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The tort system is hideously inefficient. According to the
Tillinghast-Towers Perrin numbers I cited last week, less than half
of the $246 billion that it consumed in 2003 went to compensate
victims of misfortune, because more than half was eaten up in
administrative and legal costs. Why do I bring this up again?
Because a representative of the trial bar called to protest that
"there are no real numbers on this stuff," and because there's a big
and interesting question that my last piece didn't get to.
First, what about the claim that there are no "real" numbers? In
October 2003, the scrupulously cautious and nonpartisan
Congressional Budget Office did a report on the tort system. It
cited the same Tillinghast data that I used, calling them the most
comprehensive available. The CBO generally shies away from reaching
policy verdicts, but this time it came close. "The current tort
system seems to be an inefficient way to compensate victims," it
stated.
Prominent micro-economists, such as Kip Viscusi of Harvard, also
regard Tillinghast's survey as the best available. Patricia Danzon,
an authority on medical malpractice at the Wharton School, concludes
her book on this branch of the tort system by saying: "[C]ompensation
can be effected more cheaply and arguably more equitably through
first-party health and disability insurance, which operate on lower
overhead, pay in a more timely fashion, and pay all victims without
regard to cause of the injury."
So the trial bar's "no real numbers" claim is nonsense. The direct
costs of torts (lawyers, administrators) are out of all sane
proportion to the direct benefits (compensation for victims). But
that leaves unanswered a different question. What of the tort
system's indirect consequences?
These indirect effects include both costs and benefits. The costs
include the possibility that companies may waste time on procedures
that serve to fend off lawsuits rather than serving consumers, and
that this may distract them from the innovation that drives the
economy forward. The best known example is the "defensive medicine"
that President Bush likes to invoke. Doctors order up expensive
tests to protect themselves from litigation.
But the tort system creates an indirect benefit as well, and Bush
would be a better advocate of tort reform if he had the honesty to
acknowledge it. Thanks to the trial bar, companies may produce safer
products.
How to weigh these costs and benefits? The first thing to be said is
that the costs can be substantial. Before he became a Bush official,
Mark McClellan co-authored a paper with Daniel Kessler of Stanford
in the Journal of Public Economics; it found that states that
enacted tort reform reduced spending on hospital patients with heart
complaints by 4 percent, with no adverse health consequences.
We don't know if hospitals could achieve similar savings across the
board. But 4 percent of a health system that costs around $1.5
trillion a year implies a saving of $60 billion annually. Add in the
possibility that some of those resources could be used to come up
with fresh treatments or management efficiencies, and the gains
could be bigger. Add in savings from other industries, and you start
to get an appreciable boost to living standards. This would mean,
among other things, that more people could afford health care.
But what about the safety gains we get from the existing tort
system? Here it really is true that no measure exists, because
companies don't publish numbers on safety expenditures. But it seems
pretty clear that, however big these benefits are, intelligent tort
reform could make them bigger.
The problem with the current tort system is that it's unpredictable:
Doctors or companies can't foresee what they might be sued for, or
how much the damages will be, so they don't do as much as they
should to change their behavior.
This is almost certainly true of health care: According to a 1999
Institute of Medicine study, medical errors injure perhaps 1 million
patients annually -- hardly evidence that the tort system is doing a
great job of promoting safety. Other examples are even clearer.
Asbestos companies had no idea that their product, deemed safe and
legal by regulators, would one day trigger multimillion-dollar
lawsuits. So how could these unanticipated lawsuits ever have
changed their behavior?
At a minimum, therefore, the tort system should be made more
predictable. There should be a short statute of limitations
(Wharton's Danzon suggests three years) to prevent asbestos-type
lawsuits and a schedule of awards for different types of injury.
But, given the direct and indirect costs of the system, making it
more predictable does not go far enough; it needs to be shrunk
substantially. Government regulation, particularly regulation that
forces disclosure of product safety records, can protect consumers
more efficiently. If Web sites told patients which hospitals are
most error-prone, these hospitals would have a business incentive to
be safer.
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