Liability-by-Contract: A Reform That Would Help Patients

My past several posts have been devoted to improving patient safety by reforming the malpractice system. I have explained the enormity of the problem of adverse medical events, offered principles to guide malpractice reform, and outlined the benefits that a system of liability-by-contract would bring to doctors, the courts, and other stakeholder groups.

Here now are more advantages such a system would deliver to patients and to society at large. (For more details, please consult my Independent Institute book Priceless: Curing the Healthcare Crisis.)

Patients would receive cash compensation for unexpected outcomes without the stress or expense of a lawsuit

The loss of a loved one is a traumatic event. The prospect of filing a malpractice lawsuit is also inherently stressful and traumatic. The compensation system that I have proposed would put doctors and patients on the same side, with only one obligation—completing the paperwork needed to collect from an insurance company.

Patients and their families could self-insure for additional compensation

How much should a surviving spouse receive for the death of a loved one? The decision will, to a certain extent, be arbitrary—especially if made by a legislative body. However, if the amount is publicized in advance and broadly known, families can make adjustments to meet their expected needs. If the amount is too low, for example, families could buy additional life or disability insurance on their own—including insurance under the provider’s insurance contract.

The social cost of a liability-by-contract system is likely to be much lower than the cost of the current system

As many as 187,000 people die each year because of adverse medical events. If the surviving family members of these patients each received a check for $200,000, the total cost would be less than $37 billion. The total cost of the current malpractice system is estimated to be as much as $250 billion, or more than five times as much.

Moreover, the current system involves a huge use of real resources—lawyers, judges, courtrooms, and so forth. By contrast, the check-writing solution involves very few real resources—other than monitoring and administration costs; it primarily involves moving money from some people to others, leaving real resources to be used in more productive ways.

Further, if hospitals were required to pay $200,000 per unexpected death, on the average, the healthcare system would not continue to sustain so many deaths from adverse medical events each year. Hospitals would quickly find ways of reducing their error rates.

Healthcare costs for patients would likely be reduced

Ultimately, the cost of any compensation system will primarily be paid by patients and potential patients. Just as the cost of malpractice premiums is embedded in the patients’ cost of care, the cost of a liability-by-contract system will also be passed on to patients (and their insurers) in the form of higher prices. However, if the proposed system is socially more efficient, patients will see an overall reduction in healthcare costs (as well as an increase in quality and better personal protection against untoward events).

Liability by contract is a socially better way of handling sympathetic cases

Some of the most heart-wrenching cases in malpractice law involve newborns facing the prospect of a lifetime of care. Even if the doctors and hospital personnel committed no error, the parentsare confronted with an enormous burden—in terms of both time and money. The tendency on the part of jurors, therefore, is to have great sympathy for the plaintiffs.

One reason malpractice premiums for obstetrician/gynecologists are so high is that the system is inching ever closer to a system of liability without fault. But if this is the case, why not move there directly and dispense with the lawyers, judges, and juries? The reformed system would take care of the sympathetic cases in an efficient, responsible way.

[Cross-posted at Psychology Today]

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books Priceless, and A Better Choice.
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