We have to change the way we compensate Americans who are injured by a physician's negligence. The current system of malpractice litigation is not fair to patients or physicians.

According to a recent U.S. General Accounting Office (GAO) study, a grossly disproportionate amount of total dollars awarded for malpractice claims go to a small number of claimants. Up to 62 percent of total dollars paid out in 1984 were received by only 2 percent of the total number of claimants who obtained some compensation. These cases usually involve very high awards for pain and suffering in addition to compensation for medical bills and lost wages.

In contrast, many people with small but legitimate medical liability claims are either undercompensated or do not press their claims because the costs of bringing a case outweigh any potential award.

The reason is that attorneys usually accept medical liability cases on a contingency fee arrangement. This means that the injured person pays the attorney a fee only if the claim succeeds. For larger claims, this arrangement may play a worthwhile social function by allowing those who cannot afford to pay an attorney by the hour access to the courts. On the other hand, many attorneys are reluctant to take smaller cases, and these patients often cannot find an attorney even to help evaluate their claims.

Another disadvantage of the current system is that the injured individual receives only a portion of any award. If an attorney successfully argues a case of behalf of a patient, the contingency fee usually runs from 30 to 40 percent and sometimes as high as 50 percent. As a result, the victim's share may not compensate him or her even for out-of-pocket or "economic" damages.

As a former surgeon, I believe it's time to develop a system that will quickly determine fault, not necessarily in an adversarial atmosphere. There should be a predictable compensation system based on economic damages objectively and fairly determined.

Under our proposal, the power of state medical boards, which are charged with licensing, credentialing and disciplining physicians and other health professionals, would be expanded to evaluate malpractice claims and award compensation for medical expenses and economic losses.

A major advantage of such a system is that meritless claims could be identified and dismissed at an early stage in this process. The cost of litigating these unsuccessful claims is a major source of waste in the current system. Millions of premium dollars are spent every year in defending claims that have no merit and, ultimately, very little chance of success.

Claimants also could be represented by their own attorney or one provided by the Medical Board. There would be strong incentives to settle claims where a health care provider has been at fault in causing or contributing to a patient injury. Substantial additional savings in both costs and time would be achieved by early settlements.

If a claim has reasonable merit and the patient wishes, the board will appoint an attorney to represent him or her. If a person has a board-appointed lawyer, the full amount of any award would go to the patient. This is a tremendous cost savings and benefit for the injured individual.

With this plan in place, the now erratic amounts awarded for pain and suffering would level off and it would be much easier to predict the rate of future claims and their economic impact. This in turn would help slow the increase in liability insurance premiums for physicians and hospitals. As it stands now, there are disruptive swings in malpractice awards with substantial sums awarded to one injured individual and nothing to another with injuries of equal severity.

If insurance premiums eventually could be lowered, that would ultimately stabilize health care costs for individual patients and the nation. It also would smooth over the gaps in medical services that are caused when physicians get hit with huge bills in insurance premiums that they cannot afford. Either they stop providing that service or they pass the higher cost on to patients.

If these escalating increases in insurance premiums were eased, physicians who are the most prone to be sued -- such as obstetricians, neurosurgeons, orthopaedic surgeons, cardiovascular surgeons and others -- would, it is hoped, stop their current exodus from the higher-risk areas of treatment.

Yearly increases in medical liability insurance premiums have averaged between 20 and 30 percent throughout the 1980s, in comparison to an average inflation rate of about 3 to 4 percent during the same time period. And for selected specialties, the rates have been much higher.

Everyone makes mistakes, physicians included. But there's a difference between an honest mistake and a negligent mistake. If a negligent mistake is made, the physician should be held accountable.

But the climate of professional liability must be fairer, more stable and more certain, so that physicians -- especially those in high-risk specialties -- can continue to deliver needed care and patients can receive it, with confidence.

James S. Todd, MD, is the American Medical Association's senior deputy executive vice president.