Medical malpractice relief: reform and managed care offer cloudy forecast.

A June 19 ABC News/Washington Post poll showed that 67% of Americans now favor federal health care reform, including employer mandates and universal coverage. Despite the public's heightened interest and apparent support of reform, it's unfortunate -- for patients, physicians, and the general public -- that the substantial and costly problem of medical malpractice lawsuits has neither been solved, nor has it become central to the reform agenda in California or the nation.

From a pure business standpoint, physicians, medical groups, clinics, and hospitals all have much bigger economic concerns today than the increasing frequency of malpractice suits, costly settlements, or professional liability insurance premiums. Intense market pressures have made the economics of modern medicine extremely tenuous for providers of health care services.

The fact is that the costs of malpractice litigation are substantial and continue to be passed on to everyone -- to doctors, medical institutions, and the public. It is a problem that the business community has rarely been willing to tackle in any comprehensive way. Meanwhile, economists acknowledge that the indirect effects of rising frequencies and severities of both malpractice and personal injury lawsuits are subtle, but economically staggering -- resulting in higher costs of care (for "defensive" medicine), court costs (to government), legal fees, taxes and premiums for major business insurance coverages (professional liability, health, general liability and workers' compensation).

Most health experts agree that no amount of health care market reform can solve this expensive problem unless there is also a comprehensive reform of the medical malpractice system. Perhaps the most dramatic illustration of the problem is the malpractice-related $89-million verdict issued last year against Health Net, a Woodland Hills-based health insurer.

In the lawsuit, the jury awarded damages to the heirs of a deceased cancer patient who had been refused coverage for a bone marrow transplant. Health Net defended its action on the grounds that bone marrow transplant therapy remains an uncertain and experimental form of treatment which quite possibly would have worsened -- not improved -- the patient's condition. After the patient died of breast cancer last year, her family sued. Obviously, the case is ethically complicated and speaks right to the heart of both health care and medical malpractice reform issues.

Setting aside the complex standards of legal ethics for awarding damages in such a case, consider that the initial award does not include the thousands of dollars in legal fees that this lawsuit certainly piled up (Health Net subsequently appealed and settled the case out of court for an undisclosed amount in May). Of course, by comparison to the initial award of damages, the legal expenses might seem tiny. Yet, Health Net's legal expenses should have easily surpassed $100,000, not including the settlement amount. Meanwhile, the plaintiff's attorney probably earned up to 33% of the final settlement (which legal industry experts estimate was probably between $18 million and $35 million).

Alain C. Enthoven, the Stanford Business School Professor and "intellectual father" of managed competition, was so concerned about the initial Health Net judgment, that in April he mentioned it during a speech on health care reform to members of the California Medical Group Managers Association. He commented that the indirect costs of such a massive judgment for damages would be devastating to everyone. He added that the costs of defensive medicine, medical malpractice, and malpractice-related damage awards are ultimately passed on through the whole health care system and would all continue to grow if left uncontrolled.

Historically, physician organizations -- supported by medical institutions -- have offered the only staunch advocacy of malpractice reforms in both public and political arenas. The Southern California Physicians Insurance Exchange (SCPIE), a not-for-profit medical malpractice insurance company owned by its more than 11,000 physician policyholders, was formed by such an advocacy coalition during the malpractice insurance crisis of the early 1970s.

Insuring physicians, surgeons, medical groups, and clinics throughout California for the past 18 years, the Beverly Hills-based company finds that its physician members feel current health care trends pose greater threats to their professional well-being than malpractice concerns. From a pure business standpoint, physicians, medical groups, clinics, and hospitals (SCPIE began insuring hospitals this year) all have much bigger economic concerns. Malpractice, SCPIE insureds say, is now just one more piece of a much bigger economic puzzle impacting their medical practices.

Today, doctors face decreasing revenues from their various managed care contracts with health plans, increasing health plan patient populations and declining fee-for-service patients. This is especially true for solo, small group, and physician partnership practices in urban areas. SCPIE's risk managers say that these pressures -- combined with the complexities of health plan administration and utilization issues of patients -- have caused greater tension between doctors and patients. Such tension leads to poor communication and is a primary factor contributing to the recent growth in malpractice claim frequency.

Even with the increasing frequency of suits, settlements costs, and professional liability insurance premiums, malpractice increasingly takes a backseat to concerns about medical economics. Thus, intense market pressures have made the economics of modern medicine extremely tenuous for individual doctors and other providers of health care services. So tenuous in fact that a number of SCPIE's larger medical groups report that physician morale is at its lowest point since the malpractice crisis of the 1970s.

However, malpractice coverage (technically called medical professional liability insurance) is still extremely important -- especially in our current litigation-happy American society -- for providing the legal and financial protection needed by individuals and medical institutions delivering health care services. Yet, most reform-minded business leaders have been quite willing to virtually ignore the rising costs - of both this expensive yet essential coverage and the growth of related costs from the increasing frequency of malpractice lawsuits against providers.

Medical lawsuits -- whether against professionals (doctors or other health professionals) or institutions (medical centers, clinics, hospitals or health insurers) -- have increased dramatically throughout the nation during the past three decades. According to an article published in the San Francisco Chronicle last year, not only are there more malpractice cases than ever before, but patients are winning more of these cases with higher awards each year.

The same article reported, for example, that New York averaged one malpractice lawsuit per year for every 100 doctors in practice during 1960. By 1985, that number had grown to 18 suits per 100 physicians -- an increase of 1700%. Malpractice experience in the rest of the nation has been similarly on the rise. In California, the frequency of suits or reported claims for 1992 through 1993 was roughly between 21 and 25 claims per 100 physicians, according to variable data from physician-owned professional liability insurers and independent actuaries.

The problem is not restricted to the U.S. alone. During an international Comparative Health Law Conference at Loyola University in Chicago last October, American, British, and Canadian experts reported that all three nations are experiencing increases in frequency and severity of medical malpractice claims. However, conference presenters also noted that the tort systems of Canada and England have built-in safeguards to discourage the kinds of widespread medical malpractice crises which have occurred in the U.S.

In the early 1970s, California experienced such a crisis. In 1975, the California legislature adopted a tort reform system, the Medical Injury Compensation Reform Act