Thursday, May 10, 2012

Tort Reform

Some people claim that tort reform would lower medical costs and improve medical care.

The term "tort reform" means tighter regulation of the medical law industry. We use the obscure term "tort reform" because the conservatives who favor tort reform generally disfavor greater regulation and the progressives protecting the tort industry tend to favor more regulation.

As for me, I believe that the abuses in the tort industry indicate that there are deeper problems in the medical industry and that the conservative drive for tort reform is a case of treating a symptom and not the disease.

Before talking about the disease, I would like to recount a true story.

I worked for an insurance trust. The formula for this insurance trust was fairly simple: We would tally up the claims as we paid them through the year. We would then charge the members of the trust for the claims and tack on a profit margin. It was something like 5%.

We lost a big case for $500,000. After the verdict there was a meeting in which management prattled about doom and gloom for the trust and how we would all have to cut back. Some people in the meeting were visibly distressed; So, I pointed out the obvious.

The charter for the trust said that we would charge claims back through to the clients with a 5% margin. By losing the case, the trust made a $25,000 profit. The lawsuit included legal expenses, so we actually made money on the amount we paid our own lawyers!

By introducing a third party, the insurance industry creates perverse incentives which undermine the integrity of the system. Even worse, large insurance pools create a third party with extremely deep pockets. Having a third party with deep pockets enables the tort industry to ramp up lawsuits and drive costs into the stratosphere.

The perverse incentives are not unique to trusts. The whole insurance industry works on bascially the same mechanism. Insurance companies skim off a piece of the total expenses.

An unspoken truth of the insurance industry is that the insurance companies want medical costs to rise because rising medical costs increase their profits.

The beautiful thing about this system is that politicians who created this dystopia can divert the attention of conservatives by complaining about lawyers and they can divert the attention of progressive by complaining about "the corporation."

This keeps the pundits busy while the rogues on both sides of left/right divide can rob our nation blind.

Sadly, the culture war blinds people to the real problem and real solutions.

The problem is that we are using group funding for individual consumption.

The solution is to restore the concept of self-funded health care.

If we returned to a system in which people funded the bulk of their health care through their own savings, we would restore the incentives in health care.

If the money flowed directly from the patient's saving into the medical system, then it would automatically realign the medical industry to the needs of the patient.

This is the direction I've taken with the Medical Savings and Loan.

The Medical Savings and Loan is a wonderful presentation on free market health care reform. If your group is interested in hosting a meeting on this wonderful concept, please contact me.


  1. 3rd part may always pervert healthcare, but when doctors must pay $50,000 a year in malpractice insurance, that cost get passed onto patients. Or insurers, who pass them onto patients in the form of higher premiums. Someone always pays and Docs make mistakes like the rest of us.

  2. The question of medical liability is somewhat complex. This is why I want to have meetings about the Medical Savings and Loan rather than trying to describe all the details online.

    My argument is that if we restored a system of self-funded health care we would realign the medical liability industry so that it better serves the patient.

    I am a fan of product liability. I will present a simple example:

    Lets say there was a procedure that cost $100.00 and had a 99% success rate. That 1% fail rate leads directly to a $10,000 cost.

    The direct cost of performing 100 procedures is 100 * $100 which is $10,000.00. The 1 percent fail rate costs $10,000.

    In my simple example, the liability equals the cost of delivery the procedure.

    In my opinion, the liability should be included in the price of a product or service. The pricing of the product should be $200.00.

    By having the correct pricing, the patient is better able to make health decisions.

    Let's say there is a competing product that costs $120.00 but has a fail rate that is half of the first procedure. By calculating in the liability, we would see the real cost of the $120 procedure is $170.

    If a patient was only looking at the cost of delivering a product, they would opt for the $100 product that has a higher risk.

    The act of including the liability in the price shows the real cost of the procedure. The patient would see the riskier procedure costing $200, and the less risky operation costing $170.00.

    The Medical Savings and Loan is not necessarily against the tort industry and malpractise suits. If executed correctly, the MS&L would seek to transition malpractice into a product/service liability model because a fullfledged product liability model gives better pricing information.

    Unfortunately, this one argument is very hard to make online.