July 18, 2005
On Wisconsin! (In Defense of Ferdon)
Posted by Christine Hurt

As I mentioned a few posts below, the Wisconsin Supreme Court held last week that a $350,000 cap on noneconomic damages in medical malpractice negligence actions was unconstitutional under the Equal Protection clause of the state constitution.  The opinion left viable the same cap for wrongful death actions.

Bloggers have already looked askance at the opinion:  see Ann Althouse and David Bernstein.

Let me present the other side.  In this opinion, the majority analyzes the claim from an equal protection point of view.  The cap treats two groups dissimilarly:  med mal victims whose damages are greater than the cap, and victims whose damages are lower.  The majority shows that statistically the victims in the former group are disproportionately children because of their greater life expectancy.  However, the majority acknowledges that these groups are not suspect classes of individuals and the rights involved (Wisconsin constitutionally-protected right to a trial, right to a remedy) are not fundamental.  So, the majority acknowledges that rational basis scrutiny is the proper level of scrutiny.  Here's where the fun begins.

The majority strikes down the cap under rational basis review. 

The dissent argues that because of this result, the majority must have been using intermediate review in rational basis clothing.  As an outsider not in love with the logic of Con Law jurisprudence, I find it interesting to read a jurist come so close to saying that legislation cannot fail under rational basis review.

So, how does the majority find that the cap is arbitrary?  The majority looks at the "findings" section of the legislation and tests these findings.  The first is that caps will decrease medical malpractice premiums and that lower premiums will lower overall health care costs.  Putting aside whether lower premiums would lower health care costs, let's focus on that aim.  The court focused on whether the noneconomic damages cap was rationally designed to further that goal of decreasing medical malpractice premiums.

The majority looked at many sources, including the Wisconsin Commissioner of Insurance, which reports every two years on whether the 1995 cap has had an impact on malpractice rates.  I cannot find a copy report on the Wisconsin website, but the majority cites the report as saying that the caps have not affected med mal premiums.  The opinion cites themost recent version of the Report as stating "it would be difficult to draw any conclusions from premium numbers based solely on the enactment of Wisconsin Act 10" and "no direct correlation can be drawn between the caps enacted in 1995 and current rate changes taking place in the primary market today."  The court, finding no correlation, finds that "it is not reasonable to conclude that the $350,000 cap has its intended effect of reducing medical malpractice premiums" and concludes that the cap "is not rationally related to the legislative objective of lowering medical malpractice insurance premiums."

I don't teach Con Law, but I do teach Torts, and I spend one day on the tort crisis issue.  I challenge my students to argue pro and con with evidence, not generalizations.  In preparing for that class, I read the empirical data.  I read the law review articles that analyze the empirical data.  The empirical analyses that are important here are the analyses that purport to find some correlation between damage caps and malpractice premiums.  Everything I have looked at says "no."  The GAO said no.  Numerous law review articles say "no."  The most recent study by Bernard Black, Charles Silver, David A. Hyman, and William M. Sage of claims and premiums in Texas (1988-2000) seems to conclude that the post-1999 spike in premiums was not related to any accompanying increase in med mal payouts.

Prof. Bernstein, however, wonders where the line is to determine what is rational.  "The ceiling (on non-economic damages) won't have a large effect? Perhaps. Won't have a noticeable effect? It's possible. Is not "rationally related?" Only because the court seems to define "rationally related" as "having a guaranteed large effect."

I don't agree with the characterization that the majority claimed that the legislation would have to have a "guaranteed large effect."  The majority concluded that the legislation had no discernible effect on its stated goals.  Prof. Bernstein seems to argue that the legislation would be rationally related if the legislation would not have even a "noticeable effect."  Is that the level of rational basis scrutiny?  As long as the legislation has or could have an effect greater than zero, even if not noticeable?  That is quite a bit of deference there.  I would hope that rational basis scrutiny would require some estimation that the legislation would effect its goals to a noticeable degree.  If the Con Law scholars out there say "nope," then I'll just shake my head and be quiet.

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Comments (17)

1. Posted by Paul Stancil on July 18, 2005 @ 13:31 | Permalink

One weakness in Black's dataset is that he did not have access to defense costs as to "zero payout and small payout claims," because the closed claims database did not include that information. Although I agree in general outline with the paper's approach and conclusions, I'm interested in whether there's a "if all you have is a hammer" problem here.

From my perspective, at least, the overarching questions should be: (1) whether there is a strong correlation between the overall costs associated with medical malpractice claims and malpractice insurance rates; and (2) if there is, whether the relationships make sense (if there is, indeed, a serious malpractice problem, then it would seem appropriate for there to be lots of claims that cost bad doctors a lot to defend).

As to #2 -- I have no clue. But as to #1, I wonder if the missing data on cost of defending small- and no-payout claims isn't essential to a complete analysis. If I am an insurer setting rates (or asking a regulator to set them where I want them), my projections must take into account the total costs associated with my enterprise, including what I believe is a significant line item for many insurers -- the costs of defending meritless lawsuits.

If, for example, medmal claims typically make it past the "motion to dismiss" stage -- a stage that doesn't really even exist in Texas -- the costs of defending a typical no-payout or small-payout claim may be pretty darned substantial. Winning on summary judgment or settling small at the completion of discovery isn't a whole lot cheaper than trying a case.

Everything Black et al. cite in their paper is worth considering, and the correlation between insurance rates and "excessive" medmal costs is not as strong or as easily explained as the AMA would have us believe. But the data in the closed claims database may be missing a component essential to the calculation.

If the costs associated with defense of low-value claims are high, then the question becomes whether and to what extent changes in the liability regime result in changes in the number of such claims. My intuition is that there is likely to be something of a "go ahead and roll the dice" phenomenon among marginal claimaints and their attorneys if you lift liability caps completely, but I don't know how big that effect would be.



2. Posted by Kate Litvak on July 18, 2005 @ 15:15 | Permalink

Christine,

You vastly misunderstood the point of the med mal paper by Black at al. Yours is a rather common misunderstanding, so I want to correct it. Black at al. made *no findings* on whether the imposition of med mal caps reduces insurance premia. Absolutely no such findings. All they found is that the increase in premia in the 90s is not predicted by the increase in payouts. There are lots of insurance-market explanations to this, and price gouging by insurance companies is the least convincing one because the largest premia increase was found at the doctors’ cooperative insurance, which is a nonprofit.

Again, they have *no data* supporting the finding that the imposition of caps won’t reduce premia. At the extreme, if the med mal damages were capped at zero, med mal insurance premia would go down to, well, zero. Bernie goes out of his way to point this at every talk he’s given on this paper.

It’s very frustrating that so many people take one piece of information and draw conclusions that are completely unsupported by it. Most of these people also happen to have strong political biases, but some just honestly don’t understand statistics.

By the way, I would never, never refer students to a law review for empirical data. Law reviews almost never contain original empirical research, and whatever they publish doesn’t go through a peer-review process, so you never know whether any real robustness checks were performed. Even “analyses” and “summaries” in law reviews are mostly done by people who are incapable of original empirical research and hardly capable of sophisticated understanding of original research conducted by someone else. I would refer interested students to publications by health economists and away from quacks populating law reviews.


3. Posted by Christine on July 18, 2005 @ 15:32 | Permalink

Kate, thanks for that clarification. For those who haven't read the paper, in Section V, the paper states "The most important findings in this study are negative. For Texas, the frequency of large paid medical malpractice claims, and the per claim cost of these claims, were relatively stable from 1988 to 2002 when one controls for inflation and population. The most important changes we find are that defense costs rose and smaller paid claims (less than $25,000 in 1988) shrank in number. Bur rising defense costs cannot explain the premium spikes that occured in 1999-2003)."

So, the Wisconsin legislature is trying to prove that caps make insurance premiums go down, which presumes that uncapped, high damages force premiums to go up. All this data finds is that premiums went up in Texas without an increase in high damage awards. I don't think the data is irrelevant to the question, though.

What would you posit was the primary cause of the premium spikes? Insurance cyles? Market downturn affecting insurance companies' investment rate of return?


4. Posted by Christine on July 18, 2005 @ 15:35 | Permalink

And just to clarify, I characterized the paper as just stating that there was no correlation between premium spikes and large payouts. (I did lump it in with specific med mal cap/premium studies, which was misleading.)


5. Posted by Kate Litvak on July 18, 2005 @ 16:51 | Permalink

I have not seen any good evidence that caps do not affect premia. What we know is the size of damages is not the only predictor of insurance premia, but this does not mean caps won’t have a reducing effect.

Again, imagine the world where malpractice liability is capped to zero – that is, nobody can sue for medical malpractice. How large would med mal premia be? Would there even be such thing as med mal insurance? How about the world where malpractice liability is capped to $100? Is it possible that a $100 cap wouldn't affect premia?

I have no answers on what drove the spike in insurance premia. Industry cycles and market downturn are good candidates. It’s also possible that insurance was underpriced for a long time, and the spikes represent “normalization” in pricing – we can’t tell whether today’s premia are “normal” or “excessive.” But these are just my speculations. I know Black at al. are looking into it.


6. Posted by Ted on July 18, 2005 @ 20:06 | Permalink

Kate, if people draw the stronger conclusion from the Black paper (which I agree it doesn't support), it's because at least one of the authors (I forget how many) published a NYTimes op-ed that made precisely that claim contemporaneous with the release of the paper.

The Black paper doesn't even support Christine's lesser point that there's no correlation between premium spikes and large payouts because it didn't measure variance, which is a critical component in calculating adequate reserves.

The irony is that Wisconsin insurance companies couldn't immediately take the cap into account when setting rates because of the risk that the courts would strike down the caps. It became a self-fulfilling prophecy because of the indefensible decision in Ferdon.


7. Posted by Walter Olson on July 18, 2005 @ 21:03 | Permalink

Although there have been a few energetic efforts recently to cast doubt on the relationship, the consensus of many years' empirical research is indeed to confirm that when med-mal damage caps are set relatively low and not riddled with exceptions, they correlate with lowered insurance rates, exactly as intended by their supporters. To quote my Feb. 24 post on Point of Law (links omitted, but follow the final link and you can reach them): "See, for example, Zuckerman, Bovbjerg & Sloan, 1990 (caps on physician liability 'significantly lower premiums'), Congressional Office of Technology Assessment, 1993 (at pp. 64-65, summarizing five studies suggesting link between caps on damages and reduction in insurance premiums); Kessler & McClellan, 1997 (finding 'substantially and statistically significant lower trend growth in [doctors'] real malpractice insurance premiums' within three years of reforms); HHS, March 2003 (sec. 6, 'States with Realistic Limits on Non-Economic Damages Are Faring Better'); Congress's Joint Economic Committee, 2003 (many references); General Accounting Office, Aug. 2003 (see p. 30, 'Premium Growth Was Lower in States with Noneconomic Damage Caps Than in States with Limited Reforms'); American Academy of Actuaries testimony, 2003; Congressional Budget Office, 2004 (summarizing, at footnote 11 and accompanying text, yet another such finding). For more summaries of research, see the AMA's Dec. 2004 position paper (pp. 23 et seq.), and Daniel Kessler's comments at pp. 6-8 of his working paper here." For links on these studies, as I say, consult

http://www.pointoflaw.com/archives/000973.php

The Wisconsin Supreme Court may choose to wish these findings out of existence in pursuit of its preferred result, but I hope you will check into them before you assure your next class that "Everything I have looked at says 'no'" regarding such correlations.


8. Posted by A Very Rational Person on July 19, 2005 @ 8:43 | Permalink

O.K., kid. Bear with me and just assume that a state legislature was constitutionally able to pass a version of the recently expired assault weapons ban. Would an unelected conservative majority on the state Supreme Court be justified in overturning the legiuslature and governor using the "rational basis" test? After all, as Handgun Control, Inc. even acknowledges, it was patently obvious that assault weapons ban had absolutely no effect on crimes using "assault weapons." Under your test, the people's representatives would get no deference on the political decision to control such weapons. The final arbiter would be an unelected or unrepresentative judge's opinion on the merits of the particular law.

Don't be surprised when the responsible adults refuse to take this "rational basis" b.s. seriously and decide they'd be much better off throwing out stupid judges versus stupid laws.


9. Posted by Will Baude on July 19, 2005 @ 9:08 | Permalink

Remember that in Wisconsin judges face retention election every ten years; I suppose they have the advantages of incumbency, but there's little reason to suppose that their interpretations of the State Constitution differ egregiously from what the people think it means.

I don't see what would be terrible about a world where ineffectual laws that treated people unequally for no good reason were struck down.

Maybe the Court was wrong in this case about whether this law really was ineffectual, and maybe the people of Wisconsin don't want to have such an equality provision in their Constitution, but would the sky fall if they did?


10. Posted by Christine on July 19, 2005 @ 20:36 | Permalink

I'm going to assume that "A Very Rational Person" was referring to me as the "kid." He may have been referring to Will, but I'm going to assume it was me. Maybe I'll go try to get carded later.

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