Standing at the intersection of medicine, law, ethics, and economics, medical malpractice suits are the epitome of 'multifaceted.' They are a battleground for the warring interests of multiple parties: physicians, injured patients, health insurance companies and sometimes the state. These lawsuits entail a degree of financial complexity that is difficult to match. Funds from myriad sources go into medical malpractice suits and are eventually collected by other parties in the case. Here we will examine the costs and losses incurred by each party engaged in a malpractice suit, how they are paid for and compensated, and by whom - as guided by the eventual outcome of the case. It is important to note that the economic stakes (and standing) of plaintiff and defendant are wildly different. That gap is even wider if measured between litigant and insurance company, who could foot the bill for legal expenses as well as hefty damage payouts.
There is a seemingly endless variety of terms designating the various costs and payments associated with malpractice suits. Contingent fees, advancement of costs, insurance deductibles, expert witness fees, trust accounts, state compensation funds, economic, punitive and non-economic damages, collateral sources - it can get a bit dizzying, but when these terms are unpacked and clearly explained, they may be easily understood.
The Costs of Commencing Litigation
Working capital is required to commence litigation of a negligent medical act. Sometimes plaintiffs or defendants enter into formal legal financing agreements with a specialized legal financing company to secure the services of their attorney. In other cases, they may retain legal representation on the basis of contingent fees, in which case the attorney will only be compensated if the verdict is in favor of their client, or is favorably settled outside of court with their assistance. Contingency fees are standard fare in personal injury and medical malpractice cases. If your attorney successfully litigates your medical malpractice claim and you are awarded damages, the contingency fee may range from 20%-40% of the awarded sum.
Sixteen states (California, Connecticut, Delaware, Florida, Illinois, Indiana, Maine, Massachusetts, Michigan, New Jersey, New York, Oklahoma, Tennessee, Utah, Wisconsin, and Wyoming) have imposed caps and scales on contingency fees in medical malpractice cases. Some states employ a flat rate system, while others use a "sliding scale." Tennessee and Utah cap contingency fees at 33.33% of awarded damages. For states that use a sliding scale, the rate decreases as the damage amount increases. For example, 40% over the first $50,000 of recovered damages, 33.33% over the next $50,000, 25% over the next $500,000 and 15% over the rest in California.
Six states (Hawaii, Iowa, Maryland, Nebraska, New Hampshire, and Washington) make attorney fees subject to scrutiny and approval by the court. The term 'advancement of costs' refers to a legal provision requiring liability insurance companies to cover the costs of defense litigation. Physicians hold liability insurance, almost across the board, so if and when they become the defendant in a malpractice suit, they will not be personally liable to pay any damages or settlement. It will be covered by the liability insurance company, up the amount denoted in their policy. Advancement of costs is an additional benefit of holding liability insurance, as it will cover legal fees and expenses that are incurred in anticipation of the verdict. The court-imposed fee associated with filing a medical malpractice claim is usually somewhere between $100 and $500 dollars. There are also negligible fees associated with obtaining a patient's medical records.
The Costs of Pursuing a Medical Negligence Claim
There are a slew of elements needed to successfully pursue a claim of medical malpractice. The plaintiff and defendant in a medical malpractice suit contend with different economic situations and have access to variant financial resources to respectively pursue and defend the claim. The defendant physician has the backing of a liability insurance company or a malpractice trust, who will advance the costs of litigation, including lawyer fees, expert witness fees, administrative fees, filing fees and so on. Although the plaintiff stands to gain substantial compensation if they win their claim, they do not have access to the same kind of financial resources as the defendant, who already took out liability to ensure they could ably defend any claim.
The plaintiff's available financial resources at the outset of a claim may not be stellar because they could not foresee that they would be in the position of needing to pursue medical malpractice, whereas the physician could reasonably foresee it and took out liability for that very reason. If a lawyer's fee structure is contingency based (in which case they are paid a portion of the allotted damages if they win the case), working capital is needed to cover various expenditures of prosecution. Plaintiffs have the option to seek out a legal financing company who may fund the expenses of litigation, or their attorney could foot the bill for these expenses, such as expert witness and administrative fees, in hopes that they would be compensated with hard-won contingency fees. Malpractice cases can quickly rack up substantial tabs, upwards of $50,000 easily.
Liability insurance companies are especially weary of these expenses because they are required to advance all the costs of litigation for the defendant. A defense attorney may be costing the liability insurance company anywhere from $150 - $400/hr, or more. Plaintiff attorneys do not benefit from insurance company cost advancement, so any expense they incur in the course of prosecuting a claim is their own - they will not be compensated for these expenses if they do not win. This incentivizes plaintiff attorneys to provide the best & most aggressive defense possible; it also encourages an attorney's prudence and selectivity in which cases they choose to take on. If an attorney does handle their client's money in any capacity, this money must be placed in a trust account. The client's funds and the attorney's funds are never to be mingled in one trust account, as this would result in serious disciplinary action for the attorney. Records of trust accounts must be kept for five years after the conclusion of a case. Any withdrawal must be made by request.
Costs of Expert Witnesses
Perhaps the most fundamental and critical expense in a medical malpractice claim is securing an expert witness to evaluate the claim. During the wave of tort reform in the 1980's, some state legislatures went about meticulously outlining expert witness requirements. Certain states do not even allow a claim to proceed in the absence of an expert witness. It is arguably the most crucial element in the prosecution of a medical malpractice claim. Recruiting an expert witness to review a claim alone can be very expensive to both plaintiff and defendant. Ironically, plaintiff and defendant will each recruit an expert witness from the same field who must necessarily come to opposite conclusions.
The plaintiff's claim could be tossed or deemed meritless if not backed by an expert opinion, attesting to an incidence of negligence. Concurrently, a defendant will almost assuredly lose the case if they do not provide expert testimony to the effect that no negligence occurred. With each side's interests hinging so heavily on this single, critical aspect of malpractice suits, they will often go to great lengths when it comes to expert testimony. Multiple expert witnesses may be retained, in lieu of just one. In addition to a physician practicing in the same field as the defendant, experts may be recruited from a number of areas relating to the claim. If medical technology was involved, perhaps a litigant could offer relevant testimony from an expert biomedical engineer. If a particular drug and its effects are being scrutinized, perhaps the testimony of a skilled pharmacist will be presented.
The most important function of the expert witness is to define the standard of care in the defendant's field and to present an argument that the defendant either deviated from that standard or diligently adhered to it. And finally, if a deviation did occur, how it proximately caused injury to the patient. Any additional expert testimony may significantly buoy a defendant or plaintiff's argument, but it would come at the cost of compensating these additional experts. Using multiple expert witnesses could be considered financially risky if the claim does not pay out; bear in mind that the jury is not required to adopt the expert's opinion but they will fairly evaluate all the facts they present. Failure to secure an expert witness could lead to the court deciding in favor of the opposing party before the case even goes to trial.
There are expert witness databases and consulting firms which help connect litigants to expert witnesses. The average expert witness fee is $385/hr for in-court testimony, $353/hr for depositions and $254/hr for file review. Defendants will normally see these fees covered by liability insurance cost advancements, while plaintiffs or their attorneys will cover these costs in the hopes of winning them back in awarded damages should the court find in their favor.
Lawsuits are extremely document-intensive. For this reason, administrative fees account for a notable portion of legal expenses. This includes but isn't limited to hiring court reporters for depositions and creating copies and transcripts of medical records, and shipping critical documents back and forth.
Arbitration: Fees and Settlements
A substantial number of medical malpractice claims settle outside of court, never seeing trial. This is due in part to the efforts of legislators to emphasize and streamline pretrial arbitration as a means of resolving medical malpractice disputes. Although far less costly than formal litigation, arbitration has its own associated fees and varies in nature and process state to state. Some states such as Vermont, which settles 98% of malpractice claims by way of arbitration, impose pretrial review by an arbitration screening panel as a mandatory precursor to litigation. It is not mandatory in every state, but either party in the case may elect for arbitration prior to trial. Many healthcare providers actually put arbitration clauses in medical consent contracts, in an effort to stem the number of litigated malpractice suits and their associated costs.
The statute of limitations associated with medical malpractice claims is tolled (paused) until arbitration is completed. The arbitration panel typically requires a prospective plaintiff file a Certificate/Affidavit of Merit, which is completed with the assist of an expert witness attesting to the merit of a negligence claim. This panel may be composed of at least one attorney, one medical professional, and one approved layperson. Both the composition and proceedings of an arbitration panel may vary state to state. Arbitration fees can usually be split between the injured plaintiff/their legal representation and the defendant's insurance company. These fees can vary substantially, depending on the state and whether a public or private arbitration service is used. Hourly, case service and filing fees could begin around $200 and possibly reach a few thousand dollars. Unlike court cases, arbitration proceedings are not documented, and arbitrators are immune from suit. The decisions reached in arbitrations are entirely legally enforceable.
If the disputing parties reach a settlement during arbitration, the plaintiff may be compensated for their injury. An arbitration-derived settlement will probably be lower than the damages a trial court could have awarded but at a fraction of the cost of a formal trial. If the defendant settles with the plaintiff, the settlement will likely be covered by the liability insurance company to a point. The plaintiff's attorney would likewise be compensated by a portion of these damages if they operated on contingent fees. Settlement payments account for 96% of malpractice claim payouts. The other 4% were the result of a trial judgment. 
When a case does, in fact, go to trial, the plaintiff will be awarded damages to compensate for an injury - if the claim is successfully litigated. The financial losses associated with an injury are categorized into economic damages and noneconomic damages. Punitive damages are a separate category altogether; they are levied on the defendant to punish their negligent act, but this money is not awarded to the plaintiff.
Economic damages compensate the real financial loss associated with an injury. These may include medical bills, prescription fees, physical therapy costs, lost wages and loss of earning capacity. Not all the impacts of an injury can be measured in cold hard math. The court still allows injured plaintiffs to be compensated for the other hardships of an injury; these are noneconomic damages which include, physical pain and suffering, disability and disfigurement, loss of companionship or loss of consortium, or loss of enjoyment of life.
A majority of states impose damage caps. A minority hold that such caps are unconstitutional. Caps are the result of an effort to curb the costs of medical malpractice claims and liability insurance premiums. Some states have noneconomic damage caps as low as $250,000, while others have caps that land somewhere upward of one million dollars. In states with no damage caps, a plaintiff may be awarded whatever amount the jury deems fit. There have been a number of medical malpractice plaintiffs awarded multimillion-dollar damages, especially in birth injury cases.
Award Reductions: Collateral Sources and Comparative Fault
Any damages awarded a plaintiff will usually be reduced by their share of collateral sources and their proportion of fault. Reduction by collateral sources is actually quite a simple concept in practice. Because many people carry health insurance, even more so following the Affordable Care Act, at least a portion of their medical bills will be covered by their insurance company. Economic damages compensate a patient for, among other things, medical bills accrued from their injury. However, if they did not have to pay these bills personally because they were covered by insurance, then their awarded damages will be reduced by an amount equal to their covered bills. This way plaintiffs are not compensated twice for their medical expenses.
Another means by which damage awards may be reduced is something known as "comparative fault." The 50 states have a handful of different approaches toward assigning fault for an injury. In an effort to be fair to healthcare providers who are sued for malpractice, the court evaluates the injury to determine whether it was entirely the fault of the provider or if the provider and patient share the fault. This would include cases where the patient somehow exacerbated their own injury. The court assigns a "percentage of fault" to each party. Some states have "bar rules" on the books. A bar rule imposes a limit on how much fault the patient can have before they are entirely blocked from recovering damages. Some states employ a 50% bar rule, meaning a plaintiff who is assigned fault at 50% or more will not be able to recover damages for the injury. Other states employ a 51% bar, which holds to the same principle but at 51%. Not every state uses a bar rule. Regardless, if a plaintiff is assigned a portion of fault that does not bar them from recovery, their damages will be reduced by their proportion of fault. For example, if a court finds that a plaintiff was 30% at fault for their injury, and the court awards $100,000 in damages, the plaintiff will be able to collect only $70,000 of that amount.
Who Pays Damage Awards?
It seems the obvious answer to this question is the defendant, or their liability insurance company. But the reality is more complex. Insurance companies will usually only cover damages up to a point, an amount established in the provider's policy. If a defendant owes the plaintiff $2,000,000 and their liability insurance policy only covers $1,000,000, they are responsible for the remainder. In an effort to curb the perceived detriments of medical malpractice litigation and bring down liability premiums for providers, a small number of states created injured patient compensation funds. Providers are required to contribute into these funds and must still hold liability insurance up to a certain amount. If they lose a malpractice suit, then the compensation will cover the remainder of a damage award after the insurance payout.
Medical Malpractice Economics, Outside the Courtroom
Outside of the courtroom, there is an observable economic impact of medical malpractice. According to an analysis released by the NYU School of Law, "medical error increases average hospital costs by $1,246 per patient admission, and in the riskiest hospitals increases average costs by $4,769 per patient admission Overall, medical error costs about $17–29 billion per year."  Fear of medical liability likewise engenders a sizable economic toll, in the form of high-priced, overkill, defensive medicine. It has also hiked up the policies and premiums in the medical liability insurance industry, contributing to (but not the sole cause of) heightened healthcare costs.
Insurance companies have a vested interest in the outcome of the case, at the outset. Liability insurance companies stand to lose a good deal of money if the defendant physician loses the case. Health insurance companies likewise have a vested interest in the outcome and any precedents established by a given case. If, for example, a court rules that a physician erred in not administering a certain treatment, drug or technology - because it was a disputed aspect of the standard of care - and the court finds that it is essential to the standard of care, then that treatment, drug or technology is then normalized in the standard of care to that field. This means health insurance companies must now cover this procedure/drug.
Experimental procedures are an excellent example of this phenomenon. If a court finds in favor of a plaintiff's right to receive a potentially life-saving experimental treatment, thereby normalizing it as part of the standard of care, the insurance company must rewrite policies so as to include coverage of this treatment. Generally, insurance companies do not want to insure pricy treatments; it is perceived as a great financial detriment, which they will try to undercut by bumping up premiums. Similarly, expert witnesses have a vested interest in which treatment and technologies they endorse in their testimony because they work within insurance companies' network of healthcare providers. The normalization of a pricy treatment could mean higher medical bills, which in turn could increase the paycheck of a healthcare provider.
Conversely, from a financial perspective, it is best to be prudent and keep costs down when administering tests and undertaking procedures. This may be so heavy-handedly implemented by the insurance company that a physician's hands could be effectively tied as far as the treatment they can offer. Before a medical malpractice claim is ever commenced, there is a chance that the circumstances that gave way to it were economically influenced. This is not an expense or cost incurred in the course of litigation, but it is at least worth noting.
|Component||Estimated Cost (in billions)||Quality of Supporting Evidence|
|Total Indemnity Payments||$5.72||Good|
|Economic Damages||$3.15||Moderate, as to precision of split|
|Noneconomic Damages||$2.40||Moderate, as to precision of split|
|Punitive Damages||$0.17||Moderate, as to precision of split|
|Component||Estimated Cost (in billions)||Quality of Supporting Evidence|
|Total Administrative Expenses||$4.13||Moderate|
|Plaintiff legal expenses||$2.00||Good|
|Defendant legal expenses||$1.09||Moderate|
|Other overhead expenses||$3.04||Good|
|Component||Estimated Cost (in billions)||Quality of Supporting Evidence|
Source: National Costs Of The Medical Liability System - Exhibit 1
|The average cost of defending a medical malpractice claim was approximately $47,000 |
|The average damage amount for paid medical malpractice claims in 2010 was approximately $330,000 |
|In 2001, 28% of physicians held liability insurance coverage up to $1 million. By 2010, that figure increased to 41%. |
|In 2010, 63.7% of claims were withdrawn, dismissed or dropped without payment. |
 Jr., Morgan Lewis. "Medical Malpractice Costs Continue to Climb." Medical Economics. Advanstar Communications Inc, 11 Jan. 2012. Web. 18 Apr. 2017. <http://medicaleconomics.modernmedicine.com/medical-economics/news/clinical/practice-management/medical-malpractice-costs-continue-climb>.
 http://search.proquest.com/openview/2f43821370b7b248ef7b2b2c6543995a/1?pq-origsite=gscholar&cbl=36027 http://www.gilmanbedigian.com/california-medical-malpractice-laws