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Odysseas Papadimitriou
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Odysseas Papadimitriou is Chief Executive Officer and Founder of Evolution Finance. Evolution Finance operates a number of internet properties, including CardHub.com, WalletBlog.com, and FindHub.com. Mr. Papadimitriou began his career in consumer lending in 2000 at Capital One, where he worked... More
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  • American Rule Responsible for High Healthcare Costs 0 comments
    Jul 17, 2009 10:03 AM | about stocks: AMPH-OLD, PRA, FPIC, AET, UNH, CI

    As the nation’s lawmakers make decisions about healthcare reform, we ought to recognize how dangerous it is to fix a system without understanding how it became broken in the first place.  Among nations with comparable average lifespans, Americans pay more for healthcare than does anyone else in the world.   The system is grossly overpriced, because it has structural problems, which need to be acknowledged before they can be fixed.  One such problem is the American Rule in lawsuits.

    The American Rule  stipulates that, even if someone wins a lawsuit, they remain responsible for their legal fees.  This means that if someone brings a lawsuit against you, though you may have done nothing wrong, you still have to pay for your defense.  In general, the American Rule encourages a kind of legalized bullying because the system does not deter people from starting lawsuits starting, and actually encourages frivolous legal action.

    The effect of the American Rule on America’s healthcare industry is twofold.  First, because of frivolous lawsuits, insurance companies like American Physicians Service Group (NASDAQ:AMPH), ProAssurance Corporation (NYSE:PRA) and FPIC Insurance Group (NASDAQ:FPIC), charge doctors more for malpractice insurance than is reasonable.  As the problem is system-wide, the fee rates are high for all doctors regardless of whether they’ve ever lost a lawsuit or not.  If they actually do become involved in a lawsuit, the fees go up from there.  To pay these unreasonable fees, doctors have to charge more for their services, which in turn causes healthcare insurance companies like Aetna (NYSE:AET), UnitedHealth (NYSE:UNH) and Cigna (NYSE:CI) to demand premiums that are sky high. Thus, part of the reason that Americans pay more for healthcare than any other Western nation is because it costs more to be a doctor in America than it does anywhere else.   One of the main reasons it costs more to be a doctor here is because the American Rule makes American doctors vulnerable to lawsuits.

    Secondly, the bullying encouraged by the American Rule requires doctors to be overly cautious, so as to avoid making themselves vulnerable to lawsuits.  The system encourages healthcare providers to run more tests and to prescribe more preventative treatments than are necessary.  The benefit of this thoroughness for the patient is disproportionate to the costs, because it is not designed to address the well being of patients, but instead to cover all the doctor’s legal bases.
    It is easy to talk about healthcare reform in terms of increased government spending, but the right kind of reform should make the necessary hard choices that will be required to create a self-sustaining system rather than the next Medicare disaster.  For this reason, we are calling for politicians to make what will be a tough decision concerning the structure of healthcare in this country, and to abolish the American Rule.

    We expect that any discussion of this degree of change will summon up, once again, argument concerning the rights of the poor, who will have trouble bringing forth a lawsuit if they are at risk of having to pay both their own and their opponent’s legal fees.   The abolishment of the American Rule will make it more expensive for everyone who loses a lawsuit and less expensive for everyone who wins.  At the end of the day, there are legal costs involved in a lawsuit and we reject the idea that the loser and the winner should share those costs.   So long as lawsuits are initiated in earnest, the system will increase the legal power of the economically challenged and even save them money on their health insurance.

    Disclosure: No positions

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