Trial Lawyers Inc. Health Care: The Lawsuit Industry's Effect on American Health

This report is the third entry in the Manhattan Institute Center for Legal Policy’s Trial Lawyers, Inc. project. Our initial report, Trial Lawyers, Inc.: A Report on the Lawsuit Industry in America, 2003,[1] examined how the litigation industry operates in the U.S. Sensing a need to explore how the plaintiffs’ bar operates on an individual state basis, we released Trial Lawyers, Inc., California, 2005,[2] which examined how the litigation industry operates in the nation’s largest state.

Trial Lawyers, Inc.: Health Care represents a logical extension of this project. In our original report, we explained the business model of the plaintiffs’ bar and described how Trial Lawyers, Inc.—like any other big business—had various “business lines” crucial to its current and future profitability. Since our closer look at a particular state’s litigation industry proved so useful, we decided that an in-depth exploration of one of Trial Lawyers, Inc.’s many business lines might be equally revealing. For our first such effort, the health-care sector is a sensible starting place: health care represents over 15 percent of the U.S. economy, up from only 5 percent in 1961.[3]

While the excesses of the litigation industry alone cannot explain America’s mounting medical costs, litigation is a large, and growing, contributor to our health-care bill. As the graph below shows, medical malpractice liability—the “tort tax” on doctors and hospitals, whose costs constitute the majority of health expenses—has grown much faster than health-care inflation.[4] Indeed, medical-malpractice liability alone constitutes over 10 percent of the entire U.S. tort tax, which by 2003 represented over $3,300 for a family of four.[5]

Although medical-malpractice liability provides Trial Lawyers, Inc. with its largest health-care sector revenue stream, litigation over pharmaceuticals and medical devices exacts a staggering cost on an increasingly important part of the U.S. economy. Wyeth’s massive reserve for Fen-Phen litigation is $21 billion,[6] and Merck’s exposure to Vioxx lawsuits may total as much as $50 billion.[7]Such figures are astronomical in comparison with these companies’ individual budgets, representing nine to twelve times each company’s annual research and development costs.[8] In fact, since each drug was only widely used for about four years, the approximate annualized liability cost of these two drugs comes to almost $18 billion—equivalent to 10 percent of the annual revenues for the pharmaceutical industry as a whole.[9]

As this report will detail, far from limiting its attacks to doctors and drug makers, the plaintiffs’ bar is attacking all levels of the health-care distribution chain. Some of Trial Lawyers, Inc.’s favorite targets, nonprofit hospitals and nursing homes, are the health-care providers that minister to our nation’s most vulnerable—the poor and the elderly. And as if its effects on health costs were not bad enough, the litigation industry has focused its crosshairs on managed- care providers, who, while politically unpopular, are crucial to dispersing risk and providing for health care at affordable cost.

It is also important to emphasize that the direct costs of healthcare litigation only begin to scratch the surface of the toll that these predatory lawsuits exact on our economy—and on our health itself. Med-mal lawsuits tend to inflate health-care costs by encouraging “defensive medicine”—unnecessary procedures and referrals that doctors and hospitals prescribe in order to limit their exposure to future litigation. Studies suggest that defensive medicine costs are several times higher than the direct liability costs themselves.[10]

Nor are we made safer by product-liability litigation over drugs and medical devices. Such suits inevitably drive innovation from the marketplace that would lead to net health improvements not only for U.S. society but for the entire world. Since any drug manufacturer might be held accountable for unanticipated liability of the magnitude of Vioxx and Fen-Phen, every drug company will consider such numbers in its research and investment decisions, and many drugs that would otherwise save lives or improve the quality of lives will never reach the market.

Trial Lawyers, Inc.’s defenders typically will assert that tort litigation has a deterrent effect on risky or negligent activity, which it undoubtedly does, but in our current civil justice system it also deters any activity that might lead to high-cost lawsuits, which is not at all the same thing as actual risk. For instance, a seminal Harvard Medical Practice Group study gathered data on more than 30,000 New York hospital patients from a weighted sample of more than 2.5 million and found that the vast majority of medical-malpractice suits did not involve actual medical injury—and that most cases in which there was actual injury involved no doctor error[11]—which makes the claim that medical-malpractice litigation serves mainly to deter doctor misconduct a peculiar argument indeed. When our liability system punishes so indiscriminately, it does not efficiently deter bad conduct but rather reduces health-care access by reducing the supply of doctors; encourages expensive, unnecessary, and often dangerous procedures; and lowers the expected return from research into new medicines and medical devices that save lives.

Finally, it is worth noting that the litigation industry does a very poor job compensating the victims it professes to be protecting. Not only are most medical-malpractice claimants not harmed by avoidable doctor error, but most medical-malpractice victims never sue, and plaintiffs typically wait years to recover damages—then getting less than 50 cents on the dollar, with lawyers’ and administrative fees soaking up the majority of settlements and verdicts.[12] When Trial Lawyers, Inc. pursues mass tort drug liability claims like Fen-Phen by gathering large numbers of highly questionable cases using attorneysponsored screenings, and settles those along with legitimate claims, actual victims of drug side effects receive insufficient compensation.[13]

With Trial Lawyers, Inc.: Health Care, the Manhattan Institute hopes to shed light on the unwholesome effects of lawsuit abuse on our wallets and our well-being. In the concluding section, we’ll offer prescriptions for restoring sanity to the system; while the current prognosis for U.S. health care is bleak, thoughtful reform can help protect medical innovation, reduce costs, improve efficiency, and ensure that the truly injured are compensated in a fair and timely fashion.

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