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Sebastian Mallaby, Columnist

Better Than Lawsuits

We Need a Smaller, Predictable System

By Sebastian Mallaby
Monday, January 17, 2005; Page A17

The tort system is hideously inefficient. According to the Tillinghast-Towers Perrin numbers I cited last week, less than half of the $246 billion that it consumed in 2003 went to compensate victims of misfortune, because more than half was eaten up in administrative and legal costs. Why do I bring this up again? Because a representative of the trial bar called to protest that "there are no real numbers on this stuff," and because there's a big and interesting question that my last piece didn't get to.

First, what about the claim that there are no "real" numbers? In October 2003, the scrupulously cautious and nonpartisan Congressional Budget Office did a report on the tort system. It cited the same Tillinghast data that I used, calling them the most comprehensive available. The CBO generally shies away from reaching policy verdicts, but this time it came close. "The current tort system seems to be an inefficient way to compensate victims," it stated.

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The Trouble With Torts (The Washington Post, Jan 10, 2005)
Trouble With Choices (The Washington Post, Dec 20, 2004)
Flaws of Private Accounts (The Washington Post, Dec 13, 2004)
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Prominent micro-economists, such as Kip Viscusi of Harvard, also regard Tillinghast's survey as the best available. Patricia Danzon, an authority on medical malpractice at the Wharton School, concludes her book on this branch of the tort system by saying: "[C]ompensation can be effected more cheaply and arguably more equitably through first-party health and disability insurance, which operate on lower overhead, pay in a more timely fashion, and pay all victims without regard to cause of the injury."

So the trial bar's "no real numbers" claim is nonsense. The direct costs of torts (lawyers, administrators) are out of all sane proportion to the direct benefits (compensation for victims). But that leaves unanswered a different question. What of the tort system's indirect consequences?

These indirect effects include both costs and benefits. The costs include the possibility that companies may waste time on procedures that serve to fend off lawsuits rather than serving consumers, and that this may distract them from the innovation that drives the economy forward. The best known example is the "defensive medicine" that President Bush likes to invoke. Doctors order up expensive tests to protect themselves from litigation.

But the tort system creates an indirect benefit as well, and Bush would be a better advocate of tort reform if he had the honesty to acknowledge it. Thanks to the trial bar, companies may produce safer products.

How to weigh these costs and benefits? The first thing to be said is that the costs can be substantial. Before he became a Bush official, Mark McClellan co-authored a paper with Daniel Kessler of Stanford in the Journal of Public Economics; it found that states that enacted tort reform reduced spending on hospital patients with heart complaints by 4 percent, with no adverse health consequences.

We don't know if hospitals could achieve similar savings across the board. But 4 percent of a health system that costs around $1.5 trillion a year implies a saving of $60 billion annually. Add in the possibility that some of those resources could be used to come up with fresh treatments or management efficiencies, and the gains could be bigger. Add in savings from other industries, and you start to get an appreciable boost to living standards. This would mean, among other things, that more people could afford health care.

But what about the safety gains we get from the existing tort system? Here it really is true that no measure exists, because companies don't publish numbers on safety expenditures. But it seems pretty clear that, however big these benefits are, intelligent tort reform could make them bigger.

The problem with the current tort system is that it's unpredictable: Doctors or companies can't foresee what they might be sued for, or how much the damages will be, so they don't do as much as they should to change their behavior.

This is almost certainly true of health care: According to a 1999 Institute of Medicine study, medical errors injure perhaps 1 million patients annually -- hardly evidence that the tort system is doing a great job of promoting safety. Other examples are even clearer. Asbestos companies had no idea that their product, deemed safe and legal by regulators, would one day trigger multimillion-dollar lawsuits. So how could these unanticipated lawsuits ever have changed their behavior?

At a minimum, therefore, the tort system should be made more predictable. There should be a short statute of limitations (Wharton's Danzon suggests three years) to prevent asbestos-type lawsuits and a schedule of awards for different types of injury. But, given the direct and indirect costs of the system, making it more predictable does not go far enough; it needs to be shrunk substantially. Government regulation, particularly regulation that forces disclosure of product safety records, can protect consumers more efficiently. If Web sites told patients which hospitals are most error-prone, these hospitals would have a business incentive to be safer.


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