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6 Liability: Patient-Centered and Safely-Focused, Nonjudicial Compensation SUMMARY DESCRIPTION Demonstrations in this category would create injury compensation systems outside of the court- room that are patient-centered and focused on safety, while also addressing provider concerns about rapidly rising liability insurance premiums. Specific characteristics of this nonjudicial approach to malpractice reform are replacing tort liability with alternative systems for ensuring that patients who have experienced avoidable injuries receive timely, fair compensation from responsible parties; limit- ing financial exposure for health care providers; promoting apology and non-adversarial discussions with patients; encouraging provider organizations to report and analyze medical errors; rewarding prov, iders that put in place effective programs for reducing medical injury; and involving patients in safety improvement efforts. Prompt federal action to provide incentives for adopting this approachcoupled with appropriate state legislationhas the potential to produce immediately measurable benefits in terms of provider access to affordable, high-dollar liability coverage; gains in administrative efficiency once criteria for compensation are fully developed, allowing quicker payments to be made to many more injured patients; and Tonger-term improvements in patient safety and stabilization of insurance markets. The Department of Health and Human Services (DHHS) would issue a Request for Proposals (RFP) to the states and select four to five of those that apply for demonstration projects in this category. The demonstrations would be designed to ascertain a reform's effect on the number and nature of claims filed and associated total costs, as well as to permit comparison of claim and cost information across all the demonstrations. All of these components would be part of the overall evaluation of the demon- strations. If successful, the reforms could continue indefinitely. 11 81

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Liability The committee suggests that participating states implement one of two options on a demonstration basis: . Option 1: Provider-Based Early Payment Under this approach, the federal govern- ment would provide reinsurance on a shared-cost basis to self-insured or experi- ence-rated provider groups that voluntarily agreed to identify and promptly compensate patients for avoidable injures. States would prospectively set limits on non-economic damages, including pain and suffering, for identifiable classes of avoidable injuries. - - 1-~- - - ~ . Option 2: Statewide Administrative Resolu- tionUnder this approach, states would grant all health care professionals and facili- ties, however organized, immunity from tort liability (under most circumstances) in exchange for mandatory participation in a state-sponsored, administrative system established to provide compensation to patients who have suffered avoidable inju- ries. - . Both options are compatible with the Admini- stration's recent proposal related to liability re- form, which caps noneconomic damages and supports the concept of "early offers" of com- pensation (U.S. Department of Health and Hu- man Services, 2002~. However, both options also differ in certain respects from the Admini- stration's proposal and do not depend on its enactment. BACKGROUND For the first time in nearly 20 years, the United States is facing a broad-based crisis in the availability and affordability of malpractice liability insurance for physicians, hospitals, and other health care providers. The American health care system has undergone dramatic changes since the last malpractice crisis two decades ago (Abraham and Weller, 1994; Sage, 1997~. Reforms to address the current situation 82 t~ should therefore take into account a number of new concerns and constraints: (~) increased sensitivity among providers and the public to substantial rates of medical error and the need to improve patient safety at a system level; (2) lower margins and reduced provider capac- ity resulting from private- and public-sector cost containment, which increases vulnerability to "liability shocks"; and (3) organizational and technical innovations in health care financing and delivery, including provider integration and consolidation, that have affected the dynamics of litigation as well as expanding the range of public policy responses to a liability insurance crisis. There is widespread agreement that the current system of tort liability is a poor way to prevent and redress injury resulting from medi- cal error (Bovbj era et al., 2001~. Most instances of negligence do not give rise to lawsuits, and most legal claims do not relate to negligent care (Localio et al., 1991~. Many injured patients do not know they have suffered an injury resulting from error, and those who go through the legal process often do not even recover the cost of their continued health care (Sloan et al., 1991~. A few plaintiffs and their attorneys, however, win large sums that may be disproportionate to their injuries or unrelated to the defendant's conduct. Prolonged, adversarial haggling over claims by plaintiffs' attorneys and liability in- surers alienates both providers and patients, and generates legal fees and administrative expenses that consume more than half the cost of liability insurance premiums (Kakalik and Pace, 1986~. The apparent randomness and delay associ- ated with this pattern of accountability not only prevent severely injured patients from receiving prompt, fair compensation, but destabilize liability insurance markets and attenuate the signal that liability is supposed to send health care providers regarding the need for quality improvement. Fear and distrust breed inefficient "defensive medicine," and lead to missed opportunities for information exchange and apology that might avoid lawsuits in the first place. Unfavorable economic conditions and catastrophic events external to the health care

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Liability system add to the effects of legal uncertainty on liability insurance premiums, particularly for high-dollar coverage that depends on global reinsurance markets. The shortcomings of the current malpractice system therefore come from three directions, all of which have contributed to the present crisis: inefficient and inequitable legal processes for resolving disputes, problematic responses by clinicians to the threat and cost of liability, and volatile markets for liability insurance. Although some states face greater insurance in- stability than others as the result of different legal standards, public expectations, and profes- sional cultures, no state is immune to the threat of service interruptions affecting physicians, hospitals, and other health care providers. The current liability insurance crisis provides a compelling case for reform. How- ever, approaches that focus narrowly on reduc- ing the number and value of legal claims (e.g., limiting damage awards) may lower liability insurance premiums but do nothing to improve patient safety or produce prompter and fairer compensation for patients who are injured. The systemic problems noted by the Institute of Medicine (IOM) in To Err Is Human and Cross- ing the Quality Chasm (Institute of Medicine, 2000, 2001) strongly suggests the need to create a legal environment that both fosters high- quality patient care and relieves financial strain and administrative burden for health care pro- viders. The committee believes that replacing tort liability with a system of patient-centered and safety-focused nonjudicial compensation linking claims resolution to organization-based error disclosure and safety improvement proc- essescan best accomplish these goals. Such systems would cap providers' financial expo- sure at reasonable levels, both directly by limit- ing damages and indirectly by providing afford- able umbrella coverage. They would also encourage and oversee health care organiza- tions' efforts to identify, compensate, and reduce errors in cooperation with patients. In combination, these improvements should enhance patient safety and enable a greater number of patients with valid claims to receive :- compensation, while simultaneously stabilizing liability insurance markets by decreasing the unpredictability associated with high-dolIar, nuttier cases (Studdert and Brennan, 200 1a; 2001b). Approaches intended to compensate more injured patients by using a standard of "avoidability" rather than the narrower tort stan- dard of"negligence" raise appropriate concerns about increased cost. Rigorously testing such systems on a demonstration basis would allow policy makers to determine the total cost of compensating medical injuries outside the courtroom. Further, by gathering, analyzing, and comparing claims and cost data across par- ticipating states, policy makers wouIcl gain insight into how definitions of avoidable injury and the generosity of the compensation pack- ages selected influence total cost. Finally, policy makers would obtain important information about the possible dollar benefits of reducing the incidence of avoidable injuries. Through the demonstrations in this cate- gory, states would have the opportunity and the incentive to select one of the two non- judicial claims resolution options outlined above. All participating states will refine the technical and scientific underpinnings of such a system through an expert or participatory proc- ess, depending upon the state's preference. States would build on well-developed, but untested proposals such as "ACEs" ("avoidable classes of events," also called "accelerated com- pensation events"), early offers of settlement, and scheduled ranges of allowable damages for pain and suffering. ACEs identify' in scientifi- cally rigorous fashion, situations in which inju- ries that typically are preventable occur, such as giving a patient two drugs that are known to in- teract (Tancredi and Bovbjerg, ~ 99 I). Early offer systems protect defendants from additional liability if they reliably and promptly acknowI- edge problems and offer fair compensation (O'Connell, 1982~. Damage schedules ascertain reasonable levels of compensation for pain and suffering on the basis of jury awards for injuries of defined severity and cap damages at those 83

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~ Liability - amounts rather than imposing a one-size-fits-all limit (Bovbjerg et al., 19894. States would need to create centralized mechanisms to ensure the identification, disclo- sure, and analysis of avoidable injuries, as well as voluntary, confidential reporting of "near misses." The way in which such mechanisms would be operationalized will be left up to the states, necessitating resolution of important policy issues. The federal government might play a role by helping to develop consistent definitions and data reporting standards, thereby reducing the need for each state to reinvent the wheel and allowing for comparisons across states. States also would help health care providers communicate more effectively, both internally and with patients, when errors occur by encouraging apology and the use of facili- tated discussion procedures such as mediation (Cohen, 2000; Sage, 2002~. Finally, states would engage in sustained efforts to educate the public with respect to the trade-off involved in replacing tort liability with administrative reme- dies for avoidable medical injury: faster, fairer, surer compensation but forgoing a jury trial. Some states might choose to phase in non- judicial~approaches to compensation, beginning with selected provider organizations (e.g., hos- pitals, large medical groups, and closed-panel health maintenance organizations tHMOs]) that have demonstrated their willingness and ability to detect, disclose, and prevent medical errors and have entered into voluntary contractual agreements with patients that establish the terms of compensation (Havighurst, ~ 995; O'Connell, 1986; Sage et al., 1994~. Other states might want to move more quickly by establishing comprehensive state-wide systems of adminis- trative claims resolution with mandatory partici- pation by all health care providers in the state (e.g., physicians, nurse practitioners, hospitals, nursing facilities). The former approach has the advantage of building on the IOM's earlier recommendations regarding the optimal structure and conduct of high-guality health care organizations (Institute of Medicine, 2000, 2001~. Specifically, this approach creates incentives for physicians ant! row hospitals to join together to form well-managed clinical entities that bear primary financial responsibility for avoidable errors and have the medical know-how to minimize patient injury. The strength of the latter approach is that it gives all health care providers equal, immediate access to relief from the current liability crisis and does not depend upon particular organiza- tional forms (e.g., integrated group practice) that may not be well developed in many juris- dictions. The workers' compensation system is the most familiar example of substituting adminis- trative claims resolution for tort liability on a state-wide basis (Fishback and Kantor, 2000; Kramer and Briffault, 1991~. Experience with workers' compensation demonstrates that no- fault systems can enhance predictability and im- prove access to compensation. It also confirms the importance of maintaining safety incentives (e.g., through self-insurance or experience rating) and establishing reasonable injury thresholds and clear categories of compensable injury that reduce waste and discourage fraud. Nonjudicial approaches to compensating unexpected medical injuries are the norm in New Zealand, Sweden, and elsewhere (Bovbj era and Sloan, 1998; Danzon, 1985, 2000~. Similar programs were debated inten- sively in Colorado and Utah in the mid-199Os, but were not adopted (American College of Physicians, 1995; Petersen, 1995~. The commit- tee believes the time is now ripe for successful implementation of such approaches in the United States because of two contributions by the emerging science of patient safety. First, hu- man factors engineers have shown that non- punitive approaches encourage the detection of avoidable injuries and foster systems for con- tinuous improvement, which suggests that resolving malpractice cases without a deter~i- nation of fault will help rather than harm quality (Institute of Medicine, 2000~. Second, as more health care providers accept their responsibility to disclose errors to patients, capping liability at (leaned amounts an essential attribute of any affordable nonjudicial system will likely

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Liability result in more rather than fewer patients receiv- ing compensation. GOALS The demonstration projects in this category would have the following goals: I. Improve the malpractice system for patients Make compensation for injury more predictable, timely, and fair. Promote honesty, transparency, and trust in clinician-patient relationships. Prevent liability concerns from compro- mising the availability of health care services for patients. Put patients and physicians, not lawyers and courtrooms, at the center of a reformed system 2. Enhance patient safety Promote robust reporting of errors in a safe environment. - -Promote system-level responsibility for errors through organization-based financial incentives for improvement, such as self-insurance and experience rating. errors and related compensation formu- las. Analyze and compare data within and across states. DEMONSTRATION ATTRIBUTES Both liability reform options outlined earlier require the following actions by participating states, with federal grants for up-front costs and technical assistance, as well as waiver authority . ,% 1~ necessary: . Involve patients in safety improvement efforts. 3. Maintain access to liability insurance Improve predictability of liability costs Increase affordability of high-dollar liability coverage. Decrease the administrative costs of resolving disputes. 4. Assess cost impact Generate definitive data regarding error rates, claims rates, compensation costs, and administrative costs under various state systems for identifying avoidable . Infrastructure The state would develop and maintain objective indicators of avoid- able errors (ACEs), relying on experts, a broader and more participatory process, or a combination of the two. The state also would develop and maintain fa*, consistent methods (schedules) for calculating economic harm and reasonable compensa- tion for pain and suffering. Both the ACEs and the schedules would need to be updated on a regular basis, with ACE categories expanding over time to encompass the large majority of avoidable injuries. There also would need to be centralized collection of data related to the state-level demonstra- tions. To help states in developing ACEs and damage schedules, DHHS should pro- vide support for related grants to the Health Resources and Services Administration (HRSA) or the Agency for Health Care Research and Quality (AHRQ). Legal environment States would need to authorize statutory or contractual modifica- tions of tort liability to reflect the terms of the option they select, as well as to create clear, narrow exceptions to the malpractice reform (e.g., intentional harm). The state would also need to protect from legal expo- sure individuals and organizations acting in good faith to implement the demonstration approach (e.g., health plans and employers negotiating group contracts on behalf of enrollees). And to make the demonstration affordable, states would need to prevent

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f Liability health insurers, disability insurers, and other parties who pay costs incurred by patients suffering compensable injuries from suing health care providers to recover those pay- ments (i.e., barring subrogation claims). Finally, states would need to ensure that apologies and other systematic communica- tions, such as mediated discussions between . . providers and patients following the occur- El~g~b~ty rence of an avoidable injury, do not increase providers' financial liability or legal expo- sure. 5 Patient safety reporting systems States would establish oversight mechanisms to verify the detection of injuries and disclo- sure to patients. The specifics of these mechanisms would depend on whether the claims resolution system operates at the state-wide or institutional level (i.e., upon the demonstration option selected). These mechanisms would build upon existing state reporting requirements. States would also need to establish mechanisms for collecting and analyzing patient safety data, including voluntary, confidential reporting of near misses. Federal legislation currently under consideration by Congress would aid this process if enacted. The collection and reporting of patient safety information would need to rely on computer-based monitoring systems within health care insti- tutions. With time and experience, these systems could be linked to decision support and knowledge management systems that would help prevent errors from occtuTing in the first place. Federal technical assistance would be available for these activities. EducationThe states would be charged with educating the public about the benefits and costs of liability reform, which offers faster, fairer, surer compensation on the one hand but requires waiving the right to a court trial on the other. States would also need to work with the principal stakeholder groups (e.g., consumer organizations, health care providers) to build familiarity with and trust in the public policy goals of the option selected, and to allay concerns about the constraints imposed by the demonstration. Option I: Provider-Based Early Payments A variety of health care provider organiza- tions could participate in such a demonstration, including hospitals, academic health centers, large medical groups, closed-panel HMOs, and skilled nursing facilities. independent physi- cians might decide to affiliate with provider or- ganizations (sometimes called"channeling") in order to participate in a demonstration and re- ceive liability protection. Participating Provider Responsibilities Provider organizations would first need to self-insure their liability risk, or purchase experience-rated primary coverage so that the organization benefits (or not) from how well they reduce the number of avoidable injuries. They would also need to inform patients about their participation in the demonstration, provid- ing contractual notice of modified liability (perhaps through payers at the point of health insurance enrollment) (Moore and Hoff, 1986; O'Connell and Bryan, 2000-2001~. It is likely that mandatory patient participation as a condi- tion of treatment would best serve the goals of the demonstration for states adopting the provider-based early payment option. However, a state might choose, for legal, political, or other reasons, to allow patients to opt out of the reformed system at the time of health insurance enrollment or hospital admission (i.e., pre- injury), or might modify the early payment sys- tem in special situations (e.g., emergency care). Should a specific avoidable event (ACE) cause injury, providers would need to notify patients promptly; express regret, and tender payment for both net economic harm (medical care, lost wages, lost domestic production, with collateral source offset) and capped, scheduled noneconomic harm (pain and suffering). Provid-

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Liability ers also would be permitted, but not required, to tender similar payments in other cases of avoid- able medical injury that do not fit into an ACE category, thereby gaining immunity from suit. Because providers would be required to comply with external oversight and error reporting obli- gations, states would be able to monitor early payment practices to determine the circum- stances under which providers are voluntarily tendering or not tendering early payment. In terms of patient safety, providers would need to offer patients meaningful opportunities to par- ticipate in efforts designed to reduce error (e.g., mediated discussions with patient safety committees regarding their experiences). Government Responsibilities The state would protect participating provider organizations from tort liability in cases where payment is promptly tendered. States, either directly or through intermediary organizations, would ensure that organizations reliably inform patients in all instances of avoidable injury. . The federal government would provide reinsurance or other umbrella coverage as an incentive for provider organiza- tions to self-insure and channel coverage for affiliated physicians, with shared-risk corndors or similar safeguards against moral hazard. The federal government should consider whether additional funds should be made available in the event that the early payment system is more expensive than the current system. In addition to the general support described above, DHHS might provide technical assis- tance to states establishing oversight mecha- nisms for captive insurance companies or risk- retention groups formed by provider organiza- lions. Finally, DHHS would create "safe har- bor" protection under the antikickback statute so that hospitals and other provider organizations can offer shared, subsidized liability coverage to affiliated physicians. . ~ . ~ Option 2: Statewide Administrative Resolution Eligibility All licensed health care providers (professional and institutional) within a state (or large geographic area within a state) would par- ticipate. States might explore including health plans and other potentially liable parties as well. Provider Responsibilities Providers, along with the state, would notify patients about the state's modified liability system and give them related information. No pre-injury opt-out would be available under this option. Providers also would need to set up systems to detect errors and disclose them to patients and to provide related apologies. For injuries to patients that fall within the scope of the demonstration, providers or their liability carriers would be responsible for paying amounts determined by the publicly adminis- tered adjudication system in the manner author- ized by that system. . . .. . . . . ~ .. ~ Government Responsibilities States would need to create a publicly administered adjudication system, with each state having latitude to determine how it will do so. Key elements of such a system include the following: . Compensation criteria based on avoidability (e.g., expansion over time of established ACEs categories) A definition of compensation that combines net economic harm (medical care, lost wages, lost domestic production, with col- lateral source offset) and capped, scheduled noneconomic harm (pain and suffering) Injury thresholds (days of hospitalization, days of disability, total economic loss) W11

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f Liability . An administrative system of adjudication for determining eligibility and compensa- tion in individual cases A consumer and provider appeals mecha- nism A multidisciplinary expert panel, including consumer representatives to oversee the system DHHS would provide start-up intending for the administrative adjudication system, with the understanding that there will eventually be a transition to a provider surcharge with federal matching funds. This might be done using HRSA or AHRQ grants to states in amounts sufficient to cover the operating costs of calcu- lating payments and resolving disputes, as well as initial expenses associated with defining compensable events and developing damage schedules. As states develop the iniias~ucture needed for the demonstrations, they would need to work with stakeholder groups, including consumer advocacy groups, to anticipate and avoid state constitutional challenges and other implementa- tion delays. The states would also need to put in place a system for funding compensation pay- ments that maintains financial incentives for safety improvement within health care organiza- tions, possibly modeled on workers' compensa- tion systems that segment employers according to size and structure into tiers of class-rated individual risk, commercially insured (experience-rated) nsk, and self-insured risk. Pooling of individual risks might best be han- dled in the long run by a state fund supported by physician surcharges and administered by private entities under contact to the state. For practicality, however, demonstration sites should encourage liability carriers that currently insure individual clinicians to accept essentially all applicants, with discounts for meaningful patient safety activities. Finally, the federal government would guar- antee fiscal neutrality from the state's and its providers' perspectives to account for the possi- bility that a comprehensive system that identi- fies and compensates avoidable injury may be more expensive than the current patchwork system of tort litigation. As part of this guaran- tee, appropriate maintenance-of-effort and other design safeguards would need to be in place. REFERENCES Abraham, K. S., and P. C. Weller. 1994. Enterprise Medical Liability and the Evolution of the American Health Care System. Harv Law Rev 108 (2~:381-436. American College of Physicians. 1995. Beyond MI- CRA: New Ideas for Liability Reform. Ann In- tern Med 122 (6):466-73. Bovbjerg, R. R., R. H. Miller, and D. W. Shapiro. 2001. Paths to Reducing Medical Injury: Profes- sional Liability and Discipline Vs. Patient Safety--and the Need for a Third Way. J Law Med. Ethics 29 (3-4~:369-80. Bovbjerg, R. R., and F. A. Sloan. 1998. No-Fault for Medical Injury: Theory and Evidence. Univer- sity of Cincinnati Law Review 67 (1~:53-123. Bovbjerg, R. R., F. A. Sloan, and J. F. Blumstein. 1989. Valuing Life and Limb in Tort: Schedul- ing "Pain and Suffering". Northwestern Univer- sity Law Review 83:908-76. Cohen, J. R. 2000. Apology and Organizations: Ex- ploring an Example From Medical Practice. Fordham Urban Law Journal 27 (5~: 1447-82. Danzon, P. M. 1985. Medical Malpractice: Theory, Evidence and Public Policy. Cambridge, MA: Harvard University Press. . 2000. Liability for Medical Malpractice. In Handbook of Health Economics, IB. Amster- dam: Elsevier. Fishback, P. V. and S. E. Kantor. 2000. A Prelude to the Welfare State: The Origins of Workers' Compensation. Chicago, IL: University of Chi- cago Press. Havighurst, C. C. 1995. Health Care Choices: Pri- vate Contracts As Instruments of Health Reform. Washington, D.C.: AEI Press. Institute of Medicine. 2000. To Err Is Human: Build- ing a Safer Health System. eds. L. T. Kohn, J.

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