Wampum

In my last post, I described the methodology and general findings of a joint Harvard School of Public Health and Brigham and Women's Hospital study of medical malpractice claims. The study was published in the May 11, 2006 edition of the New England Journal of Medicine.

While the study showed that the results of the tort system were generally accurate, one finding jumped out at me. The study found that 37% of the 1452 medical malpractice claims reviewed did not have evidence of a medical error.

That is a disturbingly high figure. Evidence of medical error is an essential element of any malpractice case and, apparently, it is lacking in nearly two out of five claims made.

The key questions are why are so many such claims brought, and what sort of reforms are needed to reduce the number? If the study is accurate, and I suspect that it is roughly so, reform is clearly needed. The litigation costs of resolving a large number of cases lacking evidence of an essential element is quite high and no doctor or patient should be put through the meat grinder of the litigation system if an essential element of the claim is absent from thr outset.

As to why a large number of claims are brought despite lacking evidence of medical error, the common answer given by tort reform advocates is that greedy trial lawyers push people to bring such suits so that they may extort huge sums of money from insurance companies using as leverage the threat that juries will hand out huge verdicts willy nilly.

That explanation has never made sense to me because the economic incentives for the lawyer seem all wrong. The NEJM study provides empirical evidence that the common explanation is not true.

Let's look carefully at the economics of bring medical malpractice suits without evidence of medical error based on the findings of the NEJM study to see if the common explanation makes sense. The economics in question, of course, are from the plaintiff's lawyer's perspective because in the common explanation, he or she is the key actor driving the claims.

There are four reasons that the economics of bringing medical malpractice claims without evidence of medical error do not make economic sense from the lawyer's perspective. First, such claims are likely to lose. The Harvard study found that such cases lose 72% of the time. When a lawyer works on a contingency fee basis and loses the claim, he or she receives no compensation for the time invested and, indeed, usually recovers none of the expenses incurred in preparation or presentation of the claim.

Secondly, in the minority of cases in which compensation is paid despite the absence of medical error, the amount of compensation is far lower than in cases with evidence of error ($313,000 as against $521,000).

Third, insurance companies are far more reluctant to settle cases with no medical error. Twenty-three percent of claims without evidence of medical error went to trial while only 10% of claims with evidence of error did so. All a lawyer has to sell is his or her time. Cases that go to trial take up more time thus reducing the profit potential of such cases.

Finally, for the same reason as above, non-error cases incur more expenses than cases with demonstrable error because such cases are more likely to incur the additional expenses associated with a trial. Trust me, trial testimony by experts, and high quality demonstrative aides are expensive.

Is bringing med mal suits in the absence of evidence of medial error profitable for the lawyer? Let's take a close look at the numbers from the study. The income to the lawyers bringing non-error claims is a contingency fee, let's say 40%, on the cases that do receive compensation.

The study found that 37% of 1452 claims lacked evidence of medical error. That is 537 claims. Plaintiff's lose 72% of those claims and plaintiff's lawyers receive no fees from those. The 28% of such cases in which plaintiff's received some compensation amounts to 150 claims.

Those claims average $313,000 of compensation. Total compensation paid on those 537 claims lacking medical error would be about $47,000,000. That sounds like a lot but it is not. It amounts to about $87,500 per claim. A group of experience medical malpractice plaintiff's attorneys noted in 2000 that they would not touch a med mal plaintiff's case if the expected recovery was less than $200,000. They would reject the 537 cases out of hand.

At a 40% contingency, the total attorney's fees generated by those 537 claims is $18,780,000. That is $35,000 per claim. $35,000 per claim may also sound like a lot but it is before expenses are subtracted.

The study found that administrative expenses for cases that went to trial averaged about $113,000. For cases settling before trial the average was $42,000. Those averages include the expenses for both sides. Let's assume that plaintiff's expenses are half of the total or $56,000 for trials and $21,000 for settlements.

The study found that 23% of claims with out medical errors went to trial. That is 123 claims. Plaintiffs lose 79% of the trials (according to the study) so a plaintiff's attorney would have to eat the litigation costs associated with 97 trials. At an average of $56,000 of expenses per trial, the total lost expenses associated with trials is $5.4 million. The plaintiff's lawyer would also have to eat the expenses of 290 claims that were resolved prior to trial without compensation being paid. At an average of $21,000 per claims, that amounts to another $6 million.

Once expenses are subtracted, plaintiff's lawyers bringing non-error claims would receive compensation of $7.38 million for bring 537 claims for an average of a little under $14,000 per claim.

As noted above, all a lawyer has to sell is his or her time. How much time would a lawyer spend on those 537 claims? One judge estimates that it takes 500 hours of preparation time for a medical malpractice suit. Let's assume that is for a trial and that settled cases average 300 hours of attorney time (in my experience with complex, high stakes, important, non-med mal cases, both estimates are too low).

If those estimates are accurate, then lawyers bringing non-error claims would have 61,500 hours in the 123 cases that went to trial and 124,200 hours in the cases that did not go to trial. That totals to 185,700 hours to handle all 537 claims. With plaintiff's attorneys netting $7.38 million from 185,700 hours of work, they are earning less than $40 per hour for their efforts. At 2000 hours per year, that would result in $80,000 gross income for the lawyer.

That of course, is before the lawyer pays their other expenses such as rent, bar dues, employee salaries and benefits, and the rest. If rent is $1,500 per month, the lawyer has one employee (a receptionist/secretary/paralegal) earning $2,000 per month year, and utilities, bar dues, business license, library costs, malpractice insurance, telephone, computers, office supplies, and other costs adding $2,000 per month, expenses would eat up about $66,000 per year. The lawyer would then net $14,000 per year or about $7 per hour.

I know of no lawyers who can make a living charging $40 an hour for their time, even for routine type of work, much less for complex litigation such as medical malpractice.

Unless you think that there are a lot of lawyers prepared to sell their time for $7 per hour, the NEJM study suggests that the reason 37% of claims had no demonstrable medical error must be something other than the common explanation. I have an idea what that other reason is but that must await my next post.

Update: I have now reviewed the full study. Many thanks to the person who sent it to me. You know who you are.

The figures cited above for litigation expenses are actually just on the defense side. They are described in the study as "administrative (or overhead) costs associated with defending the claim" (parenthetical in original). I am not sure whether or not those costs include attorney fees. Nonetheless, my guess of plaintiff's out of pocket litigation expenses of $56,000 for claims tried to verdict and $21,000 for claims settled is, based on my experience, quite reasonable.