Economics and similar, for the sleep-deprived

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Update: seemingly not

Update: Oh yeah!

Monday, January 06, 2003

Back on the DHSS

I'm following some of the discussions on tort reform and the spiralling cost of medical malpractice insurance in the USA with interest. One point that I don't think anyone's made so far is that, whatever you do, it's not possible to legislate economic losses out of existence. All that you can do is to ensure, via tort reform or similar methods, that the cost of medical malpractice falls on the victims, as individuals, rather than on the medical profession. This strikes me as rather inequitable but thinking about it, I don't see any solution to the problem which wouldn't involve unrealistically far-ranging changes to the kind of society that the USA is. My analysis ...

On the basis of cursory examination of the literature, admittedly mainly cribbed from "Asymmetrical Information", it seems that the problem with respect to medical malpractice awards is, in large part, the cost of awards made in the US court system for "economic damages"; in other words, lost earnings. If one wanted to be cynical and unpleasant about this, not to mention pretty swinishly sexist to boot, one would say that the stereotype American malpractice case is one of a fairly typical obstetric complication of the kind that goes wrong all the time through no particular fault of anybody's, which is blown up into a multimillion dollar settlement because the mother swears blind that, but for this calamity which has befallen her new child, she would have continued in her prepartum career as a high-flying middle manager until the age of 60, and should be awarded economic damages comensurately. The actual "tort reform" crowd (see my earlier post on "pension reform" for my views on the word "reform" as a danger sign) would also engage in some fairly moronic populist lawyer-baiting, but since I don't believe that juries are any less reasonable in jury rooms than in their normal lives, I'll pass on that.

So in any case, what could account for the fact that economic damages are so deliriously high in America? Well, think about it this way; in which country in the developed world has the lowest "replacement rate" (ratio of social benefits to average earnings)? I haven't looked it up and don't propose to, but I'd be surprised if the USA wasn't right up there. And which country has the greatest degree of inequality in earnings? Now this time, I'm pretty sure that the USA is up there. The proposition I'm trying to advance is this; in the USA, more than any country on earth, the "replacement ratio" for a middle class wage earner -- the amount of money which you would have to give a middle class wage earner in order to leave their lifestyle unchanged if they were unable to continue in paid employment -- is higher than almost anywhere else, and has got a lot higher over the last ten years. Note for the minute that I am using "middle class" in its English sense, the sense in which it is a term that makes a meaningful distinction, not in its American sense which appears to refer to the segment of Americans who earn more than subsistence farmers but less than investment bankers.

I'm not sure I've made this clear, so let's approach the problem from another angle. The idea behind a medical negligence award is (jurisprudential theorists, cut me some slack here) to make the plaintiff whole; to award them a sum of money such that they can live the kind of life which they would have led had the medical mishap not taken place. This includes a sum of money for the additional medical care they will need, plus a sum of money reflecting the fact that, for one reason or another, their earning capacity is less. We'll ignore "mental distress" here, although it is a damn sight easier for us to ignore it with scare-quotes than for someone suffering it to ignore it as a fact. The point at issue is the economic damages; they're what's driving the cost inflation in medmal insurance, and without them, there wouldn't be a problem.

So now, if you're still with me, cast your mind back to the last time you saw a really bitter argument between a European and an American about relative living standards. Chances are, I was involved ... Often, the crux of these arguments runs thus:

Europe: But what about the things which the government provides in Europe like education, healthcare, childcare, theatres, holistic massage, socks, etc?

America:: What about 'em? They don't make a difference in terms of GDP. You can't claim that they're more valued by Europeans who don't have to pay for them than by Americans who can pay for them if they want 'em.

The American is right in this context; things like this don't make a heck of a lot of difference at the level of national income. But they do make a heck of a lot of difference if you're a plaintiff in the professional classes who's been rendered unable to earn a living through medical malpractice. If you're a European, then there's whole chunks of your life which remain unchanged, because they were being provided to you and your middle class friends free of charge anyway, as a sort of kickback from the tax system. If you're American, then you and your friends were paying for those things out of your own pocket, so anyone who is going to compensate you for your loss is going to have to get you to a point at which you can go on paying for them -- as it were, they're going to have to "Put your kids through college". Lionel Jospin used to have a good riff on "yes to the market economy, no to the market society", and I think that the cost of medical insurance in the USA throws his meaning into sharp relief. Because if you're going to have a market society -- a society where a socially desirable lifestyle cannot be supported without both adult members of the household taking part in the wage economy -- then your only alternatives are to accept that the cost of compensating victims of medical negligence is going to skyrocket (which appears to be inconsistent in a practical sense with the economics of the medical profession as it is currently organised) or to insist that victims of medical negligence have to bear the majority of the cost of medical negligence themselves (which is intolerably inequitable).

I have no idea where this points in terms of policy conclusions. But it does throw a bit of light on one particular statistic which has always struck me as bizarre; the fact that the USA spends 20% of its GDP on healthcare. When you realise that, through the medical negligence insurance system, this spending actually includes a fair old chunk of what is provided under other categories of government spending in Europe, it seems a bit less bizarre, although I do have to admit that I still think that it is pretty bizarre to fund these provisions via the attorneys acting for two insurance companies and an HMO rather than through general taxation. I'd also note that there is a reason why the UK used to have a single government department in charge of "Health and Social Security", and that when you think about what the words mean rather than thinking of the various cack-handed government attempts to implement them "social security" sounds like the sort of thing that one would really like to have some sort of insurance protecting one for.

May 2003 bring you all good health, and continued social security.

1 comments this item posted by the management 1/06/2003 07:25:00 AM

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