Business Law and the Practice of Otolaryngology

Business Law and the Practice of Otolaryngology

Robert S. Iwrey

Stephanie P. Ottenwess

Jessica L. Gustafson

Kathryn Hickner-Cruz

David M. Ottenwess

Reginald Baugh

With the continuing avalanche of new regulations, the evertightening belt of third party payor reimbursement, the increased scrutiny by federal and state enforcement authorities, the increased emphasis on cost-containment and payfor-performance measures, and the always looming threat of medical malpractice actions, physicians find themselves having to play the role of accountant, attorney, billing consultant, business manager, financial advisor, risk manager, and, if time permits, practicing physician. Long past are the days when a physician could simply devote virtually all of his or her professional time seeing patients and providing high-quality care.

In today’s environment, physicians must still focus on providing high-quality care to their patients; however, they may also need to delegate certain aspects of the business side of medicine to the right individuals in order to optimize their success. This may seem counterintuitive to some in that in order to maintain control over their practice as a whole, physicians must learn to let go of some of the pieces.

The most important first step to gaining or regaining control over one’s practice is to identify key advisors and specialists. Selecting an experienced health care attorney and an accountant with significant experience in representing physicians and physician practices is crucial as they can help navigate through the often murky waters of the health care regulatory landscape. There are numerous legal and accounting aspects of starting, maintaining, expanding, merging, and even closing a medical practice that require professional advisors to guide physicians so as to avoid the myriad of serious negative consequences that can result from noncompliance with the ever-changing rules of the game. Some of these consequences include, but are not limited to, overpayment demands by third party payors, departicipation or exclusion from third party payors, civil fines, and even criminal sanctions. Experienced, qualified health care attorneys, accountants, and other advisors can mitigate against the risks of facing such consequences as well as assist in crucial administrative matters for example, obtaining and maintaining the appropriate licenses (such as one’s medical license, controlled substance license, drug control license, and Drug Enforcement Administration [DEA] registration), obtaining the best financing for medical and office equipment and supplies, obtaining the appropriate insurance (e.g., professional liability, personal liability, property, workers’ compensation, directors and officers liability policies, and even policies now available to insure against fines and defense costs for billing errors and omissions).

Some physicians find it helpful to consult with a business advisor as well to sit down with the other professional advisors and to help develop a business plan based upon the physician’s desires and needs. Such plans may include staffing determinations, changes in physical location, adding ancillaries such as imaging and laboratories, marketing, and developing affiliations with other health care providers, entities, and organizations. Prior to implementing such plans, it is a good idea to run them past one’s key advisors to assure legal compliance.

Another important step is to make sure that the physician has a good understanding of where his or her practice stands in terms of the billing of professional services rendered. Remember, a physician alone is responsible for the use of his or her provider number. Whether one chooses to do his or her own billing, to employ an in-house biller, to contract with an outside company, or to rely upon his or her employer, ultimately the physician is responsible for the claims submitted under his or her provider number. Thus, if a physician chooses to rely upon others to do his or her billing, the physician should make sure that he or she has the requisite knowledge and experience in his or her specific field of practice. Being proactive, asking the right questions, and researching the prospective biller prior to engagement are time well spent and can save the physician significant headaches in the future. While the enforcement authorities may find that the physician did not have the requisite intent for criminal prosecution because his
or her biller made the errors and not the physician, the physician will still incur significant costs in both time and money defending the billings, and very often, the physician is subject to significant fines and penalties on top of returning monies to which the physician believed he or she was entitled and upon which he or she relied in the operation of the practice. As such, the physician needs to be familiar with the billing rules as they pertain to his or her specific area of practice. Responsibility for this knowledge and expertise should not be delegated.

Of course, no chapter on the business of medicine would be complete without discussion of medical malpractice and the efforts to reform the system—which to many appears broken and sorely in need of repair but without a viable solution. For the past three decades, medical malpractice tort reform has remained a highly polarizing, heavily contested legal issue, which affects not only physicians and attorneys but also the great many Americans seeking health care each year. But why does this legislation inspire such fervency in those that revile it and in those that champion it? Ask its critics, which typically include much of the plaintiffs’ bar, and the answer is simple: medical malpractice tort reform strips individuals of their ability to redress injuries that they have incurred and right the perceived wrongs that have been committed against them. To its advocates, the answer is equally clear: medical malpractice tort reform is the mechanism by which defensive medicine is prevented, doctors’ personal and professional livelihoods are protected, and litigious plaintiffs with frivolous lawsuits are deterred from bringing suit. While both sides make frequently valid and often convincing arguments, the reality of medical malpractice tort reform lies somewhere in the middle. It is a legislatively constructed concept, which has made its impact, both positive and negative, on the American legal landscape.

The purpose of this chapter is to provide the physician with a general overview of some, but not all, topics of interest to otolaryngologists regarding the business of medicine. It is by no means an exhaustive list as health care is a broad field and highly regulated with ever-changing laws, regulations, rules, advisory opinions, guidance, and contractual provisions. The goal of this chapter is to provide the physician with a business perspective of medicine and to arm the physician with enough insight and business savvy to recognize certain risk areas so that the physician may timely seek appropriate assistance in compliance with such areas and avoid the negative consequences often associated with a lack of knowledge.


Medical Liability Claims in the United States


Medical malpractice, or negligence law, is just one subset of the legal behemoth that is tort law. A tort is generally defined as a civil wrong that causes an injury, for which a victim may seek damages, typically in the form of money damages, against the alleged wrongdoer (1). Tort law is that body of law that serves as the vehicle by which tort liability can be sought in a court of law against such wrongdoers and generally serves to award damages to a victim sufficient to restore him to the position he would have been in, had the tortious conduct not occurred (1). Tort law typically governs three types of causes of action or, more simply phrased, legal theories of a lawsuit: negligence, strict liability, and intentional torts. A claim for negligence is brought when an injury results from an individual’s failure to exercise the standard of care of a reasonably prudent person would have exercised in a similar situation (2). These matters involve unintentional acts that may cause harm. Actions for medical malpractice are classified under the umbrella of negligence claims. Claims for strict liability do not require an intent to harm or the presence of actual negligence but rather are based on the breach of an absolute duty to make something safe (3). Strict liability typically arises in situations that are considered inherently dangerous. For example, an individual who keeps a domesticated Siberian tiger in his home is strictly liable for any injuries that the tiger may cause, no matter the precautions the individual takes in protecting the safety of others. He need not be found to have breached the standard of care to be found strictly liable in such scenarios. Finally, intentional torts are defined as torts committed by a wrongdoer acting with intent (4). Examples of intentional torts include assault and battery, defamation, and false imprisonment.

Historic Analysis of Tort Law and the Evolution of Medical Malpractice Action in the United States

The modern system of American tort law and its district categories are by no means a recent construct. Tort law has existed in some form for hundreds of years, originating from English common law. Common law is defined as law that is issued from judicial decisions and not derived from legislatively enacted laws or statutes. Consequently, centuries-old decisions made by judges in England have greatly affected how the US legal system addresses actions for negligence, strict liability, and intentional tort. Taken one step further, the law that is applied in the most complex medical malpractice case can trace its ancestry to an English judge deciding whether a Welsh farmer’s horse was negligently corralled during the 15th century.

The element of damages in tort law is of major significance and is integral to understanding the overall concept of medical malpractice law, mainly because the “runaway juries” have been the subject of great media attention and scrutiny. In tort law, compensatory money damages can be sought by a victim for both economic and noneconomic losses (5). Economic damages seek to compensate an individual for quantifiable economic losses, such as lost income and medical bills, while noneconomic damages are more speculative and seek to compensate an individual for noneconomic losses, such as mental distress and pain and
suffering (5). In certain rare scenarios, generally involving egregiously reckless conduct or behavior, a victim may also seek punitive damages against a wrongdoer (6).

Tort law is a function of state law, with each state providing different rules for bringing about a tort claim.1 Procedurally, various states may approach tort claims differently; however, the basic premise of a tort claim and the elements that a plaintiff must prove in order to bring a successful cause of action remain consistent across all 50 states. This chapter focuses its state-specific discussion of tort law and medical malpractice tort reform on the state of Michigan and utilizes Michigan’s experience with medical malpractice tort reform to illustrate how, in recent years, many states have attempted to handle the rising number of suits for medical malpractice.

The modern medical malpractice system in this country dates its origins to the 1840s, when the United States experienced a sudden surge in the number of medical malpractice actions brought in state courts (7). This boom could be attributed to the lack of a national “standard of care” for medical treatment, which often left patients seeking care from unqualified or unskilled medical practitioners (7). As the number of medical malpractice actions spiked, plaintiffs’ attorneys also found a new niche in which lucrative careers could be made, primarily due to the availability of contingency fees, wherein a plaintiff’s attorney receives as his fee one-third of the plaintiff’s overall jury award or settlement. This time frame is typically considered the first medical malpractice “crisis,” and the commencement of the long and complicated interplay between the medical community and the legal system.

The second significant medical malpractice crisis in the United States occurred in the 1970s and 1980s (7). During this time period, there was a rapid rise in the number of medical malpractice claims filed, as well as the size of awards made in medical malpractice actions. It has been estimated by the American Medical Association (AMA) that in 1975 as many as 14,000 malpractice suits were filed against physicians. The average jury award in these suits was $171,000 (7). The influx of medical malpractice claims and their subsequent jury awards created a chain reaction that had a far-reaching effect. Many private insurance companies began withdrawing from providing insurance coverage, and the insurers that remained responded by raising malpractice premiums. In 1975, it was documented that malpractice premiums had increased from anywhere from 100% to 750% (7). The sudden increase in insurance premiums, coupled with the loss of many private insurance companies from the market, resulted in some physicians leaving particular practice areas, or retiring from the practice of medicine altogether. It was the culmination of these factors that sparked a call for policy change at both the state and federal levels, and with that, modern medical malpractice tort reform was born.

Before addressing tort “reform” and its impact on the physician’s practice, it is important to understand the anatomy of a modern medical malpractice case, as oftentimes the physician is quick to equate “reform” with the altogether elimination of medical malpractice claims from the American legal system. It is not the legal system, however, that is broken. Our civil litigation system has existed for centuries; it is only because it is so interwoven with and dependent on the human element that we see it as controversial. Consequently, a description of a malpractice action is in order that will outline the “theory” of litigation along with the “reality” of being a party defendant in a medical malpractice case.

Medical Malpractice Litigation

Anatomy of a Medical Malpractice Case2

General Legal Background

As a practicing physician with a highly advanced degree, years of sophisticated training, and a hard-earned professional license to protect, it is important to gain an understanding of the basic elements of a medical malpractice claim and the procedural aspects of bringing a lawsuit in order to best understand how to limit your exposure to claims of medical negligence. In today’s legal environment, physicians often think that a lawsuit is a natural consequence of any “bad result” arising out of care provided to a patient. While a bad result should put the physician on alert that a suit may be on its way, a bad result does not, in and of itself, qualify as a legitimate malpractice claim. To bring, and sustain, an action for medical malpractice, the plaintiff bears the burden of establishing the four basic elements required of any negligence claim, with some variations. Specifically, the plaintiff must establish (a) that a physician or health care provider owed the plaintiff a duty of care, (b) that this duty of care was breached by conduct that was not in accordance with the standard of care that a reasonable physician would have employed under like circumstances, (c) that this breach was a cause of the plaintiff’s injury, and (d) that the plaintiff suffered damages as a result of this breach (8).

In regard to the third element of causation, a physician’s allegedly tortious conduct must be both the cause in fact and the proximate cause of the victim’s injury. The cause in fact (or “but-for” cause) of a plaintiff’s injury simply means that but for the physician’s conduct, the injury would not have occurred. Proximate cause is a complex legal concept, one that is particularly vexing to first-year law students, but essentially, proximate cause can be defined as the initial conduct or act, which sets off a natural and continuous sequence of events that produces an injury.3 In order for a plaintiff to successfully bring an action for medical malpractice, he or she must establish that the defendant’s actions were both the cause in fact and the proximate cause of his or her injuries. Thus, because a bad result may be a natural consequence of treatment, there is no viable claim until a similarly situated physician testifies that the defendant physician breached the standard of care and that the breach was a cause of plaintiff’s injuries.


In a vacuum, a patient who suspects that he or she has been the victim of medical malpractice will retain an attorney who will determine if the plaintiff has a viable claim. If the attorney believes there is evidence of a physician’s negligence, the attorney will conduct an investigation, which requires having a qualified physician look at the medical records involved and offer an opinion whether proper treatment was rendered in the case in question. Once the attorney is convinced that the expert will testify adequately about the legal requirements of duty, standard of care, and proximate cause, the attorney may initiate a lawsuit by filing a complaint, almost always in state court. But, in some instances, there may be ways to avoid a lawsuit and circumvent the entire adversarial litigation process.

As a practical matter, a patient who may feel that he or she received inadequate medical treatment due to negligence knows little or nothing about the “burden of proof” or what other legal requirements are necessary to proceed in a court of law. Consequently, a patient who has a negative experience is angry and wishes some redress or, if nothing else, a bit of an explanation as to why he fell into that small percentage of patients that his physician quoted as being at risk of a potential complication from the medical treatment in question. As a result, a patient really may only be looking for answers, rather than an attorney.

It is during this period that, in some instances, a physician can head off a lawsuit if her office is receptive to the patient’s concerns. Some physicians have gone to great lengths to avoid speaking directly to patients about the “mechanics” of medicine when a less than optimal result has occurred. However, avoidance or vagueness almost always instills suspicion and can, by itself, be the impetus for a patient to head to the nearest attorney’s office. One course of action to follow is to be as straightforward and direct with the unhappy patient as possible and to speak with them at length about their complaints if they seek out an explanation. Also, a physician should provide a patient with any requested medical records and may offer to refer a patient to another physician, if the patient so desires. While it is not in the physician’s best interest to admit that anything he or she did was inappropriate (unless, of course, what he or she did was inappropriate, and then you must let your conscience be your guide), being empathetic to the patient’s plight may even go so far as to head off a potential lawsuit.

Suit Filed: Discovery

Assuming that the patient is neither placated nor interested in an informal discussion about the patient’s medical care and an attorney is retained who has obtained a positive review from an expert, the formal action is begun in court by filing a pleading known as a complaint.4 The complaint initiates a civil action and outlines with specificity the basis for the plaintiff’s medical malpractice claim and the relief that the plaintiff seeks (9). The complaint is then filed upon the opposing side, who in response must file an answer, which is the defendant’s first pleading that addresses the merits of the case and generally denies the plaintiff’s allegations and sets forth any of the defendant’s defenses and counterclaims (10).

After the complaint and answer have been filed, the pretrial process of gathering evidence to support either party’s position, referred to as the discovery stage of the proceedings, begins. During discovery, interrogatories are exchanged between the parties, which are written sets of questions that are required to be answered candidly. Also during the discovery period, depositions of the relevant witnesses are taken. A deposition is a witness’ out-of-court testimony, which is taken under oath and recorded for later use at trial or to further additional discovery (11). Depositions are a critical part of the discovery process, as they assist counsel for both parties to focus their discovery requests and identify important issues to be addressed at trial.

The discovery phase of the lawsuit is really the nuts and bolts of the litigation process. The physician learns exactly the nature of the charges being advanced by the patient and what steps will be necessary to defend against the claims. In Michigan, the defendant physician will get some early
inkling of the specific claims of malpractice being brought, as the plaintiff must file an affidavit of merit with the complaint. This affidavit must be executed by a similarly trained and certified physician who is prepared to testify as an “expert” witness that the defendant physician committed professional negligence. The entire scope of the expert’s opinions, however, does not materialize until the witness is actually deposed. It is during the deposition of the expert that the attorneys are given, relatively speaking, free rein to delve into the bases of the expert’s opinions and to examine the expert’s background and training to verify whether the expert has adequate credentials and/or the adequate background to testify in the case.

Before depositions of experts can be completed, the defendant physician must undergo his or her own deposition. Short of trial, this is typically the most difficult part of the litigation process for a physician. A physician must be very well prepared for his or her deposition testimony, as such testimony usually only can “lose” a case and rarely ever results in one getting dismissed. It is therefore imperative that the pertinent medical records are reviewed in great detail prior to the physician’s deposition and that the physician meet with the attorney well in advance of the deposition to ensure a comfort level for both the physician and the attorney. With the expense involved in litigating medical malpractice actions, the defendant physician can fully expect the plaintiff’s attorney to be well prepared for the deposition, which makes it crucial that the physician not take the procedure lightly. While the actual process one must undertake to get ready for a deposition could fill another chapter, suffice it to say, the more prepared one is for grueling questioning, the better off the defense of the case will be. Remember, the plaintiff’s attorney is not only listening to your every answer; she is also sizing you up to determine just how well you will present before a jury and exactly how you will handle yourself under difficult circumstances.

Having survived the deposition process, it may appear that your case has suddenly disappeared; do not be misled. The lull in the action is only due to the fact that your attorneys are now turning their sights toward taking the discovery of either other defendants or the plaintiff’s expert witnesses. This process can usually take several months and only makes it appear as if nothing is moving.

Expert Witnesses

In a medical malpractice action in Michigan, as is true in virtually every state, the plaintiff must secure medical expert testimony in order to advance the case before a jury.5 That is to say, before a jury can actually decide the merits of the case, the plaintiff must present expert testimony that the defendant physician breached the standard of care during the treatment of the patient and that that breach was a cause of injury to the plaintiff. This testimony is required because the typical jury does not, as a whole, have the requisite knowledge to decide intricate questions of medical treatment without the assistance of a qualified expert witness. Just what constitutes a qualified expert witness is a matter of discretion for the trial judge and is one of the “human elements” that make litigating a case more difficult. For instance, the judge may have a more liberal interpretation of what the expert needs to be “qualified,” which can be frustrating to the defendant.

Because there are no standard rules regarding what is “proper” expert testimony, the use of expert witnesses in medical malpractice cases has become a main source of contention for many advocates of medical malpractice tort reform. As filings of medical malpractice lawsuits have increased throughout the country, the provision of expert witness testimony has become very lucrative for physicians across all medical disciplines. As a result, proponents of tort reform argue that because of the ease at which an expert can be retained to offer expert testimony on a medical malpractice claim, it is increasingly easier for plaintiffs to bring such claims, exacerbating the medical malpractice crisis in the United States. Thus, while theoretically the parties should get well-trained, credible, and reliable experts to testify, this is not always the case.

As a practical matter, proposed expert witnesses are not always bound by their ethical and moral obligations. Because the standard of care is, in most circumstances, neither codified nor objective in nature, there may be wide disagreement as to what really constitutes the “standard of care.”6 For the most part, experts, while genuine in their opinions, will oftentimes confuse their own practice, or what they believe the practice should be, with a national standard of care. For instance, while it is inappropriate for a physician in Michigan to testify about the standard of care in relation to what he or she does or does not do in their practice personally, many experts do just that. Because it is difficult to verify oft-stated, sweeping generalizations made by an expert that their opinions “are common knowledge,” “may be heard at any meeting,” or “can be readily found in the literature,” the defendant physician may risk that a jury will simply accept unsupported statements as true because they do not possess the requisite knowledge of the subject matter. While steps can be taken to hold an expert’s feet to the fire on certain medical issues, a liberal judge or
sympathetic jury may be persuaded by an expert who does little else but sit in an office and testify against physicians.

Indeed, there are a few physicians who rely heavily on the income derived from testifying against physicians. It is highly lucrative, and the physician is at little risk for repercussions. Experts on behalf of the plaintiff will typically testify against physicians outside of their state, which gives them a comfort level that they would not ordinarily enjoy if they were testifying against a local colleague.

Progress has been made to limit and correct some of these problems. Various medical organizations have established their own ethical guidelines for expert witness conduct. For example, the American Academy of Otolaryngology-Head and Neck Surgery sets forth that an expert witness to a medical malpractice action should not adopt a position as an advocate or partisan in the legal proceedings; should review all the appropriate medical information in the case and testify to its content fairly, truthfully, and objectively; should review and be thoroughly familiar with the relevant standards of practice and medical literature prevailing at the time of the occurrence and limit their testimony to their areas of expertise; should be prepared to state the basis of the testimony presented and whether it is based on personal experience, specific clinical references, or a generally accepted opinion in the specialty field; should be compensated at a rate that is reasonable and commensurate with the time and effort given in preparation for testifying and should not link their compensation to the outcome of the case; and should be aware that transcripts of their deposition and courtroom testimony are public records, subject to independent peer review (12).

Stringent ethical guidelines, such as the ones imposed by the American Academy of Otolaryngology-Head and Neck Surgery, help ensure that expert witness testimony offered in medical malpractice actions is scientifically truthful and founded in reliable and universally recognized methodologies. These guidelines protect the equitable nature of the civil litigation process and hold accountable expert witnesses who proffer less than truthful medical opinions under oath.

While individual societies are trying to take steps to reign in unreliable testimony, it is not likely to vanish entirely. What constitutes the standard of care is simply too subjective in many instances, and the lines of what constitutes an exercise of judgment and what constitutes medical negligence are often blurred. The important thing to note is that the defendant physician should try to avoid taking any such criticisms personally and should consider the source of those opinions when applicable.

The End Game: Settle or Not to Settle

Once discovery has been completed in a particular case, counsel will begin the process of a cost-benefit analysis of whether a case should, or even can, proceed to trial. This is usually the most difficult part of the case for the defendant physician. The defendant is faced with a Hobson’s choice of either grinding it out in trial, with no guarantee of success, or suffer the ignominy of “caving in” to the plaintiff’s demands. While those views represent opposite ends of the emotional continuum, the defendant physician experiences these pangs of emotion when deciding what to do.

Before the physician arrives at a decision about settlement versus trial, counsel must first do a complete analysis of the case to determine whether from a factual and legal standpoint, there is a good chance of prevailing at trial. To that end, counsel will analyze all of the opinions of the defendant physicians, the subsequent treating physicians, and the expert witnesses. Counsel will take into account the jurisdiction (where the case is located), the judge involved in the matter, the attorney who is representing the plaintiff, and, perhaps most importantly, the presentation of the client himself. While having excellent experts and a great judge on a case is extraordinarily helpful, those factors may pale in the face of a tentative witness, who also happens to be the defendant. Juries often look to the parties, that is, the plaintiff and the defendant physicians, in order to formulate a decision about the case as, oftentimes, they have heard polar opposite testimony from the experts on the question of whether the defendant breached the standard of care. So, while a case may be extraordinarily “defensible,” it may be impossible to move forward with trial because of the personality or fortitude of the defendant physician.

Similarly, many physicians simply cannot afford to be out of the office for several days or several weeks while a trial is being conducted. Trials are typically a session of consecutive days until completion and often take all day to attend. It is easy to “fight to the death” on a case when your physical presence is not needed leading up to trial and your own time and assets are not at risk because your insurance dollars are paying all of the discovery costs and expenses. But when trial is imminent, hard decisions need to be made. It is only when the defendant traverses the “courthouse steps” that either backbones stiffen or knees buckle. Consequently, settlements may be made strictly from a convenience or emotional standpoint, as opposed to on the merits of a case.

Another major reason why cases typically will not proceed to trial is that the defendant physician simply cannot stand the process emotionally. Indeed, it is very difficult to sit through days, if not weeks, watching a parade of witnesses criticizing your every action. Further, the inability to understand the procedural machinations of the court can sometimes make matters extraordinarily frustrating. As a result, it is the rare physician who will take that trip to trial on more than one occasion.

Once it is determined that you want to move forward with trial, new anxieties arise. The question of “How can a jury of lay people possibly understand the medicine and decide in my favor?” is a common concern. Indeed, this fear is often the major reason to settle a case. It is here that counsel must ensure that the issues presented in the case are concise, relevant, and put into language that the jury
can understand. For the most part, juries can be trusted to understand the issues presented in a medical malpractice action and with the proper preparation on the part of defense counsel, a jury will typically make an informed decision.

If a defendant physician does in fact decide to go to trial, he must be prepared to enter an entirely different world and face a process that can be potentially grueling and involves going to court on consecutive days until the case is complete. One of the first steps of trial that a physician will witness is jury selection. Initially, a group of individuals, called the veneer, are brought into the courtroom and prospective jurors are selected randomly to hear the case. Before the jury is sworn in, the attorneys and the judge will ask questions to determine whether any of the potential jurors have any biases or prejudices that would render them incapable of arriving at a fair verdict. This process is known as voir dire. Once the jury is impaneled, the parties proceed to opening statements and then evidence is produced, hopefully, in a reasonable fashion. Once all of the evidence has been heard, both sides have rested, and plaintiff has met his burden of proof to present a prima facie case of negligence, the jury is charged by the court to decide the case. The jury then deliberates in private and renders a verdict.

This brief overview of the trial process encapsulates what can amount of many weeks worth of events and also is based on the assumption that all the parties involved in the process will be reasonable. More often than not, that is not the case, as in the adversarial setting of a courtroom it is the opponent’s job to be unreasonable. Furthermore, some judges, possessing little more than a rudimentary understanding of the medical issues involved, sit and decide important evidentiary issues. Fortunately, the jury decides “guilt” or “innocent”; however, this may provide little comfort to the physician in the hot seat.

As if 2 years of litigation culminating in a long drawnout trial were not enough, if the physician prevails, the plaintiff has the option to appeal. Depending on the state in which the case sits, the appellate process may take another additional 1 to 4 years. After sweating it out for this period, the appellate court could overturn your hard-fought win and require you to relitigate your case. Thus, given the many unknowns that are associated with trial, physicians and their insurance carriers will look closely at each of the factors involved with a case to determine the best course.

On the other hand, the consequences of settling the case are a bit clearer. First, the case has ended completely with no chance of it hanging over the defendant’s head ad infinitum. A release and settlement agreement is entered into, which, in some cases, allows for a confidentiality agreement; that is, the terms of the case cannot be discussed by any of the parties. Also, the physician is not admitting negligence by entering into a settlement agreement, only resolving a “disputed” claim. The only real cost with this course of action is a mandatory report to the National Practitioner Data Bank and perhaps a wounded ego. While this is not necessarily desirable, settlement at least allows the physician to move forward without protracted litigation hanging over her head.

Medical Malpractice Insurance

Because of the risks associated with litigation noted above, along with the sheer number of malpractice claims filed annually in the United States, it is not surprising that professional liability insurance has, and should, become a high priority for most practicing physicians and health care professionals. Professional liability insurance can serve a number of goals, the most important of which is the protection of a physician’s personal and professional assets and the provision of legal support if a lawsuit is initiated. While most states legally require a physician to purchase a minimum amount of professional liability insurance, there are various other components to consider when deciding what type of coverage best fits a physician’s specific needs.

Certain elements affect how much professional liability insurance a physician requires, including the physician’s practice area, whether his state requires a minimum level of coverage and whether the physician is willing to jeopardize his personal assets if his level of coverage is insufficient. Once it has been determined exactly what a physician’s unique needs are, it is then important to evaluate potential professional liability insurance carriers based upon the levels of protection that they offer against lawsuits, their financial solvency, their process for handling specific medical malpractice claims, and the type of coverage they offer.

Professional liability insurance carriers often offer one of two types of coverage: an occurrence policy or a claimsmade policy. An occurrence policy offers protection from losses, which occurred while the policy was in effect, or during the policy term. Furthermore, an occurrence policy will continue to cover those losses any number of years in the future, even if the policy has since expired. For example, if a physician buys an occurrence policy in 1999 and terminates the policy in 2009, he will be covered for any incident of alleged malpractice that occurred in that period of 10 years, even if he is sued for such an incident in 2012, well after the occurrence policy has expired. Essentially, with an occurrence policy, a physician is covered for any incident that occurred during his or her policy term, no matter when he or she is sued. Occurrence policies are especially attractive to physicians because often evidence of alleged medical malpractice is not discovered until many years in the future and occurrence policies allow physicians to remain protected from any potential undetected exposure. Occurrence policies are, however, typically more expensive than a traditional claims-made policy, due to their permanence.

A claims-made policy is also another viable option for professional liability insurance coverage. Claims-made policies differ from occurrence policies in that they offer protection from claims made during a specific time period. A claims-made policy must continually be renewed from the time of the alleged incident to the time the claim is
filed, and when a claims-made policy expires, a physician no longer has coverage in the future for alleged incidents of malpractice that occurred in the past. For example, if a physician purchases a claims-made policy in 1999 and renews it until 2009, at which point the physician allows it to expire, the physician will not be covered from a potential claim that is brought in 2011, even if the alleged act of malpractice occurred in 2006, when he or she had claimsmade coverage.

In order to reduce their risk of liability exposure, physicians with claims-made policies will often purchase what is called tail coverage. Tail coverage serves to cover losses that occur after a claims-made policy has expired. Functioning much like an occurrence policy, tail coverage protects a physician from claims made after the expiration of the claims-made policy, but which occurred while the policy was effective. For example, a physician purchases a claims-made policy in 2002, which he renews until 2004, at which point he allows it to expire. He then purchases a tail policy in 2004, which protects him from any claims brought against him during the 2002-2004 time frame during which the physician was insured.

The primary difference between tail coverage and an occurrence policy is that when an occurrence policy expires or is terminated, the physician is no longer required to pay premiums on the policy and yet, will continue to have coverage for any losses that occurred during his or her policy term. With tail coverage, the physician must continue to pay premiums until he or she no longer wishes to have protection from incidents that may have occurred during the time the physician’s claims-made policy was in effect.

The decision whether to purchase claims-made or tail insurance is a complicated one, which should take into account your particular needs and exposure risks. Claimsmade policies offer physicians great flexibility because they are renewed annually, allowing an individual to revise or change his insurance coverage. Furthermore, claims-made policies are portable and may be transferred between insurance carriers, while occurrence policies remain with their original carriers, as they are permanent. Occurrence policies, however, are not without their advantages. An occurrence policy offers protection ad infinitum, is not required to be renewed, and does not require the additional purchase of supplemental or tail coverage.

Finally, it is important to consider that in the context of medical malpractice professional liability insurance, a physician’s insurance premiums may be covered by the hospital or practice group that employs him. Typically, in such instances, this coverage is made on a claims-made basis. Therefore, if the physician is then to leave the hospital or practice group for other employment, it is critical that he purchases tail coverage to protect against any potential liability that may have occurred while working for his former employer.

No matter the type of insurance coverage a physician chooses to purchase, a physician’s protection of his personal assets must be a top priority, particularly in light of the fact that a physician may be personally liable for any portion of a judgment or settlement in excess of his professional liability insurance coverage. After the lengthy and expensive process of obtaining a medical license, a physician must utilize every asset protection strategy available to him to protect his livelihood, including sound tax and estate planning and low-risk financial investments.

Asset protection strategies can be easily implemented by a physician with little expenditure of time or effort. For example, a physician can maximize his contributions to his IRA or other qualified employee benefit plan, which are typically shielded from claims of creditors. Various life insurance arrangements may also be considered, as many jurisdictions exempt all or part of the cash value of a life insurance policy from creditor claims. It is also critical to hire an experienced estate planner, who can suggest trust arrangements that offer significant asset protection and may provide some protection from the claims of creditors, and a knowledgeable accountant or tax expert, who will suggest methods by which to protect assets from various taxing authorities.

While maintaining insurance to protect personal assets is the overreaching goal to the insured, there are other avenues of insurance coverage, which, if appropriately managed, provide security and could ultimately produce income. Offshore captive insurance groups have become very popular with large health systems and large physician groups. Essentially, offshore captives are developed and owned off of the US borders by the insured parties. The captives are subject to the insurance laws of the country of domicile and are not formally required to adhere to US insurance regulations, like a typical domestic or US-domiciled company.

The upside for ownership interest in a captive is a potential return on your premium dollars. Instead of paying a local insurance company tens of thousands of dollars in premiums —money that will never be recouped—these insurance dollars may be placed in a captive, where theoretically, those dollars will grow, ultimately leading to distributions or, at least, a tangible asset. It is important to understand, however, that in order for these entities to become viable and, later, profitable, they must be well capitalized and very well managed—usually with outside underwriters, actuaries, and financial advisers. A well-run offshore captive can turn a liability, insurance premiums, into an asset.

On the other hand, an undercapitalized or poorly managed captive can be a physician’s worst nightmare. Poor planning, reckless underwriting, or fraud can spell doom for the captive and could result in zero insurance protection to the participating physician for a period of time. Just to litigate a medical malpractice case up to the time of trial can cost upward of $200,000.00. This figure does not include trial costs, appeals, or a possible verdict, which can be staggeringly expensive. Stated simply, a lack of insurance could result in bankruptcy, humiliation, and a possible legal investigation.

The physician just beginning practice should ask many questions if his or her new group owns its own insurance
company and obtain counsel if necessary—as this could make the difference between entering into a practice with a viable, sound captive and entering into a practice with a poorly managed captive destined for failure and economic ruin.

Tort Reform


In response to the above-mentioned criticisms of medical malpractice litigation and the medical malpractice crisis of the 1970s and 1980s, physicians and malpractice insurance carriers began to lobby heavily for changes to reduce medical malpractice tort liability. Proponents of medical malpractice tort reform argued that as a result of changes to laws governing medical malpractice claims and their associated awards, malpractice insurance premiums would decrease. They further argued that lower insurance premiums for health care providers would increase the number of practicing physicians, lower the costs of health care for consumers, and result in an overall improvement in available medical care. These arguments obviously struck a chord in state legislatures throughout the country because by the mid-1980s, medical malpractice tort reforms had been widely adopted. It is important to note that while medical malpractice reform legislation was introduced at both the state and federal levels, as will be discussed below, attempts to pass real reform have taken hold on the state level, while attempts at passing federal legislation have been unsuccessful.

Typically, medical malpractice tort reform at the state level has focused on legislative reforms to the general doctrines of tort law, such as rules governing punitive damages, noneconomic damages, collateral sources, and joint and several liability (13). These doctrinal reforms have had varying degrees of success throughout the nation, with some reforms being widely adopted across all jurisdictions, and others being less enthusiastically received.

State laws capping noneconomic damages have been just one of the legislatively implicated medical malpractice tort reforms. Advocates of tort reform argue that noneconomic damages are arbitrary and unpredictable and, as such, complicate the settlement process. Further, it is argued that losses for emotional distress and pain and suffering are intangible and exceedingly difficult to assign a dollar value. Currently, over 30 states have caps on noneconomic damages as applied to medical malpractice actions.7 These limitations on noneconomic damages vary across jurisdictions: some states employ caps on both economic and noneconomic damages in medical malpractice awards; some states apply noneconomic damage caps only to certain types of malpractice claims, such as obstetrics; and other states allow for increased recovery in particular scenarios, such as where the patient has died or has substantial physical injury (14).8 Typically, the limit on noneconomic damages varies on a state by state basis, with caps on damages ranging from $250,000 to $500,000 (14).

The tort law concept of joint and several liability has also undergone significant tort reforms in the context of medical malpractice claims. Traditionally, joint and several liability allows a plaintiff, who has been injured by two or more wrongdoers, to recover the full amount of his damages from any one of the defendants that may have been involved in the tortious conduct. This has historically resulted in an injured party seeking damages against the defendant with the most financial resources. A party sued under a theory of joint and several liability may then seek contribution from the additional parties at fault, so that the other defendants have to share in the payment of damages. Oftentimes, however, contribution cannot be achieved because the additional at-fault parties lack the financial means to contribute. As a result, proponents of tort reform argue that joint and several liability is an inequitable concept because one defendant, generally the defendant with the most financial resources, is required to pay damages in an amount considerably more than his share of the total liability. This criticism has caused over 40 states to enact tort reforms to the joint and several liability system, either outright abolishing joint and several liability or requiring an individual defendant to pay an amount of damages proportionate to his share of the overall fault (15).9

States Where Tort Reform Has Been Enacted

Michigan serves as an illustrative example of how the specific states have addressed medical malpractice tort reform in an attempt to deal with the modern medical malpractice crisis. In recent years, Michigan has passed sweeping legislation curtailing frivolous litigation in the context of medical malpractice. For example, in 1986 the state passed a rule allowing a court to assess attorneys’
fees and costs for filed actions that are perceived as frivolous (16). In 1993, Michigan also enacted noneconomic damages caps in medical malpractice actions, limiting the award of noneconomic damages in medical liability cases to $280,000 for ordinary occurrences and $500,000 in cases where the plaintiff has suffered serious damage to the brain, spinal cord, or reproductive organs (16). In 1995, the state passed a reform to the rule of joint and several liability, barring the application of joint and several liability in the recovery of all damages, except in cases of medical malpractice where the plaintiff is determined to have no allocation of fault (16). The Michigan state legislature additionally passed reforms to the collateral source rule in the context of medical malpractice litigation (16). Prior to passage, the collateral source rule prohibited the presentation of evidence at trial that an injured party has received compensation for his losses from another source, such as an insurance policy. The collateral source rule reform passed by the state of Michigan as part of the overall medical liability reform package now provides that medical malpractice awards be offset by the amount of collateral source payments received by the plaintiff (16).

Through the adoption of comprehensive medical malpractice tort reform, Michigan has done what many other states have wished to achieve: the near-total elimination of all medical malpractice litigation. Indeed, reform began to gain traction in Michigan in the early 2000s following a series of conservative holdings by the State’s Supreme Court strictly interpreting the key medical malpractice reform statutory provisions. Reports from the State of Michigan Office of Financial and Insurance Regulation (OFIR) demonstrate that reported claims10 for the period 2000-2007 show a 77% decrease in court filings (1,142 in 2000 to 263 in 2007). This is a significant drop in cases, which has resulted in a modest drop in insurance premiums. Nonetheless, as will be discussed in the “Compliance and Regulatory Issues” section of this article, health care costs have not declined. Contrary to assertions that less litigation will protect physicians from the constant threat of second-guessing from their patients who have obtained a less than optimal result, health care costs and unnecessary testing has continued to rise.11

Despite the adoption of the above-mentioned tort reform measures throughout a variety of US jurisdictions, tort reform has yet to gain momentum on a federal level. Attempts at passing federal legislation restricting medical malpractice liability have failed since the 1970s, when federal tort reform was proposed in response to the first modern medical malpractice crisis. While contemporary presidents and politicians have campaigned for the adoption of far-reaching federal tort reform, all have failed in their efforts. In 2004, President George W. Bush proposed tort reforms affecting the liability exposure of physicians and drug and medical equipment manufacturers; however, opposition in the U.S. Senate prevented the enactment of this federal legislation (17). Additional proposals made in 2005 sought to cap noneconomic damages in medical malpractice actions, restrict the availability of punitive damages, restrict the statute of limitations for medical malpractice suits, and limit contingency fees collected by plaintiffs’ attorneys in jury awards (18). Again, this federal legislation failed to get out of Congress.

With efforts at federal tort reform legislation stalled, it is impossible to determine the effect federally implicated restrictions on medical malpractice liability would have on overall national health care costs. It is, therefore, critical to consider whether medical malpractice tort reform at the state level has achieved the movement’s stated goal: to reduce health care expenditures.

Relationships between Medical Malpractice Litigation and Health Care Costs

Impact on Rising Health Care Costs

One of the greatest criticisms leveled at the medical malpractice tort system is that the defense of medical malpractice actions needlessly increases the costs of health care in the United States. Medical malpractice tort reform advocates have long argued that the ever-present threat of litigation forces health care providers to charge higher rates to offset the costs of rising malpractice insurance premiums as well as promotes the practice of defensive medicine, which is defined as the overuse of diagnostic testing and health services in order to minimize a physician’s liability exposure. The contention that medical malpractice tort reform is the soundest means by which to stabilize malpractice insurance premiums and generally lower health care costs, however, remains a controversial stance among both the legal and medical communities.

Much of the research conducted on the medical liability system suggests that in actuality, costs surrounding medical malpractice litigation are a small fraction of overall health care spending in the United States. Per the National Association of Insurance Commissioners, the overall cost of defending medical malpractice claims and compensating victims of medical malpractice in 2007 was estimated at $7.1 billion, a mere 0.3% of the annual health care costs for that year (19). Even when these figures account for the
use of defensive medicine, as well as the expense of defending medical malpractice claims and compensating plaintiffs, the total costs associated with medical malpractice litigation are modest relative to overall health care spending. In 2008, the annual medical malpractice tort system costs, which included the costs of defensive medicine, were estimated to be $55.6 billion, or 2.4% of the total health care costs for the year (20).

If recent statistics appear to reflect that the cost of medical malpractice litigation does not have an overwhelming effect on the overall cost of health care spending, then why have rising health care costs been routinely evoked to demand the adoption of medical malpractice tort reform? The answer may lie with the perception perpetuated by insurance and health care provider lobbyists alike: that the practice of defensive medicine, as well as increased malpractice insurance premiums, is the direct result of increased medical malpractice litigation. Empirical evidence has shown, however, that malpractice insurance premiums are much less affected by medical malpractice litigation than commonly believed and that the costs of defensive medicine are often exaggerated.

May 24, 2016 | Posted by in OTOLARYNGOLOGY | Comments Off on Business Law and the Practice of Otolaryngology

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