Medical Malpractice ain't easy

"Advocates of reducing the amount insurers have to pay for medical mistakes often cite California as a model. In the 1970's, California set a ceiling of $250,000 for jury awards for pain and suffering, and malpractice insurance prices have not soared there. But Harvey Rosenfeld of the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif., says patients have suffered. Because of the cap on payouts, he said, many lawyers refuse to represent malpractice victims, making it difficult for them to pursue claims."

Hmm... let's start from the beginning... imagine that one day, John Smith (that would be you), were injured as a result of medical malpractice: a surgeon accidently left his spatula in your stomach and you experienced pain and suffering as said spatula passed out. After hiring a lawyer and submiting this case to a jury of your peers, they awarded you a monetary value, which would be paid by said surgeon's insurance carrier.

This scenario belies a very intricate equilibrium. Each entity has different incentives under the system, with the result that the payment cap becomes the linchpin that holds it together (abeit not very well). John Smith has two incentives, 1) to inflate his pain and suffering and 2) To file as many claims as he can, because he would not have to pay attorney fees unless he won. The Lawyer makes money either way; generally, he has the incentive to facilitate the lawsuit because he makes more money if he wins. The insurance company charges Mr. Surgeon an insurance premium, based on whether Mr. Surgeon has a prediliction towards leaving spatulas in patients. However, they have an incentive to overprice the premiums, because heck, they can lose an infinite amount of money. Finally, Mr. Surgeon has the incentive to not leave spatulas in John, so that he can keep his premiums down.

In an ideal world, everything would be hunky dory, but let's look at this in pseudo-mathematical terms: John, if he lost, would lose a little time (with a monetary value placed on it of course), but has the possibilty of (almost) infinite gain, if he won. Sort of like a free lottery ticket. The lawyers and the insurance companies make money either way the case goes*. They want MORE cases. And the surgeon faces the possibility of an infinite loss, in the form of insurance premiums. What he does is attempt to balance that, by changing John a heckuva lot of money for surgery, and making him sign a contract that limits that liablity. But these things, in excess, also give him incentives to leave spatulas in John (because John is only worth so much eh)

What the payment cap does is 1) Limit John's potential lottery ticket by capping it, 2) By capping it, it also gives him less of an incentive to play the lottery i.e sue, because he has to balance it with the loss he might incur. 3) It also limits the incentive of the lawyer to play the lottery, because now he has to balance his wins with his losses. 4) It keeps premiums in check, because using the payment cap and some statistics, a surgeon can calculate how much he should be paying as a premium. 5) Using these same premiums, the surgeon can decide how much he should charge John vis-a-vis how much he needs to charge John to stay in business.

But, there are negatives: Some valid cases would not be tried because they are too minor and some rewards may be too small because of the cap. Whether this is fair or not depends on your point of view. However, keep in mind that because the $250,000 cap was decided by a legislature, we can be sure that it was the proper utilitarian result of a cost-benefit calculation done by society. Yup, several million Californians have balanced the gains and losses of the cap effects.

*lawyers have different incentives, depending on whether they are paid a lump sum, or on a percentage basis, but that doesn't change this much.