An issue that must be resolved under any health insurance policy is the locus of decisions about treatment. There will be times when a patient may want some treatment that the insurance company or health maintenance organization (HMO) will not want to provide. There may be other times when a decision must be made about the amount to spend on care. Such decisions can be made through contract or through tort law. It is possible to specify in advance what sort of payments will be provided through a contract between the patient and the HMO; it is also possible to wait until after an illness occurs and a treatment decision is made and then use tort or malpractice law to decide whether the treatment was adequate.
One question is whether malpractice liability under tort law should apply to managed care offered by employers. Currently, such HMOs are exempt from malpractice liability. Several proposals would extend malpractice by allowing patients to sue an HMO under tort law if they believe that the HMO has harmed them or has unreasonably refused treatment. The proposals would also open to liability the employer who chose the HMO, unless the employer gives up any effort to monitor the HMO and thus control costs.
Such proposals are flawed and would ultimately harm consumers. They would lead to smaller enrollments in HMOs, and those who would be excluded would be the poorer members of society. Many employers would cease offering health care benefits if the proposals passed.
The provision of medical care through voluntary contract promotes efficiency and has other desirable properties. Primarily, it allows people to decide how much they want to spend on medical care. Although it may appear that one needs a certain amount of care depending on one’s health, such is not the case. For many conditions, there are alternative amounts of medical care available, each with a different cost.
One example is the amount of care to be given at the end of life. Some people may want all possible efforts taken to keep them alive; others may prefer to end life sooner. But cost is a factor; it may cost hundreds of thousands of dollars to prolong life for a short time. Some may be willing to spend such an amount, either directly or through higher insurance premiums for a policy that provides such care. But if other people do not want to spend so much, they should not be forced to do so, nor should they be forced to pay for those who do. Allowing contractual freedom is the best way to make such decisions. If we do not allow free contract, then either the government or medical professionals will make decisions best left to patients.
Contractual freedom can also be used to determine the penalties for contractual violation. That is, a contract itself can indicate the nature of the liability of an HMO for failing to provide the level of care for which a patient contracted. If policies providing for increased liability were worthwhile, then some HMOs would offer them and some customers would buy them, without the need for a law. Instead, HMO contracts provide for other remedies–usually, that the treatment be provided. But the contracts do not include tort liability.
The costs of such protection would not be trivial. By one estimate, the imposition of liability on HMOs would increase costs by between 2.7 and 8.6 percent, leading more consumers to choose not to carry insurance at all. Indeed, estimates are that the number of insured persons would decrease by 500,000 to 1,800,000 as a result of subjecting HMOs to malpractice liability. Most of those who would drop insurance are low‐income consumers. We may ask whether consumers would find the right to sue HMOs and employers worth the ultimate price they would pay. Analysis shows that the damage payments consumers might collect are not worth their cost to consumers.
That explains why imposition of liability on HMOs and employers would lead to a reduction in insurance coverage: many would not find the increased benefits worth the amount they would be forced to pay for them. Moreover, because employers might become liable for malfeasance of HMOs, imposition of liability might cause many employers to stop offering plans to workers, again reducing the number of insured consumers.
Proposals to require additional benefits through law, and particularly proposals to require tort liability, have the effect of harming the poor and reducing their access to insurance. Those proposals do so by requiring poorer consumers to subsidize insurance for richer consumers and by increasing the price of medical insurance so that fewer low‐income workers will find the insurance worth purchasing. The proposals make little sense either in terms of economic efficiency or in terms of equity.