The sources of why Americans pay more for healthcare and get less: The litigious nature of America.
The litigious nature of America is one of the most costly burdens on the healthcare system. Moreover, litigation does nothing to fix the problems with the medical system. It only makes the system more expensive, taxing all to create a legal lottery where only a few benefit. It’s not that litigation is necessarily bad. It does recompense those injured by incompetence or negligence.
It would be great if the lawsuits drove change in healthcare quality. That is what supposed to happen when the legal system is functioning correctly. But it doesn’t work that way with doctors. Unlike business, which can adjust with quality improvement processes, the medical system is too fragmented and intentionally disorganized. So change does not occur fast.
Let me explain: when a big corporation is sued and it loses, they can and do change their factories, designs, and train their people to fix the problem. The products we buy have gotten far safer as a result. But products come out of factories designed to make everything the same. They are made by machines run by people who are not the highest paid person in the company.
Now think about your doctor’s office. The highest paid person is the doctor. He or she is also the production line worker. Almost everything around a doctor is designed to make them more efficient. All the staff is there for that reason. Imagine a company where everything had to be made by the management and lower paid workers kept them busy and you will have a good mental image of how a doctor’s office is run.
A doctor’s day is very complex, and like a CEO’s, the problems vary from patient to patient. The doctor must make hundreds of very complex decisions over a day in the office. The doctor can prescribe drugs, but can only knows how they average person and disease will react to them. In a factory, you know precisely how the materials and parts interact. Everything is same and is replicated. This difference is why litigation has failed to improve quality of health care.
Since most Americans do not like government control and they see healthcare as very personal, the infrastructure evolved around a small business model. So even when a need for change is recognized, it is hard to ensure that the change has actually occurred across hundreds of thousands of independent businesses and doctors.
Thus, litigation has a negligible effect on improving the quality of health care, but it has a huge effect on driving its cost, as well as diminishing quality. For example, a survey of Pennsylvania doctors in 2001 found 72% of them reported postponed the purchase of new equipment or hiring new staff due to malpractice insurance costs.
The cost of defending even a frivolous suit can be half a typical practitioner’s annual pay. Worse, by 2000 more than half the jury awards for malpractice were over $1M. When this happened, half was typically taken in legal fees in the form of contingency fees, court costs, expert witness fees, and other overhead costs that captures lots of detailed costs like fees for making photocopies. Moreover, studies indicate that patients receive no payment in 70 percent of claims. So litigation is hardly helping the few patients that have a claim.
But litigation costs do add huge overhead costs to a doctors practice in the form of malpractice insurance. Amazingly, there is very little cohesive data on this and it varies state-to-state. One thing is for sure, they pay more in states where litigation is unchecked by legal limits. Annual premiums of $200K to 300K are not uncommon. That means that for every dollar that goes to pay the doctor, about a dollar goes to pay the insurance company.
The effect of litigation through these costs has been to diminish heath care quality. They have demolished the morale of the profession. Wouldn’t yours be too be too if you’d seen insurance take almost half your income over the last couple of decades. The risk-to-pay ratio also means that it hardly pays to be a General Practitioner. Only 17% of students entering medical school intend to become GPs. Why do this when the additional year or two in school to become a specialist means they can increase their annual income by double, triple, or even more. A shortage of GPs drives rates up.
OB/GYNs all over the country have stopped delivering babies because they can’t afford the insurance to perform these procedures. This is one reason why America’s infant mortality rate ranks among that of third world nations. More than 60 emergency rooms in California have closed over the past 10 years — six of them in the past year. So more people will die because they can’t make to an open emergency room. Cross the country to New York and another sign of the crisis is the St. Vincent’s Hospital filing for bankruptcy. It’s the largest Catholic hospital in the state with $1.6B in annual revenues. Yet it lost $144M and they were found to have overstated earnings.
How can this happen when healthcare is fastest growing part of America’s economy? As we have seen part of the answer lies on America’s legal system. It is a system that contributes to higher costs and lower quality of healthcare.
In the next piece, An Insurance Based Infrastructure, I examine how health insurance contributes to these issues.