October 24, 2011 2:18PM

Libertarians, Medical Malpractice and Contract

Last week, as Michael Cannon has noted in this space, Cato published Shirley Svorny’s partial defense of the medical malpractice system, and ever since, knowing my interest in the subject, people have been asking me what I think of it. There is of course no consensus view among libertarians on how to weigh the many important empirical factors, disputed and otherwise, at play here. (For example, I am more alarmed than Svorny at the large volume of claims filed against blameless doctors, and less reassured than Svorny that (p.3) “the dollar amounts [in awards and settlements arising from unfounded cases] are smaller than they would be for similar injuries that result from physician negligence.”

But the empirical disagreements can mostly await another day. To the extent libertarians have made one durable contribution to the med‐​mal debate, it is to uphold the role of contract — a principle advanced by Richard Epstein in his pioneering Medical Malpractice: The Case for Contract and more recently by Michael Cannon in a paper last year. In brief: most medical interactions occur after a point at which the patient, or someone authorized to make decisions on his or her behalf, could have made a contractual election on how to specify compensation if at all in case of medical misadventure. In modern health care delivery, this would mostly not have to take place at the last minute on arrival for treatment (“Could you set this broken arm? I promise not to sue you for more than a half million if something goes wrong, nor for anything short of gross negligence, and yes, I agree to arbitration.”) Instead, matters could proceed far more efficiently if negotiated wholesale beforehand through health insurers or other intermediaries: as part of your health plan, you would get a set of rights in case of dispute, pre‐​negotiated with doctors and other providers, which might involve damage specifications, arbitration procedures, submission of specialized fact issues to expert panels, and so on.

The one signal fact about the American court system is that, paternalistically, it generally refuses to enforce contractual arrangements of this sort. No matter how well spelled out in advance, courts will not enforce the disclaimer of liability or apply the agreed‐​on damage limit. You will instead get the malpractice coverage that courts and lawmakers deign to prescribe for you, not the coverage you and your medical provider might have chosen yourselves.

What sort of medical liability coverage would the market furnish were people free to contract for it? A very different sort, I believe, than the pseudo‐​insurance package now foisted on the parties. While a genuine private insurance market does indeed exist to furnish coverage against accidental injury, it virtually never provides unlimited payouts. Instead, it specifies a maximum — the “policy limits” — even though that means some unlucky claimants predictably will not recover their full losses. It also tends to avoid coverage triggers whose subjective or scientifically open‐​ended nature leaves many cases open to dispute (could obstetricians have avoided this case of cerebral palsy?) And, significantly, private insurance markets virtually never promise financial payouts for pain and suffering, as distinct from lost wages and other out‐​of‐​pocket expense. Indeed, if there is a single example from any fully private insurance market of a contractual promise to provide cash compensation for pain and suffering, I am unaware of it. Even in cases where health buyers have enormous negotiating clout — say, in dealings between the UAW/​Big Three and Detroit‐​area health providers — I believe one has not seen contract coverage for negligence‐​based pain and suffering. And that points to an important empirical truth: the ex post cost of providing that kind of insurance greatly exceeds the ex ante value of the coverage to consumers, who quite rationally prefer to negotiate instead for other sorts of coverage expansion, lower copays and so on.

Like others, I grow impatient with lawmakers as they struggle with inevitably arbitrary lines on whether the pain‐​and‐​suffering component of their obligatory med‐​mal “insurance” should top out at $500 thousand, $1.0 million, or $1.5 million. Were they to step back and allow a market to work, I think we would soon see a distinctly un‐​arbitrary figure emerge: $0.00.