Nationwide Review Supports $250,000 Hard Cap

As passed by the Texas House of Representatives, House Bill 4 includes a $250,000 cap on noneconomic damages in health care liability cases. In response to proposals that would index the cap for inflation or create exceptions, the Texas Medical Association and the Texas Hospital Association request that Chairman Ratliff and members of the State Affairs Committee consider the following:

Regarding noneconomic damage caps. As cited by the 2002 Texas Senate Interim Committee Report on "The Medical Malpractice Liability System" (page 2.12), research by the National Conference of State Legislators (NCSL) finds a distinctive correlation between noneconomic damage caps and greater market stability, which can lead to increased competition among insurers, and reduced health care liability insurance rates.

Regarding special exceptions. In July 2002, the Nevada legislature passed a $350,000 cap with special exceptions: gross negligence and cases in which there is clear and convincing evidence of exceptional circumstances. In each of these exceptions, larger noneconomic damages can be assessed. The problem is the subjective nature of the two exceptions. Who will be the arbiter of the special exceptions? In many venues, judicial discretion will be a lottery at best. Actuaries will give little if any credit for premium savings based on the subjectivity of the two special exceptions. Insurance claims adjusters and defense attorneys will not know what to base a settlement value on because of the uncertainty created by the exceptions. Because of the exceptions, new carriers will not be attracted to Nevada, impairing competition and exacerbating existing access-to-care issues. Less than a year after the tort reforms passed, Nevada physicians and hospitals are petitioning their legislature to abolish the exceptions.

Regarding the indexing of the cap. It has been suggested that with the low inflation experienced of late, a cost-of-living adjustment would not seriously impair the value of the cap. It should be noted that the wrongful death cap in health care cases initially was set at $500,000 and currently is more than $1.4 million due to indexing. A better approach would be to leave the cap at $250,000 and revisit the issue during upcoming legislative sessions. This approach has stood the test of time for more than two decades in California.

Furthermore, it defies logic to tie noneconomic damages to an economic yardstick like the Consumer Price Index. Because noneconomic damages are subjective and by definition immeasurable, no amount of money can compensate for pain and suffering. Unlike economic damages, noneconomic damages are not influenced by inflation. This negates the need for an inflationary adjustment.

Regarding higher hard caps. Several national studies have shown that the only type of state reform that consistently showed significant results in reducing liability costs - and reducing premiums - is a cap on noneconomic damages. According to the Office of Technology Assessment, minimizing large damage awards allows insurers to better match premiums to risk.

According to the American Academy of Actuaries, the cap on noneconomic damage awards must be established at a low enough level to have a positive impact on liability insurance premiums, and has suggested that the cap on noneconomic damages be set at $250,000.

A study conducted by the U.S. Department of Health and Human Services found that states with a cap on noneconomic damages experienced lower liability premium increases than states without a cap.

Based on Texas Department of Insurance studies, assuming that the $250,000 cap would reduce claim payments by 20 percent and reduce liability premiums by 12 percent, a $500,000 cap would produce less than a 6 percent premium reduction.

One of the goals of health care lawsuit abuse reform is to restore predictability and stability to the liability insurance market. A reasonable $250,000 cap on noneconomic damages achieves these objectives.

Health care lawsuit abuse in Texas . According to state statistics, 87 percent of medical liability claims in Texas are without merit and end with no payment to the claimant. In short, Texas personal injury trial lawyers have a lottery mentality whereby they advertise for clients so they can file as many contingency fee lawsuits as possible with little regard for the merits of their clients' claims.

The jackpot in this abusive lawsuit lottery is unlimited noneconomic damages from which the lawyers receive more money than the claimants. Proof of this is very evident in review of the Texas Department of Insurance's 1989-1999 Closed Claim Data. This report documents the percentage of health care liability awards paid for noneconomic damages has shifted from one-third of the total award to two-thirds of the total award.

The growing frequency and severity of claims paid has made health care insurance unprofitable in Texas (reported by the 2002 Texas Senate Interim Committee Report on "The Medical Malpractice Liability System," page 2.8). Texas now ranks last in health care insurance profitability. Because of lawsuit abuse and the lack of profit in this line of insurance, Texas has witnessed a three-year exodus of medical liability insurance companies; 76 percent have left the state. Today, only three private liability companies (and the nonprofit Texas Medical Liability Trust) remain.

Due to rising liability insurance premiums, doctors statewide are shutting down their practices or severely limiting patient care services. Hospitals are diverting scarce resources to paying higher insurance premiums or increasing their self-insured retention amounts. As a result, expansion of hospital services are being postponed or curtailed.

Texas Medical Association and Texas Hospital Association recommendation. Based on an extensive review of the cap on noneconomic damages in other states, the Texas Medical Association and Texas Hospital Association believe strongly that special exceptions, indexing and a cap in excess of $250,000 will not provide meaningful premiums savings to our members and consequently will not help reduce the current access to care problem. The reality of the situation is complex. There is great difficulty projecting savings based on a cap on noneconomic damages; however, from a review of other states, it is clear that erosion due to indexing, special exceptions, or higher cap levels reduces the premium savings significantly. Provisions in the California law, which include a $250,000 hard cap, limits on plaintiff attorney contingency fees, modification of the collateral source rule and periodic payment of future damages, have passed the test of time, and should be considered by the Texas Legislature.

Additionally, the Texas Medical Association and Texas Hospital Association strongly support just and full compensation for all Texans who have valid medical liability claims including full economic recovery for all past/present/future medical expenses and all past/present/future lost earnings. Neither the Texas Medical Association nor the Texas Hospital Association supports the use of noneconomic damages to pay for actual economic damages. In California, the $250,000 hard cap on noneconomic damages has been validated by both the courts and the legislature as fair. Furthermore, California's $250,000 noneconomic damage hard cap has neither limited nor restrained in any way the recovery of economic damages, including actual medical expenses. The tested California model of a hard cap - when compared with the failed experiences of states that have indexed or created special exceptions - strongly argues in favor of such a cap for Texas.

Public Opinion on Noneconomic Damage Caps. In a very recent EPPSTEIN GROUP statewide poll (March 5-8, 2003) that interviewed 1,001 Texas registered voters, 69 percent favored a constitutional amendment that would cap noneconomic damages in any lawsuit. Additionally, 60 percent of Texans said that a $250,000 noneconomic damage cap was either "about right" or "too high."

According to Texas Government Code 305.027, portions of this material may be considered "legislative advertising." Authorization for its publication is made by Joe A. DaSilva, Senior  Vice President, Texas Hospital Association, P.O. Box 15587, Austin, TX 78761-5587, and Louis J. Goodman, Ph.D., Executive Vice President and CEO, Texas Medical Association, 401 W. 15 th St., Austin, TX 78701.

April 2003