06 January 2014

Counting Costs

'Lost in Translation: Law, Economics, and Subjective Standards of Care in Negligence Law' by Charles R Korsmo in (2013) 118 Penn State Law Review 285 comments that
The law and economics movement has been a victim of its own success. Over the past four decades, it has generated an enormous specialist literature, often explicitly intended for other specialists. As is so often the case with increased specialization, the result has been escalating technical complexity accompanied by forbiddingly formal mathematics and a tendency to retreat into abstraction. As a result, economic analysis has often failed to provide general legal audiences with insight into important legal questions, even where the tools of economics would be appropriate and useful. 
This Article examines – and rectifies – just such a failure. In particular, this Article examines departures from a uniform reasonable person standard in negligence law. From an economic standpoint, individuals might be held to different standards of care because: (1) they differ in their costs of taking precautions (e.g., a good driver can take additional precautions more cheaply than a bad driver); or (2) they differ in the accident costs they generate when exercising a given amount of care (e.g., a good driver causes fewer accidents than a bad driver who is exercising the same precautions). Though the two possibilities lead to sharply different prescriptions, the law and economics literature has focused almost entirely on the former scenario, while neglecting the latter. 
By examining both possibilities, I provide a new and superior explanation of how tort law treats disabilities and professional skill, with the potential to change the way these important topics are conceptualized, taught, and ultimately adjudicated. In doing so, I also demonstrate the extent to which important legal insights can remain unappreciated when buried in an overly abstract mathematical literature.
'Does Medical Malpractice Law Improve Health Care Quality?' by Michael Frakes and Anupam Jena comments that
Despite the fundamental role of deterrence in justifying a system of medical malpractice law, surprisingly little evidence has been put forth to date bearing on the relationship between medical liability forces on the one hand and medical errors and health care quality on the other. In this paper, we estimate this relationship using clinically validated measures of health care treatment quality constructed using data from the 1979 to 2005 National Hospital Discharge Surveys and the 1987 to 2008 Behavioral Risk Factor Surveillance System records. Drawing upon traditional, remedy-centric tort reforms — e.g., damage caps — we estimate that the current liability system plays at most a modest role in inducing higher levels of health care quality. We contend that this limited independent role for medical liability may be a reflection upon the structural nature of the present system of liability rules, which largely hold physicians to standards determined according to industry customs. We find evidence suggesting, however, that physician practices may respond more significantly upon a substantive alteration of this system altogether — i.e., upon a change in the clinical standards to which physicians are held in the first instance. The literature to date has largely failed to appreciate the substantive nature of liability rules and may thus be drawing limited inferences based solely on our experiences to date with damage-caps and related reforms.
They state that
We employ two approaches to identifying the influence of liability forces on health care quality. First, we take the more traditional route in the literature which typically estimates difference-in-difference specifications that draw upon the adoption of caps on non-economic damages awards and related reforms (i.e., ‘traditional reforms’ or “damage cap reforms”). These plausibly exogenous reforms primarily serve to decrease the expected consequences of liability and by doing so allow us to evaluate the impact on health care quality of malpractice reforms that essentially maintain the basic structure of the tort system, but that simply blunt its severity. Second, in contrast to these traditional, remedy-focused reforms, we study the impact on quality of care of more substantive reforms which directly alter the standards of care against which physicians are judged in medical malpractice suits. In particular, we study changes in state-level laws which led to the retreat from rules which expected physicians to follow customary local practices and the contemporaneous adoption of rules that physicians be held to national standards of care (Frakes 2013). 
The empirical malpractice literature to date, which again has focused primarily on damage-cap reforms, has largely viewed medical liability forces in a rather abstract sense. It has spoken about liability “pressure,” without necessarily asking: “pressure to do what?” We demonstrate that this failure to appreciate the substantive nature of liability rules and the clinical expectations such rules place on physicians may leave analysts relying solely upon our experiences to date with traditional reforms with incomplete information regarding the potential role of medical liability in shaping physician practices. We contend that, even if observed levels of health care quality happen to be relatively insensitive to the adoption of a damage cap or related remedy-focused reform, one would be premature to take such findings to conclude that physicians are, in fact, universally unresponsive to liability forces. Relative to such traditional reforms, substantive reforms that change the standards against which physicians are judged hold the potential to more directly and powerfully influence physician practice patterns. Such latter reforms thus merit separate attention. 
To understand the intuition behind the insufficiency in merely relying upon the results of the damage-cap studies, one must first understand the substantive nature of our present liability rules. In determining the legal standards against which physicians should be judged, malpractice law generally defers to customary market practices. In other words, physicians determine their own standards. Liability forces in a system of this nature thus impose few independent expectations on physicians. Generally, physicians in such a system may only alter their practices in response to liability fears due to uncertainty in their beliefs as to how courts will assess customary practices — i.e., they may aim to deliver higher quality than otherwise customarily desired over fear that courts will misjudge customary practices to entail such higher practices. Damage caps may therefore only induce changes in physician practices to the extent that they reduce the cost of uncertainty to physicians about whether their practice patterns deviate negatively from customary market practices. Caps otherwise do not alter the clinical expectations being placed upon physicians. 
One might not be surprised to find that the channel of influence inherent in a custom-focused liability system is limited in its ability to independently induce substantially higher levels of care. After all, as just suggested, liability forces in this system may only incentivize higher levels of care as a result of blind guesswork on the part of physicians. Consider, in contrast, an alteration of the structure of this system altogether — for example, by changing the way in which the clinical standards expected of physicians are determined in the first place. To the extent that these standards change in a way so as to explicitly expect higher levels of quality, one might be less surprised to find a substantial response in physician behavior. Following a reform of this nature, physicians will not deliver higher quality of care simply because they are guessing that this might be expected of them at court. Rather, they may deliver higher quality care as a result of explicit directions under the law to do so. The potential channel of influence created by standard-of-care reforms are direct and immediate and do not operate through any second-order reduction in uncertainty. 
Generally consistent with expectations, our empirical analysis of the impact of remedy-centric traditional reforms on the quality of care provided by physicians generally casts doubt upon the independent deterrent effect of medical liability forces in the present custom-focused liability system. For each measure of health care treatment quality, the estimated effect of malpractice pressure within our current liability system, as identified by the adoption of non- economic damage caps and related tort reforms, is both statistically insignificant and small in magnitude, with a 95% confidence interval that is relatively tightly bound around zero. For instance, at one end of this interval, the lack of a non-economic damages cap — which is indicative of higher malpractice pressure — is associated with only a 2 percent decrease in inpatient mortality rates for selected medical conditions. 
Importantly, however, while this remedy-centric-reform analysis implies at most a modest degree of deterrence stemming from the present system of liability rules, the results from the standard-of-care-reform analysis suggests that a substantive alteration of the malpractice system may lead to more meaningful changes in observed measures of quality. For example, for each measure of health care treatment quality, we find that when states modify their standard-of- care rules to expect physicians to provide a higher level of quality, observed levels of quality increase substantially in the direction of such new expectations. Moreover, when states modify their rules so as to condone lower provision of quality by physicians, physicians do not appear to respond by delivering lower quality care. Changing the legal standard of what is expected of physicians therefore has the potential to improve the quality of care provided by low-quality physicians without reducing the quality of care provided by already high-quality physicians. Our analysis suggests that medical liability forces—under the right structural framework—hold the potential to elevate the quality floor. 
The paper proceeds as follows. In Section II, we discuss existing evidence on the deterrent impact of medical liability. Section III presents a simple model of physician decision- making and discusses the various sources of ambiguity that cloud the channel of deterrence intended to be created by the malpractice system. Section IV discusses the data and empirical methodology. Section V presents the results of the empirical deterrence analysis. Finally, Section VI concludes.