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Pacific Research Institute Trots Out Junk Economics and Myth

A report released last month by the Pacific Research Institute (PRI) that purports to lay out the costs of the American civil justice system uses discredited cost estimates and junk economics to vastly over-inflate the alleged cost of the tort system. But the problems do not stop there.

Even if PRI’s evaluation of costs were defensible, the report would miss the point. The merits of the civil justice system cannot be measured solely on the basis of cost because it is designed to reflect moral judgments that help define our society. Those types of questions, which concern our ethical obligations to others under our system of law and constitution, are for juries to decide. The tort system is the primary mechanism by which ordinary citizens can hold corporations accountable for preventable deaths and injuries caused by negligence, and any analysis which discounts this clear ethical purpose sheds little light on the values embodied in the system.

PRI’s report is also riddled with faulty logic, economic fallacies and trumped-up myths from the tort battle frontlines. Some of its many flaws are highlighted below.

Report Wrong on the Numbers

PRI Relies on Tillinghast Figures Widely Viewed as Bunk

As the basis for its calculations, PRI uses discredited “cost” estimates originally put forward by an insurance industry consulting firm, Tillinghast-Towers Perrin. The Tillinghast numbers are widely criticized as a gross overstatement because they include virtually all insurance costs, regardless of whether they bear any relationship to tort payments.

The Tillinghast numbers are not, as they are described, the costs of litigation – a fact that Tillinghast admits. They also include attenuated and speculative costs, making it unreasonable to claim that they are part of the civil justice system.[1] For example, for the years 2000 to 2005, 22.3 percent of insured tort costs in the Tillinghast study – some $218 billion – are the costs of administrative expenses for the insurance industry. And most of the costs included in the study are associated with auto insurance, despite the fact that coverage may be required under state law. As the Economic Policy Institute (EPI) said in 2005, “any work that relies on [Tillinghast’s] seriously flawed reports is, to that extent, also unreliable.”[2]

In 1999, Fordham University law professor Daniel Capra analyzed a report containing Tillinghast’s figures. “The Tillinghast figures are vastly overinclusive,” Capra wrote.[3]He continued:

“The tort costs include the costs created by insurance companies engaged in at least two distasteful ‘hardball’ tactics: refusing to pay legitimate claims, thus forcing injured citizens to seek redress in the courts; and requiring confidentiality agreements as a condition to settlement, which means that similarly situated victims will have to bring a new litigation from scratch.”[4]

In 2005, EPI reviewed Tillinghast’s estimate of tort costs and concluded that:

“They have grossly exaggerated the costs of the tort system, and have made unfounded claims about the tort system’s impact on insurance premiums, corporate research and development funding, product innovation, productivity, wages and employment, and business profits. And they have claimed without any evidence whatsoever that changing the tort system will stimulate economic growth and produce jobs.”[5]

More recently, a blog post by a well-known conservative jurist, Richard Posner, analyzing the PRI study observed that the Tillinghast figures are “almost certainly exaggerated, given the financial connection between the firm and the insurance industry.”[6] Posner goes on to challenge virtually every other assumption of the PRI study, concluding that “the authors’ estimate of the net social loss created by our tort system – is, as I have tried to show, fictitious.” Conservative economist Gary Becker, a fellow blogger, agreed that the PRI study is bunk, writing that “Posner’s criticisms of [PRI’s report] are right on the mark, as the authors of the study considerably exaggerate the cost of the tort system.”[7]

Insurance Costs Are Not the Same as “Tort Costs”

Many earlier studies by Public Citizen and others have shown that there is little correlation between insurance costs and tort payments.[8] A January 2007 Public Citizen study further demonstrated that medical malpractice liability  payments were rational, in the sense that people with more severe and disabling injuries were paid more than those with less severe injury.[9] That study also pointed out that repeat offender doctors are a major source of medical malpractice claims, suggesting that poor doctor discipline is the cause of higher medical malpractice insurance rates rather than any increase in compensation for injured plaintiffs.

Other analysis, including the current “soft market” for insurance, strongly suggests that insurance rates have far more relation to unpredictable but regular changes in the insurance marketplace than they do to litigation.[10] Regardless, it is clear that PRI’s analysis concerns insurance costs alone, and the study provides no insight into the “marketplace” for litigation itself. While PRI’s recommendations for closing down civil justice access may in fact make it harder for injured consumers to get into court, the study offers no evidence that these draconian measures would, in turn, lower insurance rates or costs.

PRI’s Next Steps Wrong as Well: Faulty Math and Slap-Dash Economic Models

Disregarding the research described above, PRI uses the Tillinghast numbers as its baseline, and adds in many more “indirect costs” to achieve its jaw-dropping conclusions. These additional “costs” are even more speculative than the widely disputed Tillinghast figures and are generally indefensible.

PRI’s economic models are, at each step, dubious. Taking just a few steps:

  • PRI first adds 46 percent ($128 billion) on top of the Tillinghast figures for fictional “tort transfer costs,” which it defines as the money spent seeking to avoid a cost (called, in economic terms, “rent avoidance”). PRI fails to provide any data or analysis to suggest that there is an empirical basis to assume that the $128 billion added in this step is actually spent by insurance companies to avoid or seek “rent.” And “transfer costs” are just that – transfers from one party to another, and not a cost. As Posner points outs, PRI fails to explain why the entire amount transferred should be “translated into a cost.”[11]
  • PRI then tacks on an additional 27.9 percent ($36 billion) for alleged “deadweight” costs based, without further analysis, on a single corporate tax rate study. The corporate tax study that PRI used concerned consumer and societal behavior to substitute an untaxed item for one that incurs a tax, and the costs to society of such a change. PRI fails to identify or explain how the principles apply to insurance costs or even to tort transfer costs. As Posner notes, “Of course the threat of tort liability might well alter the behavior of potential injurers – indeed, it is intended to do so – bit it might alter that behavior in the direction of greater efficiency, by making potential injurers internalize accident costs.”[12]
  • To this “fictitious” $164 billion ($128 billion plus $36 billion), PRI tacks on another $36 billion that will allegedly be spent to avoid the first $36 billion of costs. This makes little sense and is, in Posner’s terms, “double counting.” And there is no empirical support for any claim that any money would be spent to avoid the costs tacked on above. PRI’s new total? $200 billion.
  • Then, citing a deeply flawed 2006 study by anti-tort researchers, PRI conjures out of thin air economic impacts from “ghost workers” whose lives would allegedly be saved by unspecified “tort reform” measures to shut down the courts. The authors of the study used by PRI speciously assert that tort claims raise the cost of goods, pricing risk-reducing products more expensively, and thus costing lives. The study fails to rationally account or balance in any way the risk reductions encouraged and lives saved by the tort system.[13] PRI merely monetizes the value of these “ghost workers” in keeping with the general immorality of its approach.

The fallacies roll on and on. Posner makes at least three additional corrections to PRI’s misuse of economic theory – the study at one point confuses consumer surplus with social costs. Crucially, while PRI is great at over-counting costs, its calculus on the economic value or benefits of tort is miserly.

Using international cost comparisons (again based on Tillinghast-Towers), the report assumes that the “average” of costs for insurance for countries in the Tillinghast report is the same as the benefits of the tort system in the U.S. This assumption ignores differences in health care and other costs among the countries studied; it also is not a benefits calculation in the traditional sense because it makes no attempt to actually measure benefits. As Posner remarks, “A more serious weakness is the implicit assumption that a tort system generates benefits exactly equal to its costs. It might generate much greater benefits.”[14]

PRI Analysis Utterly Disregards Corporate Responsibility for Harms Such as Asbestos

PRI’s report considers asbestos lawsuits only as a drag on the economy, failing to consider the necessity of lawsuits that hold companies accountable and provide redress to victims. For PRI, any lawsuit that adversely affects a company’s wealth is pernicious, no matter how reprehensibly a company may have acted or how many people were needlessly harmed.

Yet, it is difficult to ignore the extreme corporate irresponsibility at the center of the asbestos story. The asbestos industry has long shown a complete disregard for human life. For example, in 1966, an executive at Bendix Corporation (now part of Honeywell) wrote to an employee of Canadian Johns Manville Co. Ltd., “My answer to the problem is: if you have enjoyed a good life while working with asbestos products why not die from it.”[15]

Manville had a sordid history of its own. Litigation against Manville revealed that the company was aware of the dangers of asbestos exposure as early as 1934 but failed to inform its employees.[16]

PRI is evidently more concerned with protecting the wealth of companies that mishandled these deadly products, regardless of their conduct or the harm it caused, than it is with protecting the lives of employees and consumers. PRI even suggests that a fictional figure related to “job displacements” resulting from the cost of litigation should be a greater concern to workers than their own lives.[17]

Hilda Bankston Story – Recycled, But Still False

PRI’s anecdotes are just as phony as the crisis the report supposedly documents. Perhaps the most outrageous of these is the uncorrected story of the Bankston Drugstore.

Hilda Bankston became a darling of lobbyists and lawmakers seeking to restrict plaintiffs’ rights in 2002 when she first came to Washington, D.C., to tell her story. Bankston testified to Congress that her family’s drugstore was named as a defendant in hundreds of lawsuits brought against a variety of pharmaceutical manufacturers. She told lawmakers that the lawsuits were so numerous that she was unable to keep track of them.[18]

Bankston’s story might engender sympathy – if it were true.

In 2005, investigative reporter Stephanie Mencimer visited the Jefferson County, Miss., courthouse to check out Bankston’s story. Mencimer found only a single lawsuit against Bankston-Rexall Drugs, a far cry from “hundreds.”[19] And Bankston’s attorney – who was paid by drug companies, not the Bankstons – confirmed to Mencimer that the pharmacy was totally indemnified by the drug manufacturers. Neither Bankston nor the drugstore suffered any costs, even for legal fees, as a result of litigation, Mencimer reported.[20]

Bankston’s story is merely another in a long list of myths designed to manufacture a crisis where none exists.

PRI Desperately Plies “Defensive Medicine” Myth

In its discussion of health care costs, PRI trots out the repudiated “defensive medicine” argument that physicians alter the way they practice medicine from a fear of litigation. To support this theory, PRI relies on a 1996 study by Daniel Kessler and Mark McClellan. But the Kessler and McClellan study also has been widely discredited. In 1999, a General Accounting Office report concluded:

“Because this study was focused on only one condition and on a hospital setting, it cannot be extrapolated to the larger practice of medicine. Given the limited evidence, reliable cost savings estimates cannot be developed.”[21]

In 2004, the Congressional Budget Office (CBO) examined the Kessler-McClellan study and “found no evidence that restrictions on tort liability reduce medical spending.”[22] The CBO went on to say, “using a different set of data, CBO found no statistically significant difference in per capita health care spending between states with and without limits on malpractice torts.”[23]

In fact, PRI’s claim that litigation is responsible for the high cost of health care is simply ridiculous. In 2006, the CBO found that malpractice costs amounted to less than 2 percent of overall health care spending in 2002.[24]

 

 

Endnotes



[1] For more analysis, see Center for Justice & Democracy, Debunking Myths About Tort System Costs, January 2007. (Available at: www.centerjd.org/MB_2007costs.htm.)

[2] Lawrence Chimerine and Ross Eisenbrey, “The Frivolous Case for Tort Law Change,” EPI Briefing Paper #157, Economic Policy Institute, May, 17, 2005.

[3] Daniel J. Capra, “An Accident and a Dream: Problems with the Latest Attack on the Civil Justice System,” 20 Pace L. Rev. 339 (2000).

[4]Id.

[5]Lawrence Chimerine and Ross Eisenbrey, “The Frivolous Case for Tort Law Change,” EPI Briefing Paper #157, Economic Policy Institute, May, 17, 2005.

[6] “Is the Tort System Costing the United States $865 Billion a Year?” Richard Posner, http://www.becker-posner-blog.com/archives/2007/04/is_the_tort_sys.html(visited April 4, 2007).

[7] “Improving the Tort System,” Gary Becker, http://www.becker-posner-blog.com/archives/2007/04/improving_the_t.html (visited April 4, 2007). Becker’s broad criticism of the tort system in the remainder of the piece is well rebutted in the comments.

[8]See, for example: Public Citizen, Medical Misdiagnosis in West Virginia: Challenging the Medical Malpractice Claims of the Doctors’ Lobby, Jan. 2003; Americans for Insurance Reform, Medical Malpractice Insurance: Stable Losses/Unstable Rates 2007, March 28, 2007.

[9]Public Citizen’s analysis of malpractice payments as reported in the National Practitioner Data Bank Public Use File for the years 1990 to 2005.

[10]Kevin Bingham, “2006 Rate Survey Shows Rates Leveling Off and the Early Signs of a Softening Market,” Medical Liability Monitor, Oct. 2006 (showing soft market); Tom Baker, The Medical Malpractice Myth, Chicago:   University of Chicago Press, 2005.

[11] “Is the Tort System Costing the United States $865 Billion a Year?” Richard Posner, http://www.becker-posner-blog.com/archives/2007/04/is_the_tort_sys.html (visited April 4, 2007).

[12]Id.

[13]Paul H. Rubin and Joanna M. Shepherd, “Tort Reform and Accidental Deaths,” Emory Law and Economics Research Papers, Nos. 05-017, Feb. 20, 2006. For Public Citizen’s analysis of this study, please see: Public Citizen, Why the “Tort Reform and Accidental Deaths” Report is Fundamentally Flawed, Oct. 12, 2005.

[14] “Is the Tort System Costing the United States $865 Billion a Year?” Richard Posner, http://www.becker-posner-blog.com/archives/2007/04/is_the_tort_sys.html (visited April 4, 2007).

[15] E.A. Martin, Letter to Noel Hendry, Canadian Johns Manville Co. Ltd., Quebec, Canada, Sept. 12, 1966. (Available at: www.ewg.org/reports/asbestos/documents/pdf/BX-091266.pdf.) [Emphasis added.]

[16] David T. Austern, Memo to the Trustees, Manville Personal Injury Settlement Trust, Feb. 8, 1988. (Available at: www.ewg.org/reports/asbestos/documents/pdf/Austern_Full.pdf.)

[17] Lawrence J. McQuillan, et al., “Jackpot Justice: The True Cost of America’s Tort System,” San Francisco, CA: Pacific Research Institute, 2007, p. 38-43.

[18] Hilda Bankston, Testimony, Hearing Before the Committee on the Judiciary, U.S. House of Representatives. 107th Congress, Second Session.  Feb. 6, 2002.

[19]Stephanie Mencimer, Blocking the Courthouse Door, New York City: Free Press, 2006. p. 165.

[20] Id. at 167.

[21] U.S. General Accounting Office, “Medical Malpractice: Effects of Varying Laws in the District of Columbia, Maryland and Virginia,” October 1999, p. 3.

[22] Congressional Budget Office, “Limiting Tort Liability for Medical Malpractice,” Jan. 8, 2004, p. 6.

[23] Id. at 6-7.

[24] Congressional Budget Office, “Medical Malpractice Tort Limits and Health Care Spending,” April 2006, p. 11.