Reforming Medical Malpractice

The President finally made some concession to reforming the legal process of medical malpractice claims. Surprising, since the 3 bills before the House and 1 in the Senate, each over 1,000 pages long, do not say 1 word about this. Unfortunately the reason usually touted for reforming this, that is, defensive medicine, is wrong.

The impetus for reform seems to be the supposed savings from correcting the overutilization of medical testing. As I previously explained in my blog "Econ 101 and the Health Care Debate," the savings that would result from this are small. So, as much as I hate to conceed any argument related to this issue, that is not going to help.

So, why should we reform malpractice? Well, the simplist reason is that 60% of the malpractice premiums doctors pay goes to attorneys, and 40% goes to the patients who have supposedly been harmed by malpractice. That's really all you need to know.

Attorneys frequently claim that any limits on filing or damages in this type of tort case are unconstitutional, and that all citizens have the right to sue anyone for anything, anytime. But this ignores the fact that, historically, the rules for filing and proving cases has changed multiple times in the past. Under the current rules in most states, filing a case for a plaintiff is very cheap. But that simple act then generates huge costs in trying to defend the case. In fact, about 80% of cases that go to court are won by the physician. Many cases never come to trial, but the cost of reviewing records, getting depositions and retaining expert witnesses is substantial. So most of the money goes to defense attorneys. Some changes that require plaintiffs to have reviewed medical records and had understandable opinions from an expert witness before the case is even filed would save huge amounts of money. Expecting a jury of "peers" to make fact decisions on complex medical testimony is not very realistic.

But from the physician's point of view, there are multiple other factors that should be of more concern. The system is simply unfair. Any physician can be sued regardless of the facts and the cases drag on for years. Frequently in the past physicians have been willing to settle just to be done with the case rather than risk an unpredictable jury trial. On the other hand, a rare case may settle or be decided for a large amount. Thus, since it is cheap to file a case, this causes a "lottery" mentality for the plaintiff's attorney. Meanwhile, the physician's reputation is suspect, applications for credentials may be denied and the cost of malpractice insurance goes sky high.

The threat of a claim causes a very real barrier between physicians and patients. To the degree that defensive testing is done, it leads to lack of trust. Even more significant is the fact that physicians and hospitals are afraid to report any adverse events for fear of liability, even when doing so may help to identify and correct systems problems that could prevent errors. Most patients, and some attorneys, do not seem to understand that a bad result in itself does not mean malpractice. This is very different from most accidents or product liability cases for the simple reason that patients come to physicians because there is already something wrong.

Consider the economics of malpractice for a primary care physician. Most physicians will see about 100,000 patient visits in a career. The current average reimbursement for a visit under Medicare varies with location but is about $56. So, if a physician does a good job, he or she will get a thank you and a check for $56. But if there is 1 bad result among 100,000, the penalty could be as much as that doctor could make in an entire career. To argue that that is what insurance is for, misses the point. And the current premium for a primary care physician in this area is $40,000 per year. Since the average salary is about $150,000, if this premium were less it would be a substantial improvement in income. Some specialties, such as obstetrics, could have insurance premiums of over $100,000.

Reforming the system would be more just for everyone, patients, doctors, even plaintiff's attorneys.

Health Care as a Right

Much has been made of the concept of health care as a "right." This is an emotionally charged issue because it seems to imply that, if it is a right, then we must follow a certain course of action, such as a national health care plan. If we have a right to "life, liberty and the pursuit of happiness," then denying someone health care might certainly lead to loss of life.

However, if health care is a right, then so are food, clothing and shelter. Yet there is no outcry to nationalize agriculture, even though some people go hungry and some eat too much. But, we do have the FDA and package labelling.

There is no call for a national panel of experts to decide which style will be in fashion this year or what Donna Karan can charge for a dress. But, we do have content, country of origin and care instruction labelling.

There is no proposal to nationalize the construction industry even though some people are homeless and the housing bubble set off our current economic crisis. But we do have Section 8 housing and building codes.

Although we usually think of our rights as "inalienable" or "God given" or "self evident," in reality each right is relative to all other rights. Simply labelling something does not either compel or preclude a certain course of action. After all, you don't have the right to tax me so that you can pursue happiness.

Pay for Performance

One of the ways proposed to limit costs in health care is to switch from the current "pay for service" to "pay for performance." The idea is that physicians are compensated for doing things and that this is a perverse incentive to do unnecessary testing and procedures. The theory is that by paying for outcome, it eliminates this disincentive.

This concept is flawed for several reasons. In the first place, physicians rarely are compensated by the amount of testing they do. The equipment for MRI's, CT's, blood work, etc., by and large is owned by hospitals or other entities. The "Stark laws" actually prohibit physicians, and even their families, from owning the entities at which most of the testing is done. Surgeons are compensated by the procedures they perform, but our long experience with managed care has shown that the number of denied procedures is small. Too small, in fact, to justify the administrative expense of going through the approval process.

A more serious flaw is in the statistical parameters needed to reach probability. Most primary care physicians will have about 3500-4000 patient visits per year, and of course, these are in multiple categories. To reach a statistically significant number of visits even for a common illness such as diabetes, would be difficult for an individual physician. And of course, each of those patients comes with a pre-existing set of risk factors that needs to be "risk adjusted" to get a valid conclusion. Assuming that all physicians have a certain amount of difficult patients that will "even out" over time is simply not valid.

If there were a pay for performance rule, the incentive would be to avoid taking care of the sickest or most uncooperative patients. Not exactly a very desirable situation.

Also, the amount of money in the physician pool is much smaller than most people realize. About 20% of the health premium dollar goes to "physician and clinical" services. That includes the amount for most outpatient testing. And physicians have to pay overhead expenses, which are frequently more than 50% of payments received. So, even in the most optimistic scenario, a 10% savings due to pay for performance would lead to a 20% or more reduction in physician income. If penalized to this extent for something essentially beyond one's control, most physicians would not cooperate or simply quit altogether.

Last but not least, the idea that physicians somehow do unnecessary things for the sake of maximizing income is insulting. Granted that there are 600,000 physicians in the US and there are bound to be some who are dishonest, but the number of physicians involved in fraudulent activity is very small. To base a reimbursement scheme on this premise is foolish.

The Death Panel Controversy

Much has been made of the "Death Panel" provision in the current health reform proposals. The actual provision, at least as has been revealed to date, was to give reimbursement to physicians for counselling patients about end of life decisions. Why this needs a separate payment schedule from any of the other things we counsel patients about is another discussion altogether. This has obviously been exagerrated and there is no question that it has been used to score some political points. Big surprise there. The real focus, however, should be on why this issue arose in the first place.

Human nature being what it is, if you make any proposal on an important subject, keep the details hidden in 4 separate House and Senate bills each over 1000 pages long, have many congressmen who admit they don't even read most of the bills they vote on, and then insist that it come to a decisive vote within 2 weeks, you are going to raise a little suspicion. Rumors and inuendo are the least response one could expect. Trying to evade facing the issue and labelling protestors as a mob of undemocratic stooges will only make it worse.

Let's be honest. The thrust of the current proposals is mainly to limit health care costs. No matter how you parse that, it means that some things are going to be cut. When you spend a lot of time talking about how much money is being spent in the last year of life for Medicare patients, it's natural to assume this a place where cuts will occur. In fact, that is exactly what has been done in England, where the euphamistic acronym of NICE has been applied to a panel of "experts" who decide what treatments are worth the money spent per "quality life year."

How anyone thinks they know what you might consider to be a quality life year seems to be the height of arrogance. Consider the dilemma this presents to a physician. If I decide that I think this is the last year of your life and then withhold treatment, then it likely will be the last year of your life. The common expression for that is "self-fulfilling prophecy." Any honest physician will admit there are patients who survive and live long lives despite expectations. Does that mean that there are no limits? No. Only that you and your family decide rather than a bureaucratic panel.

And things change over time. Recall that Jacqueline Kennedy had a premature baby die while her husband was President. Here you had one of the richest and most powerful people in the world, yet the best medical science could not save that baby. If there were a NICE panel at the time, surely Neonatal Intensive Care would have been on the cutting floor. But today many of these babies are saved and their intellect and accomplishments match their age groups. The only reason this happened is that there were no artificial limits placed on neonatal care.

So, there is nothing surprising about this controversy. If people can express their concerns, regardless of how diplomatically they do it, then the situation can be clarified. Denying that only makes it worse. The lesson should be to have more transparency about what else is hidden in each of those 1000 pages.

Econ 101 and the Health Care Debate

Medical training leaves little room for elective courses and I have to admit my exposure to economics is limited to Econ 101. But did everything I learned there stop being valid?

Consider the idea that there are billions of dollars in savings if we limit "unnecessary" medical tests. If you get an MRI, you will get a very real bill for about $1000, which you will promptly pass on to your insurer, which then has to write a check. The current proposals for reform in health care seek to limit the use of MRI's by having some form of guideline developed by an expert panel, which would reduce the number of MRI's that are done. It seems to be common sense that the health system can save $1000 for every MRI not deemed necessary.

But most community hospitals have only 1 MRI machine. That machine is there whether you do 1 study every day or 100. The special room for magnetic shielding and the technicians running the machine all have to be there, essentially 24/7 to be available for emergencies, regardless of how many studies are done. So this becomes a fixed vs. variable cost problem. The fixed costs are high, and in this case, the variable costs are basically limited to how much electricity it takes to run the machine and the $30 the radiologist will be paid to interpret the study.

So, in reality, the hospital saves essentially nothing on each study that is not done. That means that the price charged per study has to go up. Or, as is usually the case, since reimbursement is limited by fixed allowable charges from Medicare or private plans, the lost reimbursement has to be made up from some other revenue source. This is the cost shifting that is the bane of our current insurance system. The only way to avoid the fixed costs here is to not have an MRI at all.

Now I am not arguing that doctors should order tests indiscriminately. But doctors order MRI's because they give you a lot of information, and that helps to improve the accuracy of diagnosis, and ultimately the timeliness of treatment. There are some MRI machines that are owned by private medical groups, but the vast majority are owned by the hospitals. There is rarely any direct financial incentive to the doctor for the test to be ordered.

The same is true for almost all "high tech" medical devices and procedures. The fixed development and acquisition costs are high and the variable costs are low. Most hospitals have 2 blood analyzers, one kept primarily for backup purposes. The cost for the chemicals to do each test literally is in cents. Many hospitals have 2 CT scanners, but even there the number of studies would have to be reduced by 50% to be able to eliminate a machine. Not likely.

So, how could we save money on high tech medical tests? Let's compare the situation to other consumer products. When DVD players first became available, it would literally cost $1000 to buy one. Now a better machine is available for $49. How did that happen? It wasn't because we limited access, but rather because we did not limit it. After the initial development costs were recovered, the marketplace dictated that the cost would fall. If the government plan limits the use of MRI's, it will simply guarantee that the cost of an MRI will always be high. Of course, not every living room will have an MRI, but in a free market, the costs should drop substantially over time.

In the US, we basically have not had constraints on buying high tech equipment, as there have been in virtually all other countries with national health plans. This means that the fixed development costs for medical advances has to be recovered in the American market. In turn, after those costs have been covered, other countries can buy the technology at a much cheaper cost, sometimes not much more than the variable cost of production. If the American market did not exist, it would be the end of new developments. The rest of the world has its limited access to most technology only because the American market subsidizes it.

There are 4 conclusions to this scenario. One, we cannot really save any substantial money by artificially limiting most medical tests and procedures. Two, if we do limit them, the development of new medical technology will probably cease. Three, the only way to lower the cost of medical technology is not to have us use less, but to have other countries use more. Do you think there would be no foreign market for medical technology? Ask the hundreds of thousands of foreigners who come to the US every year to buy it out of their own pockets.

The fourth conclusion is perhaps the most significant. When detailed, categorical analysis is done of the difference in costs between the US and other countries, it is not due to poor quality, waste or unnecessary tests. It is basically technology. The answer is not to deprive our citizens of the advances in technology, it is to get other countries not to deprive their citizens.