For example, the patient who complains of chest pain while in the hospital for some other minor reason will typically get a battery of tests such as an electrocardiogram, cardiac enzymes, electrolytes, pulse oximetry, and a chest x-ray even if he or she does clinically look like he is having a heart attack. If the physician fails to do all these things and the patient does indeed have a heart attack, the physician may be on the hook for that event.

Thus in such a litigious environment, every physician should obtain malpractice insurance. In many specialties, such as obstetrics, these costs can be prohibitively expensive in certain states, driving physicians out of those states. However, some states, such as Texas, have addressed tort reform. Texas has enacted a law several years ago that caps noneconomic damages at $250,000. This sort of policy limits liability for the physician and drives down the cost of malpractice insurance significantly. It is interesting to note that since the law went into effect, the number of physicians applying for medical licenses in Texas has increased every year.

Tort reform and capping of damages obviously has the significant benefit of allowing physicians to practice medicine with limited liability. Thus, it is significantly pro-physician and is cost-effective. However, from the patient’s perspective, putting a number on a possible outcome from malpractice may not be palatable. After all, we live in a society where people can successfully sue others for millions of dollars from other types of accidents.

Thus, malpractice will continue to be an issue at the forefront of the health economic and policy debate. From my perspective, the medical industry is regulated in almost every other area. It might as well regulate malpractice and make the health economy more financially viable.

The tort liability system in the United States, at almost 2% of the GDP*, is the most expensive in the world. It is a pro-consumer system which makes companies responsible for any damages caused by their products and services. It forces the companies to consider the scope for damages that the company’s product(s) may cause.

The basic idea behind the tort liability system in making the injurers pay for the damages or harm they cause is that it not only compensates the victims, it also gives the injurers incentives to reduce the frequency of or prevent the injury in the future.

There are two sides to every coin. The tort liability system may improve or reduce efficiency. If the tort liability claim is optimal, it alters the behavior of the companies in a socially desirable way. If it is excessive, it can have a bad effect. It can reduce the output and deter production.

There is a small degree of risk that every product sold may cause unintended harm which may not be insured against. The tort liability ensures that companies pay due attention to the safety aspect of their products. The ability of the consumers to pursue lawsuits for damages acts as an incentive for companies to make better and safer products or can be a deterrent and affect the output and production.

For the tort liability system to work as an incentive for companies, the damages must not be random. There are many who feel that if punitive damages are essentially random, then they will not provide proper incentives and, instead, act as a tax on the companies. It is a cost with no corresponding benefit. However, not everyone agrees with this finding. Many experts feel that tort liability is largely predictable and can provide proper incentives to companies. Companies have incentives to invest in product safety research in an effort to reduce liability costs while still bringing a particular product to market.

The economic benefits of the tort liability system should not be measured in terms of the compensation or payments to the victims of the tort but the gains to society through the efforts taken by the potential injurers (companies) to design safer products.

*Editor’s note: Estimated U.S. GDP for 2007, according to the CIA’s The World Factbook, is $13.84 trillion. This puts tort litigation at $276.8 billion.