Olaf Gersemann

Cowboy Capitalism

Samuel Desiderio is an unfortunate young man deserving of everyone's empathy. After he underwent surgery in the New York Presbyterian Hospital in 1990, doctors failed to notice that pressure was building up in his brain. Not even four years old at the time, he suffered permanent brain damage. A jury awarded Desiderio $140 million in damages—a ruling that has since been upheld by the New York's State Court of Appeals.

Desiderio's lawsuit may have been as justified as the amount of damages that he received. And who could be against the right of victims to pursue malpractice through the courts?

However, malpractice lawsuits have become a national pastime in the United States. And clearly, when damages reach, as in Desiderio's case, $100 million plus, they become a major cost factor. Indeed, as the amount of compensation has grown, U.S. liability laws have become one of the main culprits for the explosion of health care costs.

In 2001, 39 percent of suing patients whose cases were decided by a jury were successful. More than half of those were rewarded $1 million or more—twice as many as in 1996.

What's more, the risk exposure for the defendants is entirely impossible to calculate. How high damages will be in any given case can't be predicted because in most states there are no caps. Whether the sum ends up having six or eight digits depends more on the whim of the moment than on anything else. In Europe, by contrast, no such 'lawsuit lottery' exists; damages are much lower and, at least as important, much more predictable.

The lawsuit craze in the United States has already undermined the trust between doctors and patients. After all, every wrong statement could bring about a multi-million-dollar lawsuit. New therapies and drugs are used only hesitatingly, because from the doctor's point of view, everything new and unknown carries some risk of a lawsuit.

Also, the cost of malpractice insurance is rising dramatically. In Florida premiums for an Ob/Gyn run $210,000 a year. In California, where tort liability is more restricted, the very same insurance costs $57,000.

In some places, such excessive premiums have already threatened the availability of medical care. Gynecologists refuse to assist in childbirth, and entire obstetric units have been closed. Specialists such as neurosurgeons, emergency doctors, and urologists quit their jobs or move their practices out of states that are known to hand out extraordinarily high damages to patients. By early 2004 the American Medical Association had declared 19 states emergency regions; tort law reform tops the AMA's wish list.

Critics such as New York lawyer Philip Howard, founder of the reform movement Common Ground, estimate the cost of excessively high insurance premiums and lawsuits at $10 billion annually. And that's not all. Add to that the costs of 'defensive medicine'—treatments that are exclusively or chiefly aimed at protecting doctors from lawsuits rather than helping patients. Defensive medicine is not only a waste of resources, it can also harm the patient—for example, when a doctor shies away from promising but risky treatments.

Just how widespread the practice of defensive medicine is in the United States was shown by a survey of 300 doctors in March 2002. Forty-one percent of the respondents admitted to prescribing more drugs than medically necessary in order to avoid lawsuits. Seventy-four percent said that they sent patients to specialists more often than necessary, and 79 percent declared that, by their own reckoning, they ordered too many tests.

Estimating the cost of that problem is difficult, because in any single case it can't be determined from afar what motivations caused a doctor to prescribe a certain treatment. However, economists Daniel Kessler and Mark McClellan have found a solution. In a study that won the Kenneth Arrow Award in Health Economics, they looked at how the treatment of heart patients in states with very lawsuit-conducive climates differed from treatment in states where liability is more limited. The underlying presumption is that to the extent that increasingly expensive tort liability is correlated with the intensity of medical care, but without positive health outcomes, physicians are practicing defensive medicine.

Their findings were that even modest reforms would eliminate large parts of the problem. Reforms that directly limit liability, such as caps on damage awards or the abolition of punitive damages, could reduce hospital expenditures by 5 to 9 percent without any negative effect on the well-being of patients. The tort system burdens the U.S. health care system with a price tag of 'well over $50 billion per year,' Kessler and McClellan concluded. More recent estimates of the cost come to twice as much.