American Journal of Law & Medicine

Medical error reduction and tort reform through private, contractually-based quality medicine societies.


The current medical malpractice system is broken. Many patients injured by malpractice are not compensated, whereas some patients who recover in tort have not suffered medical negligence;furthermore, the system's failures demoralize patients and physicians. But most importantly, the system perpetuates medical error because the adversarial nature of litigation induces a so-called "Culture of Silence" in physicians eager to shield themselves from liability. This silence leads to the pointless repetition of error, as the open discussion and analysis of the root causes of medical mistakes does not take place as fully as it should. In 1993, President Clinton's Task Force on National Health Care Reform considered a solution characterized by Enterprise Medical Liability (EML), Alternative Dispute Resolution (ADR), some limits on recovery for non-pecuniary damages (Caps), and offsets for collateral source recovery. Yet this list of ingredients did not include a strategy to surmount the difficulties associated with each element. Specifically, EML might be efficient, but none of the enterprises contemplated to assume responsibility, i.e., hospitals and payers, control physician behavior enough so that it would be fair to foist liability on them. Likewise, although ADR might be efficient, it will be resisted by individual litigants who perceive themselves as harmed by it. Finally, while limitations on collateral source recovery and damages might effectively reduce costs, patients and trial lawyers likely would not accept them without recompense. The taskforce also did not place error reduction at the center of malpractice tort reform--a logical and strategic error, in our view.

In response, we propose a new system that employs the ingredients suggested by the task force but also addresses the problems with each. We also explicitly consider steps to rebuff the Culture of Silence and promote error reduction. We assert that patients would be better off with a system where physicians cede their implicit "right to remain silent," even if some injured patients will receive less than they do today. Likewise, physicians will be happier with a system that avoids blame--even if this system placed strict requirements for high quality care and disclosure of error. We therefore conceive of de facto trade between patients and physicians, a Pareto improvement, taking form via the establishment of "Societies of Quality Medicine." Physicians working within these societies would consent to onerous processes for disclosing, rectifying and preventing medical error. Patients would in turn contractually agree to assert their claims in arbitration and with limits on recovery. The role of plaintiffs' lawyers would be unchanged, but due to increased disclosure, discovery costs would diminish and the likelihood of prevailing will more than triple.

This article examines the legal and policy issues surrounding the establishment of Societies of Quality Medicine, particularly the issues of contracting over liability, and outlines a means of overcoming the theoretical and practical difficulties with enterprise liability, alternative dispute resolution and the imposition of limits on recovery for non-pecuniary damages. We aim to build a welfare enhancing system that rebuffs the culture of silence and promotes error reduction, a system that is at the same time legally sound, fiscally prudent and politically possible.


For centuries, physicians have been held liable for medical error. (1) However, it is particularly in the last thirty years, beginning with the malpractice crises in the 1970's and continuing with subsequent crises in the 1980's and 2000's, (2) that many observers began devoting considerable intellectual energy to the structural and conceptual deficiencies in tort's management of medical negligence. (3) As a result, scholars now generally agree--although often for different reasons--that when addressing malpractice the current American tort system is broken. (4) Some of this failure has to do with an inefficient mechanism for compensation. First, injured patients determined to proceed with litigation often face structural obstacles to having their claims proceed through the tort system. (5) Equally problematic the system is neither sensitive nor specific. Ideally, the set of negligently caused injuries and the set of compensated victims would be identical, (6) but the tort system neither identifies nor compensates most medical injuries that are the result of negligence. (7) Similarly, studies indicate the tort system is also nonspecific, as some compensated injuries are actually the result of the normal risk of treatment or expected course of disease, or are accidents for which no one is at fault. (8) In fact, research suggests that severe injuries, regardless of physician fault, will likely be compensated at a rate disproportionate to the victims' actual losses. (9) One study, for example, indicates non-meritorious claims approximate over forty percent of all malpractice claims. (10) And even among those deserving injured who prevail in their claims, frictional costs eventually prevent up to half of the monies paid out from reaching plaintiffs. (11) Direct costs to physicians not borne by insurance are also significant. (12) Finally the time from an injury and even commencement of a malpractice action to a final verdict can take years, creating a disincentive for injured patients to initiate claims, and a situation that subjects both patients and physicians to extreme emotional distress for protracted periods of time. (13) As a result, the best available data suggests that the current medical malpractice regime fails to compensate seriously injured patients adequately and fails to serve as an efficient conduit to channel medical malpractice premiums into the hands of deserving, injured patients. (14)

Perhaps most egregious, however, is tort's inability to induce physicians to take steps to reduce or eliminate medical mistakes, i.e., the failure of the tort system's deterrent effect. (15) Simply put, the rationale for having a system of deterrence based on individual fault, wherein individual actors--i.e., physicians, nurses and other allied health professionals--are theoretically deterred from committing error by the threat of malpractice litigation, (16) is not working because it is based on faulty premises and subject to deforming incentives, as we shall explain below. (17)

With a system arguably failing in so many aspects, no single causative factor predominates. Accordingly, over the past several decades varied efforts at tort reform have included legislative provisions limiting attorney fees, awarding attorneys' costs for frivolous suits, and modifying joint and several liability, as well as adopting clinical practice guidelines as evidence of the standard of care. (18) Other programs have involved voluntary binding arbitration, limiting malpractice awards through caps on damages, and collateral source offsets whereby patients who receive disability insurance payments, for example, have their awards reduced accordingly. (19) Still others have explored shifting from individual liability to enterprise liability, in which hospitals and/or managed care organizations rather than physicians are held responsible for negligent injury. (20) Others have emphasized no-fault liability or combined entity- level liability with no-fault compensation schemes. (21) Much of the scholarship in law and economics, for example, articulates competing proposals centered on private, contractually-based solutions in order to determine optimum solutions maximizing welfare, either by allowing unlimited contractual freedom or allowing state laws to serve as default rules in the absence of contract. (22) But none of these specific, narrowly focused reforms has been demonstrated to reduce substantially the costs associated with malpractice litigation, with the exception of caps on damages. (23)

More widespread tort reforms have not fared well, either. (24) The favored solution of the Harvard Medical Malpractice Study Group has been a no-fault system similar to worker's compensation. (25) No state has adopted this scheme, although Florida and Virginia do have extremely limited no-fault regimes for catastrophic birth injuries resulting in neurological damage--programs that have shown limited success in removing a small subset of medical injury from the tort system. (26) The American Medical Association, in contrast, proposed over twenty years ago an administrative system in which medical malpractice claims would be heard by a panel of experts, (27) and which promised in theory swift, efficient resolution of claims across a broader spectrum of injured patients. (28) No state has ever implemented it, and it has effectively died on the vine. (29) Furthermore, many remedial measures have been passed by state legislatures, only to be declared unconstitutional by state supreme courts. (30)

Finally, in 1993, during the Clinton administration, the Presidential Task Force on National Health Care Reform considered a general solution involving many of these features, characterized by enterprise liability, alternative dispute resolution, and limits on both collateral source recovery and recovery for non-pecuniary damages. (31) While we believe the task force contemplated the correct ingredients for effective reform, we note that its proposal did not include a specific strategy to surmount the difficulties associated with each element, and it did not place error reduction at the center of malpractice tort reform. (32) In this article, we will use the 1993 health care task force considerations--which we believe continue to have great merit despite the eventual failure of the Clinton health plan--as a springboard to offer such a strategy, focusing on the need for error reduction. In doing so, however, we will eschew a public, legislatively-driven public solution as in the Clinton plan and instead explore a private, contractually-based solution to the current failure of the American tort system to deter medical malpractice.

How the medical profession, the health care industry, and the American tort system handle medical error of all types--ranging from medication errors to misdiagnoses and surgical blunders--is contradictory, secretive, and counter-productive. (33) Moreover, the three systems not only fail to eliminate peculiar incentives to ignore medical error, but also they create incentives to err. (34) Based on both our observations of medical care as practicing physicians in university academic facilities, state hospitals and private hospitals, and our review of the relevant literature, we contend that these perverse incentives induce a culture of silence when medical errors occur. (35) One might even assert that some physicians perceive a perverse right to remain silent in order to avoid legal sanctions. (36) In addition, we maintain that what we call a "mal practice nihilism" occurs among practicing physicians as a result of the malpractice tort regimen viewed as erratic and unpredictable. (37) While there do exist numerous studies of physician practices and responses to errors and to the malpractice system, society has not fully appreciated that a negative feedback loop has developed, in which efforts by the tort system to deter medical error actually impede its resolution. (38)

To this end, we offer an original proposal employing tort reform to minimize medical error, one that will draw on many different proposed, existing, and successful programs for both reducing tort costs and achieving error reduction. Such programs are to be synthesized into an overarching proposal to create private physician groups dedicated to the fearless examination and reduction of error, unhindered by fear of malpractice litigation. We call these groups "Societies for Quality Medicine" ("SQM") that will have as their primary goal the realignment of medicine to circumvent the seemingly innocent but often pernicious incentives for ignoring error. We conceive of SQMs as operating outside of the tort system. They will serve as part of health plans in which patients privately contract out of tort liability and into a regimen of alternative dispute resolution consisting of mediation and arbitration, a regimen focused on holding liable only the enterprise of the SQM and not the individual physician. In addition, awards of noneconomic damages (i.e., pain and suffering damages) will be capped. Patients in turn will be cared for by a group of physicians--the SQM--who agree to prompt identification of error, notification to patients and families when error occurs, and acceptance of responsibility through apology, remediation, and compensation.

As a result of this strategy, we conceive not of a medical practice system devoid of error (as that is incompatible with human involvement) but one borrowing from a Platonic notion of justice, "striving toward the good," (39) a system that is both more sensitive and specific than the present one. This system will compensate more injured patients equitably and allow medicine to advance more rapidly as a practical discipline. At the same time, we acknowledge the historic role of the plaintiffs lawyer as an advocate for the injured in the time of their greatest need. (40) The SQM preserves that role by creating a system in which net collections are anticipated to be higher than the current system because many more injuries will be identified and many more patients will be compensated, albeit at lower individual rates. (41)

While we do not pretend to offer the definitive solution to the problem of medical error, we hope this proposal may provide a crystallizing seed eventually yielding systems in which hospitals, physicians, and indeed, society at large, can rectify these problems through apt incentives rather than harsh--and ultimately futile--coercion. In our proposal, we acknowledge the simple fact that doctors need to be constrained, for despite their best intentions, human nature with all its frailties will resist the strong ethical and professional imperatives for quality medicine. (42) Therefore we recognize the importance of incentives; however, we want the incentives to be mutually beneficial. If the doctor is worse off, but the harmed patient is not appreciably better off, a negative sum result is achieved. We would argue that today's tort system, where many patients cannot even bring claims, and where those compensated may not in the end be much better off, and where physicians are motivated to hide medical errors and even close practices--approaches in the aggregate such a negative-sum result. (43) In contrast, by our proposal, we are trying to channel losses into gains for the maximum number of actors, including physicians, injured patients, and future patients (all the while being neutral or better for the plaintiffs bar). We believe that as a result, a "culture of safety" will replace the current tort culture of blame, inefficiency and blatant unfairness to the injured.

Part II of this article introduces the problem of medical error, reviews various studies on error rates, and arrives at a conservatively estimated baseline rate on which we base our analysis. Part III presents an ideal, general form of our proposed solution, one derived from the original 1993 Clinton health care task force considerations, including enterprise medical liability, alternative dispute resolution, caps on non-pecuniary damages, and limitations on collateral source recovery. Part III also discusses the omission of no-fault insurance from the ideal, general form. Building on the general form presented in Part III, Part IV presents our conception of an independent physician group--the SQM--that would contract with individual patients outside the bounds of traditional tort and refocus responses to medical error in a more efficient manner. Next, Part V presents a detailed economic analysis of the SQM proposal, and presents calculated figures in the Appendix. Part VI addresses the use of contract and why the SQM proposal may satisfy some of the most cogent and principled criticisms of contracting out of tort liability from legal scholars. Part VI also specifically addresses the criticisms of Professor Jennifer Arlen, who argues against private contracting out of the tort system. (44) Finally Part VII explores how the SQM will mitigate deforming incentives in the current tort system, including the responses by physicians to the prospect of medical malpractice litigation.


Despite the significant resources devoted by multiple healthcare systems to medical error reduction in the United States alone, (45) and the billions of dollars consumed administratively by the tort system, (46) preventable iatrogenic injuries continue to affect almost one million hospitalized patients annually. (47) Many more patients also suffer injuries occurring in nursing homes, rehabilitation facilities, outpatient practices, day surgery enterprises and other venues where medical care is provided. (48) Even though some of these errors are insignificant and cause no harm, others lead to increased rates of both morbidity and mortality. (49) While it is not the purpose of this article to review the many studies of medical error occurring over the past thirty years, these studies indicate iatrogenic injury rates ranging from above 40% down to as a low as approximately 3%. (50) The California Medical Association's Medical Insurance Feasibility Study--which in 1974 retrospectively examined hospital records from 23 short stay hospitals in California--indicated an approximately 5% overall injury rate (roughly 1 in 20 admissions) and implied an average risk of negligent injury of four-fifths of 1% (or 1 in 126 hospital admissions). (51) If applied nationwide, this California Medical Association (CMA) figure indicates approximately 1,500,000 injuries annually, out of which four fifths of 1% (or 1 out of 126 hospital admissions) are caused by negligence. (52) Similarly the Harvard Medical Practice Study estimated that despite the various risk reduction strategies promoted in American hospitals, negligent injury occurs in approximately one percent of hospital admissions. (53)

While we believe an exact error rate is probably not precisely discernable, we will rely on the extremely conservative CMA study to estimate an overall risk of iatrogenic injury at 5% (1 in 20 encounters). (54) We infer from that figure that 80 percent of those injuries will be the result of disease progression or non-negligent treatment, leaving a risk of negligent injury of 1% (1 in 100 encounters). (55) We count as a negligent event outpatient treatment that results in hospitalization but will not count errors occurring in nursing homes, etc. Since the CMA study identified errors retrospectively and employed broad exclusionary criteria, it provides for a reasonable and conservative analysis of medical error that cannot be accused of exaggerating the problem. (56) Further more, this error rate tracks approximately the estimate of the Harvard Medical Practice Study. (57)

While some baseline error rate is accepted as "the cost of doing business" in some manufacturing contexts, when considering the human cost in suffering attached to a 1% rate of medical error, (58) it is far less acceptable to acquiesce to the status quo. (59) Furthermore we recognize that despite the fact that various studies reported different rates of medical error, the associated costs of medical error are huge, ranging in some estimates from 17 to 38 billion dollars a year. (60) Therefore, based on both the human and financial costs of a high error rate, it is our beginning contention that the tort system is at least partially failing its deterrence function by not operating efficiently to reduce error--i.e., to improve the quality of medical practice. (61) More specifically, and as we shall explain below, the system is failing to induce physicians to invest optimally in preventing injury due to a flawed incentive structure. (62) Given these rates of error, indicating systemic failure, we therefore turn to offering an alternative to traditional tort, outlining the background and then the specifics of the Society for Quality Medicine, a theoretical construct designed to better regulate and deter medical error than the present day tort system.


In 1993, the Clinton Task Force on National Health Care Reform seriously considered the key ingredients for malpractice reform: enterprise medical liability, alternative dispute resolution, caps on non-pecuniary damages, and reduction of damages when the patient recovers monies from insurance or worker's compensation. (63) Of course, the significant difference between a list of ingredients and a recipe is that a large gap exists between identifying the elements of reform and delineating how these elements come together, and it is noteworthy that none of these reforms found their way into the final Health Security Act proposed by the Clinton administration. In its general form, the SQM proposal embraces enterprise liability, alternative dispute resolution, and some limits on recovery, which include primarily caps on non-pecuniary damages, but also elimination of collateral source recovery and calibration of awards to their net present value. We consider each of these elements in turn.


Under enterprise medical liability (EML), health care enterprises such as large hospital systems and HMO's, and not individual physicians, are the named defendants of malpractice claims. (64) The rationale for this method is that many medical errors are systems failures and therefore the enterprise is the entity that can best prevent them. (65) By transferring the legal responsibility for error onto the enterprise rather than the individual physician, the tort system will impose more effective and appropriate incentives on an entity that can efficiently exercise its authority to prevent errors by instituting system-wide quality control measures. Various options for identifying the enterprise have been offered, but most have focused on holding either hospitals or managed care systems liable. (66) The 1993 Clinton Task Force on National Health Care Reform floated trial balloons for a legislatively created system of health plan based enterprise liability, one composed of integrated organizations combining financing with delivery of care, the so-called "health plans." (67) The Clinton plan died, however, in part due to effective opposition from organized medicine and the insurance industry, particularly around issues of enterprise liability. (68)

Enterprise liability is more than a mere theoretical construct, however. The Department of Veterans Affairs (VA), (69) the Public Health Service (70) (including the Indian Health Service), (71) and the Department of Defense (72) health systems all operate under a system of enterprise liability. (73) For example, if a patient of a VA hospital asserts a malpractice claim, the Federal Government assumes responsibility for the negligence of its employed physicians. (74) Removed from the threat of malpractice liability, physicians working for the Veterans Administration are said to be proactive about error detection and disclosure, apology, and rapid remedy. (75) This mode cannot be extrapolated to the general population, however, as healthcare in the Veterans Administration is highly integrated, with virtual "one stop shopping" at many facilities. (76) With the possible exception of non-governmental entities such as Kaiser Permanente and Sharp Health Care in California, (77) this highly integrated and stable delivery method is rare in the United States. (78) As such, the major impediment blocking the broad application of enterprise liability nationally is a dearth of large-scale enterprises that are integrated enough to be charged fairly with the responsibility of enterprise liability. Additionally, integration is a necessary but not sufficient step, for control of care must be achieved after integration. That is, although many entities (university health systems and third party payers, among others) are large enough to qualify as "enterprises," they do not control the delivery of care to the extent that the Veterans Administration or Kaiser controls their providers. (79) Recall that it is not a matter of finding a defendant to designate. If the goal is to reduce error, that designee must have the power to change the behaviors and the cultures that lead to error. Unless and until the enterprises have the right to articulate standards of physician behavior and the power to enforce them, the promise of enterprise liability won't be reached.

To fill this gap, effective malpractice reform must promote the formation of entities that can serve as the enterprise, ones that can effectively examine the root causes of error and correct them. Various scholars have promoted different enterprises to assume liability, but the choice historically has come down to either hospitals (81) or managed care organizations. (82) Neither of these organizations is ideal.

In their present form, most managed care organizations afford little control at all, particularly loosely-integrated "network model" HMOs which contract with, but do not employ, affiliated physicians. (83) Additionally, HMOs might not want to institute best practice standards, as their profit comes from limiting medical care; and this profit-centered approach might not hew to best practices standards (i.e., the cheapest care might not be the best care at all). (84) Employer-sponsored HMOs might be unwilling to assume enterprise liability, as that would mean ceding their treasured ERISA preemption; (85) they prefer placing the burden for malpractice on the affiliated physician's shoulders. At present, some HMO-affiliated physicians are required to be responsible not only for holding down costs, but also for adverse outcomes occurring as a result of missed diagnoses, failure to order tests, or even the normal progression of disease. (86) While physicians might not like this, many HMOs do; accordingly, HMOs would be reluctant participants in EML.

In contrast, Abraham and Weiler have identified hospitals as being better able to monitor, control, and correct risk than managed care organizations. (87) As an example, they point to hospitals' ability to control medical teams and promote better communication with regard to such potential pitfalls as discovering a patient's previous adverse drug reaction. (88) We agree that hospitals themselves are in a position to control the types of physician performance errors that are the result of a simple "snafu," such as operating on the wrong leg, or dispensing the wrong medication due to illegible handwriting, or not knowing about a previous adverse reaction to a medication because of poor communication or record keeping. For example, with regard to medication errors stemming from illegible or misread physician handwriting, some hospitals have recently demonstrated notable success by instituting computer medication ordering systems to eliminate the root cause of misread handwriting. (89)

However, hospitals' mechanisms are not necessarily as robust in correcting more subtle--and perhaps more pervasive--errors. (90) Errors occurring when faulty plans motivate a wrong course of action are more difficult to identify, analyze, and correct as they are often the result of lagging technologies, disputes about best medical practice, and inadequately disseminated data. (91) Certainly, to attack these other more entrenched, complex forms of error, hospitals' continued use of peer review, M&M conferences, etc., has not been convincingly effective, judging by continued high iatrogenic injury rates, as noted above. (92)

The characteristics of an ideal organization to assume enterprise liability also include an ability to enforce meaningful incentives to reduce error. (93) One incentive is controlling access, which has been mostly applied to the context of access to a hospital, i.e., granting admitting privileges to physicians. (94) Adoption of a broad-based EML, it is argued, would make hospitals solely responsible for the liability of medical care of admitted patients, regardless of where the negligent act occurred (e.g., hospital, clinic, private office). (95) Such a regime would theoretically promote a credible and effective deterrence effect, as hospitals could threaten withdrawal or limitation of a physician's individual admitting privileges; therefore a net increase in the quality of care, and with it a reduction in patient injuries resulting from malpractice. (96) In addition, the enterprise accepting liability must be responsible for the malpractice of all affiliated physicians, including patients admitted to multiple hospitals over the course of care and those not admitted to any hospital. (97) Abraham and Weiler postulate that this approach would eliminate the need for physicians to purchase additional malpractice insurance against litigation by patients who are only covered by for injuries occurring in a facility such as a hospital. (98) They contend that there is no problem with this approach, because hospitals can control physicians outside the hospital, much like airlines control pilots flying in the sky and law firms their lawyers in the courtroom. (99) While we admit that this is an appealing notion, we are not sure it is practical or reflective of reality.

In our experience most hospitals have little direct control over affiliated physicians, with the exceptions of salaried physicians in large groups such as Kaiser who are more closely managed, or physicians who are direct employees of a particular hospital. (100) One simple phenomenon driving the impracticality of having hospitals assume responsibility for outpatient events--and one not apt to change much in the near future--is that many physicians admit to more than one hospital. (101) Pilots, by comparison, typically do not fly for more than one airline. Should an outpatient adverse event occur in a doctor's office or private clinic outside of the institution, each of the (fractionally) affiliated hospitals would be justified in disavowing responsibility, and we believe that much litigation will ensue to find loopholes in the contracts Weiler and Abraham envisage for individual hospitals to assume responsibility in this situation. (102) We envision, in contrast, that the SQM will be able to exert such control on independent physicians in all settings, as we will explain below. (103)


Mandatory alternative dispute resolution of medical malpractice claims has traditionally been viewed suspiciously by courts, often being invalidated as an unconstitutional infringement on the rights to due process and trial by jury or as the result of an adhesive contract. (104) As courts and legislatures have over the past few decades relaxed objections to ADR, (105) however, many commentators now view it as preferable to traditional tort litigation for several reasons:

1. Efficiency and Reduction in Cost. (106)

ADR is more efficient, as it requires less discovery, and what discovery occurs is less formal and extensive. (107) If the conflict is resolved through mediation, then the costs of formal hearing time are saved, and disputes that fail mediation and enter arbitration also require less formal hearing time. …

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