American Journal of Law & Medicine

Medical liability insurance and damage caps: getting beyond band aids to substantive systems treatment to improve quality and safety in healthcare.


The medical liability crisis is affecting our healthcare system. (1) Medical liability and limited physician and hospital access to malpractice insurance have pushed many providers to leave their states, reduce their services, or simply retire. For many, a labor of love has become an agonizing search for insurance to ensure continued practice in an industry for which they trained eight, fifteen, or even twenty years. Limited insurance and potential liability has also led to defensive medicine, in which providers try to avoid lawsuits by ordering tests, procedures, and anything else that might help protect against liability. Moreover, providers may also attempt to avoid high-risk patients or practices altogether to limit opportunities for lawsuits. Although it is questionable whether these efforts actually help, the provider perception of self-preservation through defensive medicine is undeniable--and providers, like everyone, act on their perceptions.

Damage caps have been proposed as one solution. In some states, previous reform efforts using damage caps may have provided limited relief, allowing at least some providers to keep practicing and allowing some patients that otherwise would be left without care or forced to drive 100 miles or more to see a doctor to retain access. In other states, damage caps may have also contributed to provider insurance rate reductions, enabling providers to continue to practice. Although their absolute effect has been justifiably debated, there may be some identifiable benefits of these efforts to maintain provider access to insurance and patient access to care. Caps, however, are not enough; they are at best a short-term solution. To address the vicious circle of injury, lawsuit, premium increase, and crisis, one must address the root cause of the problem: medical error.

As the influential non-partisan Institute of Medicine noted, (2) medical errors account for the vast majority of patient injury in the United States and around the world. Medical errors are not "caused" by bad doctors, bad nurses, or bad administrators callously cutting corners. Medical errors, rather, are a consequence of the structure of the healthcare system and the hidden defects therein. While this system provides a tremendous social benefit, it creates weaknesses that present an opportunity for mistake, which may, in unfortunate circumstances, lead to patient injury. Healthcare providers--good, compassionate people with the best intentions--can never outperform the system that binds and constrains them.

Error, and hence injury, can be successfully reduced. The aviation industry, the nuclear power industry, and the military have been highly successful in reducing error and improving outcomes and efficiency. Specifically, these industries have accepted that humans make errors, sealed the gap in interdepartmental transactions, removed the individually-oriented blame system, and created systems promoting and rewarding communications about system weakness and errors in order to make them transparent and correctable.

The present legal landscape, however, prevents such communications in the healthcare industry. The adversarial nature of our legal system punishes candor and rewards the manipulation of fact, thus discouraging open and honest communication of system issues. As such, important system factors and weaknesses are never addressed. Instead, a philosophy of punishing the last person to touch the patient prevails, encouraging the individually-oriented blame system that is antithetical to system improvement. Each subsequent patient and provider are fated to experience the same system weaknesses and outcomes that could have come to light and been corrected if not discouraged by a litigation system bent on individual blame.

The solution to the healthcare liability and insurance problem must go beyond superficial symptomatic treatment and instead address the substantive root cause: reducing error to reduce injury, which effectively reduces the number of lawsuits and stabilizes healthcare access and cost. To effectuate such a goal, medical providers need liability reform (in the short term), an infrastructure conducive to the open discussion of medical error, and an assurance that information collected for safety purposes will not be used against them. In exchange, they must commit to systems assessments, error analysis, and, perhaps most importantly, the integration of the most valuable parties that have been long ignored in systems improvement efforts: patients and their families. Patients and their families see the entire health delivery enterprise, whereas administrators, providers, and others see only their narrow portion of it. By integrating patients as partners, the provider-patient relationship is strengthened, communication is fostered, and safety is promoted, creating a culture of improvement for all, not punishment against one. As part of this effort, injured patients should be compensated quickly using a social insurance pool, have the opportunity to vent grievances through mediation, have their suffering acknowledged, and participate in system improvement to prevent similar occurrences in the future.

In Part II, we review previous efforts to address the medical insurance liability crisis, and conclude that it is highly difficult to determine their specific substantive effects on insurance costs and access to healthcare. In Part III, we describe medical error and the ways in which the medical and legal traditions confound efforts to address it. In Part IV, we propose a medical infrastructure paradigm that recognizes medical error and provides opportunities for patients and providers to share information in an effort to reduce error and/or its effects. Finally, in Part V, we offer some concluding remarks.


The first wave of healthcare "crisis" emerged in the late 1970's. A number of states responded to the crisis by passing new legislation. (3) Tort reform continued in the 1980's and the 1990's as the nation faced additional waves of crisis. In 2003, the American Medical Association ("AMA") announced yet another malpractice crisis. (4) The property-casualty insurance market has typically experienced these "hard" and "soft" market cycles since 1926. (5) The medical malpractice market cycle lasted for approximately six years in the 1970's and ten years in the 1980's. The current cycle, however, has lasted for fifteen years, with no end in sight. The lack of clarity regarding when this cycle will peak is of great concern, for the current environment has already reached "crisis" severity. (6)

The impact of the crisis is broad. (7) The AMA has concluded that forty-four states are either currently in crisis or at least showing problem signs. (8) Only six states (CA, CO, NM, LA, IN, and WI) are considered not in crisis. (9) AMA president Dr. Donald Palmisano has been a prominent figure in pushing medical tort reform, favoring non-economic damage caps. (10) Non-economic damage caps acknowledge and address the difficulty in ascertaining a precise figure for pain and suffering, but yet are set at levels such that patients will still receive fair compensation for their economic losses. (11) The U.S House of Representatives appears to agree, as evidenced by their passage of H.R. 5. (12) The nation also seems to be in support of this bill. A recent Washington Post poll shows that 72% of individuals support a "reasonable cap" on non-economic damages and "reasonable liability reform" in medical malpractice suits. (13) On July 9, 2003, however, the medical malpractice reform bill (14) failed in the 108th Senate on a strict party-line vote (49 Yeas; 48 Nays). (15) The parties disagreed on the root cause of malpractice insurance premium increases, disputed whether managed care organizations would benefit more from the bill than patients, and objected to the "one size fits all" approach of damage capping. (16) Below, we review various states' experiences with damage caps and some of the resultant findings from these experiences.


1. California

The failed federal medical malpractice reform bill attempted to repeat the success of California's 1975 Medical Injury Compensation Reform Act ("MICRA"). (17) Although almost every state has reformed its malpractice tort law to a certain extent, reform has been most effective in California.

California is a pioneer in malpractice tort reform. MICRA, modeled after the AMA standard, has been viewed by some as the most effective legislation in curbing increases in malpractice insurance premiums. (18) Some of MICRA's most significant features include a $250,000 non-economic damage cap, a shortened statute of limitations, a notice of intent to sue requirement, abrogation of the collateral source rule, specific distribution of attorney's fees, allowance of periodic payments, and authorization of alternative dispute resolution. (19)

MICRA was intended to bring predictability to, and result in the reduction of, liability damages, thus leading to affordable healthcare. Various statistics suggest MICRA has had a positive impact. First, in its March 3, 2003 report, the U.S Department of Health and Human Services ("DHHS") deemed California's malpractice reform "a success." (20) The report indicated that insurance premiums in California have risen by 167% since 1975, while those in the rest of the country have increased 505% over the same time period. (21) Similarly, in 1975 California had the highest premiums in the nation, but its premiums currently rank in the lowest one-third; the decrease has been attributed to MICRA. (22) Second, the American Academy of Actuaries, the Physician Insurers Association of America ("PIAA"), and the Medical Liability Monitor ("MLM") have all assessed California data and concluded that, as a result of MICRA, California physicians pay less in insurance premiums and California patients have greater access to healthcare. (23) For example, the PIAA Data Sharing Project reported that in 2002 OB/GYN physicians in Los Angeles paid $54,563 in annual premiums, while OB/GYN physicians in Miami paid $201,376. (24) Third, between 1999 and 2001, the total number of full-time, year-round practicing physicians grew five times faster than California's state population growth, but yet, on a national level, the number of physicians per thousand of the population fell by 6%. (25) Finally, MICRA has been found to reduce healthcare costs by 5% to 9% without leading to increases in mortality or medical complications. (26)

The success of MICRA, however, is hardly conclusive. In 1999, the California State Assembly Committee on the Judiciary concluded that medical malpractice premiums had not declined, but had only stabilized since the enactment of MICRA. (27) The Committee further found that medical malpractice premiums account for only 0.6% of healthcare costs in California, and that malpractice premiums amount to less than 1% of the nation's healthcare expenditures. (28) Studies have also shown that at the time MICRA was enacted, the average charge for hospitalization in California was $217 per day. (29) Yet, six years after MICRA, the average hospitalization cost had risen to $547 per day. (30)

MICRA has also apparently failed to decrease the number of malpractice filings. In California, as in the rest of the nation, the number of claims has risen steadily--from 8 per 100 physicians in 1979, to 17 per 100 in 1983, and to 22 per 100 in 1985. (31) Current data show that California has a 50% higher frequency-of-claims rate than the national average. (32) A recent General Accounting Office ("GAO") report also supports this position by pointing out possible deficiencies in the MLM data. (33) The GAO report cited inconsistent insurer reporting and incomplete insurance data; in fact, one third of all malpractice insurers do not report rates to the MLM, and for those that do report, reporting frequency is low. (34) Moreover, reported premium rates generally do not include discounts, rebates, or surcharges (35) that could affect the true expense of procuring liability insurance. (36)

Even though raw data can be interpreted to show lower rates in California, the advantage of MICRA is not conclusive. While the consensus seems to be that access to malpractice insurance in California is stable, it is debatable whether MICRA effectively defeated the crisis by reducing overall malpractice payments.

2. Indiana

Indiana's tort reform legislation has often been mentioned in the same breath with California's MICRA as a thorough, effective, and long lasting program. Indiana first passed reform in 1975 under the Medical Malpractice Reform Act. (37) Indiana capped all malpractice damages at $500,000 and eliminated all punitive damages. (38) Indiana also created a "patient compensation fund" and a mandatory claim review board as alternative remedies to medical malpractice suits. (39) Indiana courts have consistently upheld these tort reform provisions. (40)

Indiana's tort reform legislation appears to have produced several laudable results. First, medical malpractice premiums dropped immediately after Indiana's tort reform and have stayed low since then, (41) providing for affordable and available malpractice insurance, even during the mid-1980's healthcare crisis. (42) Second, at least between 1975 and 1988, the amount of compensation going to claimants with large malpractice payments was higher in Indiana than in states without tort reform. (43) The mean large claim (>$100,000) was $404,832 in Indiana, $290,022 in Michigan, and $303,220 in Ohio. (44) The median payment for large claims was $435,283 in Indiana, $180,000 in Michigan, and $200,000 in Ohio. (45) Third, at least between 1975 and 1988, 27.9% of cases paid from Indiana's patient compensation fund received the maximum allowable payment of $500,000, while only 13% of Michigan and Ohio claims were paid at this level or above. (46) Moreover, a 1991 study found that 57% of all national claims closed without payment, yet Indiana had only 32% of such claims. (47) The study also found that Indiana's average time for claim closure is similar to the national average. (48) Finally, and perhaps most important, healthcare providers and insurers are highly satisfied with the system. (49)

On the other hand, Indiana and Illinois have had similar patterns of healthcare inflation, which suggests that Indiana's reform has not affected healthcare costs. (50) In addition, there has not been a marked difference in patterns of healthcare expenditures or the number of physicians per 100,000 people in Indiana before and after the reform. (51) Although Indiana continues to have lower per capita access to physicians than the national average even after the tort reform, access may not actually have improved. (52)

3. Colorado

Colorado enacted its reform legislation, the "Health Care Availability Act" ("HCAA"), in 1988. (53) HCAA caps non-economic damages, provides for a separate limit on economic damages, limits the collateral source rule, and allows periodic damage payments. (54) AMA data suggest that Colorado's healthcare industry is relatively healthy, and the MLM reported that Denver had one of the nation's lowest medical liability premiums in 2002. (55) Colorado's reform seems to be successful by the fact that the state has shown no discernable signs of healthcare affordability or accessibility problems. (56)

Colorado's reform, however, has not escaped criticism. Critics have been quick to illustrate the HCAA's flaws through individual anecdote. For example, in one case a jury's award of $1,210,000 in non-economic damages was reduced to the $250,000 statutory cap. (57) Further, although insurance providers profited handsomely after the tort reform, reduction in medical liability premiums due to the reform is uncertain. (58)

4. Wisconsin

Wisconsin passed reform legislation in 1985 as a broad tort reform effort. (59) Wisconsin adopted a $350,000 non-economic damage cap, adjusted annually for inflation. (60) Thus far, Wisconsin's reform legislation has survived constitutional challenges. (61)

A 1995 study found that Wisconsin's tort reform has been effective in lowering the state's medical malpractice loss ratio. (62) The study concluded that the damage cap increases the profitability of insurance providers, benefiting those firms that would have suffered the greatest losses prior to reform efforts. (63) Wisconsin's noneconomic damage cap appears to eliminate liability outliers by having the greatest effect on the upper right tail of the loss ratio distribution, (64) an effect consistent with national data reported from the PIAA Data Sharing Project. (65) The difference between the average and median claim payments implies a skew-to-the-right distribution, signaling either outliers or the existence of a few large claims with large payments. (66)


1. Ohio

An initial glance at the states in crisis provides one constant theme: tort reform statutes that have been deemed unconstitutional. Ohio is one of these jurisdictions. (67) A report by the American Academy of Actuaries found a gradual decline in medical costs following Ohio's 1975 tort reform. (68) This decline, however, ended in 1986 after the Duren decision, which held liability caps to be impermissible under the state constitution. (69) The Academy of Actuaries report concluded, "[T]he data appear to support a tort reform package and the specific benefit of a cap on non-economic damage." (70)

Ohio courts, however, have concluded otherwise. The Ohio Supreme Court concluded that there is "insufficient evidence of relationship between tort reform legislation and availability or affordability of medical malpractice insurance." (71) Whether the court will step back from this position is unknown.

The latest evolution in Ohio reform efforts is a bill introduced by State Representative Jean Schmidt that allows, at the request of either party to a malpractice suit, a review panel to determine prior to trial whether a physician's care has been inadequate. (72) There are weaknesses in this reform effort, however. Panel review is not mandatory. Further, it remains unclear whether the panel's final conclusion provides irrebuttable evidence during trial. (73) Ohio has also commenced a study to reduce malpractice insurance costs and to increase malpractice coverage access. (74) The study is expected to finish in eighteen months. (75)

2. Texas

The Texas legislature passed the Medical Liability and Insurance Improvement Act in 1977. (76) A recent empirical study of Texas insurance rates concluded that the promised savings from tort reforms apparently have not materialized. (77) Moreover, Texas courts have found aspects of caps and reforms to be both constitutional and unconstitutional. (78) In response to the increase in healthcare costs, as well as other factors, the 78th Texas legislature signed House Bill 4 into law in 2003. (79) House Bill 4 established a $250,000 cap on non-economic damages, applicable to all doctors involved in a case, (80) a $500,000 cap on all involved healthcare institutions, a four month statute of limitations, and an improved disclosure/consent procedure. (81)

The Texas legislature, however, did not halt its tort reform efforts with this statute. On September 13, 2003, Texas voters were asked to consider a constitutional amendment, Texas Proposition 12, which permits the legislature to "determine the limit of liability for all damages and losses ... other than economic damages" arising out of a medical malpractice claim. (82) Texas legislators, apparently learning from court confusion and antagonism toward previous tort reform efforts, altered their approach to ensure this tort reform would not be impeded by inconsistent court rulings. Supporters of Texas Proposition 12 promised that the amendment would "rein in excessive damages in healthcare cases" and "save years of legal wrangling." (83) A recent poll showed that 71% of Texas citizens would support a non-economic damage cap. (84) Opponents of the proposition criticized the effort as a "radical change" to the Texas Constitution that "gives insurance companies [the power] to jack up insurance rates" and "lets the insurance industry ... interfere with the citizens' constitutional rights and access to justice." (85) While both sides advertised heavily for the campaign, Texas Proposition 12 passed, amending the Texas Constitution and enabling the Texas Supreme Court to fully enforce the medical tort reform under House Bill 4. Whether, as a result of the constitutional amendment, physician premiums will truly decrease and patient access to care will truly increase may take years to determine, if ever.

3. Florida

Florida providers have some of the highest liability insurance premiums in the nation. In October 2002, OB/GYN physicians in Florida paid anywhere from $136,200 to $210,600 annually for malpractice premiums, whereas the rate in California ranged from $54,600 to $65,400. (86) From 1999 to 2002, the largest medical malpractice insurer increased premiums for general surgeons in Dade County by 75%, compared to a 2% increase in Minnesota during the same period. (87) The AMA attributes the high premiums to the lack of "capping" for non-economic damages. (88) The Florida legislature, however, has resisted the notion that the state is in a medical malpractice crisis until recently, when the state's House of Representatives conceded to some, but not all, of the Senate's efforts on malpractice reform. (89)

Florida first enacted its Comprehensive Medical Malpractice Reform Act ("CMMRA") in 1975 (90) and amended the Act in 1985. (91) The CMMRA established a patient compensation fund, modified the collateral source rule, capped noneconomic damages, provided for periodic damage payments, and required mediation. (92) Access to Florida's healthcare system increased in the 1990's, though the cause is unclear. (93)

While the Florida judiciary has generally upheld the constitutionality of the CMMRA, (94) select judicial decisions have chipped away at the effectiveness of the statute. The Florida Supreme Court has found "capping" damages to be unconstitutional, prompting some to view the Florida cap on non-economic damages as a meaningless provision. (95) Further, the Florida legislature repealed the CMMRA costs-award provision due to the judiciary's inability "to enforce statutes evenhandedly" and force the loser to pay the winner's attorney's fees. (96)

In addition to the CMMRA, in the early 1980's Florida also enacted a no-fault system specifically targeting birth-related neurological injury compensation. (97) Studies have shown that OB/GYN premiums decreased throughout the 1980's and 1990's, both absolutely and relative to the national average, highlighting the impact of the no-fault program in Florida (and Virginia, which had a similar program). (98) The studies found that:

* Over 90% of OB/GYN physicians participate in the program, and Medicaid participation increased after the no-fault system was enacted; (99)

* Few claims were made: four per year in Virginia, and twenty-six per year in Florida. …

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