The Incentives to Arbitrate Medical Malpractice Disputes

By Alex Stein

In my previous post, I outlined the legal framework for arbitrating disputes over medical malpractice.  Here, I consider whether arbitration is likely to become a forum of choice for doctors and patients. I believe that this scenario is unlikely.

Here is why:

Doctor-patient relationships are predominantly formed by adhesion contracts that patients sign at the doctor’s office.  Whether a doctor and her patient will agree to arbitrate thus depends on the doctor’s decision to include an arbitration clause in the contract. For reasons specified below, I believe doctors will do so on very rare occasions.

STICKY DEFAULTS
Consider a doctor asking her patient to sign an arbitration agreement. Under extant law, as explained in my previous post, the doctor cannot clandestinely introduce an arbitration clause into the paperwork she gives a patient to sign. If a patient does not voluntarily and knowingly agree to arbitrate, he would not be bound by the arbitration clause.  The doctor therefore must draw the patient’s attention to the proposed replacement of the courts of law as a default forum for resolving malpractice disputes. Making this proposal would be awkward: it would communicate to the patient that the doctor wants to steer away from the regular course of business and create a special litigation arrangement. The doctor’s proposal would thus make the patient think that he is being shortchanged (see Omri Ben-Shahar & John A. E. Pottow, On the Stickiness of Default Rules, 33 Fla. St. U. L. Rev. 651 (2006)). I estimate that most doctors would rather risk going to court than create this suspicion in the patient.

ARBITRATORS’ INCENTIVES
Granted that doctors can somehow overcome the sticky-default obstacle, there is still a question of whether arbitration is attractive in and of itself. Arbitrators compete with courts on unequal terms. Courtwork is subsidized by the government rather than being paid for by the parties (court fees are quite small and raising them above a certain level may violate due process and access-to-courts entitlements under US and state constitutions). Arbitrators, on the other hand, need to obtain their remuneration from the parties. Consequently, arbitrators must deliver an attractive product that courts do not deliver and give parties a credible assurance that they will get their money’s worth. This incentive drives arbitrators towards making compromise decisions that split the disputed amount between the parties. Correspondingly, arbitrators generally avoid making decisions that constitute a complete victory for one party and an unmitigated defeat for another party. See Richard A. Posner, Economic Analysis of Law 711-12 (8th ed. 2011). As far as procedure is concerned, arbitrators virtually never dismiss plaintiffs’ suits directly without comprehensively examining the parties’ evidence.

DOCTORS’ INCENTIVES TO ARBITRATE
Doctors are not only interested in reducing their liability payouts. They are also—and in many cases, primarily—interested in not being listed as malpractitioners in the National Practitioner Data Bank (NPDB) pursuant to the Healthcare Quality Improvement Act of 1986 (HCQIA). For my discussion of the NPDB reporting on this blog, see here.  HCQIA, 42 U.S.C. §§ 11131–34, requires medical liability insurers to report to NPDB the liable doctor’s name, the name of any hospital with which she is affiliated or associated, the amount of the payment made on the doctor’s behalf, and “a description of the acts or omissions and injuries or illnesses upon which the action or claim was based.” Hence, payouts made pursuant to arbitration by the liable doctors’ insurers (or by hospitals to which those doctors affiliate) are reportable.

A liable doctor can avoid the reporting by using her own money to compensate the plaintiff, but even in this unusual scenario the doctor might be reported to NPDB. The reason is simple: similarly to court decisions, a negative arbitration decision might trigger negative professional review, an adverse medical-board decision or revocation of the doctor’s hospital privileges. Under HCQIA, each of those actions must be reported to NPDB.

Aware of the fact that arbitrators will virtually never let the patient go empty handed, doctors will be unwilling to commit themselves to arbitration. Courts presently offer doctors a very good deal: doctors can defeat weak malpractice suits summarily and strike settlements with plaintiffs whose suits survive a motion to dismiss. Most jurisdictions also have merit-affidavit or other rigorous prerequisites for filing malpractice suits against doctors: see here, here, and here. To make arbitration attractive to doctors, arbitrators should offer doctors a better deal. Doing so, however, will discourage patients from signing arbitration agreements and will invite more attacks on the validity of agreements that patients did sign. As I explained in my previous post, an arbitration agreement will only be valid when the patient waives her right to a court proceeding knowingly and voluntarily without giving up any of her substantive rights and remedies. Arbitrators therefore cannot successfully compete with courts to win over doctors.

Hence, if my analysis is correct, doctors would be tempted to arbitrate only in a small number of jurisdictions that are still patient-friendly: DC and Wisconsin, for example.