Introduction

Tort reform has become a prominent issue at the federal level. Over the past year, the Congress has considered several specific tort reform bills: for example, the Asbestos Compensation Fairness Act of 2003 (H.R. 1586), which would prohibit punitive damages in asbestos cases, and the HEALTH Act (H.R. 5) and the Common Sense Medical Malpractice Reform Act of 2003 (H.R. 321), both of which would limit damages in medical malpractice cases. More general proposals for tort reform have also come before the Congress, notably the Class Action Fairness Act of 2004 (S. 2062), which would have allowed more cases to be transferred from state courts to federal courts. In many instances, states have enacted tort reform proposals similar to those being considered at the federal level. This paper reviews the major studies published since 1993 that evaluate state-level tort reforms and assesses the relevance of that research for evaluating similar federal proposals.

A tort is an injury to someone's person, reputation, or feelings or damage to real property.⁽¹⁾ Under the U.S. system of tort liability, courts can hold injurers liable for many different types of torts, such as those caused by automobile accidents, contract fraud, trespass, medical malpractice, and defective products. The major categories of tort litigation are automobile-related torts (53 percent), premises liability (16 percent), and medical malpractice (15 percent).⁽²⁾ The plaintiff in a tort suit can seek compensation of two types: compensatory damages to cover the "economic" cost of an injury--for example, medical costs and lost wages--and the "noneconomic" costs of pain and suffering and punitive damages intended to punish a defendant for willful and wanton conduct. (See Box 1 for a list of definitions of some common tort terms.) U.S. tort law is almost exclusively contained in state law, and the large majority of tort cases are filed in state courts. In 2000, more than 700,000 torts were filed in state general courts, compared with only 37,000 in federal courts. Tort law is based primarily on common law--in which judicial rules are developed on a case-by-case basis by trial judges--rather than on legislation.
 

Box 1. Definitions of Some Common Tort Terms Collateral-source payments: Amounts that a plaintiff recovers from sources other than the defendant, such as the plaintiff's own insurance. Under the collateral-source rule, that compensation from other sources may not be admitted as evidence at trial. Contingent fee: A fee charged by an attorney for his or her services only if the lawsuit is successful or is favorably settled out of court. Usually, the contingent fee is calculated as a percentage of the amount the plaintiff recovers from the defendant. Economic damages: Funds to compensate a plaintiff for the monetary costs of an injury, such as medical bills or loss of income. Joint-and-several liability: Liability in which each liable party is individually responsible for the entire obligation. Under joint-and-several liability, a plaintiff may choose to seek full damages from all, some, or any one of the parties alleged to have committed the injury. In most cases, a defendant who pays damages may seek reimbursement from nonpaying parties. Malpractice: "An instance of negligence or incompetence on the part of a professional."(1) Negligence: A violation of a duty to meet an applicable standard of care. Noneconomic damages: Damages payable for items other than monetary losses, such as pain and suffering. The term technically includes punitive damages, but those are typically discussed separately. Punitive damages: Damages awarded in addition to compensatory (economic and noneconomic) damages to punish a defendant for willful and wanton conduct. Statute of limitations: A statute specifying the period of time after the occurrence of an injury--or, in some cases, after the discovery of the injury or of its cause--during which any suit must be filed. 1.  Bryan A. Garner, ed., Black's Law Dictionary, 7th ed. (St. Paul, Minn.: West Group, 1999), p. 971.

Tort Liability as a Tool for Achieving Efficiency and Equity

The risk of injury or loss is inherent in everyday life: consumers are injured or killed by defective products, workers are hurt on the job, train passengers are injured by derailments, and patients are harmed by medical errors. Markets provide broad incentives to control the number and costs of such injuries. For example, enhanced safety features can give a product a marketing advantage over competitors. Furthermore, insurance allows individuals and firms to reduce the financial uncertainty associated with potential injuries. The U.S. tort liability system, however, serves to augment the safety incentives and insurance opportunities provided by the market.⁽³⁾ In particular, it provides incentives for individuals and firms to take appropriate care, compensates those who are harmed, helps spread risk, and serves the purposes of punishment or retribution.

In economic terms, those various purposes can be related to the overarching social goals of efficiency and equity. In theory, the tort system contributes to economic efficiency by assigning liability for accidents so that individuals and firms account for the extent to which their actions affect the risk of injury. However, different concepts of equity may affect the assignment of that liability. For example, a particular concept of fairness might hold that certain victims should not be considered responsible for exercising some forms of care although it would be more efficient if they did so. The literature this paper reviews does not address the efficiency and equity implications of various reforms but examines how reforms might affect the number of court filings or the size of awards.

Arguments For and Against Federal Tort Reform

Many legal scholars agree that tort liability has expanded over the past 30 years; the opportunity for victim compensation has increased, particularly in the area of product liability.⁽⁴⁾ That growth was facilitated by a notion that more extensive tort liability would serve to compensate injured parties and reduce the level of accidents. However, many people have voiced concern that the tort system has gone too far; they say that businesses are saddled with excessive costs that lead to higher prices for consumers. Critics also express several other specific concerns about the tort system:

• The "transaction costs" of the system, particularly attorneys' fees, are too high;



• Punitive damages and compensatory damages for pain and suffering are often awarded arbitrarily, with no beneficial effect on safety;



• The class-action mechanism (whereby many claims that cover similar factual ground are combined into a single larger case) is too easily abused by plaintiffs' attorneys;



• Medical malpractice lawsuits are driving up the costs of liability insurance for physicians to the point that some of them are restricting their practices or retiring; and



• Fair compensation for victims of torts is limited by frivolous lawsuits and excessive awards of noneconomic damages, which increase the likelihood of bankruptcy for firms.

Since the mid-1980s, a large majority of states have enacted statutes to restrict tort lawsuits.⁽⁵⁾ Those statutes were enacted in response to problems in insurance costs and availability. The idea behind those changes was that limiting the liability exposure of firms would reduce liability insurance premiums.

Despite those reforms at the state level, some people see a role for a federal approach. They note that tort reforms have not been universally undertaken in the states and that those states that enacted changes have done so in a less than uniform way. People in favor of federal action contend that such a lack of uniformity in state laws increases the costs to businesses that manufacture and sell goods and services in multiple states and that federal legislation unifying tort laws across the country could reduce those costs. Uniform tort laws would also limit "venue shopping"--the ability of the plaintiff to choose the jurisdiction where a lawsuit is tried. In addition, proponents point to various large and unique liability cases--for asbestos exposure, for example--as special situations that warrant a national approach allowing victims to receive timely and fair compensation.

Opponents of tort reform argue that a lack of evidence on the benefits and costs of tort liability in general, as well as the economic effects of state reforms, makes a broad federal approach risky. Limited data on the deterrent effect of the tort system is available to counter the charges of excessive costs, but opponents of reform argue that those costs, to the extent that they exist, are justified by the system's role in compensating victims, ensuring that injurers face the total costs of their actions, and improving safety. They contend that proposed reforms are too broad and that the states and the judiciary are better positioned to make adjustments to the system in response to existing problems.

Only a small number of studies have been conducted that analyze the effects of state-level tort reforms on various outcomes, including tort court filings, damage awards, health care providers' behavior, liability insurance premiums, and insurance availability. However, whether or not tort reforms have had a significant effect on those measures says little about the overall functioning of the tort system in terms of efficiency and equity. For instance, whether damage caps reduce the number of lawsuits filed says nothing about whether it is more efficient or equitable to discourage marginal tort cases.
 

Tort Reform Initiatives at the State Level

Tort reform has been a national trend, but the extent and specifics of that reform have varied from state to state. Delaware, for example, has not passed any tort reform legislation since 1986, and its earlier statutes were limited to medical malpractice cases.⁽⁶⁾ Colorado, in contrast, has enacted reforms since 1986 that restrict the application of joint-and-several liability, allow court awards to be offset by collateral-source payments, abolish punitive damages in a number of cases and restrict them to be less than compensatory damages in others,⁽⁷⁾ limit the total award of damages to $1 million (of which no more than $250,000 can be for noneconomic damages), and modify class-action rules.

Some state-level tort reforms have made it more costly or difficult to file tort cases. For example, joint-and-several liability reforms tend to force plaintiffs to bring suit against multiple defendants rather than concentrate their efforts on a few defendants who are wealthier, more easily identifiable, or both; court procedural reforms can make it harder to file suits; and caps on legal contingent fees make it less lucrative for attorneys to accept "long shot" cases. The major argument for those reforms is that too many frivolous cases are brought in general. Other reforms limit the amount of damages, both compensatory and punitive, that can be awarded. Underlying those reforms is the contention that the courts are apt to make excessive awards, in terms of either what is necessary to compensate victims for their losses or what incentives are appropriate to avoid future accidents.

Limits on Joint-and-Several Liability

Thirty-eight states have reformed joint-and-several liability rules by statute since 1986 (see Figure 1).⁽⁸⁾ Under the common-law rule of joint-and-several liability, if two or more parties cause harm, any of them can be held responsible for all of a victim's damages, regardless of the relative degree of fault or responsibility. The plaintiff need only show that one of the defendants is at fault, and that defendant cannot use the involvement of third parties as a defense.⁽⁹⁾ This is often called the "deep pockets" rule because it enables plaintiffs to concentrate their efforts on wealthier defendants.

Figure 1.

Source: American Tort Reform Association, Tort Reform Record (December 31, 2003), pp. 2-3, available at www.atra.org/files.cgi/7668_Record12-03.pdf.

Notes: The American Tort Reform Association (ATRA) does not list reforms enacted before 1986, when the association was founded. Although the ATRA lists Vermont as enacting joint-and-several liability reform since 1986, Vermont actually enacted that reform in 1985.

In Georgia and Kansas, reforms to the collateral-source rule were subsequently found to violate the state constitution.

Supporters of this rule argue that if the individual actions of multiple defendants are together necessary for the injury to occur, then it is appropriate for each defendant to face the full value of the victim's losses--that is, all defendants are jointly and fully responsible--without considering the extent to which each defendant's own action contributed to the circumstances necessary to cause the injury. In its favor, joint-and-several liability advances the cause of full and quick compensation for the victim. It also may cause potential injurers to take care. Opponents contend, however, that the rule provides incentives for plaintiffs to bring marginal suits against wealthy defendants because the burden of proving that a single defendant is even partially at fault--rather than being primarily or wholly at fault--is low.

Changes to the common-law rule of joint-and-several liability usually limit a defendant's responsibility for damages to a fraction of the total damages commensurate with the proportion of fault that is attributed to that defendant. Under limits of that type, a plaintiff would have to file multiple lawsuits to be fully compensated and in doing so would bear increased legal costs. Additionally, a plaintiff who can collect only partial compensation from each defendant is exposed to the risk that some defendants may be unable to pay. In all, a plaintiff's expected benefit from filing a tort lawsuit is lower; therefore, those changes should result in the filing of fewer lawsuits. However, some observers argue that if the reforms are enacted, a plaintiff may attempt to inflate the size of his or her claim to offset those reductions in expected damages.⁽¹⁰⁾

In 1985, only five states restricted joint-and-several liability.⁽¹¹⁾ In 1986 and 1987, 24 additional states enacted reforms. Currently, 42 states limit joint-and several-liability in some way, but only seven have banned the use of the doctrine in the recovery of all damages. (In general, states have maintained the original doctrine except in specific cases--for example, for intentional torts, hazardous waste, and medical malpractice.)⁽¹²⁾ Other states allow a single defendant to be responsible for compensating the victim's total loss only in cases in which the defendant is found primarily responsible, which is usually defined as more than 50 percent at fault.⁽¹³⁾ Other variants of the reform include allowing a defense of comparative negligence (by which defendants' liability can be reduced by proving that the plaintiff was partially responsible for the injury); allowing joint-and-several liability for economic but not noneconomic damages; and restricting joint-and-several liability to cases in which defendants acted in a concerted effort.

Changes to the Collateral-Source Rule

Under the collateral-source rule, a defendant is prohibited from introducing evidence at trial to show that a plaintiff has received compensation for an injury from another source--for example, an insurance policy. That common-law rule prevents any offsets of damage awards by the amount the plaintiff has received from those collateral sources.

In 1986 and 1987, 18 states changed their collateral-source rules; currently, 23 states have either abolished or reformed the rule (see Figure 1).⁽¹⁴⁾ Typical reforms either permit evidence of collateral-source payments to be admitted at trial, allow awards to plaintiffs to be offset by other payments, or both.

Advocates of the collateral-source rule emphasize its incentive effects. They contend that a potential injurer facing the entire cost of an accident will exercise an efficient level of care, whereas an injurer facing a smaller payment has less of an incentive to take care. Opponents of the rule argue that it leads to overcompensation, with victims compensated twice for the same injury.⁽¹⁵⁾ Such overcompensation lowers a potential victim's incentive to take care, opponents contend, and increases the number of lawsuit filings by boosting the expected size of an award. Critics of the tort system in general often argue that court awards exceed the amount necessary to induce the optimal level of precaution; in their view, this reform acts in part to offset those overpayments.

Caps on Noneconomic Damage Awards

Since 1986, 23 states have enacted statutes limiting noneconomic damages; currently, 18 states have such statutes (see Figure 2).⁽¹⁶⁾ Advocates of limits on noneconomic damages point out that psychological losses--for example, damages for pain and suffering and loss of consortium--are not easily valued and can in some cases lead to unpredictable and extravagant judgments.⁽¹⁷⁾ Furthermore, they believe that juries tend to be biased against large corporate defendants in favor of individual plaintiffs in tort suits. Applying a ceiling to the amount of noneconomic damages that can be awarded by juries, they argue, limits those errors and biases. Also, because the expected value of the total award is capped under this reform, the expected benefit of a tort lawsuit to the plaintiff is lower--unless economic or punitive awards increase to offset the restriction--and thus the number of tort lawsuits filed may fall.

Figure 2.

Source: American Tort Reform Association, Tort Reform Record (December 31, 2003), pp. 2-3, available at www.atra.org/files.cgi/7668_Record12-03.pdf.

Notes: The American Tort Reform Association does not list reforms enacted before 1986, when the association was founded.

In several states, the caps were subsequently found to violate the state constitution. See Summary Table 1 for a complete listing of those states.

Limits on noneconomic damages are often restricted to lawsuits involving medical malpractice. The typical reform imposes an upper limit ranging from $250,000 in Kansas and Montana to $750,000 in Texas.⁽¹⁸⁾

Limits on Punitive Damage Awards

In 1985, only seven states had restrictions on punitive damages,⁽¹⁹⁾ but by 1987, legislation restricting such damages had been enacted in 22 states. From a legal standpoint, punitive damage awards serve to punish unusual and egregious behavior. From an economic standpoint, punitive awards can be justified as a useful deterrent to negligent behavior, and in a broad sense as a means to counteract torts that go undetected and, therefore, unpunished. If properly applied under that theory, punitive damage awards adjust the total expected costs of an action to reflect the expected harm to society.⁽²⁰⁾

In practice, however, in many cases a jury will only by coincidence award punitive damages that match the cost to society of certain types of harms. In fact, the economic rationale for punitive damages does not correspond with the often cited retributional goal of the courts, which may lead to excessive awards from an efficiency point of view.⁽²¹⁾ Several observers argue that those problems with implementation are manifested as random and unpredictable awards, which are an ineffective deterrent. Critics concerned with excessive punitive damage awards also note that the additional risk of being assessed punitive damages deters many firms from developing and selling products with an otherwise acceptable level of risk attached to them.

Since 1986, 34 states have enacted statutes imposing one or more of the following restrictions on punitive damages: ⁽²²⁾

• Six states ban punitive damages outright.



• Seven states allow a "government standards" defense for drugs approved by the Food and Drug Administration.



• Nineteen states impose a maximum amount of punitive damages that a victim can recover. Some states impose a cap equal to some multiple of compensatory awards (typically three times that amount), whereas others set caps ranging from $250,000 to $10 million.



• Twenty-three states require an elevated burden of proof for recovery of punitive damages. For example, many require "clear and convincing" evidence that the act was malicious before punitive damages can be awarded.



• Thirteen states have procedural reforms that make it harder for plaintiffs to pursue punitive damages by requiring a separate hearing. Seven states created trust funds that collect a percentage of punitive damage awards, further reducing plaintiffs' incentives to undertake costly litigation to win such awards.⁽²³⁾

Other Reforms

States have pursued many other types of tort reforms. In some cases, it is not clear whether those reforms favor the plaintiff or the defendant, but all are described by their advocates as increasing fairness. In general, the effects of those reforms have not been examined by the empirical literature, except insofar as they may have been lumped in the category of "other reforms."

Contingent Fees. Several states have enacted restrictions on the amount that an attorney can charge on a contingent basis in medical malpractice cases. (In those cases, the attorney receives payment only if he or she is successful in winning a dollar award for the plaintiff.) Such contingent fees--which are typically a percentage of the amount awarded--create incentives for attorneys to take on a large number of cases, each with a low probability of success, with the expectation that the fees earned from the successful cases will be large enough to subsidize the unsuccessful cases. Limiting contingent fees removes that incentive but may, in the view of supporters of the practice, foreclose a means for low-income victims to get legal representation.

Statutes of Limitation. A few states have either established or reduced the statutes of limitation or repose for certain types of cases. A statute of limitation restricts the filing of lawsuits within a certain period after an injury occurs; a statute of repose restricts the filing of lawsuits within a certain period after the manufacture or sale of a product even if injury occurs outside of that period.

Periodic Payment of Future Damages. Six states have required or allowed courts to stagger award payments over time. In that way, if a plaintiff's situation changes, the court can alter the payments.

Prejudgment Interest. Some states have limited the amount of interest that may accrue on an award for compensation during the time before the court awards damages.

Victim Compensation Funds. Some states have set up no-fault funds, similar to federal statutes such as the Childhood Vaccine Compensation Fund, to compensate victims of certain types of medical malpractice. Victims who accept compensation from those funds are limited in their right to file lawsuits.

Alternative Dispute Resolution. Several states' laws provide for court-sponsored arbitration and mediation programs. Colorado, for example, recently enacted a statute that allows judges to refer litigants to alternative dispute resolution systems. That approach reduces costs by keeping cases out of the court system.
 

The Difficulties of Evaluating State-Level Tort Reforms

Researchers must contend with a number of issues when estimating the impact of tort reforms. They include these:

• There are numerous differences in tort reform statutes. The variety in states' approaches to tort reform makes evaluation difficult. While the general approach to tort reform has been similar among the states, there are important differences in the way those reforms have been implemented. For instance, although 18 states have enacted caps on noneconomic damages, those caps range from $250,000 to $750,000 and are applied to different types of torts and conditions.



• Tort reforms are often enacted in groups. Researchers are faced with the difficult task of reliably estimating the effects of individual reforms, a task made even harder by the high degree of correlation among different types of reforms. For example, a cap on punitive damages may have the same effect on damage awards as a requirement for a separate hearing for punitive damages. If those two provisions are enacted simultaneously, it will be difficult to determine whether an observed change in damage awards is caused by the cap, the procedural reform, or a combination of both factors.



• It is difficult to determine the status of state laws. To begin with, identifying those states that have undertaken tort reforms can be difficult. Many researchers rely on the records of the American Tort Reform Association, a national organization that has tracked state legislation since 1986, while others conduct their own survey of state laws. In addition, some researchers consider court decisions that change common law, whereas others, more strictly, consider only statutes enacted by a state's legislature. Furthermore, determining whether a statute offers substantive changes to existing practices in the courts is difficult. For example, a 1987 New Mexico statute codified a practice that was already adopted in 1982 by court decision.⁽²⁴⁾



• The implementation lag caused by constitutional appeals complicates analysis. Uncertainty about whether legislation will be ultimately found to violate a state's constitution or how long those challenges will take mitigates the effect of tort reform legislation. For instance, insurance companies can be slow to change their premiums in response to a cap on damages if they think those measures will be struck down or take a long time to materialize.



• There is a dearth of data on tort cases. Few data are available that include details about tort cases brought in the various jurisdictions across the country. Only two studies have overcome that problem by using detailed data about individual insurance claims.

In addition to dealing with those data availability and quality issues, researchers must construct valid measures of the effects of tort reform. Generally, researchers compare the experience of states that have enacted reform statutes with the experience of states that have not (and compare states with themselves before and after the enactment of reforms). Implicit in that comparison is the assumption that the impact of reforms in nonreform states would be similar to that in states with reforms. But that assumption may not be warranted. The fact that some states enacted tort reform and others did not opens the possibility that the two groups of states were different to begin with and that tort reform would have different effects in each of the two groups.

To help account for differences among states, researchers statistically adjust for observed characteristics before making comparisons. However, some important factors that may help determine the outcome measure--the likelihood of reform and the state-level response to reform--may be unobservable or unknown. Failing to account for those unobserved factors can make comparisons across states (and time) misleading. If there are factors that do not vary over time--that is, they have "fixed effects"--then researchers may eliminate their influence by comparing the changes in, rather than the levels of, outcomes between reform and nonreform states.⁽²⁵⁾ However, even in those cases, there could be remaining bias in the measure of the impact of tort reform caused by unobserved (or uncontrolled) factors that are suspected of varying over time.
 

A Review of the Major Studies of State-Level Tort Reforms

The nine studies covered in detail in this review analyze the effects of state-level tort reforms on the number of court filings and the size of awards. They also look at the implications of tort outcomes on economic factors such as liability insurance premiums, insurers' profitability, and the practice of defensive medicine (see Table 1).

Many of the studies conclude that tort reform can affect outcomes most closely related to the tort system in much the same way that advocates of changing the tort system would claim. Those studies find that reforms in general have decreased the number of lawsuits, reduced awards, and improved the profitability of insurance providers. (See Table 2 for a summary of the findings from those studies.) Moving further away from economic behaviors most directly influenced by torts, the literature is thin. For that reason, the conclusions should be interpreted with caution, especially insofar as they indicate how federal tort reform might be expected to affect the economy.

Effects of Tort Reform Legislation on Damage Claims and Lawsuits

Evidence from several of the studies suggests that different tort reform initiatives affect the number of lawsuits filed, the value of insurance claims, and the value of insurance payouts for damages. A 2001 study by Albert Yoon, for instance, found that the enactment of statutes to cap damages led to a significant reduction in the amount that plaintiffs recovered in medical malpractice lawsuits in Alabama relative to three neighboring states.⁽²⁶⁾

Additionally, a 1999 study by Mark J. Browne and Robert Puelz found that caps on noneconomic damages preceded a reduction in claims for those damages and led to a large decrease in the number of subsequent court filings.⁽²⁷⁾ However, the same study found that those caps had no statistically significant effect on claims for economic damages and that, counter-intuitively, punitive damage restrictions led to an increase in court filings. The study also found that joint-and-several liability reforms led to an increase in claims for noneconomic damages but had no statistically significant effect on claims for economic damages. Furthermore, it found no evidence that joint-and-several liability or reforms to the collateral-source rule had any impact on the number of lawsuits filed; similarly, a 1994 study by Mark J. Browne and coauthors found only weak support for a reduction in the number of lawsuits filed after joint-and-several liability reform.

Mark J. Browne, Han-Duck Lee, and Joan T. Schmit (1994) concentrated on the effects of joint-and-several liability reform, the most frequent type of reform enacted during the mid- to late 1980s.⁽²⁸⁾ The authors used state-level data on the number of lawsuits filed from the National Center for State Courts and state economic and other characteristics from various sources for 19 states over the six-year period from 1984 through 1989. Their data suggest that only three of the states studied did not enact any joint-and-several liability reforms during that period. Of the 16 states that enacted reforms, three had total bans on joint-and-several liability in effect at some point.⁽²⁹⁾

Controlling for economic and other factors that may influence state-level court filings, including other types of tort reforms, the authors found weak support for an overall reduction in the number of torts filed after the enactment of joint-and-several liability reform. In contrast, in the year preceding the effective date of reform, there was a statistically significant surge in court filings in states that restricted joint-and-several liability although not in states that abolished it.

The authors hypothesize several reasons why they found no significant effect after the reforms were instituted.⁽³⁰⁾ Although they allowed for a lag in the effect of joint-and-several liability reforms on court filings, the time period of the study did not enable the authors to detect effects that may have taken several years to emerge. In addition, because the number of joint-and-several liability claims is only a small portion of total claims, the effect of those reforms on total court filings would naturally be modest.

Mark J. Browne and Robert Puelz (1999) investigated the success of tort reform legislation in reducing the number of tort cases filed in court and the value of claims for economic and noneconomic damages. Their study analyzed a data set comprising 18,777 individual automobile bodily injury claims that were either paid or closed in 45 states.⁽³¹⁾ For each accident, the data include the amount the victim claimed for economic and noneconomic damages and whether the claimant also filed a lawsuit. Those data allowed the authors to use regression analysis to investigate how tort reforms affect damage claims as well as the decision to pursue a lawsuit. The analysis controlled for a number of other factors, including the presence of no-fault insurance rules and whether the claimant retained an attorney.⁽³²⁾

Browne and Puelz postulated that tort reforms that lower potential awards make it unprofitable for plaintiffs to pursue a legal remedy in some cases. They focused on seven reforms enacted during the 1980s and early 1990s: joint-and-several liability reform, changes to the collateral-source rule, caps on noneconomic damages, limits on punitive damages, sanctions on frivolous suits or defenses, modified rules on prejudgment interest, and provisions for structured settlements.⁽³³⁾ For each claim, the authors identified whether the case would be subject to a legal reform if it occurred after the date of the reform, as provided by the American Tort Reform Association. In that way, the study identified changes in tort law occurring within a given state (before and after reform) and across states (comparing reform states to nonreform ones).

The authors estimated that relaxation of the joint-and-several liability rule led, on average, to a 34 percent increase in the amount of noneconomic claims, with no statistically significant effect on economic claims.⁽³⁴⁾ That result suggests that the plaintiffs inflated the size of their claims in an attempt to offset the lower expected damages implied by the reform. The authors also found that caps on noneconomic damages were associated with a 19 percent decline in the average value of noneconomic claims, with no statistical association with the average economic claim. Thus, reducing potential tort awards seems to have lowered plaintiffs' expectations (or limited their choices), regardless of whether they retained an attorney. Furthermore, reform of the collateral-source rule was associated with a decrease of 14.4 percent and 15.3 percent in the value of noneconomic and economic claims, respectively.

Browne and Puelz also found that punitive damage caps led to an increase of 9.5 percent in the value of economic damage claims (regardless of whether they were insurable) and a small but statistically significant 0.8 percent increase in the value of noneconomic claims. However, when punitive damages were not insurable, noneconomic damage claims actually dropped by 29 percent. The increase in economic claims implies that victims tend to offset the punitive limits by inflating economic damages, although that implication does not seem to hold for noneconomic claims. The authors do not explain the large reduction in noneconomic claims when punitive damages are not insurable; however, because punitive damages are rare in automobile injuries, the increase in economic damages may offset the reduction in the value of punitive damages.

For the minor reforms the authors studied, they found that any combination of frivolous suits or defenses, modified rules on prejudgment interest, or provisions for structured settlements reduced noneconomic damages by 4.8 percent and economic damages by 5.9 percent.

In terms of the probability that a lawsuit will be filed, the study reported that joint-and-several liability reform and reform of the collateral-source rule had no significant impact. Caps on noneconomic damages, in contrast, decreased the average probability that a case will be brought from 4 percent to 1.4 percent. Any combination of restrictions on the minor reforms mentioned above was also found to decrease the likelihood that an individual would file a lawsuit. Caps on punitive damages had the opposite effect: the study's results indicated that those caps increased the likelihood that a claim would be filed--from 2.7 percent to 4 percent. That rise could be explained by the possibility that larger punitive damages would tend to encourage an insurance company to make a more generous first offer. And as discussed earlier, the authors found that increases in economic damages would tend to offset the effect of the punitive damage caps.

A major strength of the Browne and Puelz study is its large number of observations, which enable the authors to separately estimate the impact of each major type of reform while controlling for a number of state- and individual case-level factors, including the no-fault status of the states.⁽³⁵⁾ Conversely, the study is limited in that it focused only on injuries caused by motor vehicle accidents. The response of plaintiffs in other types of torts, such as medical malpractice and product liability, could differ markedly from the response of auto accident victims.⁽³⁶⁾

Albert Yoon (2001) studied the effect of the enactment and repeal of damage caps in Alabama from 1987 to 1999 on the amounts that plaintiffs recovered in medical malpractice litigation. The Alabama legislature enacted three laws in mid-1987 to cap damages: a $400,000 cap on noneconomic damages, a $250,000 cap on punitive damages, and a $1 million cap for wrongful death claims. However, the Alabama Supreme Court found each law unconstitutional--beginning in 1991 with the cap on noneconomic damages, then 1993 for the cap on punitive damages, and lastly in 1995 for the limit on wrongful death claims.

The author compared the amounts plaintiffs recovered in individual cases filed against physicians insured by a single large malpractice insurer in Alabama to those of a control group consisting of plaintiffs filing claims with that same insurer in the neighboring states of Arkansas, Mississippi, and Tennessee, none of which had laws capping damages during the period. That comparison was done over several time segments, corresponding to either the enactment or the repeal of the caps. The states in the control group were chosen because of their geographic proximity to Alabama and their relatively similar demographic characteristics. In addition, the author statistically controlled for the particular cause of action for each claim (for example, surgery malpractice, a blood transfusion, and so forth).

Yoon found that the amount that plaintiffs recovered fell by $23,000 in the period following the enactment of damage caps in Alabama relative to the control states. Following the repeal of all of the damage cap measures, the amount that plaintiffs recovered increased by $48,000 relative to the levels in the control states, more than double the estimated impact of enactment. However, two unusually high payouts in the post-repeal period accounted for that asymmetry: after omitting those cases, the decrease after repeal was found to be about $20,000, an amount in line with the increase after enactment.

Effects of Tort Reform Legislation on the Liability Insurance Market

A number of studies using insurance data suggest that some tort reforms led to reductions in several measures of insurance costs. Those studies also indicate that state-level reforms had a significant positive effect on the profitability of insurers (measured by losses and loss ratios) and probably led to decreases in premiums.⁽³⁷⁾ Although the statistical evidence on the effectiveness of particular reforms was scant, a few studies showed that imposing damage caps--especially caps on noneconomic damages--and requiring collateral offsets reduced some medical malpractice costs. Furthermore, one study provided evidence suggesting that modifications to joint-and-several liability and punitive damage caps led to reductions in losses and premiums during the mid-1980s. That study also suggested that broad restrictions on liability helped reduce premiums. Studies attempting to isolate other types of reforms found no significant effects.

Insurance premiums for medical malpractice, product liability, environmental liability, and general liability coverage increased significantly during the mid-1970s and again in the mid-1980s, accompanied by a temporary reduction in the availability of insurance.⁽³⁸⁾ In both periods, many states enacted tort reforms to limit the perceived expansion in liability risk faced by businesses. The basic assumption was that insurers would face less underwriting uncertainty in states that had enacted reforms, which would translate into lower insurance premiums, higher profitability for insurers, and a greater willingness to underwrite risky lines of business.

The common measure used in the literature, insurance loss ratios, does not allow researchers to separately look at the cost of coverage and the amount of coverage purchased. If liability reforms worked as intended, they would lead to reductions in both the magnitude and occurrence of damage awards and would have an immediate impact on insurance losses. Any decrease in insurance prices would occur with a lag because insurers would have to obtain approval from state regulators before changing rates. In the long run, diminishing loss ratios would exert downward pressure on premiums and lead to an equilibrium loss ratio in which insurers earned a normal return on investment. Therefore, if the loss ratios were excessive before reforms took effect, then, as the results of the studies below suggest, reform would lead first to insurance companies' returning to profitability before they instituted any reduction in the price of insurance.

The Office of Technology Assessment (1993) reviewed six empirical studies of the impact of various reforms on medical malpractice costs in the mid-1970s and mid-1980s.⁽³⁹⁾ Five of those studies used data from companies that sold medical malpractice insurance; one used a survey of self-employed physicians that contained their experience with medical malpractice claims from 1976 to 1981.

The Office of Technology Assessment (OTA) concluded that caps on damage awards and mandatory collateral-source offsets showed a consistent negative impact on one or more of the measures of malpractice costs. In particular, three of the studies found that some types of damage caps reduced payments per paid claim, although the only study that examined the effect of damage caps on the frequency of claims found no significant impact.⁽⁴⁰⁾ Two of the studies found that mandatory collateral-source offsets greatly reduced claims payments, again with no impact on claims frequency.⁽⁴¹⁾ Finally, among the studies reviewed, the OTA found mixed results for various other reforms.

W. Kip Viscusi and Others (1993) separately analyzed the impact of reforms enacted in 1985, 1986, and 1987, controlling for the influence of the liability structure present before 1985 and for the role of insurance rate regulation.⁽⁴²⁾ The study considered the impact of modifications to joint-and-several liability, caps on noneconomic and punitive awards, general limits on liability (such as establishing immunities from prosecution), and a group of "other reforms" on losses, premiums, and loss ratios over the 1985 to 1988 period for both general liability and medical malpractice liability.

The study found that reforms enacted in 1986 and 1987 had, on the whole, a significant effect in reducing general liability losses over the period. Their results suggest that the 1986 reforms reduced losses by 10.1 percent, on average, and the 1987 reforms lowered losses by 4.6 percent. The 1986 and 1987 reforms also had a large effect on general liability premiums (although the impact was slightly less than the impact on losses), reducing premium levels by 9.1 percent and 4.3 percent, respectively. Although the reforms enacted in 1985 and 1986 lowered loss ratios, the 1987 reforms had no statistically significant effect on that measure.

The analysis also examined the effects of individual tort reform measures. In the case of modifications to joint-and-several liability, they separately estimated the effect of reforms enacted in 1985, 1986, and 1987. They found a substantial impact in only those 16 states that enacted the reform in 1986--the results implied a reduction of 6.9 percent in losses between 1985 and 1988. They found no effect from the joint-and-several liability reforms enacted in 1985 or 1987.⁽⁴³⁾ According to the authors' analysis, only about half of the states that enacted reforms between 1985 and 1987 experienced any significant effect on losses. In addition, it is not clear that this effect is distinct from those earlier attributed to the entire group of reforms enacted in 1986 (the analysis controls for other reforms enacted over the entire period, but not by year). In the case of caps on noneconomic damages, the authors found that such caps led to an 8 percent reduction in losses between 1985 and 1988. Furthermore, the authors suggest that premiums were negatively affected by modifications to joint-and-several liability, limits on punitive damages, and limits on liability in both 1985 and 1986.

Losses or loss ratios for medical malpractice were not significantly affected by the reforms, the authors found, except for limits on noneconomic damages, which reduced losses by about 14.7 percent. However, the 1985 and 1986 reforms overall led to average reductions of 17.3 percent and 13.4 percent in medical malpractice premiums, respectively.

Patricia Born and W. Kip Viscusi (1998) investigated the effect of state-level tort reforms enacted in the 1985-1987 period, both overall and separately for medical malpractice and general liability insurance lines.⁽⁴⁴⁾ Their data, from the National Association of Insurance Commissioners (NAIC), showed the premiums earned and losses by each insurance company in each state from 1984 to 1991, allowing the authors to measure the effects several years after the reforms occurred. In all, the data contained more than 8,000 observations for medical malpractice and 67,000 observations for general liability insurers.

The study tested whether the mid-1980s tort reforms had their intended effect by measuring insurers' loss experience following the reforms.⁽⁴⁵⁾ They restricted their analysis to whether a damage cap was imposed or whether some other type of reform was enacted. Overall, they found that damage caps and other reforms reduced insurance companies' costs and the premiums they charged, which at the same time increased profitability. The analysis also found that the least profitable insurers--those with the highest loss ratios--experienced the greatest improvement in their profitability after the enactment of reforms. In addition, the authors noted that both large and small firms benefited equally from tort reforms. Those findings were consistent across the medical malpractice and general liability insurance sectors for damage caps. For general liability insurance, however, the presence of other reforms generally did not have any significant effect, although in a few of the models the most unprofitable firms tended to perform even worse after those reforms were enacted.

Kenneth Thorpe (2004) used NAIC data to study state-level trends in insurance premiums earned and loss ratios experienced by insurers for 1985 to 2001.⁽⁴⁶⁾ The author compared the trends for those states that capped noneconomic damages, modified joint-and-several liability, capped attorneys' fees, or changed collateral-source rules with those that did not. In addition, he controlled for a number of state characteristics, including the degree of competition in the state's insurance market and the number of practicing physicians.

In line with the other studies examined in this section, Thorpe's study found that insurers in states that adopted caps on noneconomic damage awards experienced lower loss ratios while earning lower premiums than insurers in other states. In particular, loss ratios were 11.7 percent lower and overall premiums were 17.1 percent lower in states that capped noneconomic damages. The author also found that those states that allowed "discretionary" collateral-source offsets (those considered at a judge's discretion) experienced a 13.3 percent lower loss ratio compared with other states but did not experience any significant difference in premiums. Thorpe found that no other tort reform was associated with lower premiums or loss ratios.⁽⁴⁷⁾

Effects of Tort Reform Legislation on Medical Malpractice and Defensive Medicine

The risk of a medical malpractice lawsuit gives health care providers incentives to take precaution against medical errors.⁽⁴⁸⁾ Whether or not those tort incentives are optimal depends on a number of factors. Many analysts argue that medical malpractice is not clearly defined and tends to be inaccurately judged--that is, malpractice lawsuits do not properly reflect providers' actions and too many weak lawsuits are brought. One study of medical malpractice torts found that only 1.5 percent of people classified as likely victims of medical error sued.⁽⁴⁹⁾ Although providers are by and large insured against medical malpractice, a lawsuit brings other penalties: the embarrassment of being sued, loss of reputation, and time and stress involved in resolving the case.

The risk of a lawsuit may also lead providers to act too cautiously by performing excessive tests and procedures that have minimal medical benefit. That practice of "defensive medicine" is done strictly to avoid poorly assigned liability by demonstrating that the provider took all possible actions--even beyond what would be considered appropriate.⁽⁵⁰⁾ If defensive medicine is practiced, reforms of the medical malpractice system that better align actions with consequences or reduce the number of weak lawsuits could improve efficiency.

Daniel P. Kessler and Mark B. McClellan (1996 and 2002) focused on detecting the practice of defensive medicine and measuring the effects of tort reform related to medical malpractice.⁽⁵¹⁾ They found that Medicare inpatient hospital spending for patients with acute myocardial infarction or ischemic heart disease was reduced in states that enacted certain tort reforms, with no significant increase in adverse health care outcomes. That finding suggests the existence of defensive medicine. However, as reported in its cost estimate for H.R.5, the Congressional Budget Office (CBO) has found no evidence that tort reforms reduced medical spending when it applied the same methods used by Kessler and McClellan to a broader set of ailments. CBO did, however, find support for a reduction in medical malpractice premiums.⁽⁵²⁾

Kessler and McClellan matched the admission records of all elderly Medicare patients who were hospitalized with a heart attack or heart disease in 1984, 1987, or 1990 with the patients' demographic information. They focused on the elderly because heart disease leading to adverse outcomes is relatively common in that population. That robust data set allowed detailed analysis of the initial treatment and two health outcomes--rehospitalizations and mortality rates.

That study categorized tort reforms as either direct reforms or indirect reforms. Direct reforms included changes in laws that specify statutory limits on or reductions in malpractice awards (caps on damages, reform of the collateral-source rule, abolition of punitive damages, and abolition of mandatory prejudgment interest). Indirect reforms included changes that the authors believed affect awards but only indirectly: reforms that impose mandatory periodic payments, caps on attorneys' fees, joint-and-several liability reform, and patient-compensation funds.

The authors found that the adoption of direct reforms led to a 6 percent drop in hospital expenditures for heart attack patients and a 9 percent decline for heart disease patients, with no significant change in mortality rates or cardiac complications. However, after controlling for the impact of managed care organizations, their estimates fell to 4 percent for both types of diseases. Those effects occurred three to five years after enactment of the reforms. The authors speculated that it may take additional time for the complete impact of the reform to be felt. However, indirect reforms were not associated with any significant change in either expenditures or outcomes, except for some significant short-term increases in expenditures. On the basis of their calculations, the authors suggested that if direct reforms were implemented throughout the United States, expenditures on cardiac disease would fall by more than $450 million annually for the first two years and by $600 million annually three to five years after adoption, with no significant decline in health outcomes.

Daniel P. Kessler and Mark B. McClellan (2000) attempt to explain the mechanism by which tort reform would lead to the differences in outcomes found in their earlier work. In so doing, they estimated the impact of tort reform on a number of measures of "malpractice pressure": the frequency of malpractice claims; the likelihood of a prolonged duration of claims resolution; administrative and legal expenses incurred in defending against a claim; and the amount of any settlement or award to the plaintiff.⁽⁵³⁾ They supplemented their earlier data with physician-level malpractice claims data from 19 states covering the 1984-1994 period and a nationwide survey of physicians covering the 1987-1997 period. As in their earlier work, the authors controlled for differences across states that do not vary over time, 14 categories of physician specialties, and states' political and regulatory environments.

Using survey data on the United States as a whole, the authors found that physicians in states that enacted either direct or indirect reforms experienced lower trends in malpractice claims rates than physicians in states that did not enact reforms. Physicians in direct-reform states experienced a 1.4 percentage-point decrease in claims rates, while those in indirect-reform states had a 1.1 percentage-point decrease, compared with a 7.4 percent claims rate for the population as a whole. However, using the claims data from the 19 states, the authors found no statistically significant effect on claims rates.

Among measures of the resolution of medical malpractice claims in the 19 states for which data were available, the authors found mixed results. Those reforms grouped as direct reduced the number of claims paid, the number of claims incurring legal expenses, and the time it took to resolve claims. However, the reforms had no statistically significant effect on the value of claims or legal expenses. Among those states enacting reforms grouped as indirect, the authors found a statistically significant increase in most of their liability measures. In particular, they found that indirect reforms increased the number of claims paid, the number of claims incurring legal expenses, and the value of the legal expenses. However, they found no statistically significant impact on the value of the claims paid or how long it took to resolve claims.