eMJA: Wilson & Fulton, Risk management: how doctors, hospitals and MDOs can limit the costs of malpractice litigation

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Risk management: how doctors, hospitals and MDOs can limit the costs of malpractice litigation

Lionel L Wilson and Max Fulton

MJA 2000; 172: 77-80

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Introduction - What is risk management? - Current litigation environment - Medical defence organisations - Hospitals - What is effective risk management? - Conclusion - References - Authors' details
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Synopsis

The concerns of doctors regarding their risk of malpractice litigation and the costs of indemnity premiums are resulting in calls for legal reforms to limit their liability. We do not believe these returns will be successful either practically or politically.
Medical defence organisations often attempt to vindicate the doctor rather than settle the dispute -- a strategy that might be morally satisfying to doctors but which is also more expensive than the approach taken by commercial insurers.
Risk management -- the activities required to minimise financial loss for hospitals and the doctors who work in them -- is disorganised or absent in most hospitals.
Hospital managers lack incentives for risk management because the costs of litigation do not come out of their budgets.
The five mainstays of effective risk management are credentialling of medical staff, incident monitoring and tracking, complaints monitoring and tracking, infection control, and documentation in the medical record.
The implementation of risk management activities in hospitals is the immediate responsibility of hospital management, not doctors.

Introduction

Typically, the response of the medical profession and the medical defence industry to what appears to be an ever-increasing problem with malpractice litigation and the consequent rise of indemnity premiums is to call for "tort reform" -- that is, changes in the legal system to limit the legal or financial exposure of doctors to tortious actions (in law, a "tort" is a breach of duty leading to a liability for damages).

We believe that efforts to achieve limited liability are unlikely to succeed politically or in practice. Unless liability is capped at a level that would be unacceptable to the general public, capping will have little impact on indemnity funding, or insurance costs. For example, given that the value of over 99% of awards and settlements in medical cases is less than one million dollars, a cap of $5 million (which we believe would be the likely minimum rate anyone would consider as "fair") would be unlikely to have any substantive effect.

We briefly describe the current professional indemnity environment and suggest actions that doctors, hospitals and mutual funds should consider if they wish to contain the escalating cost of professional negligence indemnity cover.

What is risk management?

We define risk management as the activities required to minimise financial loss for hospitals and the doctors who work in them.¹

In the literature there is much confusion between risk management and quality management.² For our purposes, risk management is only concerned with avoiding patient harm as a means of minimising financial loss and not as an end in itself (unlike quality management). Other authors who recognise the commonality between risk management and quality management spend some time trying to clarify the relationship.^3-5

Even if all adverse events (however defined) could be avoided, not all the costs of malpractice litigation would be eliminated. The Harvard Medical Practice Study^6-8 found that while less than 2% of negligent injuries led to claims, over 80% of negligence claims were brought in cases in which there was no injury and no negligence.⁹ This means that, if the right risk management processes and systems are in place, hospitals and doctors should be able to rebut allegations of negligence in 80% of cases and successfully argue that no compensation payment should be made.

Current litigation environment

Anecdotal evidence suggests a rising tide of anxiety among doctors concerning their exposure to litigation and its costs, both financial and emotional. Many doctors perceive this increased risk as beyond their control and in the hands of others, in particular the judicial system and lawyers.

As an example of the rise in compensation payouts, the current high water mark for awards in neurological damage cases is the Black v Lipovac case,¹⁰ in which the plaintiff was awarded over $7 million. When costs are added, the medical defence organisation concerned is estimated to have paid out over $10 million.¹¹ In 1994 the highest amount awarded to a child with brain damage was only $2 million (Loo v Harbord Administration Pty Ltd).

As for the rate of claims, statistics are very difficult to obtain, resulting in a debate as to whether it is actually increasing.

In financial terms, hospitals are in an even more serious situation than doctors, although here again obtaining factual analysis of claims and judgements is extremely difficult, both for the public and private sectors.

Australia is not alone in having these problems. Poor clinical risk management is estimated to cost the NHS in the UK some Ł100 million per annum and, with an increasingly litigious population, this figure is expected to rise sharply in coming years.¹²

Medical defence organisations (MDOs)

Most doctors indemnify themselves against malpractice claims through membership of one of the MDOs. The remaining doctors either go without any indemnity cover or take professional indemnity insurance with a commercial insurer. The MDOs are "doctor organisations": non-profit societies governed by boards consisting mainly of medical practitioners.

MDOs are underfunded

Only in recent years have MDOs started to adopt the disciplines normally associated with commercial insurance companies, moving to establish wholly owned, authorised insurance companies and to introduce non-doctor, independent directors onto their boards. One sign of this has been the trend away from "discretionary cover" towards legally enforceable insurance contracts. There is still a way to go, and the way is further for some than for others. The MDOs' wholly owned, authorised insurance companies are fully funded and meet the prudential and solvency requirements laid down by Government for insurance companies. However, the MDOs themselves, which have historically provided discretionary cover, are underfunded. Ms Fiona Tito, in her Review of Professional Indemnity Arrangements for Health Care Professionals (commissioned by the Commonwealth Department of Health and published in 1994), assessed the (then) total underfunding at between $300 million and $400 million.¹³

Claims management

Apart from the way MDOs report financially, nowhere is the difference between MDOs and insurance companies more apparent than in the way MDOs manage their members' claims. It seems that the underlying philosophy driving the dispute-settling process of MDOs is an implicit belief that:

only doctors can truly understand medical issues, and if plaintiffs and their lawyers could only be made to understand what the doctors reviewing the claim understood about it they would drop the claim;
the reason for most adverse events is not negligence by the doctor but the inherent complexities of medicine;
as no doctor embarks upon a procedure with the purpose of harming a patient, in fact the very opposite, patients should be grateful for their efforts and not sue if something should go wrong.

From this position on the moral high ground, MDOs have a tendency to be far more fixated on maintaining the "innocence" of the doctor (and the profession generally) than on opportunities for early settlement.

In contrast, insurance companies are much more likely to be disinterested and pragmatic. More MDO cases are litigated, with settlements being left until later in the dispute resolution process. Often this means that MDOs pay out higher settlements than commercial insurance companies.

Many doctors would see the approach taken by MDOs as laudable and correct. MDOs are, after all, non-profit mutual societies. We disagree. Irrespective of the stance taken at the beginning, the vast majority of cases ultimately settle, so why not settle as early as practicable? There is empirical evidence that insurers' legal costs and the average compensation payment are significantly higher in those organisations that are most ready to seek a litigated solution to disputes.¹⁴ Yet we are not aware of any MDO which has established an ongoing dispute-mediation program. If mediation is used at all, it is reactive, court-directed mediation, which is a case of "too little, too late". If an MDO pursues a high litigation strategy based on the premise that it is necessary to show plaintiff lawyers that the MDO is "not an easy touch", that strategy will generally be ineffective and will cost its members money.

Medical input remains important in claims management, but it is not supreme. The processing and resolution of medical malpractice claims is a highly professional endeavour that should belong as much to the insurance and business world as it does to doctors. Failure to recognise this will only lead to a further escalation of costs and premiums.

Hospitals

The Tito Report highlighted the absence of effective risk management programs in hospitals (reference 13, page 295). In the past few years, efforts to improve risk management have been made by some public hospital authorities and by private sector groups, but this has not resulted in significant change at the individual hospital level. In the light of the level of claims against hospitals, it is difficult to explain why this is so, but we think the following reasons apply to most hospitals:

hospital managers simply do not know what has to be done; or
they know what to do but are not prepared to spend time and effort on implementation; or
they know what to do but fear the political consequences of doing it; or
they fear that the political price they will pay exceeds the costs of paying claims.

Unfortunately, the lack of data on claims and judgements is still a serious barrier to analysing hospital and medical claims (reference 13, pages 13, 21). Using data provided by NSW Health, Wilson and Goldschmidt estimated that from 1981 to 1994 there was an average of more than one claim per year for every NSW public hospital (reference 1, pages 25-27).

Data from the private sector are even more difficult to acquire. Most evidence is anecdotal, but points to a situation similar to that in public hospitals. For example, one large Australian insurer is refusing to renew any professional indemnity policies for private hospitals.

Lack of drivers for change

A "driver" is the term applied to incentives and sanctions built into any system. In most States, public hospitals have most of the costs of litigation met by State Treasury funds. As they do not have to meet these costs directly out of their own budgets, at least in the first instance, there is no incentive for public hospital managers to implement effective risk management and no sanctions if they do not. As far as risk management goes, the system in most States is devoid of effective drivers.

Many hospitals in the private sector seem to be so fearful of offending their medical staff that they would sooner meet the cost of malpractice litigation or the rising cost of premiums than take steps to reduce risk. While this may be acceptable for some private hospitals, this attitude contributes to the overall increase of doctors' premiums for indemnity insurance.

Most claims are settled out of court and generally a higher compensation burden falls on medical practitioners than on hospitals. In our view, when no formal risk management program is in place, the hospital should carry a greater proportion of the financial risk. Hospitals, not doctors, carry prime responsibility for risk management initiatives. Once public hospitals are faced with the full consequences of malpractice litigation, we believe a start will be made to implement effective risk management (reference 13, page 294). Both public and private hospitals should be compelled (by legislation if necessary) to make their statistics on malpractice claims available to the community (in a non-identifiable way) and to their medical staff.

What is effective risk management?

Five activities are the mainstay of effective risk management:

Credentialling of medical staff
Incident monitoring and tracking
Complaints monitoring and tracking
Infection control
Documentation in the medical record.

Credentialling of medical staff

Credentialling, or delineation of clinical privileges of medical staff, is a formal process whereby the medical staff demonstrate competency in procedures, for which they are then given credentials by the hospital's governing body permitting them to perform those procedures in the hospital.¹⁵

Credentialling should be separate from the appointment process and, if it is to be effective, it must be conducted annually and must be procedure-specific. Although many Australian hospitals claim to be conducting credentialling, we are unaware of any that do so to the level where it becomes an effective risk management tool. If conducted properly, credentialling is a complex undertaking, because it not only must be credible but also must be fair and free from bias or apparent bias. Achieving these ends demands a significant program, which must be planned and managed. To be effective and to prevent, or at least minimise, the possibility of a successful legal action against medical staff or the hospital as a result of the credentialling program, certain basic rules and proper process must be adhered to (see Box) (reference 1, pages 545-563).

In spite of the concerns by many doctors about their legal privilege while conducting quality management activity, credentialling is the only aspect of quality management or risk management activity that, if not conducted in strict accordance with the principles listed in the Box, carries the risk of exposing doctors to legal consequences. The need for absolute observance of the terms of reference and the need for a formally structured process are paramount. Even in North America, where credentialling of medical staff has been an intrinsic element in hospital practice for most of this century, there is a recognised need to render credentialling more robust and effective.^16,17 The Tito Report, and published material in the US, UK and Australia, strongly support detailed, robust credentialling.^13,18-21

Incident monitoring

Most Australian hospitals claim to engage in incident monitoring, and NSW Health, for example, collates incident reports from its hospitals. However, incident monitoring and analysis must be conducted as close to the workface as possible if activities to correct identified problems are to have any chance of being implemented.

Several factors tend to diminish the practical benefit of incident monitoring as it is currently practised in Australian hospitals. There is no aggregation of incidents (which might be reported to the nursing, medical or hospital administration) within hospitals, and no pattern analysis (tracking). Finally, it is of no use monitoring incidents and conducting a pattern analysis if there is no internal hospital mechanism to correct problems that are identified.

The reporting of incidents requires a non-judgemental and non-punitive attitude on the part of hospitals. Nursing staff, for example, will simply not report medication errors if they know that some punishment will follow.^19,20

Complaints monitoring

For the purposes of quality and risk management in hospitals, complaints must be handled promptly and effectively at the hospital level. In recent years, efforts have been made in several States to change the hospital culture and processes in handling complaints. Nevertheless, it is still all too common for complaints to hospitals to be met by a wall of silence and obstruction. It is still unusual for the hospital manager to become directly involved at an early stage. The patient and family readily see that they are being put off, and this increases the risk that they will become angry, aggrieved and litigious.

Hospitals should have a complaints mechanism and a complaints-resolution procedure in place and the hospital manager should play a prominent and early role in this process. Hospitals should have a policy and a mechanism to advise all patients how to make a complaint and such information should be prominently displayed. The recent innovation of patient advocates is a positive step. The monitoring and analysis of complaints becomes a valuable risk management tool.

Infection control

Infection control is an example of surveillance, the monitoring of one aspect of care. In today's hospital environment, it becomes a vital piece of the risk management strategy. Infection control in most Australian hospitals is generally considered to be well developed. However, like credentialling, it is often not sufficiently rigorous to be an effective risk management tool.

Documentation of the medical record

Nothing causes doctors and hospitals more medicolegal angst than inadequacies in the medical record. Every case that has to be settled out of court because inadequate documentation precluded an effective defence means a rise in doctors' indemnity premiums. Anecdotal accounts all confirm that the adequacy of medical records in Australia varies widely within the same hospital and from hospital to hospital.

In a case that may have far-reaching implications for doctors and hospitals alike, Australian Capital Territory Health Authority v Moorby (unreported, NSW Court of Appeal, 25 June 1997 -- CLS 1997 NSWCA 94), the court applied the doctrine of res ipsa loquitur ("the fact speaks for itself") for the first time in an Australian medical negligence case, finding negligence in the absence of any persuasive explanation for the adverse result which left a healthy 17-year-old severely brain damaged. One of the reasons why the court was able to find as it did was the absence of adequate medical notes.

Hospitals should train interns, residents and, if necessary, even visiting medical officers in the requirements for good documentation to reduce the risk of litigation, even if not for the sake of quality of care. The expenditure involved would be returned many times. If hospitals are serious about limiting their risk, they must insist to all medical staff that their continuing appointment depends on maintaining an adequate standard of medical record. Doctors, in their own interest, should support such a move. A medical record review should be conducted every six months in all hospitals.

A preliminary analysis of the results of a survey by the Australian Council on Healthcare Standards confirms that a significant proportion of hospital medical records are inadequate (Dr Denis Smith, Australian Council on Healthcare Standards, personal communication).

Integration, organisation and problem resolution

While doctors and other hospital staff must play an important part in risk management activities, it is hospital management that must make policy decisions and allocate sufficient resources to ensure implementation. Implementing and conducting these activities requires planning, organisation and management. Effective credentialling of medical staff alone is a complex undertaking requiring management resources. Furthermore, it is little use conducting incident monitoring, complaints monitoring or infection control if there is no organisational arrangement in the hospital with the authority and the capacity to correct problems that these initiatives reveal. The absence of problem-resolution mechanisms in hospitals is a major cause of poor quality and unnecessary risk.

Conclusion

Both hospital managements and MDOs have a role to play in containing the rising cost of professional indemnity. More effective efforts by hospitals to manage the risk of claims against them and their medical staff is the first essential. Effective credentialling of medical staff and a serious effort to improve medical records alone would result in a significant reduction in claims and hence in premiums.

Doctors alone do not have the authority to implement effective risk management in hospitals, but they can certainly bring their considerable influence to bear on hospitals to implement the range of activities we have described. Doctors should also be reassuring their hospitals that risk management initiatives have their full collective support.

Better claims management is the other essential requirement and this lies in the hands of the MDOs. These organisations have to continue the process of internal reform that they have already started or they will have reform forced upon them by commercial competition. Without these changes, the current escalation of indemnity premiums for doctors is unlikely to be effectively addressed.

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Authors' Details

Health Systems Sciences, School of Public Health, La Trobe University, Melbourne, VIC.
Lionel L Wilson, AM, FRACGP, Member of Faculty; Director of Qual-Med Pty Ltd, Sydney.

Claims & Liability Management Services Pty Limited, Sydney and London.
Max Fulton, LLM, MBA, Director; previously General Manager of United Medical Defence.

Reprints will not be available from the authors.
Correspondence: Dr L L Wilson, 134 Queens Road, Connells Point, NSW 2221.
lwilson10ATCompuserve.com

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