It’s Time To Ban Class Action Suits

One of the plagues of our time is the class action suit. I understand the reason for them, but they don’t work. At this point, they are nothing more than enrichment vehicles for a small group of attorneys. We should ban them to protect our economy, to protect injured people, and to protect the integrity of our legal system.



Under our legal system, legal rights are inherently personal. That means that only the person who has been injured can sue, and they can only seek compensation for the injury they themselves suffered. But class action suits are different. They let one person sue on behalf of millions of others, and that’s the problem.

History of Class Action Suits

Class action suits first arose in the United States in 1833. They were created out of a doctrine called “virtual representation,” which was created to allow judges to settle all of the property interests of a deceased person’s estate. Without that doctrine, anyone trying to settle an estate would need to obtain jurisdiction over every person potentially interested in the estate before the matter could be resolved. This would be potentially impossible (as many could not be found and some wouldn't even be born yet). By using the virtual representation doctrine, this requirement could be skipped.



Between 1833 and 1966, this remained essentially an “equitable doctrine,” which was used mainly to prevent injustices that might otherwise arise because of legal procedures. The example of settling the estate is a classic example where such a doctrine could be used to prevent injustices.



But in 1966, the rule was amended dramatically. This change created the problematic modern version of the class action suit. In 1966, Congress created what was called the “opt-out class action.” What this means is that once the suit is classified as a class action, anyone who wants to bring their own suit needs to “opt out” of the suit or their interests will be decided as part of the class.

The Theory of Class Action Suits

In theory class action suits make sense. If a million people are injured or might still be injured, rather than having a million suits filed and clogging the courts, each needlessly duplicating the efforts of the others, you could have one suit filed that represents all million people. This dramatically cuts down on the burden to the person/company being sued, it cuts down on the burden to the courts, and it makes it easier for injured persons to obtain justice, because they don’t need to go through the trouble of bringing their own suits. Moreover, this theoretically prevents any one plaintiff from draining all of the assets of the company before others can bring suit (often, others don’t even know yet that they’ve been injured when these suits are settled). So far so good. But like all things lawyers touch, this has become corrupted.

Why Class Action Suits Don’t Work

Modern class action suits are dominated by a small group of predatory firms -- you’ve seen their ads on television. They spend their time frantically searching for the next big hit: be it a drug with side effects, harmful chemicals in products, or obvious dangers that hillbillies ignore when they go off-roading on ATFs at high rates of speed through the woods. When they find one of these, they scramble to find the most horrifically injured plaintiff they can, who also must live in a jurisdiction with favorable laws. Then they rush out and bring suit. Once the suit is filed, they move for class certification. To get this, they need to show that it will be impossible to identify everyone who was (or will be) injured and that their plaintiff will be fairly representative of the others.



Only one class can be certified and it's first come first serve. So once the class is certified, that suit becomes THE class action and that plaintiff becomes THE plaintiff -- everyone else becomes part of the class. At that point, the battle is over. The lawyers sit back and negotiate a settlement. One huge fee later, they leave the crumbs in a pool for each of the injured people to fight over.



The reason this is so attractive to these lawyers is that while they might have gotten a few hundred thousand dollars from suing on behalf of one client, they can get BILLIONS from a class action suit. They also rarely need to take these to trial, whereas individual defendants usually need to go trial if they want full compensation.



The problems are this. First, there’s an incredible incentive to bring these suits, far out of proportion to what the incentive should be for lawyers. In a normal suit, a litigator is likely to get 40% of the proceeds. That means $400,000 if their client gets a million dollars. But for the same amount of effort, a class action lawyer can walk away with a hundred times or a thousand times that because now they are technically representing thousands of plaintiffs. . . even though no additional effort is required. Thus, lawyers push these things like drug dealers pushing crack.



Further, because the potential damages are so high -- most class action suits will kill companies -- the companies have a major incentive to enter into settlements just to survive, even if they did nothing wrong. It’s the same principle as extortion. Give us 80% of what you have or we’ll take 100%.



Third, and most importantly, these suits are intensely unfair to anyone except the lawyers. In a regular suit, there is no need to fight about how to split up the verdict or settlement. In this case there is. That means that each plaintiff needs their own attorney just to get their share out of the fund that gets created. That means a 40% fee on what they recover, which is already reduced by the 40% taken by the attorneys who brought the suit in the first place. Thus, whereas a regular plaintiff would be assured of collecting 60% of whatever is recovered, most class action plaintiffs are, at best, looking at 36% -- even if we assume the split if fair. . . which it isn't.



When a class action arises, many more people are added to the class than would otherwise have sued. Indeed, many people whose claims are very minor or even frivolous suddenly are added to the class, as are people who are "expected" to become plaintiffs -- even if they never do. This means that more people split the pot than would have if each suit had to be examined on its own merits. That means that the legitimately injured receive a smaller share than they should have.

Conclusion

As the system currently sits, it’s bad for companies, bad for the victims, and bad for the integrity of the system. The only people who benefit are the lawyers. While it might be worth it to reform the system by dramatically cutting the attorneys fees, that still won’t solve all the problems. . . especially as lawyers will be doing the reforming. Thus, I think the time has come to simply ban these suits.



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Congress, The RIAA and Your Rights

I despise the Recording Industry Association of America (RIAA) and their paid whores in Congress. I despise them because of what they’ve done to our judicial system.

The Music Industry Acted Stupidly

As you know, the music industry was caught flatfooted by the invention of the internet. As people learned to upload their music onto their computers, it was obvious to everyone that they would soon be passing those files around. This was the moment of opportunity for the music industry. If they embraced the new technology, by creating websites like iTunes, most people would have happily begun legally downloading music one song or album at a time.

But the music industry, like most oligopolies, didn’t want their profit model to change. They liked charging people almost $20 for cds that contained one worthwhile song and a whole bunch of crap. They didn’t want people picking and choosing which songs they wanted: “Heaven forbid that Britney Spears fans begin paying only for two songs, we might have to improve our product or lower our prices!”

So they fought the technology. And as they pushed against the waves of progress, they learned what all stagnant oligopolies learn, if you don’t change with the times, you die. Soon millions of people were illegally downloading music. Then it was tens of millions. Then hundreds of millions. Then disaster struck: so many people had gotten so used to downloading music for free that it became culturally acceptable, world-wide, to download music for free. The music industry had blown it. They had ignored consumer desires for so long that consumers moved on to something else.

Now don’t get me wrong. I’m not defending downloading. This is stealing. Absolutely. People who download copyrighted music are violating the copyright holder’s rights. There is no disputing that. But what happened next was despicable.

The Music Industry Visits A Prostitute

When the music industry lost its war against downloading technology, it decided to try to stop people from downloading files. But that’s a difficult prospect under the state of modern copyright law. So the music industry struck upon a bright idea. If they could buy enough Congressmen, they could change the law. And so they did. Before contribution laws were changed, the television/music industry contributed $18.7 million dollars in “soft money” to political candidates in 2000 and $27.7 million in 2002. They also gave (and continue to give) “hard money” to Republicans and Democrats alike.

And Congress delivered. First, Congress passed the Digital Millennium Copyright Act (DMCA) in 1998, which gave the RIAA the power to file subpoenas to seek the identity of downloaders without notifying the downloaders, without needing to go through a court, and without presenting any proof -- the mere allegation of infringement was enough. This is a serious break from 1000 years of Western jurisprudence, which has always required that anyone be notified before they can be sued, so that they have a chance to defend their rights. This also violates the fundamental principles that plaintiffs must provide some proof to a court before the plaintiff can avail themselves of judicial powers. But what’s a 1000 years of law when compared to a lobby with a lot of money that wants a little something special put into the law for them?

Yet, even this was not enough for RIAA. All this let RIAA do was spy on you. When it came to suing you, RIAA still could only do what you and I can do now, that is to sue the infringer to get a court order enjoying them from further infringement and collecting damages. RIAA wanted more. So they went back to Congress.

Once again, Congress delivered. This time they passed the Digital Theft Deterrence and Copyright Damages Improvement Act of 1999 (“Digital Theft Act”). This act set statutory levels of damages for downloading in the amount of $750 to $150,000 per song. This is rotten, and again is largely unprecedented under the law.

Now, many of you are no doubt saying, “well, these people shouldn’t be stealing.” And I agree with that. But think about this.

You all know the stories of people who go into grocery stores, pretend to fall down, and then threaten to sue. This works because it is cheaper and safer to pay these people a small sum rather than defend the suit (which can cost tens of thousands of dollars) and run the risk of a huge verdict. “Frivolous suits” against doctors or manufacturers work the same way. These are called “strike suits,” where the plaintiff threatens to sue or actually sues, with the intent of being bought off. Again, these plaintiffs know that it is simply too expensive and too risky to defend against these suits, even when they clearly have no merit. Thus, they sue for a large sum, but offer a small settlement that makes it cheaper to buy the plaintiff off rather than defend the suits.

The Digital Theft Act Leads To Insane Verdicts

What Congress did with the Digital Theft Act was to give the RIAA the right to file such strike suits against individual Americans. Consider this. If you are sued by the RIAA, you no longer face the chance of being enjoined from downloading music and having to pay some level of compensation commensurate with what it would have cost to buy the music you downloaded (and possibly attorneys fees). Instead, you now face the prospect of losing hundreds of thousands of dollars.

And that’s how this law has worked out. In RIAA v. Tenenbaum, the jury awarded $675,000 for 30 songs being downloaded. In RIAA v. Thomas-Rasset, the jury awarded $1.92 million for 24 tracks. There are many more. Since the law passed, RIAA has brought more than 30,000 suits. The exact number is not known because the bad publicity from these suits made the RIAA reconsider announcing their numbers.

This situation is so out of control that one judge, who awarded the RIAA $220,000 against a single mother of two who was found liable for downloading 24 songs, implored Congress to revise the Digital Theft Act to lower the statutory penalties. In 2006, the Eastern District of New York, a Federal District Court, found the statutory damages to be unconstitutional because the actual harm to the RIAA was only $0.70 per song. However, this suit was dropped before it could proceed, which coincidentally keeps that decision from having any real precedential power.

The Real Problem Is The Potential For Extortion

But the problem goes much deeper than the suits. Because people face these potentially huge verdicts, and because most people can’t afford what it costs to defend these suits -- and they can’t find lawyers who are as knowledgeable of the law as the RIAA’s lawyers who wrote the thing, people tend to settle rather than fight. To encourage settlement, RIAA sent each person they targeted a letter noting the potential damages and then proposing to settle the matter for around $11,000. Naturally, this has been effective. In 2003, when the RIAA had only brought 231 suits, it had already settled with 28,000 people. Most of these settled for around $3,000, with RIAA apparently accepting payments by credit card.

This is exactly how strike suits work. Even the numbers are similar. “I’m going to sue you for a million dollars, but I’ll settle right now, quietly, for $11,000. It will cost that much just to get a lawyer.” This is no different that the slip and fall plaintiff who pretends to fall down in your store.

There Are No Safeguard To Prevent Abuse

And lest you think there are safeguards to make sure that only people who actually download are being sued, the RIAA’s poorly targeted approach has been quite well documented. They have sued dead people, and demanded settlements from families. They have sued little old ladies for downloading gangster rap. They have sued people who don’t even own computers, and who didn’t have internet service.

The RIAA knows that some of the people they target are innocent, and they don’t care. Said one RIAA spokesperson, “when you go fishing with a driftnet, sometimes you catch a dolphin.”

What’s even worse, they have used abusive tactics and they have rarely backed off, even when presented with proof that the person they targeted was innocent. Take the case of Mrs. Sarah Ward, a 66 year old sculptor accused by the RIAA of sharing gangsta rap. Even though the RIAA learned that this woman did not listen to gangsta rap and cannot even run the service on which they claim she was file sharing, because it was not compatible with Macs at the time, the RIAA dragged their feet about dismissing the suit (which should not even have been filed), and then issued the statement that they would “reserve the right to refile the complaint against Mrs. Ward if and when circumstances warrant.”

Or consider the case of John Paladuk, who was accused of downloading files in Michigan, even though he lived in Florida at the time and had suffered a stroke that left him paralyzed and disabled. Despite this knowledge, the RIAA sued him. Or the case of the college student who was sued because of downloads that occurred two to three years prior to her moving into that room; again, the RIAA demanded a settlement under threat of suit.

Now new groups are starting to use the Digital Theft Act. Recently, it was learned that a vendor of hard-core gay pornographic videos, Titan Media, was using the same process employed by the RIAA. Titan contacted their targets and offered the choice of either being named in a lawsuit or of purchasing the Titan videos in exchange for “amnesty.”

Conclusion

All of this is obscene. The Congress has given these industries powers to extort money from any American they choose to pick. This not only tosses aside 1000 years of carefully developed legal principles, but it flies in the face of everything Americans believe about justice and law. Congress has allowed the RIAA to make a mockery of the court system. Congress should repeal this law immediately.

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RTRP: Health Care Reform, Tort Reform

As we wait for more details to emerge about Obamacare, let's talk about reforms that can actually fix the problems with our health care system. . . call it CommentaramaCare.

Over the next three or four posts, we will lay out the entire reform package. Today we begin with tort reform. Next time, we’ll address structural reforms for the medical profession. Then, we’ll talk about the coverage plan and the program’s costs. Read on. . .

Tort Reform

As we’ve discussed, tort reform is not THE answer to the problems with our health care system, but it is necessary. With that in mind, CommentaramaCare proposes the following:

1. Health Care Must Be Federalized

Alright, calm down, nobody said “nationalize.” We said “federalize.” There is a big difference. Nationalize means to take over the industry. Federalize means to subject the industry to federal regulation rather than state regulation.

Even though health care in the United States accounts for 16% of our GNP (with the federal government spending the lion’s share of those dollars), health care is basically regulated at the state level -- though there are some federal requirements. This means that our health care system is run by fifty different regimes, each with different rules and different interests.

This complex framework of state regulations imposes significant administrative costs on providers, makes it extremely difficult for providers to move between the states, and is highly susceptible to manipulation by local politics -- not to mention that the government’s health care bureaucracy is duplicated fifty times.

States have shown that they are poor managers of the health care system and programs like Medicaid are breaking their budgets, even with federal support.

The only way to fix this is to federalize health care, to remove states from this process. Under the commerce clause, Congress has the power to regulate the health care industry. When Congress speaks, it can supplement state law or it can replace state law in its entirety. In this instance, Congress should replace state law entirely by passing one set of regulations for health care providers. In this way, the complex net of regulations would be eliminated, the burden on state coffers removed, and medical providers would gain the same freedoms that virtually every other industry in America enjoys.

Moreover, if this is not done, then none of the reforms proposed here can be effective because state law would continue to dominate.

Federalizing also will allow Congress to require that medical malpractice actions be brought in federal court. Unlike federal courts, state courts are subject to intense political pressures. State judges often run for election, and those that do require the financial support of local organizations like trial lawyers or hospital groups. Federal judges, by comparison, are appointed for life (hence no need to satisfy contributors) and are generally considered to be higher quality judges. Similarly, federal juries are drawn from much larger pools and thus are less likely to be subject to local influence.

2. Stopping Bad Lawsuits

Now that we’re federalizing health care, let’s talk about specific changes to tort law. The first goal of tort reform should be to discourage bad lawsuits. In that regard, CommentaramaCare proposes:

1. Requiring Certificates of Merit: Prior to filing any malpractice suit, the plaintiffs must obtain a certificate, under oath, from a medical expert of similar or greater qualification to the defendant doctor(s), stating both that the medical expert has reviewed the record and has concluded to a reasonable degree of medical certainty that the defendant doctor failed to satisfy the appropriate standard of care. Without such a certificate, the plaintiff cannot file suit. In my experience with medical malpractice suits, this requirement more than any other eliminates bad lawsuits.

2. Fee Shifting: Fee shifting (making the loser pay the winner’s attorneys fees) actually does little to deter bad lawsuits. Indeed, it is common knowledge among plaintiffs’ attorneys that even where fees are shifted to losing plaintiffs, they are rarely paid. Nevertheless, fee shifting is a good idea, because it does have some deterrent effect and because it is fair to legitimate plaintiffs whose awards are often largely eaten up by attorneys fees.

3. Stopping Outrageous Awards

The second goal of tort reform should be to reduce outrageous awards, without reducing the ability of plaintiffs to obtain fair compensation for their injuries. In that regard, CommentaramaCare proposes:

1. Eliminating Punitive Damages: Punitive damages are intended to discourage truly egregious behavior that affects society at large by allowing juries to punish defendants far beyond the specific harm caused in that instance. However, there is little reason to believe that punitive damages encourage doctors to take greater care, and there are other mechanism in place to punish doctors for misconduct. Thus, there is no justification for continuing to allow punitive damages and they should be banned.

2. Capping Non-Economic Harm: Non-economic harm is better known as pain and suffering. Capping these damages at a reasonable level is a decent way to prevent juries from being swayed by emotion. However, you need to establish the cap level carefully.

If the cap is too low, old people and poor will be unable to find lawyers, because their economic harm will be too small to justify the expense. A medical malpractice suit typically costs a plaintiff’s attorney around $100,000 (out-of-pocket) to bring to trial. If there are few economic damages and the non-economic damages are capped around $250,000, as they are now in many states, it is not worth the risk for the attorney to take the case.

Moreover, you must ask if this cap is just. Consider the case of a 20 year old computer programmer who loses both legs as a result of medical malpractice. Because the programmer does not need his legs to continue in his profession, there is limited economic harm. Thus, his damages will primarily be pain and suffering. Would $250,000 compensate this person for being legless the rest of his life?

For these reasons, the cap should be set at $1,000,000.

3. Bad Faith Surcharge: To counter balance the changes above, judges should be allowed to impose an additional sanction of up to 20% of the final award, if the judge finds that the insurer denied the medical malpractice claim in bad faith. This is necessary because certain medical malpractice insurers have begun refusing to settle any claims, even where the doctor wishes to settle, because they believe they benefit from litigating all claims. This clogs the court system, wastes time and effort, abuses injured plaintiffs, and needlessly harms doctors. And this will get worse as the potential verdicts shrink in size.

4. Removing Legal Considerations From Medical Decision Making

The third goal of tort reform should be to remove the threat of lawsuits from the day to day practice of medicine -- reducing the need for so-called “defensive medicine.” In that regard, CommentaramaCare proposes adopting each of the defenses commonly allowed in common law, plus specifically guaranteeing the following two by statute:

1. Standard of Care: As will be discussed in the next article, a new Federal Medical Board must be established to regulate the medical profession. That Board will be responsible for establishing national standards of care for most conditions. Where such a standard is established, doctors may not be sued for failing to go beyond that standard.

2. Failure To Comply With Recommendations: If a patient refuses to comply with a doctor’s order/ recommendation, the patient may not base their suit in any way on that order/ recommendation; the doctor, however, may raise the patient's refusal as a defense (where relevant). In other words, if the doctor recommends a test/ procedure and the patient does not have it done, the patient cannot use that test/ procedure to prove malpractice, but the doctor can use the refusal to prove that the patient interfered with the doctor's ability to render adequate treatment -- although, such refusals will need to be noted in writing in the patient’s records, with a clear explanation that the patient was advised that the particular treatment or test is required by the standard of care.

5. Reviving Hospital Oversight

The final goal of tort reform should be to reconstruct the relationship between doctors and hospitals, which has been severed by prior tort reform.

As we noted previously, hospitals have lobbied states to change the law to allow them to avoid liability for the actions of doctors who practice at the hospital by treating the doctors as independent contractors.

This is a form of protection that other fields of commerce do not share, and it has destroyed the role of hospitals in overseeing doctors. In fact, under the current system, hospitals have an incentive to keep doctors at arms length and to avoid taking any role in supervising those doctors.

To reverse this, hospitals must again be held jointly responsible for the actions of any provider who practices within the hospital. This change will give hospitals an incentive to again oversee doctor conduct. This should lead to increased oversight by hospital staff and likely will result in physicians again being made into employees of the hospital, which will result in cost savings (to be discussed in next article).

Moreover, to encourage hospitals to conduct thorough oversight, we must remove the fear that their efforts will be used against them. Thus, the work of any oversight committee must be made inadmissible at court and not discoverable by patients/plaintiffs. In other words, it remains confidential.

However, to obtain that protection, the results of these reports must be disclosed to the new Federal Medical Board, which will oversee medical licensing. This will encourage full voluntary disclosure. (Federal Medical Board records also must be treated as inadmissible and not discoverable by patients/plaintiffs.)

Finally, in addition to protecting records from patient suits, the oversight committees/hospitals must be granted immunity from suit by the doctors they oversee and/or discipline. This is to prevent physicians from avoiding discipline by threatening to sue the committee or hospital.

Conclusion

Taken together, these reforms should (1) greatly reduce non-legitimate suits, (2) prevent outlandish jury awards, (3) greatly reduce the practice of defensive medicine, and (4) revive the system of supervision, thereby reducing medical errors.
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RTRB: Health Care, Critiquing Obamacare

Over the past couple weeks, we methodically outlined the problems facing our health care system. Today, we use that outline to take an in-depth look at Obamacare, to see if it solves those problems, and what other problems it may create.

Let us begin by listing the problems to be fixed. . . our report card:

Cost

___ 1. Dramatically reduce the costs of Medicare/Medicaid.
___ 2. Maintain or reduce the costs of private insurance.
___ 3. Reduce the costs of medical innovation, without reducing the incentive to innovate.
___ 4. Decrease the amount of medically unnecessary procedures/tests.
___ 5. Decrease administrative costs.
___ 6. Reduce the costs of care required by the top 1% of users.
___ 7. Reduce the growth of prescription drug costs.
___ 8. Decrease the amount of uncompensated care.
___ 9. Reform the legal system to reduce the costs of malpractice insurance.

Access

___ 10. Provide insurance coverage to the 17 million who cannot afford it, and the 5 million who are considered uninsurable.
___ 11. Provide insurance for the 9.7 million aliens.
___ 12. Eliminate the problem that job loss can lead to loss of insurance.

Quality Control

___ 13. Reduce over-testing.
___ 14. Improve compliance with the standard of care.
___ 15. Reduce the number of preventable medical injuries.
___ 16. Find an effective manner to oversee the medical profession to ensure quality control.

Now let’s see what Obamacare offers for each:

___ 1. Dramatically reduce the costs of Medicare/Medicaid.

As we noted, Medicare/Medicaid costs 2.4 times what private insurance costs per recipient. Potential savings in this area, just by cutting those rates to the rate charged by regular insurance equal $518 billion per year.

Obamacare makes the following proposals to reduce the cost of Medicare/Medicaid:

1. Medicare/Medicaid just negotiated an agreement with hospital groups to reduce the amount they reimburse hospitals each year by $15.5 billion.

2. Eliminate waste, fraud and abuse -- the old fall back. No dollar figures are given for this, but they are not large. The largest estimate of waste, fraud and abuse, by the National Health Care Anti-Fraud Association, puts the potential savings at $60 billion per year. However, the HHS Office of Inspector General, which pursues these matters, has recovered only an average of $1.2 billion per year.

3. Obamacare may allow providers to share in cost-savings that they achieve for the Medicare program. While this sounds good in concept, it is not clear how this will work because providers are paid for services provided. Thus, lost revenue likely will exceed any share of the savings, thereby eliminating the incentive to find savings. However, this program is intriguing and raises the grade from an F to a D.

Total likely savings: $16.2 billion of the potential $518 billion.

Grade: D


___ 2. Maintain or reduce the costs of private insurance.

Private insurance costs an average of $4,700 per single person and $12,700 for family of four. Additionally, Americans pay an additional $2,500 out of pocket for care.

Obamacare proposes:

1. Reducing costs by encouraging the adoption and use of information technology. There are no reliable estimates on the cost savings this could generate, but IT lobbyists claim savings between $30 billion and $77 billion. This represents a 1-2% saving.

2. “Strengthening” primary and chronic care management. In other words, doing better. No savings indicated.

However, any savings obtained may get lost in another portion of the plan. At this point, it appears that Obamacare also will establish a committee to recommend an “essential benefits package” which all insurance policies would need to provide. Moreover, Obamacare would forbid insurers from excluding persons for pre-existing conditions. No estimates exist to determine what this would do to the cost of insurance, but history suggests it could dramatically increase the price of insurance.

Grade: F


___ 3. Reduce the costs of medical innovation, without reducing the incentive to innovate.

Obamacare will require drug or device manufacturers to disclose payments and incentives given to providers and any investment interest held by a physician. While the potential cost savings, if any, are unclear, such a policy would be helpful for purposes of uncovering potential fraud or abuse, and may help consumers make informed choices.

However, this plan alone does little to ensure that an efficient amount of resources are allocated to medical innovation.

Grade: C


___ 4. Decrease the amount of medically unnecessary procedures/tests.

It is estimated that $500-$700 billion is wasted annually on treatments, tests, or hospitalizations that do nothing to improve health.

Obamacare does not address this issue.

Grade: F


___ 5. Decrease administrative costs.

Since the American system wastes $339 billion each year in administrative expenses (as compared to the Canadian system), this should be a fertile ground for cost savings.

However, Obamacare proposes only two measures, neither of which will reduce this cost. First, Obamacare plans to “promote efficiency and quality” in the way payments are handled. In other words, they have no plan yet, but they hope to come up with something better.

Secondly, they plan to enhance the collection and reporting of race and ethnic data in health care. The purpose of this is not clear, but it is clear that this will add to the administrative expenses, not reduce them.

Grade: F


___ 6. Reduce the costs of care required by the top 1% of users.

The top 1% of users account for 27% of health care dollars spent.

Obamacare plans to create a “Chronic Management Innovation Center” to disseminate innovations for the treating of high-cost, chronically ill Medicare beneficiaries. In other words, they’re hoping to come up with something.

Grade: F


___ 7. Reduce the growth of prescription drug costs.

Prescription drugs are the most rapidly growing portion of health care costs in the country, though recent shifts to generic drugs are reversing this trend.

Obamacare plans to limit the patent length of sophisticated biotech drugs that don’t face generic competition to either 7 or 12 years. While this is likely to reduce these costs, specialty drugs account for only 1.3% of prescriptions.

Grade: D


___ 8. Decrease the amount of uncompensated care.

Hospitals provided $35 billion worth of uncompensated care (for the uninsured) in 2008. The government reimbursed 80% of this.

In a deal about to be struck with the hospital lobby, Obamacare looks to cut that reimbursement by 10% ($3.5 billion annually). Obamacare hopes that this is offset by the increase in insurance coverage. However, gaps in coverage will remain -- see below.

Grade: D


___ 9. Reform the legal system to reduce the costs of malpractice insurance.

It is estimated that between $6 billion and $66 billion can be saved by reducing defensive medicine, i.e. over-treating to avoid lawsuits. Another $11.3 billion can be saved by reducing the costs of medical malpractice insurance.

Obamacare does not address this issue.

Grade: F


___ 10. Provide insurance coverage to the 17 million who cannot afford it, and the 5 million who are considered uninsurable.

As we discussed, the 46 million uninsured really represents only 17 million people who are uninsured because they cannot afford insurance.

The democrats are estimating that Obamacare will cover 95% of the population. That leaves 16 million uninsured. It is not clear which group this will be.

Moreover, the proposed coverage is not total coverage. Instead, Obamacare proposes to offer four levels of care. Thus, even those covered by Obamacare may still find themselves with significant expenses beyond the level of insurance they have. Although, Obamacare does seek to prohibit lifetime or even year limits on coverage, but, then, it is not clear how this will work in practice.

Obamacare will prohibit insurers from denying coverage based on pre-existing conditions, though it is not clear whether such insurance will be affordable.

Grade: C


___ 11. Provide insurance for the 9.7 million aliens.

No solution offered.

Grade: F


___ 12. Eliminate the problem that job loss can lead to loss of insurance.

In an odd way, Obamacare will solve this problem. . . by getting employers to stop providing health care. Obamacare plans to fine employers who fail to offer coverage to their employees the amount of $750 per employee. As employers currently pay an average of $7,815 annually to cover each employee, it is highly unlikely that employers will continue to provide coverage once Obamacare is implemented.

While we consider it a good thing to break the connection between employers and medical insurance (to be explained in future article), Obamacare fails to provide an adequate replacement system.

In any event, this issue may be moot, as it was disclosed today that the Senate may remove this provision owing to political pressure.

Grade: F


___ 13. Reduce over-testing.

It is estimated that over-treatment, i.e. the providing of medically unnecessary tests or procedures, wasted $500-$700 billion in 2007.

Obamacare does not address this issue.

Grade: F


___ 14. Improve compliance with the standard of care.

The primary cause of medical errors are the lack of national standards.

Obamacare proposes establishing a framework to set national priorities for comparative clinical effectiveness and to reform medical education to increase the training of primary providers. In other words, they propose to come up with something.

Grade: F


___ 15. Reduce the number of preventable medical injuries.

It is estimated that the medical costs alone of treating injuries caused by medical errors could be as high as $520 billion annually.

Obamacare does not address this issue.

Grade: F


___ 16. Find an effective manner to oversee the medical profession to ensure quality control.

Finally, Obamacare proposes to develop a strategy to improve quality. Once again, they have nothing.

Grade: F


Additional Problems Caused By Obamacare

1. Cost: So what does this plan cost? The democrats have not provided an estimate for the cost of Obamacare. They have, however, stated that they intend to pay for the plan by imposing $600 billion in unspecified new taxes over the next ten years ($60 billion annually).

So far, the taxes proposed have been a 4% surcharge on persons making more than $200,000 a year, taxing employee health benefits that exceed the coverage for federal workers, and fining individuals who do not have healthcare.

But consider this. If coverage is extended to the 17 million uninsured, at the Medicare rate, the added cost will be $204 billion annually, more than three times the tax increases expected. Even at the private insurance rate, the costs would far exceed the estimated tax revenues.

2. Also, it is not at all clear that doctors will agree to accept this insurance, particularly if the payment provisions are too onerous.

3. Finally, it is not clear what will happen to the people who lose their employer-based insurance but do not qualify for Obamacare insurance. It is conceivable that this plan could lead to the wholesale upheaval of the current system.

Conclusion

Lastly, let’s look at the Report Card again:

Cost

__D__ 1. Dramatically reduce the costs of Medicare/Medicaid.
__F__ 2. Maintain or reduce the costs of private insurance.
__C__ 3. Reduce the costs of medical innovation, without reducing the incentive to innovate.
__F__ 4. Decrease the amount of medically unnecessary procedures/tests.
__F__ 5. Decrease administrative costs.
__F__ 6. Reduce the costs of care required by the top 1% of users.
__D__ 7. Reduce the growth of prescription drug costs.
__D__ 8. Decrease the amount of uncompensated care.
__F__ 9. Reform the legal system to reduce the costs of malpractice insurance.

Access

__C__ 10. Provide insurance coverage to the 17 million who cannot afford it, and the 5 million who are considered uninsurable.
__F__ 11. Provide insurance for the 9.7 million aliens.
__F__ 12. Eliminate the problem that job loss can lead to loss of insurance.

Quality Control

__F__ 13. Reduce over-testing.
__F__ 14. Improve compliance with the standard of care.
__F__ 15. Reduce the number of preventable medical injuries.
__F__ 16. Find an effective manner to oversee the medical profession to ensure quality control.

* All information not otherwise referenced was obtained from the Kaiser Foundation.
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RTRP Health Care: Quality Control

Today we finish outlining the problems our health care system faces. We have previously discussed costs and access. Today we address poor quality control and preventable medical errors.

Our system suffers from wasteful over-treatment, exposes patients to an amazingly high risk of under-treatment, and results in an incredible number of preventable injuries. The existing mechanisms for monitoring quality control are simply inadequate.

Over-Treatment Wastes Billions

As noted previously, over-treatment, i.e. the providing of medically unnecessary tests or procedures, wasted $500-$700 billion in 2007. Yet, as also shown, only a small portion of that amount -- between $6 billion and $66 billion -- can be attributable to defensive medicine, i.e. lawyers. The rest, according to a study by Dartmouth’s Institute for Health Policy and Clinical Practice, was caused primarily by the lack of clear national standards. Indeed, recent studies have shown that many doctors lack adequate information on the risks/benefits of common treatments.

This leads to inconsistent care, including both the over-treatment mentioned and under-treatment. Under-treatment occurs when patients do not receive care that is both cost effective and medically effective. For example, the Dartmouth study found that patients had just a 50% chance of receiving flu shots, where appropriate, or receiving aspirin or beta-blockers following a heart attack, or receiving antibiotics to treat pneumonia, even though these treatments are inexpensive and are well known to improve patient health in those situations.

Another recent study, found that doctors fail to tell patients about abnormal test results 7% of the time -- 1 out of every 14 tests. This study, of the records of 5,000 patients who were tested for high cholesterol, diabetes, colon cancer or breast cancer, found significant variances in the performance of doctors, with some failing to inform patients as often as 26% of the time. This inconsistency frustrates early diagnosis, which is the key to effective treatment.

Preventable Medical Injuries

More significantly, however, the lack of standards and poor supervision/ oversight lead to a vast number of preventable medical errors each year that result in significant injuries.

A study by Healthgrades of 37 million patient records from 2000-2002 found that an average of 195,000 hospital deaths each year were the result of preventable medical errors. (A prior, smaller study by the Institute of Medicine estimated that medical errors cost 98,000 lives in 1999.). According to Healthgrades, even a 20% improvement in just the areas of failure to rescue, bed sores, postoperative sepsis and postoperative pulmonary embolism could alone save 39,000 people each year.

A 2006 study by the Institute of Medicine found that 1.5 million preventable drug-related injuries occur each year.

A 1997 study published in the American Medical News, estimated that cost of treating injuries resulting from medical error could be as high as $200 billion annually, and adversely affect the lives of tens of million of Americans. Bringing this figure forward to present day dollars would yield $520 billion, and this figure does not take into account lost wages, lost productivity or other non-treatment costs.

So why aren’t the current oversight mechanisms working?

Boards of Medicine Are Failing At Policing The Profession

The groups primarily tasked with ensuring the quality of health care in the United States are the state medical boards. However, these boards show a wild variation in disciplinary rates, a variation one would not expect if they were maintaining a consistent level of quality.

For example, in 2001, fourteen states and the District of Columbia disciplined less than two physicians per 1000. D.C. disciplined 0.73 per 1000. At the same time, the top ten states disciplined more than five physicians per 1000, with Alaska disciplining 10.52 per 1000.

That is 14 times the rate of the District of Columbia Medical Board. So unless you believe that Alaska doctors are simply 14 times more dangerous than D.C. doctors, then it is clear that a different level of oversight is being applied in different states (there is no regional pattern to this data either).

This data raises serious questions about the extent to which medical boards are protecting patients from bad doctors. Indeed, concerns have been raised about (1) whether these boards are adequately funded and staffed, (2) whether they conduct appropriate investigations, (3) whether they are independent of state medical societies and political influence, and (4) whether the disciplinary structure is itself reasonable.

Hospital Oversight Is Even Worse

Changes in the law have allowed hospitals to escape liability for the actions of doctors by separating themselves from the doctors. Thus, more and more doctors are being made independent contractors of the hospital, with the limited oversight that entails. And while hospitals ostensibly monitor doctors when deciding whether or not to extend or revoke hospital privileges, these credentialing committees are slow to revoke privileges, because they are more concerned with legal maneuvers than doctor oversight. Indeed, there is a perception that being too aggressive about oversight will lead to litigation, either by doctors or by patients who learn that their doctor was suspended.

Medical Malpractice Fails As Quality Control

Some (mainly lawyers) argue that medical malpractice serves the function of ensuring quality control by providing doctors with an incentive to take appropriate care. Thus, they oppose anything that reduces their ability to sue doctors.

However, the Congressional Budget Office rejects this reasoning. According to the CBO, “it is not obvious that the current tort system provides effective incentives to control such injuries.”

For example, the CBO notes, health care providers generally are not exposed to the financial costs of their own malpractice, because they carry insurance. Moreover, the evidence shows malpractice claims are far too few to provide an effective deterrent. According to the CBO, of the 27,179 estimated instances of malpractice in New York in 1984, only 415 (1.5%) resulted in claims being made. Therefore, it is likely that malpractice provides little incentive for providers to exercise greater care.

Conclusion

Thus, effective reform must:

1. Reduce over-testing,
2. Improve compliance with the standard of care,
3. Reduce the number of preventable medical injuries, and
4. Find an effective manner to oversee the medical profession to ensure quality control.
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RTRP Health Care: Out-of-Control Costs, Lawyers (UPDATE)

Several of you asked whether the $500-$700 billion of unnecessary tests/ procedures identified in our earlier column can be attributed to “defensive medicine” -- doctors basing their decisions on fear of lawsuits rather than medical necessity.

While there can be no doubt that some portion of the $500-$700 billion is the result of defensive medicine, the available evidence shows that defensive medicine accounts for only a very small portion of the amount.

Largest Estimate: $113 Billion/$66 Billion

The largest estimate given for such costs came from then-President Bush, who claimed in 2004 that 5% of medical costs were the result of defensive medicine. If true, this would account only for a maximum of $113 billion of the $500-$700 billion in medically unnecessary tests/procedures. That’s it.

However, even if this were accurate, the actual number would be much lower than $113 billion because most of the $2.26 trillion is not connected to the delivery of services. Thus, Bush gave a range, which went as low as 2.5%. This would reduce the $133 billion to $66 billion.

But It Could Be As Low As $6 Billion

But there is another problem with this figure. The study Bush relied upon does not appear to be reliable for reaching the conclusion that he reached. That study, by economists Daniel Kessler and Mark McClellan, compared the cost of two types of cardiology-related procedures in states that had enacted tort reform and states that had not. They found a 5% difference in costs between the two groups of states, and then extrapolated that to all medical costs.

Yet, when the Congressional Budget Office attempted to apply the same methods used by Kessler and McClellan to a broader set of ailments, it “found no evidence that restrictions on tort liability reduce medical spending. . . CBO found no statistically significant difference per capita health care spending between states with and without limits on malpractice torts.” The GAO reached the same conclusion.

Similarly, a 1990 Harvard Medical Practice Study of New York physicians found an insignificant relationship between the threat of litigation and medical costs, even though physicians reported that their practices had been affected by the threat of lawsuits.

A study published in the Journal of Health Economics in 1999, found that tort reform related to births by cesarean section did result in costs savings, but those costs savings were only 0.27%. Applying this to costs in general, as Bush did with the Kessler/McClellan study, would result in savings of only $6 billion.
Finally, a congressional Office of Technology Assessment study into the effects of “defensive radiology in children with head injuries and defensive Cesarean sections” concluded that “it is impossible in the final analysis to draw conclusions about the overall extent or cost of defensive medicine,” and then found that less than $54 million could be attributable to defensive medicine in these areas.

Thus, at best you’re talking about $113 of the $500-$700 billion, but more likely the figure is much, much smaller between $6 and $66 billion.

What Is Causing The Rest Of The $500-$700 Billion

So where does the rest of the $500-$700 billion come from? According to a study by Dartmouth’s Institute for Health Policy and Clinical Practice, there is a direct relationship between the availability of services and how much those services are prescribed, whether or not those services are medically necessary. Dartmouth found, for example, that where more medical beds were available, doctors prescribed more hospitalization, even though this was not medically necessary nor did it result in better results for patients.

According to the Dartmouth report, and various follow up reports, there are two suspected causes for this.

• First, there is a lack of clear national standards that results in wildly different treatment being provided in different geographic regions. Indeed, recent studies have shown that many doctors lack adequate information on the risks/benefits of common treatments. This results in both over and under treatment.

• Secondly, flawed payment systems reward doctors for providing more care, whether or not that care results in better treatment or results.

Thus, while tort reform should be a part of any reform, tort reform alone cannot solve this problem.
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RTRP Health Care: What’s Wrong With Our Health Care System, Out-of-Control Costs

The United States health care system costs too much and achieves too little. Seven out of ten Americans say the system needs “fundamental change” or must be “completely rebuilt.”

Before we can talk about repairing the system, however, we must first understand what is wrong with the system. The problems with the American system fall into three broad categories: (1) out-of-control costs, (2) access to health care, and (3) quality control. Today we talk about out-of-control costs.

In 2007, Americans spent $2.26 trillion dollars, or $7,439 per American, on health care. This works out to 16% of our gross domestic product (GDP) -- more than double the 7.2% of GDP spent in 1970 and more than any other country spends (except the Marshall Islands). Most European countries spend between 9-10%. And every year, these costs continue to grow, far in excess of inflation or wage growth. This is the core problem at the heart of our health care system.

Following are some facts that you need to know to understand this problem:

• Medical Advances: Half of the growth in health care spending over the past decade has been the result of medical advances.

• Overhead Costs: According to Harvard Medical School, 31% of health care spending goes to pay administrative/overhead costs (this is nearly double the 16% percent spent in Canada). A reduction to even Canadian levels would save Americans $339 billion annually.

• Medically Unnecessary Procedures: It is estimated that $500-$700 billion is spent annually on treatments, tests, or hospitalizations that do nothing to improve health. Studies have shown a direct relationship between the amount of tests/procedures ordered and the availability of such tests/procedures in the local area, even though such increased testing/procedures do not result in improved care. Moreover, where doctors are paid for level of care provided, rather than results obtained, they order more care whether or not it is medically helpful.

• Prescription drugs account for 10% of total spending. The government pays for 34% of these, private insurance for 44% and individual consumers for 22%. Prescription drugs are the most rapidly growing portion of health care costs in the country, though recent shifts to generic drugs are reversing this trend.

• Hospitals provided $35 billion worth of uncompensated care (for the uninsured) in 2008. 80% of this was reimbursed by the government.

• Malpractice Insurance: The legal system is often blamed for causing medical costs to skyrocket. This is not true. According to the CBO, effective tort reform could reduce the cost to physicians of malpractice insurance by as much as 25 to 30 percent. BUT, the overall savings to the health care system would be a minuscule 0.5% (roughly $11.3 billion).

• A 1996 study found that 1% of health care users accounted for 27% of the total spending on health care.

Thus, effective reform must (in order of importance) do the following:

1. Reduce the costs of medical innovation, without reducing the incentive to innovate.
2. Decrease the amount of medically unnecessary procedures/tests.
3. Decrease administrative costs.
4. Reduce the costs of care required by the top 1% of users.
5. Reduce the growth of prescription drug costs.
6. Decrease the amount of uncompensated care.
7. Reform the legal system to reduce the costs of malpractice insurance.

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