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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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