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7 The Legal System: The Committee's Findings and Proposals for Change m l he committee spent considerable time studying, evaluating, and discussing various proposed solutions to the professional liability crisis in obstetrics. Its recommendations for reforming the legal system were guided by its findings, set forth in detail in this report, that the professional liability problem is decreasing the availability of and access to obstetrical care, changing the practice of obstetrics, affecting the education of future obstetricians, damaging the physician-patient relationship, and increasing the costs of obstetrical care. In examining the traditional tort litigation system for adjudicating medical malpractice claims, the committee was mindful that the prob- lems related to the growth in medical malpractice litigation are part of an overall growth in certain kinds of tort liability lawsuits, coupled with increases in some types of jury awards and settlements. Moreover, many observers believe that the growth in litigation has engendered a general insurance crisis, which has manifested itself in sharp increases in pre- miums for liability insurance and, in certain situations, diminished availability or absolute withdrawal of coverage. Medical malpractice litigation is undeniably part of this broader phenomenon and shares many of its characteristics; but it is also a unique problem, separable from tort litigation in general. The commit- tee evaluated tort reforms and the various alternatives to traditional tort litigation with a view to alleviating the problems related to medical 125

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126 MEDiC~ PROFESSIONAL PITY: VOILE ~ professional liability issues in obstetrics. The committee suspects that some of its recommendations may also apply to medical professional liability in general. THE TORT SYSTEM Tort law is the branch of law allowing victims of legal wrongs to seek compensation from responsible parties through the judicial system. The tort system including the law of medical liability has a number of goals. Foremost among these are deterrence of unreasonably dangerous activity, whether intentional or negligent, and compensation of the victims of such activity. The other goals of the system are that it provide compensation expeditiously, that the threat of liability not deter benefi- cial conduct, and that both claimants and those who are subject to the threat of liability have confidence that the underlying legal rules and their manner of application are just. Although there may reasonably be debate about whether medical professional liability law achieves its goal of deterring unreasonably dangerous activity, it is the committee's conclusion that the medical professional liability system is performing the remainder of its mission inadequately. Compensation is provided to victims only after considerable delay (GAO, 1987a); the threat of liability is having far-reaching and severe effects on access to and availability of obstetrical care; medically inad- visable procedures are being overused, largely because of the threat of liability if they are not so used; and health care providers, traditionally ambivalent about medical liability, now believe this body of law to be arbitrary and unfair in the extreme. For all these reasons, the committee believes that it is appropriate for the law to explore new approaches for the resolution of medical malprac- tice claims. A variety of approaches is available and should be explored; the committee believes that three in particular have enough promise to warrant limited implementation. Tort Reforms: The Comm~ttee's Findings Tort law in the United States is based largely on common law, a body of legal principles developed on a case-by-case basis by judges, primarily in state courts. Since the 1970s, every state except West Virginia has enacted some legislation modifying common-law tort doctrine that is intended to relieve the medical liability crisis, and many are discussing additional reforms. These tort reforms were designed to moderate the frequency and severity of medical malpractice claims filed in order to

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LEGAL SYSTEM: FINDINGS ~ PROPOSES FOR CHANGE 127 control the cost and ensure the availability of professional liability insurance. The committee studded these tort reforms, many of which apply only to the area of medical malpractice. In addition, these reforms have been evaluated in several studies. Each of these studies was also reviewed by the committee. A particularly thorough analysis of various tort reforms is found in the Report of the Task Force on Metrical Liability and Mat- prc~ctzce by the Department of Health and Human Services (USDHHS, 19871. Table 7.1 lists the kinds of tort reforms that have been enacted by state legislatures in the last 10 years. After evaluating the reforms, the committee concluded that only a modest reduction in medical malpractice claim frequency and size of awards has been achieved. The limited effectiveness oftort reform can tee perceived from the data presented in Chapters 2 through 5 ofthis report on the continuing problems of access to and delivery of health care generated by the medical malpractice problem. Moreover, the commit- tee concluded that the many deleterious side effects ofthe tort system for resolving obstetrical claims-resulting in distortions of health care delivery patterns-have not been reduced by those tort reforms. The committee reviewed three studies that examine the effects of the tort reforms implemented by various states. In a 1982 study Patricia Danzon examined the impact of several post-1975 tort reforms on the frequency of medical malpractice claims per capita, the amount per paid claim, and the claim cost per capita (the product of amount per paid claim and frequency of paid claims per capita). The data base included claims closed from 1975 to 1978 by all insurance companies writing malpractice insurance premiums of $1 million or more in any year since 1970. No significant effects on frequency of claims or amount of awards were found from voluntary or mandatory pretrial screening panels, arbitration, restrictions on informed consent, restrictions on the use of res ipsa loquitur (a doctrine of presuming liability in certain circum- stances), or periodic payment of future damages. The only two reforms found by Danzon to have a substantial impact affected the size of awards-namely, caps on attorneys' fees, which lowered the amount of awards 19 percent in the two years after implementation, and the mandated consideration of collateral sources when determining awards, which led to 50 percent lower awards in two years (Danzon, 19821. In their 1983 study Danzon and LilIard used data from medical malpractice claims closed in 1974 and 1976 to examine the impact of states' modifying the collateral source rule, limiting the attorneys' fees of plaintiffs, and limiting malpractice awards. Malpractice claims in- cluded in the study were thought to be broadly representative of claims against physicians and hospitals. The study tentatively concluded that

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130 MEDICO PROFESSIONAL I: VOILE ~ limits on attorneys' contingent fees reduced the size of settlements by 9 percent, reduced the percentage of cases litigated to verdict by 1.5 percent, and increased the percentage of cases dropped by 5 percent. Limits on awards reduced the size of potential verdicts by 42 percent and reduced the size of settlements by 34 percent. Modification of the colIat- eral source rule reduced the size of awards by only a very low percentage (Danzon and LilIard, 19831. In a 1985 study Sloan examined the impact of several tort reforms on the levels and rates of change in medical malpractice insurance pre- miums paid from 1974 through 1978 by general practitioners who do not perform surgery, ophthalmologists, and orthopedic surgeons. Of the tort reforms studied, only mandatory use of pretrial screening panels had a statistically significant correlation with lower malpractice insurance premiums. In her most recent, and comprehensive, examination of the medical liability issue, Danzon concluded that of the tort reforms adopted in response to that crisis [the early 1970s], caps on awards and mandatory offset of collateral compensation appear to have slowed the growth in awards in states enacting such changes. But country wide, awards have continued to outpace the rate of irritation. Moreover, although claim fre- quency tapered off in 1976-77, this can apparently not be attributed to the tort reforms, and since 1978 the upward trend has resumed, although at a slower pace than in the early seventies (1985, p. 225~. A General Accounting Office (GAO) study concluded that tort reforms now in eject have had little impact on the professional liability problem. The study concluded that, despite the many legislative modifications of the tort system since the mid-1970s, "the frequency of claims and the size of awards and settlements, for the most part, have continued to increase" (GAO, 1987b). In addition, the GAO surveyed 54 organizations regarding their perceptions of the impact of 14 tort reforms cited in the AMA State Health Legislation Reports on issues related to professional liability. There was no consensus among the six interest groups (pro- viders, hospital affiliates, insurers, lawyers, consumers, and health insurers) that any of the tort reforms included in the questionnaire had had a major impact. A majority of health care providers believed that caps on awards have had a major impact on decreasing the size of awards and settlements and that periodic payment of awards has had a major impact on decreasing insurers' total cash outlay for awards or settIe- ments. A majority of consumers believed that pretrial screening panels have had a major impact on decreasing the time required to close claims and on decreasing the number of claims that go to trial.

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LEGAL SYSTEM: FINDINGS ~ PROPOSES FOR CHANGE 131 The committee concluded that, even in cases where tort reforms have achieved the limited objective of reducing the size of awards, they have not lessened the tort system's negative impact on the delivery of obstet- rical care nor have they increased providers' confidence in the system. Tort Reform: The Committee's Recommendations The committee believes that the problems created by medical profes- sional liability issues in obstetrics represent a serious threat to the delivery of obstetrical care in this nation. It is the committee's conclu- sion that, although some of the tort reforms already in place have merit, they do not appear sufficient to stem the exodus of obstetrical providers from the profession or to solve the attendant problems caused by the current professional liability climate in obstetrics. Accordingly, the committee makes additional recommendations. The committee was impressed by certain promising alternatives to the civil justice system that have appeared repeatedly in the literature over the past 10 years. However, the committee was equally struck by the fact that these examples of legal technology have, for the most part, been debated only as theory. There has been almost no practical experi- ence with them. Accordingly, there is no data base for measuring the costs of these alternatives, the volume of claims that would be made under these regimes, or their effectiveness in efficiently and fairly resolving medical malpractice claims. On the basis of its findings-that the costs of the current system in terms of impaired obstetrical care are great, that tort reforms are so far largely ineffective, and that data evaluating the merits of proposed alternatives to the tort system are lacking-the committee concludes that state legislatures should not focus on further reform efforts within the existing tort system but shout instead redirect their energies toward developing alternatives to the traditional tort system for resolving medi- cal malpractice claims and toward implementing these alternatives in certain circumstances. After extensive study of several proposals for alternative systems for resolving medical malpractice claims, the committee recommends that states consider three proposals for further research and implementation on a limited basis: the no-fault designated compensable events scheme (including the variants that have been enacted in Virginia and Florida to provide no-fault compensation for certain neurologically impaired infants), the AMA-Specialty Society's fault-based administrative sys- tem, and legislation authorizing the use of contractually determined legal relationships governing medical professional liability between providers and patients.

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132 MEDICAL PROFESSIONS CITY: VOICE ~ The committee recognizes that other groups, such as the American Law Institute, are also developing proposals for alternative systems for resolving medical malpractice claims. In addition, the medical malprac- tice program of the Robert Wood Johnson Foundation has funded a number of studies to produce data relevant to professional liability policy and its reform that could be useful to medical and legal policy- makers. After examining the available literature, however, the commit- tee thought that the three proposals that it ultimately commends to states for further evaluation are more fully developed at this time. Although the committee recognizes that each state must indepen- dently assess its own professional liability situation and evaluate var- ious solutions in relation to its own needs, the committee believes that the federal government has a responsibility to encourage states to solve the problems associated with professional liability issues in obstetrics, to assist them in these efforts, and to coordinate the task nationally. Accordingly, the committee recommences that the federal government provide challenge grants for DHHS-administered demonstration proj- ects to finance studies of proposed legisZatzon and to begin pilot projects for limited implementation of various solutions. ALTERNATIVES TO THE TORT SYSTEM No-Fault Compensation for Certain Events No-fault compensation for medical malpractice injuries refers to a method for compensating victims of medical maloccurrence without making the costly determination offault. The major problem with a pure no-fault system is the difficulty of distinguishing between adverse out- comes due to medical interventions and those resulting from an under- Tying condition. In addition, the problems of disciplining physicians would have to be dealt with separately. Since most illness can be associ- ated with medical decision making in some way, a pure no-fault system could de facto become a system of unlimited universal health insurance. The potential cost of such a system could be high. With these concerns in mind, current proponents of no-fault insurance for medical injuries do not contemplate total displacement of the fault system but seek to provide automatic compensation for a certain subset of designated com- pensable events (DCEs). A DCE system would operate much the same way as compensation for workplace injuries under the workers' compensation system. It would rely on a listing of medical injuries (DCEs), including those associated

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LEGS SYSTEM: FINDINGS At PROPOSES FOR CHARGE 133 with negligence and those not, all of which would be compensated without regard to fault. Injuries not on the DCE list would continue to be litigated through the tort liability system. Under such a system, physi- cians would be required to carry both DCE and tort liability insurance. Proponents of this system believe that the total cost of both would be less than the cost of premiums under the current system (Havighurst and Tancredi, 19841. The birth-related neurological injury compensation legislation enacted recently in Virginia and Florida and the federal Childhood Vaccine Injury Compensation Act are examples of limited DCE systems. Because birth-related neurological injury compensation legislation is a variant of the DCE system that relates specifically to obstetrical professional liability, a description of the Virginia act EVa. Code Ann. 38.2-5000 to -5021 (Supp. 19871] follows. In theory, a DCE system could be designed to encompass a range of compensable injuries and could, if a broad category of injuries were included, potentially be far more extensive in scope than even the traditional tort system. For example, one study, discussed below, esti- mated that only 17 percent of the potentially compensable events that occur in hospitals result in tort compensation (MilIs, 19781. Danzon (1985), however, suggests that the reverse is likely to be true. She predicts that the number of well-defined adverse medical outcomes on which experts will agree were caused by negligence will constitute only a fraction of current claims. Further, parties may disagree, and perhaps even litigate, over the issue of whether a particular injury belongs in the DCE system or in the tort system. A full DCE system that compensated close to 100 percent ofthese injuries could either raise the overall cost of providing compensation or require a reduction in the amount of compen- sation payable to any given patient. Any potential cost savings would, of course, be dependent on the amount and character of compensation provided. Each state considering such a system must decide whether minimum or maximum payments for Toss of wages would be provided, whether an allowance would be made for pain and suffering, and whether collateral sources of compen- sation would be offset. To achieve substantial cost savings, it would be necessary to limit compensation under the DCE system, either by estab- lishing a compensation schedule, by limiting compensation to direct medical expenses, or by covering economic losses only. A cause-based DCE standard could be difficult to apply. The greatest costs of the current system lie not only in determining fault but also in determining what "caused" a patient's injury or disease. Under a DCE system, the task of separating compensable injuries from noncompens- able, previously existing conditions and their natural progressions on a

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134 MEDICO PROFESSIONAL CITY: VOLUME ~ case-by-case basis could prove difficult and expensive. Moreover, unless the list of compensable events were sufficiently detailed to afford com- pensation for most injuries in the categories in question, the right to sue for events not on the DCE list would probably need to be preserved. Cause-based no-fault compensation for medical maloccurrence has been implemented in a number of countries, including Sweden and New Zealand. New Zealand adopted a general scheme of no-fault compensa- tion for accidents in 1974. The principle underlying the scheme is that the community has a responsibility to protect all citizens from losses sustained through personal injury caused by accidents occurring in employment, in motor vehicles, and from other sources, including "med- ical, surgical, dental or first aid misadventure" (Smith, 19821. This definition excludes losses that result from disease, infection, or the aging process. It embraces medical errors and failure to observe the reasonable standard of care, but it does not include maloccurrence resulting from the omission of treatment (Vennell, 19871. Despite the fact that the fund has encountered financial problems, it has widespread public support in New Zealand. Sweden enacted a scheme of no-fault compensation for medical acci- dents in 1975. In 1978 an additional scheme to provide compensation for injuries resulting from drugs was introduced. The Swedish system pro- vides compensation for loss of earnings, Toss or impairment of a bodily function, pain and suffering, and medical costs. Payments are intended to match the compensation that would have resulted under tort law. The scheme attempts to limit recovery to injuries that are directly linked to medical intervention. Disciplinary measures against physicians are handled separately. The average cost of paid claims appears to be low under this system; however, in interpreting these figures it is important to recognize that Sweden has generous social security measures that defray the major part of direct medical expenses (Oldertz, 19871. The Centre for Socio-Legal Studies in Oxford, England, and the King's Fund Institute in London recently recommended that Britain move toward a cause-based no-fault compensation scheme for medical injuries similar to the two models above (King's Fund Institute and Centre for Socio-Legal Studies, 1988~. The King's Fund estimates that in Britain a no-fault system would reduce the costs of compensating medical injuries by as much as 25 million a year this in a nation that already has a national health insurance scheme. The critical issues with any DCE system or no-fault compensation program are how many claims will be brought and what the per capita administrative costs will be. The committee found very little data on these issues. The Swedish system generates about 60 claims per 100,000 persons from all health care contacts, mostly from injuries occurring in

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LEGS SYSTEM: FINDINGS ~ PROPOSES FOR CHANGE 135 hospitals. Fifty percent of these claims are paid, averaging $6,000 per claim. It is estimated that administrative costs for this system average 15 percent (King's F`und, 19881. However, before any inferences are drawn from the Swedish experience, it must be reiterated that Sweden has a generous social security system that has no parallel in the United States. The only U.S. study of the number of injuries resulting from medical maloccurrence that might be compensated under a no-fault system was commissioned by the California Medical Association and the California Hospital Association in 1977. A team of medical and legal experts examined 20,864 inpatient charts from 23 California hospitals to iden- tify injuries that could potentially be compensable. The study found that 4.65 percent of all hospital inpatient stays (970 cases) resulted in inju- ries that were potentially compensable under a no-fault regime. Ofthese cases, it was estimated that 17 percent may have resulted from negli- gence. The study concluded that 1 in 20 hospital inpatients suffers a potentially compensable injury, and 1 in 125 has a legal claim under the present tort system (Milis, 19781. The California study examined only one state, however, and did not examine trends. The Harvard Medical Practice Study Group is conducting a similar study of the hospital records of 30,000 patients in New York State hospitals in 1984. The research is specifically designed to cast light on the critical questions related to no-fault compensation. It will examine the incidence of adverse results and the extent of negligence. A compan- ion survey of affected patients will ascertain the consequences of adverse events, including the medical and other costs incurred and whether the event led to subsequent tort or disciplinary proceedings. The study also includes an econometric evaluation of the deterrent effect of medical malpractice liability. The group's final report is expected in 1989. Other research on DCE systems is currently in progress. Under the sponsorship of the Robert Wood Johnson Foundation, research on no- fault medical injury compensation is currently being conducted as a joint effort of the University of Texas Health Science Center at Houston and the Urban Institute in Washington, D.C. This project, called No- Fault for Medical Malpractice: Moving to the Third Generation of Devel- opment, is in the data collection stage. The first and second generations of no-fault research were concerned with conceptualizing no-fault sys- tems and developing DCEs, respectively. The third generation will attempt to establish the extent to which medical records as currently maintained are useful for finding and categorizing injuries (Tancredi, 19861. The committee is of the view that when these additional data are generated, it will be easier to evaluate the electiveness of a DCE system.

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136 MEDiC~ PROFESSIONS ~: VOILE ~ Virginia's Compensatzon System for Birth-Related Injuries: A Case Study of DCE No-fault compensation for certain birth-related neurological injuries is a variant of a DOE system. The Virginia Birth-Related Neurological Injury Compensation Act is the nation's first no-fault scheme of its kind: it is both the first no-fault compensation bill dealing with medical injuries related to professional liability and the first time a state medi- cal society has endorsed a no-fault solution to the medical professional liability problem. Florida enacted a slightly different version of the Virginia act, the Florida Birth-Related Neurological Injury Compensa- tion Plan, in February 1988. The Virginia act, which took effect on January 1, 1988, is intended to make professional liability insurance for obstetrician-gynecologists both available and affordable by taking claims for certain cata- strophically injured newborns out of the civil justice system. It is also intended to provide quicker compensation for injury and to increase access to obstetrical care for medically underserved women. The Virginia act sets up a program that compensates only those infants with injuries that meet the statutory definition of a compensable injury and provides that those infants may seek remedy solely from the act's compensation program. The statutory definition of eligible infants under the Virginia act is extremely narrow: it covers only those infants suffering "injury to the brain or spinal cord 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 non-ambulatory, aphasic, incontinent, and in need of assistance in all phases of daily living." It is estimated that only 40 infants per year in the state of Virginia will meet these criteria. The Virginia act expressly excludes from coverage all congeni- tal and genetic abnormalities and applies only to live births. To qualify for compensation under the act, an infant must be delivered in a hospital that participates in the program and by a physician who participates in the program. It has been argued that this could result in unfair treatment of similarly situated infants. Further, concern has been expressed about the lack of any provision in the act for informing prospective mothers as to whether a physician or hospital participates in the program. The program is modeled after workers' compensation programs and is administered by the Industrial Commission of Virginia, an existing bureaucracy that adjudicates workers' compensation claims. It is a pay- as-you-go system in which the infant is awarded expenses for lifetime

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LEGAL SYSTEM: FINDINGS ~ PROPOSES FOR CHARGE 137 medical, hospital, rehabilitative, and custodial care that are not covered by collateral sources (except to the extent prohibited by federal law), in addition to living expenses until the age of 18 at a predetermined rate. There is no provision for recovery of noneconomic or punitive damages under the Virginia act. By contrast, the Florida Birth-Related Neuro- logical Injury Compensation Plan includes a provision allowing pay- ment of an award no greater than $100,000 to the parent of an infant granted an award under its program [1988 Fla. Laws 60-75, ch. SS-11. The Virginia act is funded by an annual assessment of $250 per licensed physician, regardless of specialty; voluntary assessments of $5,000 per participant physician; and $50 per delivery for participating hospitals, not to exceed $150,000 in any 12-month period. If the fund's reserves dip too low, the state is empowered to levy annual assessments on the liability insurance carriers in the state. The funding mechanism of the Virginia act has aroused considerable dissatisfaction among phy- sicians and liability insurers regarding both the mandatory and volun- tary assessments. However, the Attorney General of Virginia issued an opinion on August 26, 198S, stating that the mandatory $250 assess- ment on physicians does not violate the Equal Protection Clause of the Constitution. The Virginia act provides that any participating physician must as- sist in developing a plan to provide obstetrical care to patients eligible for medical assistance services and to indigent patients. The rationale behind this provision is that, in return for reducing the risk of practice for obstetricians, the state asks them to contribute something to the system by increasing the amount of care that they provide to indigent patients. However, because the plan does not include a specific obliga- tion to serve indigent patients, the indigent care provision of the Vir- ginia act has been criticized as insufficient. In light of these potential difficulties with the Virginia act as adopted, the committee believes that states considering similar no-fault legisla- tion to compensate neurologically impaired infants should consider certain modifications. These modifications are set forth in Appendix G. The AMA-Specialty Society Medical Liability Project The AMA and 32 national medical specialty organizations have ad- vanced a radical proposal to resolve medical malpractice claims (AMA- Specialty Society, 19881. The proposal calls for a fault-based administra- tive system, under the jurisdiction of strengthened state medical boards or new state agencies, that would totally replace the existing court and jury system for resolving medical malpractice claims.

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138 MEDiC~ PROFESSIONS LIVIDITY: VOGUE ~ The AMA-Specialty Society Project advance their proposal as one of several possible alternatives to the tort system to be considered by the states. Because the proposal is described in detail in an article by Carter G. Phillips and Elizabeth Esty in the companion volume of this report (Phillips and E sty, 1989), what follows is only a very brief summary. The proposal has three basic parts: (1) a claims resolution function; (2) a credentialing and disciplinary process; and (3) a codification of the legal elements of medical liability. All three components are to be administered by a revamped state medical board or by a new state agency. Claims Resolution Function Medical malpractice complaints would be submitted to an administra- tive agency, where they would be screened by experienced claims re- viewers with the authority to examine medical records and to interview the parties. It is anticipated that a significant number of claims would be settled or dismissed at this stage. Any claimant who wished legal repre- sentation would be provided with a lawyer from the agency's office of general counsel at no charge to the claimant at this stage. Any claim not settled would be assigned to a hearing examiner with broad authority to conduct a full and prompt hearing on the merits of the claim. Proponents of the system expect that reviewers and examiners will be better able than a jury to evaluate medical negligence claims and to produce consistent liability determinations and damage awards. It is also hoped that claims will be resolved faster than in the current system, thereby saving both plaintiffs and defendants the substantial expense incurred in litigating cases for years in a state court. Credentialing and Disciplinary Functions All settlements and awards would be reported to the investigative branch of the agency for comparison with other malpractice or disciplin- ary reports to determine if a pattern of substandard conduct exists. In addition, all health care entities would be required to conduct periodic assessments of physician performance and to report to the board any conclusion that a physician's overall performance has been substandard. Insurers would be required to report policy cancellations and failures to renew for reasons related to competence. All of this information would be maintained in a clearinghouse accessible to persons who conduct professional review activities. Certain credentialing agencies, such as hospitals, would be required to check with the clearinghouse on a regu- lar basis.

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LEGS SYSTEM: FINDINGS AND PROPOSES FOR CHARGE 139 Codification of the Legal Elements of Medical Liability The proposal recommends specific changes in the standards for impos- ing liability and the codification of those changes by statute in each state in which the system is enacted. The standard of care based on custom and locality would be abolished in favor of a standard that focuses on whether the challenged actions fall within a range of rea- sonableness, to be determined by reference to the standards of a prudent and competent practitioner in the same or similar circumstances. Rea- sonableness would be determined by a range of factors, including the expertise end practice environment ofthe health care provider, the state of medical knowledge, the availability of facilities, and access to trans- portation and communications facilities. Proponents of the proposal anticipate that it would be both fairer and more efficient than the current system. However, because it has never been implemented, it is not possible to evaluate its actual costs or its electiveness in resolving medical malpractice claims, nor is it possible to compare its costs and electiveness to the tort system or to other alternatives. The number of claims that would ultimately be brought if this system were implemented is not known. Accordingly, as with the DOE system, it is possible that the number of claims for injuries in the system wouldincrease. Similarly, the actual administrative costs ofthis system cannot be accurately predicted in advance. It is possible that they would be high. Moreover, the cost of the system would also be dependent on the amount and character of compensation provided. The AMA-Specialty Society proposal has been criticized for delegat- ing too much regulatory power to the medical profession itself. Although the proposal specifically provides that reviewers and examiners will include nonphysicians, some critics charge that expert review as op- posed to jury trial" is nonetheless fraught with potential conflicts of interest. Private Contracts The use of private contracts setting forth the legal rights and respon- sibilities of health care providers and patients and stipulating arrange- ments to resolve disputes is another alternative to resolving medical malpractice claims. This solution would not necessarily require legisla- tive change. The advantage of this approach is that it allows both consumers and providers greater freedom of choice regarding the rules governing their legal relationship (Epstein, 19761. They can choose any set of recovery rules to govern compensation, or procedures to determine compensation,

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140 MEDICAL PROFESSIONAL LIABILITY: VOLUME I for injury occurring during the course of medical treatment. One poten- tial disadvantage is that it assumes that consumers understand the health care system in great detail, understand the risks involved, and know their own risk preferences. It is not clear that all health care consumers, particularly those suffering an illness, are capable of in- formed bargaining. However, if a system were structured to provide consumers with incentives for informing themselves, it is possible that individual contracting for medical risks could gain acceptance (Havi- ghurst, 19861. The theoretical justification for regulating medical malpractice claims by contract has been argued by Richard A. Epstein ofthe Univer- sity of Chicago Law School (Epstein, 1976) and is presented in the companion volume of this report (Epstein, 19891. As a practical matter, the mechanism is quite simple: consumers and providers of health care may enter into contracts specifying the rules that apply in the event of medical malpractice, maloccurrence, or both. Different consumers can specify different arrangements. Possibilities include waiving the right to a jury trial and agreeing to binding arbitration or some other alterna- tive dispute resolution mechanism; limiting malpractice recovery rights such as noneconomic damages or collateral source payments in ex- change for recovery on an agreed fixed schedule; agreeing in advance to the terms of settlement in the event of certain injuries; and agreeing in advance to certain limits on recovery (Epstein, 19761. Although some committee members believe that current trends in health care delivery offer opportunities for limited implementation of this approach, other members had serious reservations about the impli- cations of adopting it. Those who believe that contract approaches might be salutary in certain circumstances believe that existing procedures for health care contracting between employers and providers and between providers and consumers (such as HMOs) could provide the basis for medical malpractice contracting. Employers, especially large ones, are becoming accustomed to shopping around for innovative health care delivery mechanisms and new arrangements for financing health care. Similarly, consumers are becoming increasingly used to selecting their own health care arrangements from an array of choices. However, this does impose a greater burden on consumers to distinguish among var - lOUS options. Other committee members were concerned about possible abuses arising from the use of private contracts to limit the professional lia- bilities of obstetrical providers. These committee members believed that the approach is unworkable and raised potentially grave ethical issues. They argued that a private contracts approach could be unfair to pa- tients who are not well enough informed about the possible risks oftheir

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LEGS SYSTEM: FINDINGS ID PROPOSES FOR CHANGE 141 treatments, or who lack bargaining power to contract electively, or who may not realize that they are delegating the power to their employer or union to be the contracting agents. Moreover, they argue that many physicians themselves do not understand the legal system well enough to come to reasonable agreement about their liability exposure. Further, it is by no means clear that labor union negotiators, benefits administrators, or hospital administrators could bargain effectively on these issues. Many experts believe that it is doubtful that the courts would approve such a contractual approach in the absence of prior legislative authori- zation, at least in cases in which a patient's legal rights seem to be limited rather than expanded. Even though there is considerable experi- ence with arbitration for medical malpractice claims, and this approach has recently received favorable judicial treatment, courts have thus far been unreceptive to situations in which providers have used standard form written contracts to reduce their liability for negligence to individ- ual patients who enter into such contracts immediately prior to treat- ment [funk! v. Regents of the University of California) 60 Cal.2d 92,383 P.2d 441, 32 Cal. Rptr. 33 (196311. In cases where employers have negotiated contracts with HMOs to care for employees and agreed to arbitrate malpractice claims that might arise out of future treatment, some courts have been willing to uphold such contractual modifications oftort rights, although others have declared the agreements unconstitu- tional Esee, for example, Madden v. KaiserFoundationHospitals, 17 Cal. ad 699, 552 P.2d 1178, 131 Cal. Rptr. 822 (197611. Accordingly, those committee members who favor limited implementation of contracts believe that it would be beneficial for a state legislature to authorize explicitly the use of contracts between physicians and patients before contracts are relied on, even on an experimental basis. Economic Damage Guarantee (Moore-Gephardt Proposal) The Moore-Gephardt proposal for a system of economic damage guar- antees is designed to provide health care providers with incentives for voluntarily paying economic damages to injured patients (Moore and O'Connell, 19841. A health care provider facing a medical malpractice claim would have the option of foreclosing such a claim by offering to pay the injured party's net economic loss within a specified period of time. In exchange for the provider's prompt settlement the injured party would forfeit all tort rights, including the right to any noneconomic damages such as Toss of consortium or pain and suffering. This proposal also includes a provision for offsetting awards from collateral sources. Under this proposal, if an offer of economic settlement is made, the case is barred from court forever.

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142 MEDICAL PROFESSIONAL [IABlLiTY: VOLUME ~ A system of economic damage guarantees could be achieved by legisla- tion at the federal or state level or by private contract. Legislation to enact such a system at the federal level (H.R. 3084, the Alternative Medical Liability Act) was introduced in the 99th Congress by W. Henson Moore and Richard Gephardt. Based on extensive academic writing by Jeffrey O'Connell, Moore discusses the system of economic damage guarantees in detail in the companion volume of this report (Moore, 19891. Proponents of economic damage guarantees argue that settlements under that system would be smaller than under the current system because collateral sources of awards would be offset and noneconomic damages would be eliminated. Patients, it is argued, would find the system attractive because it provides for certain, immediate compensa- tion, unlike the uncertainty provided by the civil justice system. The committee was not persuaded that the system would provide incentives for more claims to be settled. If the same type and number of claims now being settled were settled under an economic damage guar- antee approach, there would be some cost savings because of the elim- ination of noneconomic damages and collateral source offset. The com- mittee believes, however, that those savings would not necessarily exceed the savings realized from the tort system with limits on non- economic damages and modification of the collateral source rule. Social Insurance Most health care providers whose services are subsidized by the fed- eral government must buy their own medical malpractice insurance. As noted elsewhere in this report, those high insurance costs have effec- tively compromised the provision of obstetrical care by certain federally subsidized Medicaid programs and Community and Migrant Health Centers. The federal government currently pays approximately 30 per- cent of the nation's health bill, and the states contribute another 10 percent (HCFA Review, 19861. Because a social insurance system would address the problem of compensating victims of medical maloccurrence, the committee believes it could greatly reduce the incidence of medical malpractice claims, as it has done in the United Kingdom. A social insurance system would involve a major commitment of resources and a major rethinking of the way in which health care is financed and provided, however. Moreover, whatever deterrent effects third-party medical malpractice insurance does create would be sacrificed. (As noted earlier in this chapter, the extent to which this deterrence function operates remains a matter of debate.)

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LEGAL SYSTEM: FINDINGS AND PROPOSES FOR CHANGE 143 The committee believes that, in response to a number of factors, including the medical professional liability issue, the financing of health care in the United States is likely to become increasingly a federal responsibility. Accordingly, the committee encourages discus- sion, debate, and research concerning the implications of these changes for medical professional liability questions. OTHER NEEDED REFORMS It is the committee's conclusion that all future reform initiatives by the states should be directed toward replacing the tort system for resolv- ing medical malpractice claims. However, the committee also believes that states should address immediately the disruptions and deteriora- tion in maternity services for the poor that are brought about by profes- sional liability concerns. The committee therefore recommends that the states and the federal government consider the following short-term solutions simultaneously with any efforts to resolve the medical profes- sional liability crisis generally. Expansion of the National Health Service Corps After studying the data on the availability of obstetrical providers for publicly insured women, and particularly the effects of medical profes- sional liability on the delivery of obstetrical care in Community and Migrant Health Centers, the committee has concluded that the National Health Service Corps (NHSC) should be significantly expanded and its enacting legislation revised. The NHSC's general scholarship program has been eliminated, and its exceptional financial need scholarship and loan repayment programs are far too constricted to permit recruitment of adequate numbers of health professionals into underserved areas. Congress should reinstate general scholarships, expand the program of scholarships for students with exceptional financial need, and increase the number and variety of loan repayment options. The committee is generally pleased that over the past two years Congress has placed increased emphasis on recruiting nurse-midwives and other midIevel professionals into the remaining NHSC program. It wishes to emphasize its continued support for this federal effort to attract a maximum number of health professionals to the corps. Extension of the Federal Tort Claims Act Coverage Without an explicit waiver of sovereign immunity, the United States cannot be sued. The Federal Tort Claims Act (FTCA) t28 U.S.C.A.

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14~4 MEDICAL PROFESSIONAL CITY: VOICE ~ 1346(b) (Supp. 19881] is a limited waiver of that immunity. Prior to its enactment in 1946, a private bill was required to sue the United States in tort. The need for a private bill was largely obviated by the FTCA. The FTCA permits an injured party to sue the government "under circum- stances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred" [28 U.S.C. 1346(b) (Supp. 198811. The United States is liable "in the same manner and to the same extent as a private individual under like circumstances" t28 U.S.C. 2674 (Supp. 198811. The committee recommends that FTCA coverage or its equivalent be extended to all Community and Migrant Health Centers' personnel and contract providers engaged in obstetrical work. Medical personnel would be covered by the act only for activities related to obstetrical services. The FTCA currently insures all commissioned officers in the Public Health Service Corps, including those NHSC scholarship gradu- ates who assume a commissioned officer position rather than working as civilians in medically underserved areas. The committee believes that this distinction between civilian and commissioned NHSC members is aggravating the problem of providing obstetrical care in health centers and, therefore, recommends that it be eliminated. This is particularly important in the case of obstetrical practices that are not formally part of a health center but that are willing to take clinic patients on referral by Community or Migrant Health Centers. Direct precedent for this reform can be found in the 1988 appropriations law, which extended FTCA coverage to contract providers employed by the Indian Health Service EP.L. 100-102, 103(c) (198811. This amendment provides that any person who is employed by or is a member of a tribal organization and who is fulfilling an Indian Health Service contract is deemed to be part of the Public Health Service contract and therefore is insured against medical malpractice claims. Liability Coverage for Physicians Providing Public Health Services The committee noted with interest that Missouri, Hawaii, and Mont- gomery County, Maryland, have taken actions to reduce the profes- sional liability risk of persons who provide public health services. Mis- souri's State Legal Expense Fund, effective September 28, 1987 [Mo. Ann. Stat. 105.711 (Vernon, 19881] covers claims against physicians for negligence in treating conditions caused by pregnancy and delivery and in treating children, when the physician's services are rendered without compensation or minimal compensation, including care of Med- icaid patients, pursuant to an agreement with a city, county, or city

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LEGS SYSTEM: FINDINGS AND PROPOSES FOR CHANGE 145 county health department. The Legal Expense Fund pays damages to the extent allowed under the state's medical malpractice law. The act specifically provides that the physician's personal professional liability insurance shall not be considered available to pay claims covered by the act. The act limits noneconomic damages to $350,000 per occurrence, per defendant. As a temporary measure until a permanent solution can be imple- mented, obstetricians performing deliveries for indigent women in Montgomery County, Maryland, hospitals will be indemnified against any suits brought by these patients. Under this program, which became effective on October 1, 198S, obstetricians become county employees when they perform such deliveries, which number approximately 1,200 per year. They are paid from a special fund provided by the county, supplemented by Medicaid payments. The plan provides a cap of $500,000 on recoveries. The committee is encouraged by these efforts on the part of state and local legislatures to address the disruptions in publicly financed care caused by professional liability issues and encourages other states to consider similar efforts. At the same time, the committee believes that such solutions address only one symptom of the problem, namely, physi- cians' reluctance to provide publicly funded care. They do not address the problems inherent in resolving medical malpractice claims through the tort system. REFERENCES American Medical Association-Specialty Society Medical Liability Project. 1988. A Pro- posed Alternative to the Civil Justice System for Resolving Medical Liability Disputes: A Fault-Based Administrative System. Chicago. Danzon, P. M. 1982. The Medical Malpractice Insurance Crisis Revisited: Causes and Solutions. Stanford, Calif.: The Hoover Institution. Danzon, P. M. 1985. Medical Malpractice: Theory, Evidence, and Public Policy. Cam- bridge, Mass.: Harvard University Press. Danzon, P. M., and L. Lillard. 1983. Settlement out of court: The disposition of medical malpractice claims. J. Legal Stud. 12:345-377. Epstein, R.1976. Medical malpractice: The case for contract. Am. Bar Found. Res. J.76:87. Epstein, R.1989. Market and regulatory approaches to medical malpractice: The Virginia Obstetrical No-Fault Statute. In Medical Professional Liability and the Delivery of Obstetrical Care: Vol. II, An Interdisciplinary Review. Washington, D.C.: National Academy Press. General Accounting Office (GAO), U.S. Congress. 1987a. Medical Malpractice: Charac- teristics of Claims Closed in 1984. GAO/HRD-87-55. Gaithersburg, Md. General Accounting Office (GAO), U.S. Congress. 1987b. Medical Malpractice: A Frame- work for Action. GAO/HRD-87-73. Gaithersburg, Md. Havighurst, C. 1986. Private reform of tort law dogma: Market opportunities and legal obstacles. Law Contemp. Prob. 49:143-172.

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146 MEDICAL PROFESSIONAL LIABILITY: VOLUME I Havighurst, C., and L. Tancredi.1984. Medical adversity insurance A no-fault approach to medical malpractice and quality assurance. Health Soc. 51:125-168. Health Care Financing Administration (HCFA) Review. 1986. p. 15. King's Fund Institute and Centre for Socio-Legal Studies. 1988. Medical Negligence: Compensation, and Accountability. Oxford, England. Mills, D. H. 1978. Medical insurance feasibility study: A technical summary. Western J. Med. 128:360-365. Moore, W. H. 1989. Legislative proposals on medical professional liability regarding the delivery of maternal and child health care. In Medical Professional Liability and the Delivery of Obstetrical Care: Vol. II, An Interdisciplinary Review. Washington, D.C.: National Academy Press. Moore, W. H., and J. O'Connell. 1984. Foreclosing medical malpractice claims by prompt tender of economic loss. La. Law Rev. 44:1267-1287. Oldertz, C.1987. Compensation for personal injuries: First-party insurance or third-party liability? The Swedish alternative. Paper presented at colloquium at the University of Ghent, Belgium. Phillips, C., and E. E sty. 1989. A fault-based administrative alternative for resolving medical malpractice claims: A summary of the AMA-Specialty Society Medical Lia- bility Project proposal and its relevance to the crisis in obstetrics. In Medical Profes- sional Liability and the Delivery of Obstetrical Care: Vol. II, An Interdisciplinary Review. Washington, D.C.: National Academy Press. Sloan, F. 1985. State response to the malpractice insurance "crisis" of the 1970s: An empirical assessment. J. Health Politics Policy Law 9:629-646. Smith, R. 1982. Compensation for medical misadventure and drug injury in the New Zealand no-fault system: Feeling the way. Brit. Med. J. 284(6327):1457-1459. Tancredi, L. 1986. Designing a no-fault alternative. Law Contemp. Probs. 49:277-287. U.S. Department of Health and Human Services (USDHHS). 1987. Report of the Task Force on Medical Liability and Malpractice. Washington, D.C.: Government Printing Office. Vennell, M. 1987. Informed consent or reasonable disclosure of risks: The relevance of an informed patient in the light ofthe New Zealand accident compensation scheme. Recent Law, pp. 160-175.