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A Message from the Director
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.
James R. Copland
Director, Center for Legal Policy
Manhattan Institute for Policy Research
next section>>
1. Manhattan Institute Center For LegaL Policy, Trial Lawyers,
Inc.: a Report on the Lawsuit Industry In America, 2003, available at
http://www.triallawyersinc.com/html/part01.html.
2. Manhattan Institute Center For LegaL Policy, Trial Lawyers, Inc., California:
a Report on the LawsuIt Industry In California, 2005, available at http://www.triallawyersinc.com/ca/ca01.html.
3. Centers for Medicare & Medicaid Services, Office of the Actuary: Data
from the National Health Statistics Group, available at http://www.cms.hhs.gov/statistics/nhe/default.asp.
4. Tillinghast-TowersPerrin, U.S. Tort Costs: 2004 Update, Trends and Findings
on the Costs of the U.S. Tort System app. 1A, 2, at 13, 15 (2004), available
at http://www.towersperrin.com/tillinghast/
publications/reports/Tort_2004/Tort.pdf.
5. See id. at 5 (showing tort cost per capita of $845), 15 (showing overall
tort cost at $246 billion and medical-malpractice cost at $27 billion).
6. See Alison Frankel, The Fen-Phen Follies, aM. Law., Mar. 1,
2005, available at http://www.law.com.
7. See The Pain Is Just Beginning, BusIness week onLIne, Sept. 5, 2005,
available at http://www.businessweek.com/magazine/content/05_36/b3949056_mz011.htm
(citing analyst David Moskowitz of Friedman, Billings, Ramsey & Co.).
8. Merck’s 2004 research and development expenditures were $4.01 billion,
based on the company’s 2004 annual report, available at http://www.merck.com/finance/annualreport/ar2004/home/.
Wyeth’s 2004 research and development expenditures were $2.46 billion,
based on the company’s 2004 annual report, available at http://library.corporate-ir.net/library/78/781/78193/items/141903/AR04.pdf.
9. The Centers for Medicare & Medicaid Services assesses total U.S. prescription
drug spending at $179.2 billion for 2003, the most recently available year.
See http://www.cms.hhs.gov/statistics/nhe/historical/t3.asp.
10. See, e.g., Daniel Kessler & Mark McClellan, Do Doctors Practice
Defensive Medicine?, 111 Q.J. eCon. 353-90 (1996).
11. Troyen A. Brennan, et al., Incidence of Adverse Events and Negligence
in Hospitalized Patients: Results of the Harvard Medical Practice Study I &
II, New Engl. J. Med. 324, 370-84 (1991); see also Richard Anderson,
An “Epidemic” of Medical Malpractice? A Commentary on the Harvard
Medical Practice Study, 27 CIv. Just. MeMo (Manhattan Inst. Center for Legal
Pol’y, July 1996), available at http://www.manhattan-institute.org/html/cjm_27.htm.
12. See Tillinghast-TowersPerrin, U.S.. Tort Costs: 2003 Update, Trends
and Findings on the Cost of the U.S. Tort System 17 (2003).
13. See Frankel, supra note 6.
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