These changes helped stabilize insurance markets and, in many places, reduced liability costs. But they did not fix health care’s most troubling problems with the law. The direct costs of the liability system are not a significant fraction of total healthcare costs. Caps affect only a small number of very expensive cases, and raising caps does not reduce the barriers to compensation faced by most meritorious claims. The economic, social, and medical problems in American liability law are both different and much deeper than the issue of caps.


Published 8/1/2009
Edward A. Dauer, LLB, MPH

Social ethics, healthcare economics, and medical malpractice reform

A demonstration project in legal responses to neonatal encephalopathy

The American legal system’s response to medical errors and accidental outcomes is dysfunctional. Its fault-based liability process is inefficient and inequitable; its ability to foster patient safety is deeply flawed; and, operationally linked with a discipline-based regulatory process, it achieves punishment without accountability, retribution without justice, and diseconomy without gain. It is in need of fundamental reform.

This is a well-known complaint. Doctors, lawyers, and their political allies have quarreled about avoidable medical outcomes and excessive legal costs for at least a generation. The “insurance crisis” of the 1970s spawned reform attempts in the states by imposing damage caps and patching the existing architecture.

Edward A. Dauer,

Principles of system reform
A growing appreciation of how the legal system affects health care has inspired new coalitions. Healthcare consumers, providers, payors, insurers, and lawyers are working together in several states—including Colorado—pursuing evidence-based studies of where the flaws and the fixes might lie. The following four premises regarding the aftermath of a medical injury underscore these developments:

  • The patient or family should be restored as nearly as possible. Restoration may require compensation for economic losses or other actions. Restoration should be efficient, equitable, and effective.
  • Where a medical care provider has erred, accountability should be sure. In some cases, accountability justifies discipline. In others, it should mean remediation or correction. In every case, accountability calls for evaluation and assessment.
  • Every error should be seen as an opportunity for learning and improvement—to improve tomorrow’s healthcare quality and safety by dealing wisely with today’s errors.
  • The legal environment of health care should do no harm: it should be an effective partner, not a hindrance, to medicine’s own efforts to improve performance.

How does the current system rate?
The empirical literature on these four criteria of system performance is extensive, and largely (though not entirely) uniform in its conclusion: The present system achieves none of these goals very well.

Restoration is generally limited to money compensation, and is most often inaccessible (the costs of a fault-based system create front-end thresholds that bar the vast majority of compensable claims), inefficient (of each dollar flowing through the liability process, the injured patient receives less than 40 cents), inaccurate (overcompensating some and undercompensating others), and inequitable (treating people with identical tragedies very differently, distinguished only by the discoverability of a provider’s negligent error.)

Accountability is not sure, just, or effective. It almost always comes too late (the average time to trial in a malpractice case is more than 4 years); it is crude (courts cannot order assessment, remediation, or correction—only monetary payment); it is inaccurate (where judicial results vary as much with adversity of outcome as with the quality of care); and it is episodic, if not random (calling to account only those providers whose patient is both moved and able to bring a legal claim.)

Learning is inhibited by the legal’s system’s focus on “shame-and-blame” (information otherwise useful to prospective improvement is driven underground for fear of attracting liability, and the adversarial nature of a legal proceeding rewards a defense of what was done rather than a consideration of what could have been done better) and by the law’s support for medicine’s own propensity to deny the existence of error (keeping in place a culture of denial). More to the point, no reliable evidence exists for any significant association between liability and patient safety, and a good deal suggests the contrary.

At the same time, fault-based liability and disciplinary regulation have been shown to inhibit health care’s own performance goals. Here, the business case for reform becomes plain. Although the direct costs of liability are not a significant proportion of the nation’s healthcare budget, the indirect costs very likely are.

“Defensive medicine”—the practice of overprescribing and overtreating to avoid a liability risk rather than to enhance clinical outcomes—forces up expenditures. Although the size of the loss is hard to measure, it is real and substantial. Disruption of practice patterns and distortion of specialty choices have also been demonstrated.

Retribution—or decency?
In contrast to the narrowly retributive ethics of fault-based tort law, a decent society might choose to assist those who endure tragic events on the basis of their need—rather than linking compensation to how or why the events came to be. A fault-based liability system places the injured patient and the accused provider in reciprocal positions. One can be right only if the other is proven wrong.

For example, a family whose newborn child is affected by neonatal encephalopathy (often, though not always, cerebral palsy) faces a formidable future. If the family can show that negligent error occurred at a critical moment and on the part of an identifiable medical provider, tort law may contribute to that need. Those families that are equally devastated, equally challenged, and equally impoverished, but unequally able to identify the cause, get nothing. And vast amounts are spent just trying to distinguish between the two.

This need not be the case. Funds are available to do more. It is not unusual for liability insurance companies to spend more to successfully defend against such claims than to pay out the claims they do. The result is obvious waste in the face of abject need.

Why does this happen? Consider again restoration (or compensation), accountability, and learning (for healthcare quality and patient safety). Suppose that each of these has its own importance, its own integrity, its own necessity. If we were to take each one separately and ask how we could make that one work as well as it should, we might start thinking about the kind of apparatus (of rules and standards and procedures) that might bring that one objective to fruition, however fruition is defined.

Some countries do exactly that. New Zealand, for example, places compensation in one agency (the Accident Compensation Corporation), learning in another (the Health and Disability Commission), and accountability in a third (the Medical Councils and, where appropriate, the Disciplinary Tribunals).

Separate groups of American graduate students in both law and health policy, working to design separate ways of achieving each of these important social and economic goals, come up with designs that—like those in New Zealand—don’t look much like each other. The compensation system looks like a compensation system. The accountability process looks like an accountability process. The learning system looks like a learning system.

The chief flaw in the American tort-and-regulatory process is that it tries to do combinations of these functions simultaneously, inside a single apparatus. To the degree that accountability can be achieved only where there is easy access to compensation, the costs of adjudicating fault deters it. Compensation, when it is available, suffers only where punitive accountability is adjudicated and required. Learning does not occur in the all-or-nothing dichotomy of adversarial litigation. This combining of functions within a single legal process is what prevents any of them from being accomplished very well, for they are placed in opposition rather than conjunction.

Disciplinary regulation, although somewhat more nuanced, is much the same. Protecting the public from erring physicians is not the same as fostering the best and safest health care, yet regulatory Boards inevitably draw their authority from the threat of sanctions.

The fundamental flaw in the American malpractice system is that it links together functions that the facts of medical injury show to be distinct: restoration, accountability, and learning. The lynchpin holding these together is the tort system’s criterion of fault.

The Colorado initiative
These premises lead directly to a Colorado initiative that would establish a demonstration project to examine an alternative to the medical malpractice system, beginning with cases of neonatal encephalopathy (NNE). That system would have the following structural features:

  • Compensation would be rationalized, provided on a have-it-as-you-need-it basis, and available without regard to provider fault, so long as the medical condition and its sequelae fell within the defined area of eligibility. An expanded version of the system would be able to integrate the compensation available from traditional insurance functions with that now borne in so many of these cases by Medicaid, the State, and the schools.
  • Learning would be an independent focus in every case of a baby born with NNE. Every case, not only those selected for litigation by motivated parents, would be submitted to a community-based Patient Safety Organization for rigorous analysis.
  • Accountability would also occur in every case, though on the basis of what has come to be called “just culture” rather than just discipline. Neglect worthy of punishment would receive it. Judgment errors worthy of correction would receive that. Providers in need of remediation and limitation would be referred to facilities where assessment and evaluation can occur.

The effort in Colorado has been managed by a coalition of nonprofit healthcare provider and consumer organizations led by United Cerebral Palsy and Common Good Colorado, with the support and participation of organizations and individuals across the spectrum of health care. The Colorado Health Institute has been engaged to perform the central econometric studies; the principles and objectives have been vetted and considered in numerous medical provider and policy forums.

The growing recognition among healthcare consumers and their advocacy groups that the existing tort system simply does not serve the need is notable. (In one case, families of people injured through medical error took to calling the tort system the “tort-ure” system, describing it as a second tragedy following the first.) Because the financial structure of the alternative system can include a process enabling health insurers and other payors to cap their risk in cases of severe NNE, it is expected that the private insurance markets and the self-funded healthcare trusts will also be interested.

Implementation and impact
Although the details of this initiative are beyond the scope of this article, two important questions should be addressed. How would such an alternative be put into place? How does it fit with the other forces acting on healthcare reform more broadly?

One option for implementation would be legislative enactment of a pilot program that would operate in lieu of existing tort law for all medical injuries fitting within the program’s coverage. An alternative would be implementation by consent. Families expecting a child might opt in. To avoid adverse selection effects, postevent opt-outs would be limited or proscribed, and the contractual remedy would be exclusive. For that reason, it would be paid for (and presumably reinsured) by the liability industry and its participating providers. The role of state legislation would be limited to enacting “safe harbor” laws—describing the essential terms, constraining providers’ and insurers’ freedom of contract within those terms, and providing for enforceability of the insuring agreement. Another possibility is consent included as part of health plan contracts, similarly supported by enabling but still very limited legislation.

The second question—the connection of medical liability reform with other themes in the reconfiguration of American health care—has recently taken on a new saliency. A Democratic President, leader of a party long opposed to “tort reform” of almost any kind, has identified the need for reform as an essential part of the larger healthcare agenda.

His position expands the vision of what must be done. But although fault-based tort law does not achieve accountability for most medical mistakes, the public, not entirely wrongly, believes that lawsuits are a way of bringing erring providers to account. If reformers suggest removing “fault” from the system, they may well be asked, “Where is the accountability?” Self-policing by the profession—“peer review”—is not a satisfactory answer.

The problem with peer review
This is a real—not just a political—problem that must be solved. Peer review and medical regulation have recently come under serious scrutiny. A California study completed in 2008 found that the peer review and regulatory systems in that state were ineffective, opaque, and virtually random in both process and quality. Two earlier nationwide studies were not much more sanguine.

At the same time, the public’s tolerance for opaque self-policing has waned. Laws requiring provider “report cards” are the most obvious examples of a growing demand for access and openness. Specialty societies and forward-looking thinkers among the regulatory community have already begun to develop new approaches to ongoing maintenance of competency.

Peer review needs to be addressed, whether we have liability reform or not. And unless we improve peer review, we cannot fix medical liability.

In its 2010 legislative session, the Colorado General Assembly will be doing a mandatory sunset review of the state’s Medical Practice Act. This Act, which describes the authority and responsibility of the Colorado Board of Medical Examiners, is closely tied to the statutes that define and regulate medicine’s professional (“peer”) review.

Because the two sets of laws work together, it is likely that scheduling a similar review of the professional review process in 2011 will be included in the re-enactment bill for the Medical Practice Act itself.

A window of opportunity
One theory of policy reform holds that three things must happen simultaneously for real change to occur. First, there has to be a sufficient perception that change in the status quo is needed. Second, a political window has to open—an opportunity to have the change taken seriously by those with the ability to effect it. And third, there has to be a solution waiting to enter through the window.

In 2010 and 2011, Colorado’s political window will be open. This year and next, the organizations that have been developing the ideas for liability and regulatory reform described here will continue to study, debate, discuss, design, and invite, for open and frank exchange, every stakeholder interested and willing to participate. The recognition of the challenge, the opportunity to address it, and a menu of ideas for doing so are within our grasp.

Edward A. Dauer, LLB, MPH, is executive director of the Colorado Patient Safety Coalition. He can be reached at

Additional resources:

Sloan F and Chepke L. Medical Malpractice (M.I.T. Press 2008).

Baker T., The Medical Malpractice Myth (2005)

Demsetz H. “When Does the Rule of Liability Matter?” 1 J. Legal Stud. 13 (1972).

Bismark M., et al. "Patient Motives for Legal Action Following Medical Injury in New Zealand," 175 CMAJ 889 (2006)

Bismark M. et al. "Motivations for Medico-Legal Action: Lessons From New Zealand," 27 J. Legal Med. 55 (2006).