American Journal of Law & Medicine

Enterprise liability for medical malpractice and health care quality improvement. (Quality of Care and Health Reform: Complementary or Conflicting)

[Assumptions about quality in health care and its defense] are rooted in the past, a past in which the doctor ruled. Strangely, those assumptions have survived the revolutions that now deny the doctor the sole authority to judge and guide care. The doctor no longer really controls health care, as in the days of solo practice, but, when it comes to quality, the doctor is still held accountable. When the researchers study quality, they focus on the behavior of the physician. When the Quality Assurance Committee meets, it reviews the performance of the physician. When the payers and the regulators turn on their searchlights, they want doctors in their glare. Control is shifting, structure is shifting, the pattern of care is shifting; but accountability is not.(1)

This passage prefaces a landmark report on the application to health care of quality improvement methods used successfully in other industries. The authors of that report do not specifically address the potential for the medical malpractice system to create incentives for quality improvement according to their new paradigm.(2) Nevertheless, liability for medical malpractice is perhaps the most obvious example of our continued focus on individual accountability in an increasingly industrialized health care system.

We agree that accountability in health care must be redefined if true quality is to be achieved. We therefore join a growing chorus of voices that proposes to refocus liability for medical malpractice on the organizations that will increasingly bear practical responsibility for providing health care services using a system of "enterprise liability."

The Clinton Administration's health care reform proposal includes enterprise liability as a demonstration project for improving the medical malpractice system.(3) A system of enterprise liability for health plans should have the following principal features:

-- Each health plan would be liable for negligent injury to its enrollees caused by the health plan's affiliated practitioners and providers.

-- Physicians and other health professionals practicing as employees of or under contract to health plans would be immune from suit.

-- Health plans would be prohibited from requiring practitioners to indemnify them for malpractice losses or to purchase insurance, but would be allowed to pass along a portion of their total liability costs as overhead affecting compensation.

-- Institutional providers (such as hospitals) that can monitor and improve the quality of care within their organizations would be allowed to negotiate indemnification or risk-sharing agreements with health plans.

-- Alternatives to litigation, such as arbitration or limited no-fault arrangements, would be encouraged to allow health plans to compensate fairly and rapidly a greater percentage of injured patients.

-- Limits on damages would be instituted to eliminate the threat of unreasonably large awards against corporate defendants.



A good case can be made that the current law of medical malpractice does not accomplish the goals of a properly functioning liability system: identifying substandard practitioners, encouraging better care and compensating injured victims. Lack of efficient compensation is evidenced by the fact that those who enter the malpractice system are not, for the most part, those who are negligently injured. According to the Harvard Medical Practice Study of New York State's experience, approximately one percent of hospital admissions result in negligent medical care.(4) However, only one in eight such incidents gives rise to a malpractice claim, and only one in sixteen negligently injured patients receives compensation.(5) At the same time, only one out of every six malpractice claims is based on persuasive evidence of negligent injury.(6)

This compensation mismatch weakens the deterrent impact of the malpractice system. Physicians view malpractice suits as unpleasant, isolated events, not as indicators of poor quality care.(7) In addition, malpractice insurers do not assess premiums based on individual experience, but classify risk according to location and specialty, thereby minimizing financial incentives for quality improvement.(8) Moreover, the brand of "risk management" practiced by malpractice carriers generally views managed care as increasing liability exposure and advocates defensive practice and suspicion of cost-effectiveness programs.(9) These practices tend to create inefficient risk pools that disproportionately burden certain physicians, such as obstetricians in small communities, and neither identify "bad" doctors nor teach them how to improve.(10)

The failure of the malpractice system has not been lost on the public or on the political process. It was recently reported that fifty-nine percent of the public believes that the malpractice system contributes "a great deal" to our health care woes.(11) Unfortunately, public perceptions emphasize the cost of the malpractice system rather than its failure to improve quality. As a result, the most frequently debated tort reforms consist of barriers to suit and restrictions on recovery that do not address the infrequency of compensation and poor deterrent effect that plague the malpractice system.(12) In fact, liability insurance premiums and self-funded reserves totalled approximately $9.1 billion in 1991, only about one percent of total health care spending.(13) Nonetheless, reports of outrageous jury verdicts vie with accounts of lawyers' contingent fees in the public imagination, while trial attorneys and certain consumer groups on the one hand and physicians and their insurance carriers on the other continue to battle over "tort reform" at the state and national level.

The United States is currently engaged in a comprehensive restructuring of its health care system. This effort should include malpractice reforms that are consistent with the way that health care will be delivered in the future, and should avoid isolated changes based on outdated and largely erroneous perceptions. This article argues that shifting malpractice liability from individual providers to health care enterprises can benefit our health care system during the implementation of national health care reform. Most reform proposals emphasize both extended coverage and cost-containment. Enterprise liability has the potential to help accomplish these apparently contradictory goals by coordinating cost concerns with quality concerns so as to improve performance.

It is of course probable that medical malpractice law, like all outlets for our demanding and litigious society, will never function perfectly. A fundamental problem with resolving medical disputes through the tort system is that many injured patients have little way of knowing whether or not their injuries resulted from medical negligence. This is largely the result of three factors. First, most patients who require medical services are ill, and illness leads to the possibility of a bad outcome regardless of negligence. Second, medical care is frequently complex and technical, and therefore may be difficult for patients or other lay parties to evaluate. Third, many physicians and other health care providers are unlikely to admit their negligent behavior to themselves, much less to their patients.

However, the American tort system is in many ways representative of democracy -- the worst possible system, except for all the others. Paul Menzel writes that "it is virtually inevitable that a rational and decent system of care will disappoint patients' and subscribers' expectations at critical and disputed points."(14) A properly designed method of legal redress may be able to offer a reformed health care system the blend of economic incentive and ehtical imperative needed to balance systematic cost concerns with responsibility to individual patients.(15)


To us, the logic and likely benefit of enterprise liability is self-evident. However, the recent political debate demonstrates that our conviction is not universally shared.(16) Therefore, before describing in detail our vision of a reformed health care liability system, we feel it necessary to address certain beliefs that appear to us to underlie many critical reactions to enterprise liability.

It is perhaps ironic that the explication of what is at heart an economic concept should begin with a sociologic discussion. Alas, such is the nature of health care. We all feel a certain ambivalence about placing health care within an industrial model because of the personal and humanitarian appeal engendered by illness and because of the intimacy with which we view those who care for us. Relatively few people would fail to hold a resort company primarily responsible for a fatal miscount by a busy scuba instructor or to penalize a restaurant for the scalding spill of an overworked waiter, yet many react with concern to the "corporatization" of responsibility for medical malpractice.(17)

Two deeply rooted preconceptions aobut medical accountability and malpractice may perpetuate this discomfort:

1. Many observers believe that the roles of management and provision of health care services can never merge. They therefore conclude that a health care "firm," as opposed to individual physicians struggling against external constraints, is neither desirable nor achievable.(18)

2. Many observers also believe that the medical malpractice system is the exclusive province of special interests fundamentally unrelated to the delivery of health care. They therefore conclude that malpractice liability cannot in any significant way promote quality.(19)

These biases cause critics to prejudge enterprise liability for medical malpractice in two ways. Those who view management and service provision to be as unmixable as oil and water cannot imagine that removing liability from "front-line" clinicians to "bean-counters" could possibly improve care.(20) Those who view the malpratice system as merely a transfer of wealth from provider to patient, with a hefty cut taken by lawyers, consultants and administrators, tend to recognize only the benefits of enterprise liability that are external to care delivery, such as the consolidation of legal defenses in a single party, and not the direct impact that legal liability might have on the quality of health care services.(21)



A potentially fertile approach to overcoming biases against enterprise liability is to remind ourselves of the reason for the debate: the crisis of cost and access in our national health care system. We spend nearly one trillion dollars a year on health care, twice as much per capita as almost all comparable nations.(22) For this staggering sum, about eighty-five percent of our population has health insurance that allows them access to whatever services they and their physicians deem appropriate, the expense or the modesty of potential benefit notwithstanding.(23) The remaining fifteen percent, almost forty million people, are unable or unwilling to purchase coverage, and either go without care or obtain it at public expense, often in expensive emergency settings when their illnesses have progressed beyond cure.(24) Overall health in the U.S. remains poorer than in most industrialized countries.(25) A consensus has emerged that the status quo is both shameful and expensive, and that we, as a society, are not getting "value" for our health care dollars.

Two concepts of value compete for our attention. First, we question the intrinsic value of the health care we purchase as individuals; that is, we ask "are we getting what we pay for?" There is ample evidence of waste, fraud and inefficiency in our health care system.(26) It stands to reason that, if we can restructure the health care delivery system to eliminate this unnecessary expense, we will receive health care of substantially similar quality at lower cost. These savings might accrue to individual consumers or be used by society to provide health care to the currently underserved.

Second, we question the value of the health care services we buy as a society compared to other health care services or to alternative potential uses of our money; that is, we ask "are we paying for the right thing?" This question relates not to the fairness of the price but to the prudence of the purchase. We clearly have expensive tastes in care.(27) Economist Victor Fuchs believes that "low-yield" medicine, health care that is appropriately priced but provides relatively modest benefits to the recipient, contributes even more to total expenditures than "no-yield" medicine or waste.(28) For example, few people with health insurance would refuse a pill that offered a one percent chance of curing a terminal disease, even if it cost "the system" a million dollars that could otherwise be used to prevent a thousand deaths through early screening. There is no doubt that if we could prioritize our health care spending, we would gain more from our health care dollars. However, this decision-making process raises extremely difficult ethical questions because increases in the quality of health care services for one person necessarily imply quality losses for another.(29)

Our current health care cost crisis reflects both sources of insufficient value.(30) This fact has important implications for whether and how we choose to assign blame for bad health care outcomes that are attributable to the quality of care.(31)


To the extent that quality means the efficient reduction of waste, principles of "law and economics" suggest that the assignment of liability should be a simple matter of reducing the "externalities" that confound decisions relating to the utilization of health care services.(32) In any industrial model of health care, some organizational unit will be responsible for providing services efficiently. That unit will choose to deliver particular services in particular ways if, in its view, the benefits outweigh the costs. Among those costs should be the costs of patient injury arising from the substandard delivery of care.(33)

If the organizational unit responsible for delivering cost-effective care does not suffer financial loss when its attempts to control utilization result in more severe morbidity, it will fail to take appropriate precautions in designing and implementing its cost-containment policies. This might occur in the current system if a hospital paid on a capitated basis refuses to admit even severely ill patients for overnight preoperative stays or to perform certain diagnostic tests. In the medical malpractice arena, where liability is at present borne by physicians, a corollary principle is also important. If another organizational unit, perhaps an anesthesiology group on monthly retainer to the hospital, is liable for patient harm but receives no direct benefit from the hospital's cost-containment procedures, it will be more likely to subvert even justifiable procedures in order to minimize its exposure in the event of an adverse patient outcome.

The conclusion to be drawn is that the organizational unit that is ultimately responsible for efficient health care delivery should also bear direct financial liability for malpractice so that it will "internalize" the cost of patient harm into its cost-benefit calculus.(34) An important point to note is that this conclusion does not impose any particular constraint on the size or character of that organizational unit. It might be an individual physician or other health care professional, a group of professionals, an institution such as a hospital or clinic, a health insurer or even government, so long as it proves in practice to be the most efficient manager-provider of health care services.


Protecting quality by ensuring the appropriate allocation of society's health care resources raises a very different set of concerns. Allocation necessarily implies a pooling of competing interests and requires that a single party be given authority to make distributional decisions affecting that pool. The primary concern of the participants in the pool is that the allocating party makes equitable decisions.

Allocation decisions are made continually in the current health care system.(35) However, these decisions are unsystematic, and no consensus has emerged on a coordinated allocation mechanism that would account equitably for the rights and needs of individuals.(36) The allocation implications of comprehensive health care reform are particularly challenging because the financing of a health care entitlement must occur at the national level, while the organizational unit for the delivery of health care is necessarily smaller.(37) A national board or commission to assess and make recommendations with respect to certain advanced medical technologies has been suggested. …

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