Political Economy

As usual, I wish I had some of these comments before I wrote mine! Just a few reactions.

Yes, the Macdonald's case is more complicated, but no one made a convincing case that the customer could not have tasted the coffee first to determine how hot it was. Macdonald's criteria in serving hot coffee are not the real issue if it were easy for customers to check the nature of the product they consume. That surely was true in this case.

One can separate, at least to some extent, who gets punitive damages from who gets the compensatory damages. But one also wants to give victims sufficiently strong incentives to sue.

I generally do support allowing customers and providers of medical care, other services, or goods, to reach contracts ahead of time about rights to sue, compulsory arbitration, and so forth. Still, the same considerations that justify lawsuits-lies, withholding relevant information, and terrible service- would also be relevant in interpreting such contracts.

Posted by becker at 08:36 PM | Comments (9) | TrackBack

The value of using group membership in judging unobserved characteristics is uncontroversial most of the time, and so is hardly noticed. For example, automobile insurance companies consider young unmarried males as a relevant group in determining driver insurance premiums because they tend to have more car accidents than older males or young women. These higher insurance rates also help cut down the number of auto accidents by reducing driving by accident-prone young males. Yet given that group membership is almost always an imperfect predictor of unobserved characteristics, some individuals will be treated much worse (or better) than their true characteristics justifies. In the driving case, young unmarried males who are careful and responsible drivers will pay more for insurance than they would in a world with better information. They might be discouraged from driving because they suffer from the bad driving of other young unmarried males.

Still, limited information about individuals means that group identities is often useful in gaining information about them. However, the use of religious, racial, or ethnic characteristics for national security protection and in fighting crime has been a political hot potato, and has led to accusations of discrimination on the basis of race and other characteristics. For the use of group identities in order to treat different groups differently may be the result of a desire to discriminate against various minority groups instead of a desire to act effectively to prevent some undesirable actions.

On top of the current agenda is the effort by organizations fighting terrorism to treat Muslim with greater suspicion. Is it justified to single out young Moslem males from the Middle East for much more careful searches at airports, or for tougher requirements to gain tourist visas and green cards? Or are employees at stores that are trying to prevent theft of their goods justified in watching minority customers more carefully than they watch others? Macy’s was recently fined for allegedly watching blacks and Hispanics more carefully, although the company denies that such profiling of customers is their policy.

Efficient actions would say minimize the amount of terrorist activities in the US, given a limited amount to be spent on preventing terrorism, or would minimize store theft, given a budget for security personnel. Then security checks at airports would try to both catch terrorists before they board a plane, and to discourage future airport terrorism by raising the chances that they are caught at the airport. Similarly, store security both tries to apprehend thieves, and to discourage future store theft.

If young Moslem Middle Eastern males were in fact much more likely to commit terrorism against U.S. than were other groups, putting them through tighter security clearance would reduce current airport terrorism. Whether such religious and ethnic profiling furthers the second goal, of deterring future terrorism, depends on the degree of responsiveness of different potential terrorists to a greater likelihood of being caught. If the degree of response by different groups were proportional to their average propensity to engage in terrorism, then checking young Moslem Middle Eastern males more carefully would also help deter future terrorism at airports.

On the other hand, profiling by average propensities might be inefficient if the marginal propensity to reduce terrorism with more careful checks were smaller for groups like Moslems that might have higher average propensities. That could well be true if these groups were more fanatical and less easily deterred by the prospects of being caught. Then the “deterrent” effect on future terrorism would be opposite to and might be stronger than the “apprehension” effect on current terrorism.

The deterrent effect is less likely to dominate the apprehension effect when the difference in average behavior is greater. This is why it is efficient to profile young male Middle Eastern Moslems for terrorist attacks at airports, and perhaps it is efficient also to watch minority shoppers more carefully at stores. To be sure, such profiling is “unfair” to the many young male Moslems who are not terrorists, and to the many minority shoppers who are honest. That could be made up in part by compensating groups who are forced to go through more careful airport screening through putting them in shorter security lines, or in other ways. Similarly, innocent shoppers who are stopped and searched could be compensated for their embarrassment and time.

To be sure, some profiling by governments and the private sector has been due to prejudice against various groups, not as a way of achieving efficiency. So it is crucial to be able to distinguish whether a profiling is efficient from whether it is evidence of discrimination. This distinction can be made in the terrorist field (similar considerations apply to fighting crime) by keeping records on the fractions of young Moslem males and others who were searched and found with weapons or other evidence of intent to commit a terrorist act. If the fraction were much greater among Moslems searched than among others, this would at least be consistent with an emphasis on efficiency rather than discrimination.

A further test would be to determine what happens to apprehension rates as the amount spent on airport security increased or decreased. The profiling policy would again be consistent with efficiency if greater spending on airport security reduced the apprehension rates of young male Moslems who were searched about as much as the apprehension rates of others.

So it is possible to provide analytical criteria and guidelines to determine when particular types of profiling are explained by efficiency considerations rather than discrimination. By using these guidelines to analyze data on apprehension rates, one can determine in an objective manner whether discrimination rather than efficiency is responsible for different treatment of members of ethnic, religious, or racial groups.

Posted by becker at 08:27 PM | Comments (18) | TrackBack

As usual, there were many excellent comments. Let me respond to some:

Several comments point out correctly that the determination of medical malpractice (that is, medical negligence) by the courts is very often inaccurate; there are many false positives and false negatives. To that problem, capping damages judgments is no solution. An attractive solution is testimony by a neutral expert witness. The fact that judges may have difficulty determining who is neutral is no objection; the judge can ask the parties' medical experts to jointly nominate a third; he would be the neutral and the judge and jury would appropriately rely heavily on his testimony. The procedure I am suggesting is similar to a widely used procedure for picking a neutral arbitrator: each party designates one arbitrator, the two arbitrators choose the third, who is neutral, and he then provides the deciding vote.

An alternative, mentioned in one comment and already in force in a number of states, is to require the malpractice plaintiff before suing to submit his claim to a panel of physicians, whose findings, if unanimous, are admissible in court should the claim result in a lawsuit.

One comment pointed out that medical errors are often systemic, i.e., they result from erroneous procedures or practices by hospitals, drug companies, and other institutions rather than from mistakes by individual physicians. However, those entities are suable.

It was also noted that heavy insurance premiums might drive some physicians from practice and deter some people from becoming physicians in the first place. That is true, but if the result is less medical negligence, the benefits might exceed the costs. In addition, the overall effect on medical expenses is likely to be slight, because physicians' fees are only a moderate component of overall medical expenses. Furthermore, if physicians are driven out by high premiums, the resulting reduction in the supply of physicians should enable those who remain to raise their fees.

A slightly esoteric point: one comment suggested that pain and suffering, disfigurement, and other nonpecuniary losses imposed by medical errors are not real costs because people rarely try to buy insurance against such losses. However, the reason they do not buy insurance is not that the losses aren't real, but that insurance is designed primarily for replacing income or defraying an expense.

I also disagree that negotiation of the level of medical care should be left to physician and patient, because they have a preexisting contractual relationship. The principle is fine (though it would require a chance in existing law), but the transaction costs would be prohibitive because of the patient's ignorance of particular procedures, risks, and so forth. In addition, a physician who told his patient that he would operate on him only if he waived his right to sue for medical malpractice would be signaling the likelihood of an unfavorable outcome. Hence physicians would be reluctant to suggest such waivers.

I was pleased to learn from two of the comments that some insurance conmpanies do experience-rate medical malpractice insurance. Why others do not is a mystery, but it occurs to me that one possibility is that the inaccuracy of judicial determinations of malpractice is so great that being sued and losing a malpractice case does not provide useful information about the likelihood of being sued in the future. On this view, malpractice liability is random. One hopes not; but if so, reforms, such as those suggested above, aimed at increasing the accuracy of malpractice determinations are urgently needed.

Posted by posner at 02:33 PM | Comments (3) | TrackBack

There is a movement afoot, assisted by the strengthening of Republican control over Congress, to impose federal limits on tort litigation, particularly medical malpractice; premiums for malpractice insurance have soared in the last two years and physicians are protesting vigorously.

The costs of malpractice premiums are only about 1 percent of total U.S. health-care costs. Moreover, insofar as physicians are forced to swallow the cost of the premiums rather than being able to pass them on to their patients or their patients’ insurers in the form of higher prices, the premiums do not actually increase total health-care costs. There is an indirect effect, however, insofar as malpractice liability causes doctors to practice defensive medicine. But there may be offsetting benefits, to the extent that defensive medicine actually improves outcomes for patients; and surely it does for at least some. What is more, because malpractice insurance is not experience-rated—physicians are not charged premiums based on their personal liability experience—malpractice liability may have only a slight effect on physicians’ methods or carefulness, except insofar as physicians are pressured by their insurers to change their methods in order to reduce the amount of malpractice litigation.

The relation between malpractice premiums and malpractice judgments is also uncertain. No doubt capping judgments, which is the principal reform that is advocated, has some tendency to reduce premiums, but perhaps not much, because there is evidence that premiums are strongly influenced by the performance of the insurance companies’ investment portfolios.

A better reform would be to permit, encourage, or even require insurance companies to base malpractice premiums on the experience of the insured physician, much as automobile liability insurance is based on the driver’s experience of accidents. That would make malpractice liability a better engine for deterring malpractice—which in turn would reduce malpractice premiums by reducing the amount of malpractice. Capping judgments, in contrast, would reduce the incentive of insurance companies and their regulators to move to a system of experience-rated malpractice insurance.

It is always important to distinguish between financial and real costs. Insofar as malpractice liability merely transfers wealth from physicians to (some) patients, aggregate costs are unaffected. The real cost of malpractice liability is limited to the cost of the actual resources consumed by such liability, principally the time of lawyers and expert witnesses (roughly half the total amount awarded in judgments goes to pay lawyers and expert witnesses), unless defensive medicine is assumed to cost more than its benefits in improving treatment outcomes. The real benefit of malpractice liability is its effect if any in deterring medical negligence; reducing that benefit would impose a real cost. Hence it is simplistic to assume that the total annual malpractice premiums paid is a good index of the net social cost of malpractice liability, or that measures to reduce those premiums by capping malpractice liability would result in a net improvement in welfare. To repeat, part of the premiums represent simply a wealth transfer from physicians to the patients who receive malpractice judgments or settlements paid by insurers. The part (roughly half) that pays for lawyers and expert witnesses should be understood as the cost of maintaining a system for increasing medical safety; the efficacy of the system could be improved, I have argued, by experience rating, but not by capping judgments.

In any event, there is no compelling case for federal limitations on malpractice liability. The issue belongs at the state level, and as reported in a New York Times article last Friday, a number of states have adopted or are seriously considering adopting the kind of caps being advocated in Congress. Federal legislation would simply stifle state experimentation with different methods of regulating physicians and prevent us from learning which is best.

There is a stronger case for federal regulation of class actions, as in the case of suits against asbestos manufacturers. When the members of a plaintiff class are scattered across the country, the class lawyer has a wide range of places in which to sue, and there are certain counties in the United States in which judges and juries are disproportionately generous to tort plaintiffs. Most of the costs of a large judgment or settlement in such a case are exported to other states, while the benefits are concentrated in the locale where the suit was litigated, because of the business generated for local lawyers, as well as the judgments or settlements received by the members of the class in the locale. This is a formula for abuse, concretely for a tendency for such judgments and settlements to exceed an unbiased estimate of the true costs imposed on the class by the defendants’ misconduct. Malpractice litigation does not give rise to such an abuse to any very great extent, because patient and physician are usually in the same state, and a single plaintiff has only a limited choice of courts in which to sue. This is another reason not to make medical malpractice the principal object of federal tort reform.

We should be cautious about tort reform. It would be unfortunate if interest-group politics, and anecdotes concerning outlandish lawsuits (such as the suit against McDonald’s by the customer who spilled hot coffee in her lap), were allowed to obscure the difficult policy issues.

Posted by posner at 08:59 PM | Comments (41) | TrackBack

I agree with Richard Posner that the ability to sue against medical malpractice, drunk drivers, and sellers of defective and dangerous products induces doctors, producers, and others to pay closer attention to what they do. I also agree that reforms are generally better left to the states than to the federal government in order to allow competition among state legal rules. However, without reform of class action suits, Posner’s appropriate criticism of the right to bring class suits in more generous jurisdictions undermines the argument to leave legal reforms entirely to the states.

He is right too that a few foolish cases should not be the basis for policy. Yet there is need for some tort reform because there is too much litigation, compensatory damages are often too low, and punitive damages have sometimes been grossly excessive.

“Compensatory” damages are supposed to compensate individuals for their losses from medical malpractice, and other careless or reckless behavior. In practice, they commonly refer to the loss of earnings due to injury or death from such actions. Yet the correct measure of compensatory damages should equal what individuals are willing to pay to avoid death or the injuries in question. The value placed on loss of life, or on substantial disabilities, are usually many times greater than the loss in earnings.

Critics of the American tort system generally neglect this tendency to underestimate compensatory damages. To be sure, this is not easily corrected by legislation, although it might be possible to have useful rules of thumb about the appropriate ratio of full damages to lost earnings. And greater recognition that compensatory damages are often much too low would be helpful to juries and judges.

“Punitive” damages are often imposed in order to encourage doctors, drivers, and producers to be more careful and responsible. The system would be working well if any underestimated compensatory damages were just about offset by inflated punitive damages. But punitive damages have sometimes been huge multiples of compensatory damages -occasionally exceeding 50 or 100 times compensatory damages- and may only reflect a jury’s or judge’s perception about how deep are the pockets of defendants. Although huge punitive damages tend to be reduced on appeal, they often remain much too large.

The rule of thumb in anti-trust litigation is that punitive damages equal to three times compensatory damages sufficiently recognizes that many anti-trust violators are undetected and are not punished. A limited ratio of punitive to compensatory damages would also be appropriate in the great majority of other tort cases.

The Supreme Court in a couple of cases in recent years has in fact suggested that punitive damages should generally not exceed nine times (I would add correctly measured) compensatory damages, and their ruling applies to state as well as federal punitive damages. I believe that as in anti-trust cases, the ratio should typically be much less than 9. One exception, first articulated in an opinion by Judge Posner, is when compensatory damages to each person harmed are very low, while the total harm may be large because many persons suffer small loses. In these cases, it would be desirable to raise the punitive-compensatory ratio to encourage lawsuits to discourage the behavior that produced these harms.

Excessive litigation in the United States creates inefficient defensive practices by doctors and others, and sometimes destroys good companies, as in the asbestos litigation, and perhaps now in the looming Vioxx class action suits against Merck. Litigation against doctors and others is justified when they could have but did not take sufficient care to insure safety, if they lied, or if they withheld evidence about safety. In these cases, doctors and producers should be responsible because they have much easier access to the relevant information than do patients and consumers.

On the other hand, consumers should bear responsibility for their actions when they could have easily prevented the damage. The MacDonald’s customer who drove with hot coffee on her lap should not have won her lawsuit, and perhaps should have been forced to pay at least some of MacDonald’s legal expenses. Similarly, parents who carelessly allow their children access to dangerous medicines should be responsible, not the manufacturer of medicine bottles.

In many cases there is reasonable doubt as to whether patients or doctors, consumers or producers, could more readily have avoided the harm. I believe in these cases there should be a presumption toward “caveat emptor”- buyer beware. A bias toward buyer beware when there is considerable doubt about who could have more readily avoided the damages would cut out much useless and costly litigation without discouraging the justified cases where there is negligence, fraud, or information suppression by doctors, drivers, producers, and others.

Posted by becker at 07:36 PM | Comments (17) | TrackBack