What We Know About Malpractice Settlements

• Author: Philip G. Peters, Jr.
• Position: Ruth L. Hulston Professor of Law, University of Missouri-Columbia
• Pages: 1785-1833

Ruth L. Hulston Professor of Law, University of Missouri-Columbia. I am indebted to Chris Guthrie, Jennifer Robbennolt, Grant Nelson, and Michelle Mello for their comments on an earlier draft.

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Introduction

Critics of malpractice law contend that the civil justice system is an irrational lottery in which a plaintiff's chance of receiving a substantial settlement has nothing to do with the defendant's fault. President George W. Bush stated the charge this way:

Doctors and hospitals realize . . . it's expensive to fight a lawsuit, even if it doesn't have any merit. And because the system is so unpredictable, there is a constant risk of being hit by a massive jury award. So doctors end up paying tens of thousands, or even hundreds of thousands of dollars to settle claims out of court, even when they know they have done nothing wrong.¹

Is this claim correct? Its strongest empirical support comes from the 1996 findings of the Harvard Medical Practice Study ("Harvard Study").²This study concluded that the merits of a malpractice claim have no bearing on the likelihood of a settlement.³ The authors of the study even suggested that the entire adjudicative process is "an expensive sideshow."⁴

The widespread reliance of both tort critics and the media on this single study is unfortunate.⁵ Its findings are decidedly inconsistent with the growing body of empirical data that researchers have accumulated over the past two decades. Taken as a whole, these studies demonstrate that settlement outcomes are driven by the strength of the plaintiff's case.⁶ Weak claims fare worst, toss-ups do better, and strong claims fare best. Although the fit is not perfect, it is surprisingly good.⁷

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Remarkably, however, scholars and policymakers continue to understate the strength and consistency of the correlation between negligence and settlement outcome.⁸ Some of that misunderstanding probably stems from the unfavorable findings in the Harvard Study. Some is due to the absence of widespread knowledge about the favorable findings of the overall body of settlement research. Only Tom Baker, a prominent professor and scholar in this field, has attempted to collect those findings and to examine their implications.⁹ However, his important summary of the research did not attempt to quantify the cumulative findings of the studies or to identify the patterns revealed by them. Nor did he offer a theory to explain the research findings. This Article takes up those tasks.

When examined in detail, the research data support several important hypotheses, none of which support the suspicions that malpractice settlements are irrational. Weak claims are much less likely to result in a settlement payment than strong claims. Only 10% to 20% of the weak cases result in a payment, and it is typically only a token amount, such as forgiveness of any unpaid doctor bills. Strong cases settle at a much higher rate (85% to 90%) and for a much larger average payment. Borderline cases fall in the middle.

The evidence that defendants avoid payment in the great majority of weak cases and settle the rest for highly discounted amounts means that the settlement rate, standing alone, is a misleading indicator of the problem of "erroneous" payments. In addition, the data indicate that defendants are able to extract similar advantages in their settlement of borderline cases. They make settlement payments in approximately half of these cases and then pay a highly discounted amount in the cases they decide to settle. This amounts to a double discount and results in a payment below the expected value of the claim. Although the data do not permit a similarly confident statement about the resolution of strong malpractice claims, the data hint that they too are settled for less than expected value. The ability of malpractice defendants to settle cases below expected value suggests that defendants have a marked superiority in bargaining power. In turn, that superiority enables them to obtain settlements that are more favorable than are justified by the merits.¹⁰

The superior bargaining power possessed by malpractice defendants probably has several sources. These sources include superior risk tolerance, better access to information, more-experienced attorneys and insurance representatives, easier access to expert witnesses, and the incentive to fightPage 1787 low-odds claims vigorously.¹¹ Defendants probably gain additional bargaining power from the fact that malpractice claims are very hard to win at trial, even with strong evidence of negligence.¹² As a result, the data strongly contradict the popular assumption that the settlement process is unfair to defendants.

This Article proceeds as follows. Part I summarizes the findings of the principal studies regarding medical malpractice settlements. Part II synthesizes those findings and explores their implications, paying special attention to the likelihood of double discounting. Part III identifies the likely sources of the defendants' superior bargaining power. The Article concludes by suggesting that the Harvard Study was an outlier, that settlement outcomes are closely tied to the quality of claims, and that the departures from this pattern favor defendants more often than they favor plaintiffs.

I The Studies

Over the past three decades, more than a dozen studies have examined the relationship between the strength of a plaintiff's malpractice claim and the eventual settlement of her case. The resulting body of data amply justifies a search for patterns and policy implications. This Article undertakes that search.

The studies can be usefully subdivided according to the sensitivity with which they rated the quality of care given to the patient.¹³ Most of the studies divided the claims into three or more categories, e.g., negligent, not negligent, and uncertain. A few studies, however, used only two categories, e.g., negligent or not negligent. This difference proved material. The two-category studies showed a much weaker correlation between negligence and settlement outcome than the three-category studies. As this Article will explain, the weaker correlation is a predictable consequence of the two-Page 1788category design.¹⁴ As a result, the number of categories used by the study is an attribute that must be taken into account when drawing conclusions from the cumulative data. To set the stage for that analysis, the literature review that follows discusses the two sets of studies separately.

A Three-Category Studies

In eight of the settlement studies, the researchers used three categories to rate the quality of care given to the patient by the defendant physician. All eight found a direct correlation between the quality of care rendered and the likelihood of a settlement payment. Only three of these eight studies tested the relationship between quality of care and settlement size, and they reached conflicting conclusions. The studies are discussed in the order of their sample size, except when multiple studies were done by the same authors.

1. Taragin et al

In the largest of the malpractice-settlement studies, Mark Taragin and his colleagues examined 8,231 claims made against doctors insured by a physician-owned New Jersey company between 1977 and 1992.¹⁵ As a part of that company's claims procedure, whenever the claims representative had harbored any doubts about the defensibility of a claim, a review of the claim was performed by a physician chosen from a panel of volunteers from the same medical specialty.¹⁶ The insurance company's expert reviewer discussed the case with the "claims representative, the defense attorney, and the defending physician" before giving his evaluation.¹⁷ In orthopedic and neurosurgery cases, a panel of outside physicians was employed and a majority vote determined the rating of defensibility.¹⁸

After examining the disposition of these claims, the authors found a significant association between negligence and the probability of settlement.¹⁹ The plaintiff received a settlement payment in 91% of the casesPage 1789 where medical care was judged to be negligent, in 59% of the cases where liability was unclear, and in 21% of the cases in which the medical care was defensible.²⁰ The correlation between care quality and settlement size was also positive but was not statistically significant.²¹

The authors concluded, "The defensibility of the case and not the severity of patient injury predominantly influences whether any payment is made. . . . Our findings suggest that unjustified payments are probably uncommon."²² They reached this conclusion despite the finding that payment had been made in 21% of the "defensible" cases.²³ The authors attributed this discrepancy to their rating process:

First, the determination about physician care was made very early after a claim was generated and may have been inaccurate as more information became available. Second, a physician-based review process may be biased toward assessing physician performance in the physician's favor. Third, the insurance company may err toward an initial determination of physician care...