
medical malpractice crisis. Perspect. viol. Med. 20:228; Epstein, R. 1978. Medical
malpractice: Its cause and cure. In The Economics of Medical Malpractice, S. Rotten-
berg, ed. Washington, D.C.: American Enterprise Institute, p. 245; Epstein, R. 1976.
Medical malpractice: The case for contract. Am. Bar Found. Res. J. 76:87. For other
defenses of the same position, see Danzon, P. M. 1985. Medical Malpractice: Theory,
Evidence, and Public Policy. Cambridge, Mass.: Harvard University Press; Robinson,
G.1986. Rethinking the allocation of medical malpractice risks between patients and
providers. Law Contemp. Prob. 49:173.
5. For a discussion of this exacting Pareto standard, and the alternative Kaldor-Hicks
standard, whereby there is a social improvement if the winners in principle can
compensate the losers for their pains out of their winnings from the transaction, see
Coleman, J. L. 1980. Efficiency, utility, and wealth maximization. Hofstra Law Rev.
8:509. Note that the system of contracting, with its unanimous consent, satisfies both
criteria and does not require any very subtle social analysis to determine the relative
impacts of complex regulatory programs on both winners and losers.
6. For a formal introduction of transaction costs into modern legal and economic think-
ing, see, generally, Coase, R. 1960. The problem of social cost. J. Law Econ. 3:1.
7. See Danzon. 1985, p. 211; see note 4.
8. See Lewis-Idema, D. In this volume.
9. Atiyah, P. S. 1986. Medical malpractice and the contract/tort boundary. Law Con-
temp. Prob. 49:287, 295.
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VI~ OBSTETRICS NO-FA=T STATUE 133
10. For example, the Supreme Court of California examined the following admissions
release form in Tunkl v. Regents of the University of California, 60 Cal.2d 92,383 P.2d
441, 32 Cal. Rptr. 33 (1963):
RELEASE: The hospital is a nonprofit, charitable institution. In consideration of
the hospital and allied services to be rendered and the rates charged therefor, the
patient or his legal representative agrees to and hereby releases The Regents of the
University of California, and the hospital from any and all liability for the negli-
gent or wrongful acts or omissions of its employees, if the hospital has used due care
in selecting its employees.
Ibid. at 94, 383 P.2d at 442, 32 Cal. Rptr. at 34.
11. Thus, the California court struck down the clause in Tunkl (see note 10). In his opinion
for the court, Justice Tobriner reasoned:
Thus the attempted but invalid exemption involves a transaction which exhibits
some or all ofthe following characteristics. It concerns a business of a type generally
thought suitable for public regulation. The party seeking exculpation is engaged in
performing a service of great importance to the public, which is often a matter of
practical necessity for some members of the public. The party holds himself out as
willing to perform this service for any member of the public who seeks it, or at least
for any member coming within certain established standards. As a result of the
essential nature of the service, in the economic setting of the transaction, the party
invoking exculpation possesses a decisive advantage of bargaining strength against
any member of the public who seeks his services. In exercising a superior bargain-
ing power the party confronts the public with a standardized adhesion contract of
exculpation, and makes no provision whereby a purchaser may pay additional
reasonable fees and obtain protection against negligence. Finally, as a result of the
transaction, the person or property of the purchaser is placed under the control of
the seller, subject to the risk of carelessness by the seller or his agents.
Ibid. at 98-101, 383 P.2d at 445-446, 32 Cal. Rptr. at 37-38.
12. This was a constant theme in the discussion sessions at the symposium. Few of the
speakers who made this assertion had a strong intellectual orientation toward mar-
kets.
13. See Madden v. Ka~serFoundatzon Hospitals, 17 Cal. ad 699,552 P.2d 1178, 131 Cal.
Rptr. 882 (1976). Note that insurance companies are often unwilling to provide
additional coverage against loss for an additional premium because of the risk of
adverse selection that is, those persons who are likely to demand the coverage are
the most likely to sue. The practice, therefore, is to make the coverage constant across
broad classes of cases. See Epstein, R., C. Gregory, and H. Kalven, Jr., eds.1987 Supp.
Cases and Materials on Torts. Boston: Little, Brown, p. 44, note 3.
14. Carter Phillips, speaking on behalfofthe American Medical Association (joined by 32
other medical groups), made this point very clear in his oral presentation at the
symposium (see his and Elizabeth Esty's chapter, this volume). Phillips, like me, is
doubtful that any major restructuring of medical malpractice laws can be limited
solely to obstetrics and gynecology.
15. See, for example, the sources cited in note 2.
16. See, for example, Abraham, K. S.1987. Individual action and collective responsibility:
The dilemma of mass tort reform. Va. Law Rev.73:845, 886-889; Keeton, R. E. 1973.
Compensation for medical accidents. Univ. Pa. Law Rev. 121:590, 605, 612-614.
17. For example, a $10 million verdict against three prominent obstetricians in Washing-
ton, D.C., prompted their patients and colleagues to rally around them on appeal. The
verdict exhausted the obstetricians' insurance coverage and, if it had been upheld on
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134 MEDICO P~FESSiON~ ~~: VOILE ~
appeal, may have forced them into bankruptcy (Lee Hockstader, Colleagues rally for 3
doctors ordered to pay $10 million. 1988. Washington Post. June 4, p. A-1). The case,
however, was settled for $4 million the limit of the obstetricians' coverage—as well
as for $800,000 paid separately by the hospital (Lee Hockstader. King of area mal-
practice cases creates stir in, out of court. 1988. Washington Post. September 10, p.
B-1).
18. Clearly, this numerical example is dependent on the assumption that most medical
interventions today are beneficial. That assumption seems to be unquestionable, even
if the exact ratio is subject to doubt. But even if the number were 98 to 2, the net
positive would still be very large, and the analytical point would remain the same.
Benefits conferred are not ignored in any ex ante calculation. In addition, if the
percentage of negligence cases were much higher, then the system would collapse
under its weight. The frequency of malpractice litigation would be unbearable if, for
example, 2 percent of surgeries resulted in malpractice litigation. If the average
surgeon performed 100 surgeries per year, there would be two cases per year. If each
suit lasted five years, the average surgeon would be a defendant in 10 cases at one
time. Even the present frequency of litigation is far lower than this.
It has been suggested that the real torts crisis is that too few victims sue. See Abel,
R. L. 1987. The real tort crisis Too few claims. Ohio State Law J.48:443-467. Abel
relies on the work of Patricia Danzon, showing that 90 percent of the incidents of
medical negligence do not result in any legal action (ibid., p.448, citing Danzon.1985,
pp. 19-21, 23; see note 4). Danzon's figures suggest that in 1974 there was a nation-
wide total of 260,000 negligently inflicted injuries out of more than 1.5 million
iatrogenic injuries (Danzon.1985, p.20). If all these injuries resulted in suits, as Abel
urges, it would overwhelm the system.
19. For a commentary on this article that reveals the ideas and pressures underlying the
initial drafting of the Injured Infant Act, see O'Connell, J. 1988. Pragmatic con-
straints on market approaches: A response to Professor Epstein. Va. Law Rev.74:1475.
20. For a fuller discussion of the content and passage of the statute, see Note, innovative
no-fault tort reform for an endangered specialty. 1988. Va. Law Rev. 74:1487.
21. Va. Code Ann. § 38.2-5001 (Supp.1987) [hereafter referred to by section number only].
22. § 38.2-5003.
23. § 38.2-5019(A)(1).
24. Ibid.
25. § 38.2-5020(A).
26. § 38.2-5019(A)(2).
27. §§ 38.2-5019(A)(3) to 38.2-5020(A).
28. § 38.2-5020(B). The collections are made "if required to maintain the Fund on an
actuarially sound basis."
29. § 38.2-5009.
30. Ibid.
31. § 38.2-5001. "As appointed by the Governor of Virginia, the Board shall consist of a
general citizen's representative and of representatives of the other interest groups
under the plan participating hospitals, participating physicians, liability insurers,
and nonparticipating physicians such that the majority of the Board represents its
participants" (§ 38.2- 5016).
32. § 38.2-5001. It is certainly worth noting that the obligation to participate in such an
effort is not made a separate substantive provision of the statute but is incorporated
into the definition of a "participating" physician or hospital.
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VIRGO OBSTETRiC~ NO-FA=T STATUE 135
33. See Heland, K. V. 1987. Memorandum to the American College of Obstetricians and
Gynecologists, Committee on Professional Responsibility. March 5 (on file with the
Virginia Law Review Association).
34. § 38.2-5001.
35. These issues were raised in a discussion at the symposium by Donald N. Medearis, Jr.,
Charles Wilder Professor of Pediatrics at Harvard Medical School and chief of the
Children's Service at Massachusetts General Hospital, and Ruth Watson Lubic,
general director of the Maternity Center Association, New York City.
36. According to one commentator:
In fact, the research suggests that a single cocaine "hit" during pregnancy can cause
lasting fetal damage. While a single dose of cocaine and its metabolites clear out of
an adult body within 48 hours, an unborn baby is exposed for four or five days. . .
Cocaine, which is soluble in fat, readily crosses the placenta, where the baby's
body converts a significant portion of it to norcocaine, a water-soluble substance
that does not leave the womb and that is even more potent than cocaine. Norcocaine
is excreted into the amniotic fluid, which the fetus swallows, re- exposing itself to
the drug. As a result, the researchers believe, almost no cocaine-exposed baby fully
escapes its damaging effects.
Brody, J. E. 1988. Cocaine: Litany of fetal risks grows. New York Times (Chicago
ed.). September 6, p. 19.
37. Ibid., pp. 19, 23.
38. § 38.2-5008(1).
39. For the modern statement, see Usery v. TurnerElkhorn Mining Co., 428 U.S.1 (1975).
I have criticized this approach at length in Epstein, R. 1985. Takings: Private Prop-
erty and the Power of Eminent Domain. Cambridge, Mass.: Harvard University
Press, pp. 256-258, and more briefly in Epstein, R. 1986. Self-interest and the
Constitution. J. Legal Educ.37:153, and Epstein, R.1984. Judicial activism: R`eckon-
ing of two types of error. Cato J. 4:711.
40. For a discussion of the so-called excess burden of taxation, see Gwartney, J., and R.
Stroup. 1987. Economics: Private and Public Choice, 4th ed. San Diego: Harcourt
Brace Jovanovich, pp. 110-111.
41. For the classical elaboration, see Buchanan, J., and G. Tullock. 1962. The Calculus of
Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: University of
Michigan Press. For the modern controversy, see Symposium on the theory of public
choice. 1988. Va. Law Rev. 74:167-177.
42. For a related discussion concerning AIDS, see Epstein, R. 1988. The AIDS Commis-
sion's hidden tax. Wall Street Journal. June 13, p. 12.
43. For a general account of the operation of private insurance markets with respect to
liability, see Epstein, R. 1985. Products liability as an insurance market. J. Legal
Stud. 14:645-669; Schwartz, S. 1988. Proposals for product liability reform: A theo-
retical synthesis. Yale Law J. 97:353.
Representative terms from entire chapter:
injured infant
