The post New Regulations Only Limiting Justice? appeared first on Show-Me Institute.

For background, a civil litigation funding company helps a person pay for the costs of a lawsuit before a reward is obtained. In return, the company gets a portion of the reward if the litigant is successful. Critics say that civil litigation funding companies often take an unreasonably large portion of the eventual reward. Critics are also hopeful that regulation will reduce the number of lawsuits brought against businesses, saving businesses money.

Defenders of civil litigation funding say that without these funding arrangements, many people with legitimate claims wouldn’t be able to access our justice system. In many instances people who’ve been injured or wronged would be forced to settle with an insurance company for a fraction of the compensation necessary to make them whole again. If you make it harder for people to fund lawsuits, you won’t necessarily decrease the number of frivolous claims—but you will limit access to justice for people who can’t afford to wait for resolution of their claim.

I’m most interested in whether regulating lawsuit funding companies is consistent with a free market. Shouldn’t a plaintiff be able to sell a portion of a legal claim at any freely agreed upon price? What business does the state have in regulating how people pay for a lawyer?

Professor Jeremy Kidd, a law professor at Mercer University, addressed the Alabama State Senate Judiciary Committee opposing a bill that would regulate lawsuit funding in Alabama. In doing so, he helped answer this question:

“This issue—and so many others—requires acknowledgement of a simple truth, that there is a fundamental difference between being pro-business and being pro-market. Free markets enable tremendous human flourishing, and protecting markets is essential to growth. Importantly, however, while protecting markets protects consumers and businesses, protecting businesses typically improves the businesses’ bottom line at the expense of markets and, by extension, every consumer. Senate Bill 67 is pro-business, rather than pro-market, because it is designed to protect businesses against lawsuits without inquiring as to whether those businesses are actually at fault.”

I see a great deal of truth in this statement. Real tort reform will address the problematic aspects of our tort system. Regulation of civil litigation funding appears to ignore the merits of individual lawsuits, making it even more difficult for poor Missourians to pursue legitimate legal claims.

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In this appearance, Stokes and the host discuss topics such as the recent supreme court decision overturning Missouri’s legislatively imposed cap on non-economic damages in lawsuits, the cost of malpractice insurance, the back-to-school sales tax holiday, the state’s uniquely low cigarette tax rate, and the imminent primary election.

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In its effort to change the business climate in Missouri, the Missouri Chamber of Commerce and Industry has identified three broad policy initiatives for the current legislative session. According to Chamber president Daniel Mehan:

“Among the list are issues left unresolved last legislative session that will be advocatied (sic) by Missouri’s top business associations and employers: workers’ compensation reform, employment law, and tort reform,” Mehan says.

Within the context of these broader policy initiatives, the following topics are among the most important issues the Chamber addressed. As briefly discussed below, each deserves careful consideration as a reform measure that can foster economic growth in Missouri.

1. Making Missouri employment discrimination law consistent with federal law. Businesses face confusing and parallel obligations under federal and state laws. Making Missouri law consistent with federal law reduces confusion and lowers compliance costs for businesses, which in turn lowers the cost of doing business in Missouri. Consumers and businesses then share the benefits of lower costs.
2. Capping damages in employment discrimination cases. Caps make future business costs more certain and predictable. Although the plaintiffs’ bar does not favor this idea, no one is closing the doors to the courthouse. Policymakers should carefully weigh the benefits and costs and make the decision that best advances business competitiveness and the administration of justice.
3. Exempting co-employees from liability for injuries sustained in workers’ compensation cases. Currently, employees injured by co-employees at work may sue the latter for damages outside the workers’ compensation system. This gives rise to costly disputes among employees, disruptions in the workplace, and an increase in employer costs (not always monetary). Also, multiple lawsuits for the same injury may occur as the injured employee sues both his employer in workers’ comp and his co-employee in circuit court. Time, money, and effort may be economized by requiring injured employees to maintain a single suit in a workers’ comp venue.

Again, these are but a sample of current issues impacting the business climate in Missouri. These issues are important in that each imposes additional costs on businesses in Missouri. As a result, consumers and households may suffer because they will face higher prices, fewer goods, and lower employment. Remember, we are all in this together, despite what some others may say or imply. Isn’t it possible that sometimes what is good for business is good for the people?

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We have debated the important issues of corporate farms, local land-use controls, and tort reform here at Show-Me Daily before. My own views favor general tort reform (as passed in Missouri in 2005), and the power of local communities to pass zoning regulations (although I would be perfectly happy to live somewhere without zoning), but generally oppose special laws. In this case, those special laws could be seen as either tort limitations or land-use contraints involving only large-scale animal farming operations.

The theoretical free-market solution here does not involve either zoning  restictions or tort limitations. On the other hand, the practical solution probably does not involve them, either. If an area does not have zoning, or is zoned for industrial uses, a CAFO should be able to open. If that CAFO then harms its neighbors, its owners should be held responsible under the same civil litigation rules that all businesses face. Regular readers know that I generally favor practical solutions over theoretical ones, but it’s nice when they fit together.

It may seem that I have arrived at a conclusion despite my initial statement that I don’t know where I stand. Not really, though — this is a very tricky issue, and I’d love to read comments from people with firsthand knowledge of these cases. I don’t want to see businesses driven from Missouri by nuisance lawsuits, but, from what I have read, I don’t see these lawsuits as petty or improper. I think this was one of the best points in the article:

A grad student pointed out — correctly — that the innovations in odor-reducing technology are the direct result of litigation. Companies like Smithfield didn’t start spending money to reduce the stench of tens of thousands of hogs and their waste until the threat of legal action provided incentive to do so […].

If the company in question is improving its production process, it won’t be nearly as affected by the lawsuits in the future. That is something we can all root for.

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The bill would prevent consumers from suing the food industry for weight gain, obesity and health problems caused by long-term consumption of fattening foods and non-alcoholic drinks such as soda.

In general, I believe that the less government does, the better. However, encouraging tort reform is not inconsistent with a free-market philosophy (we discuss the issue often on Show-Me Daily), and interpreting this policy as simply another government restriction is an oversimplification. Reducing frivolous lawsuits will have positive consequences for companies and their consumers.

One possible benefit of this policy is that it will encourage people to take ownership over their own health, encouraging personal responsibility and limiting government dependence — things that Free Marketeers like me support (e.g., health savings accounts, limiting the welfare state, etc). Americans tend to blame their weight problems on everyone except themselves, but this policy would limit their ability to blame food companies. As I always say, personal responsibility is the best medicine. As one state legislator puts it:

“Let’s say I choose to eat 100 bananas and my stomach ruptures,” said Rep. Glenn Gruenhagen, a Glencoe Republican. “That’s not the banana growers’ fault.”

It’s also possible that more businesses will locate to the state because they will no longer fear a barrage of frivolous lawsuits. Frivolous lawsuits increase the cost of doing business in the state, which discourages companies from locating there.

Additionally, perhaps this policy would result in lower food costs, much like medical malpractice reform leads to lower health costs. In the health care industry, medical providers practice defensive medicine; I wonder if an equivalent practice exists in the fast food industry?

Lawmakers in Missouri would be wise to watch how Minnesota fares under this policy, if and when it is enacted. As long as the measure doesn’t restrict consumers from suing food companies when they incur actual harm (e.g., health code violations), it will likely benefit the state.

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There is a lot of good information in the series, and there are some solid recommendations for improvement in medical care. There are also some suggestions that make no sense at all, and the articles take some harsh and inaccurate shots on people I have known for a long time. For example, I don’t think there is anything wrong with a lawyer who represents doctors in civil cases serving on the medical licensing board. However, should the board itself have more than one public member? That is another question, but a good one raised by this series. I think the answer is that it should, which is similar to what I recommended a while back for judicial appointment boards.

This is the first time that I have blogged about a story in which my own dad is quoted, although the quote itself is not germane to this post.

The heart of the story is that Missouri’s medical licensing system is not strict enough. There are some frightening stories here about how doctors who have harmed people can continue to practice, leading to greater harms. Closely related are stories about doctors who have committed crimes unrelated to practicing medicine, who also continue to practice.

Not surprisingly, the series has led to calls for the licensing board to toughen up the penalties for doctors. That is different and more defensible than calls to toughen up the licensing of doctors in the first place. However, I think that the best improvements are the ones that involve making more information about doctors available to the public so that patients — and hospitals who hire doctors — have better data available all along. As Sen. Bill Stouffer said, in a quote with which I entirely agree:

State Sen. Bill Stouffer, R-Napton, said changes to the state laws should start with making the letters of concern a public record and allowing patients to compare doctors’ performance.

“I think transparency would cure a lot of our problems in health care,” Stouffer said. “It’s amazing what the light of day cleans up.”

We do have a system in which doctors who harm patients can be held accountable. It is our very robust civil court system. I supported tort reform back in 2005, but even with those needed changes, doctors that irresponsibly treat patients can still be readily held accountable. Is that enough, though? Do we need tighter changes to state criminal penalties and licensing restrictions in order to monitor medical care?

If those changes involve improving the information available to everyone, then I support them, although I understand that concerns of doctors who would fear that some members of the public would not be able to tell the difference between a bogus malpractice suit and a legitimate claim.

If the changes involve restricting the license to practice medicine for those convicted of a crime related to medical care (i.e., sexual abuse of patients, or Medicare fraud), then I can also support that. If the changes involve restricting the license to practice for those convicted of a crime unrelated to medical care, then I have to question the benefit of stripping their license. If they commit a crime, they should receive the proper punishment for that crime. I fail to see why, after they have served the punishment for that crime, they should not be allowed to earn a living in their profession. A person who does not pay taxes on their rental property at the Lake of the Ozarks should be properly punished for that, but not prevented from filling my cavities or diagnosing the debilitating case of globophobia I currently suffer from.

So, don’t come after me and ask whether I think a child rapist should be allowed to practice medicine, because child rapists should receive prison terms long enough to make the practice of medicine moot.

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In 2004, the Congressional Budget Office conducted a review of nine studies that looked at the effects of tort reform. The review notes that studying tort reform is difficult because of the many types of reform and the issue of controlling for differences between states, but it does present some evidence in favor of imposing caps on non-economic damages. Of the three studies that examined this specific type of reform, two found that premiums declined significantly for at least some insurance lines (the other one found no significant effect). These three studies also found that insurers’ profitability increased after the imposition of caps. Contrary to what some politicians may have you believe, this is a good thing. Health insurance profit margins are typically about 6 percent, give or take a few points, which is very low compared to other forms of insurance. Increased profitability for health insurance companies allows for more firms to survive and compete for business, which will drive down costs and make insurance more affordable.

Opponents of caps on non-economic damages would probably point to this same CBO study, which also points out that malpractice costs account for less than 2 percent of health care spending. But this does not take into account the amount of defensive medicine that is practiced by physicians on a daily basis. According to this Gallup poll of 462 randomly selected U.S. physicians, one in four health care dollars is spent on defensive medicine. The study defined defensive medicine as “the practice of diagnostic or therapeutic measures conducted primarily not to ensure the health of the patient, but as a safeguard against possible malpractice liability. This may include tests, prescriptions, hospitalizations and referrals that may not be medically necessary, but are viewed as providing protection from a potential lawsuit.”

As demonstrated by this survey, this is a very real phenomenon. For example, a young female who complains of frequent headaches might get a brain MRI to rule out a tumor, even though she is young and has minimal risk factors. The only way to legally and definitively say that there is no tumor is by using an MRI, even though clinical suspicion is low and does not warrant the scan. So in a case like this (a real example provided to me by a medical student), legal implication trumps clinical judgment, and the unnecessary tests that result then drive up the cost of health care. Caps on non-economic damages mean that doctors can reduce the amount of defensive medicine they practice, because they know they’re not subject to the arbitrary determinations of juries about how much a plaintiff may deserve in compensation. They can instead focus on using their clinical training to make the proper diagnoses and do their jobs as doctors.

Another tangible benefit of imposing caps on non-economic damages is the increased physician supply that occurs as a result. A study published in 2005 looked at the impact of caps on non-economic damages from 1985 to 2000, and concluded that caps increased the per-capita supply of physicians by 2.2 percent relative to states without caps (another study put this number at 2.4 percent; these studies were summarized by the American Medical Association in this report). Missourians will therefore have greater access to care as a result of the court’s decision in this case.

Unfortunately, because the court did not specifically invalidate the plaintiff’s other complaints about the 2005 tort reform bill’s supposed unconstitutionality, the door is open for more challenges in the future. Let us hope that any such challenges are rejected.

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On the other hand, not having a cap can encourage too many lawsuits and add to medical cost inflation. However, it is important to keep the costs of excessive lawsuits in perspective. The Congressional Budget Office estimates that the savings for instituting a typical set of tort reforms (including but not limited to a cap on damages) saves 0.5 percent on total medical spending. This is not completely insignificant, but those savings would be totally swamped by a single year’s medical inflation.

There is a way to reform the tort system without giving anyone special privileges. Outside of the United States, most of the developed world uses what is usually referred to as the “loser pays” system, whereby whoever loses the lawsuit must pay both sides’ legal expenses. This system would have the salutary effect of eliminating frivolous lawsuits and lowering total lawsuit expenses. A 2008 Manhattan Institute study found that when compared to countries with the loser pays system (e.g. Britain, Australia, Germany), the United States spends at least twice as much on tort litigation as a percentage of GDP. If Missouri instituted loser pays, we could reap the benefits of lower litigation costs without creating a privileged legal class.

The post Real Tort Reform appeared first on Show-Me Institute.

Right now, having tort reform laws on the books puts us at a comparative advantage with other states and other nations when competing for new industries. The loss of these laws would put us at a disadvantage, discouraging companies from creating new jobs in Missouri which could be created more cheaply in other states.

I actually disagree with James on a related issue: that of judicial appointments in Missouri. However, I totally agree with every word he wrote in this piece. If the state Supreme Court strikes down the current tort laws that were enacted in 2005, it would be a disaster for Missouri in countless ways, especially economically. I won’t get too worked up, because I am optimistic that the court will agree that elected officials have a right to set limits on government actions, such as court verdicts.

If opponents of tort reform laws want to go back to the way it was in Missouri, they need to get people elected to office who run on rescinding the lower award limits and other reforms that were passed. After all, the officials elected in 2005 almost all ran on the issue of tort reform. The people of Missouri elected legislators who had proposed to limit awards, change venue laws, etc. If you want to change those laws, do it through the democratic process — not the courts.

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