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

Lionel L Wilson and Max Fulton

MJA 2000; 172: 77-80

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Introduction - What is risk management? - Current litigation environment - Medical defence organisations -
Hospitals - What is effective risk management? - Conclusion - References - Authors' details
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Synopsis z The concerns of doctors regarding their risk of malpractice litigation

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

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

We believe that efforts to achieve limited liability are unlikely to succeed

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

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substantive effect.

We briefly describe the current professional indemnity environment and

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

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

In the literature there is much confusion between risk management and

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

Even if all adverse events (however defined) could be avoided, not all the
costs of malpractice litigation would be eliminated. The Harvard Medical
Practice Study6-8 found that while less than 2% of negligent injuries led to
claims, over 80% of negligence claims were brought in cases in which there
was no injury and no negligence.9 This means that, if the right risk
management processes and systems are in place, hospitals and doctors should
be able to rebut allegations of negligence in 80% of cases and successfully
argue that no compensation payment should be made.

Current Anecdotal evidence suggests a rising tide of anxiety among doctors

litigation concerning their exposure to litigation and its costs, both financial and
environment emotional. Many doctors perceive this increased risk as beyond their control
and in the hands of others, in particular the judicial system and lawyers.

As an example of the rise in compensation payouts, the current high water

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

As for the rate of claims, statistics are very difficult to obtain,

resulting in a debate as to whether it is actually increasing.

In financial terms, hospitals are in an even more serious situation than

doctors, although here again obtaining factual analysis of claims and
judgements is extremely difficult, both for the public and private sectors.

Australia is not alone in having these problems. Poor clinical risk

management is estimated to cost the NHS in the UK some ?00 million per annum
and, with an increasingly litigious population, this figure is expected to
rise sharply in coming years.12

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

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by boards consisting mainly of medical practitioners.  

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

z only doctors can truly understand medical issues, and if plaintiffs and
their lawyers could only be made to understand what the doctors
reviewing the claim understood about it they would drop the claim;

z the reason for most adverse events is not negligence by the doctor but
the inherent complexities of medicine;

z as no doctor embarks upon a procedure with the purpose of harming a

patient, in fact the very opposite, patients should be grateful for
their efforts and not sue if something should go wrong.

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

In contrast, insurance companies are much more likely to be disinterested

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

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

Medical input remains important in claims management, but it is not supreme.

The processing and resolution of medical malpractice claims is a highly

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professional endeavour that should belong as much to the insurance and

business world as it does to doctors. Failure to recognise this will only
lead to a further escalation of costs and premiums.

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

z hospital managers simply do not know what has to be done; or

z they know what to do but are not prepared to spend time and effort on
implementation; or

z they know what to do but fear the political consequences of doing it;
or

z they fear that the political price they will pay exceeds the costs of
paying claims.

Unfortunately, the lack of data on claims and judgements is still a serious

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

Data from the private sector are even more difficult to acquire. Most
evidence is anecdotal, but points to a situation similar to that in public
hospitals. For example, one large Australian insurer is refusing to renew
any professional indemnity policies for private hospitals.  
Lack of drivers for
change A "driver" is the term applied to incentives and sanctions built into any
system. In most States, public hospitals have most of the costs of
litigation met by State Treasury funds. As they do not have to meet these
costs directly out of their own budgets, at least in the first instance,
there is no incentive for public hospital managers to implement effective
risk management and no sanctions if they do not. As far as risk management
goes, the system in most States is devoid of effective drivers.

Many hospitals in the private sector seem to be so fearful of offending

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

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

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legislation if necessary) to make their statistics on malpractice claims

available to the community (in a non-identifiable way) and to their medical
staff.

What is Five activities are the mainstay of effective risk management:

effective risk
management? z Credentialling of medical staff

z Incident monitoring and tracking

z Complaints monitoring and tracking

z Infection control

z Documentation in the medical record.

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

Credentialling should be separate from the appointment process and, if it is

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

In spite of the concerns by many doctors about their legal privilege while
conducting quality management activity, credentialling is the only aspect of
quality management or risk management activity that, if not conducted in
strict accordance with the principles listed in the Box, carries the risk of
exposing doctors to legal consequences. The need for absolute observance of
the terms of reference and the need for a formally structured process are
paramount. Even in North America, where credentialling of medical staff has
been an intrinsic element in hospital practice for most of this century,
there is a recognised need to render credentialling more robust and
effective.16,17 The Tito Report, and published material in the US, UK and
Australia, strongly support detailed, robust credentialling.13,18-21  
Incident
monitoring Most Australian hospitals claim to engage in incident monitoring, and NSW
Health, for example, collates incident reports from its hospitals. However,
incident monitoring and analysis must be conducted as close to the workface
as possible if activities to correct identified problems are to have any
chance of being implemented.

Several factors tend to diminish the practical benefit of incident

monitoring as it is currently practised in Australian hospitals. There is no

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aggregation of incidents (which might be reported to the nursing, medical or

hospital administration) within hospitals, and no pattern analysis
(tracking). Finally, it is of no use monitoring incidents and conducting a
pattern analysis if there is no internal hospital mechanism to correct
problems that are identified.

The reporting of incidents requires a non-judgemental and non-punitive

attitude on the part of hospitals. Nursing staff, for example, will simply
not report medication errors if they know that some punishment will
follow.19,20  
Complaints For the purposes of quality and risk management in hospitals, complaints
monitoring must be handled promptly and effectively at the hospital level. In recent
years, efforts have been made in several States to change the hospital
culture and processes in handling complaints. Nevertheless, it is still all
too common for complaints to hospitals to be met by a wall of silence and
obstruction. It is still unusual for the hospital manager to become directly
involved at an early stage. The patient and family readily see that they are
being put off, and this increases the risk that they will become angry,
aggrieved and litigious.

Hospitals should have a complaints mechanism and a complaints-resolution

procedure in place and the hospital manager should play a prominent and
early role in this process. Hospitals should have a policy and a mechanism
to advise all patients how to make a complaint and such information should
be prominently displayed. The recent innovation of patient advocates is a
positive step. The monitoring and analysis of complaints becomes a valuable
risk management tool.  
Infection control Infection control is an example of surveillance, the monitoring of one
aspect of care. In today's hospital environment, it becomes a vital piece of
the risk management strategy. Infection control in most Australian hospitals
is generally considered to be well developed. However, like credentialling,
it is often not sufficiently rigorous to be an effective risk management
tool.  
Documentation of
the medical record Nothing causes doctors and hospitals more medicolegal angst than
inadequacies in the medical record. Every case that has to be settled out of
court because inadequate documentation precluded an effective defence means
a rise in doctors' indemnity premiums. Anecdotal accounts all confirm that
the adequacy of medical records in Australia varies widely within the same
hospital and from hospital to hospital.

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

Hospitals should train interns, residents and, if necessary, even visiting

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

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A medical record review should be conducted every six months in all

hospitals.

A preliminary analysis of the results of a survey by the Australian Council

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

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

Doctors alone do not have the authority to implement effective risk

management in hospitals, but they can certainly bring their considerable
influence to bear on hospitals to implement the range of activities we have
described. Doctors should also be reassuring their hospitals that risk
management initiatives have their full collective support.

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

References
1. Wilson LL, Goldschmidt PG. Quality management in healthcare. Sydney:
McGraw-Hill; 1995.
2. Quality and Outcomes Branch, Commonwealth Department of Health and Aged
Care. Clinical Risk Management in Rural Victoria. Better Health
Outcomes (A newsletter for the Health Service). 1998; December: 16.
3. Bennett B. Quality care through risk management. Orthopaedic Nursing
1993; 12(3): 54-55.
4. Atkins P. Reducing risks through quality improvement, infection control
and risk management. Crit Care Nurs Clin North Am 1995; 7: 733-741.
5. Murphy D. The development of a risk management program in response to
the spread of bloodborne pathogen illnesses. J Intravenous Nurs 1995;
18 Suppl 6: S43-S47.
6. Brennan TA, Leape LL, Laird NM, et al. Incidence of adverse events and
negligence in hospitalized patients: results of the Harvard Medical
Practice Study I. N Engl J Med 1991; 324: 370-376.
7. Leape LL, Brennan TA, Laird N, et al. The nature of adverse events in
hospitalised patients: results of the Harvard Medical Practice Study

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II. N Engl J Med 1991; 324: 377-384.

8. Localio AR, Lawthers AG, Brennan TA, et al. Relation between
malpractice claims and adverse events due to negligence. Special
article. N Engl J Med 1991; 325: 245-251.
9. Brennan TA. Medical injuries: international perspectives. Med J Aust
1995; 163: 475-476.
10. Black v Lipovac [1998] 699 FCA (4 June 1998).
11. Hirsch D. Lessons from Lipovac Aust Health Law Bull 1998; 6: 85-87.
12. Knowles D. Clinical risk management. Br J Hosp Med 1995; 53: 291-292.
13. Tito F, Chairman. Compensation and Professional Indemnity in Health
Care. Review of Professional Indemnity Arrangements for Health Care
Professionals. Canberra: Commonwealth Department of Human Services and
Health, 1994.
14. Wright T, Eyland A, Cox J. Claiming under the Motor Accidents Scheme.
Sydney: Justice Research Centre. August 1998.
15. Wilson LL. Credentialling of hospital medical staff. J Qual Clin Prac
Dec 1997; 17: 187-194.
16. Weagly S. Making the case for robust provider credentialling. Health
Care Innovations May/June 1996: 29-39.
17. Suarez CA. Training, credentialing, economics and risk management in
operative surgery. Int Surg 1994; 79: 268-272.
18. United States General Accounting Office. Health care: initiatives in
hospital risk management. Washington: USGAO, 1989: 17.
19. Elnitsky C, Nichols B, Palmer K. Are hospital incidents being reported?
J Nurs Admin 1997; 27(11): 40-46.
20. Mant J, Gatherer A. Managing clinical risk. BMJ 1994; 308: 1522-1523.
21. NHS Management Executive. Risk management in the NHS. London:
Department of Health, 1993.

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

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

Reprints will not be available from the authors.

Correspondence: Dr L L Wilson, 134 Queens Road, Connells Point, NSW 2221.
lwilson10ATCompuserve.com

©MJA 2000
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  Lionel L Wilson || Paul Nisselle. Managing medical indemnity: must we
choose between quality assurance and risk management?. Med J Aust 2004; 181
(9): 519-520. [Letters]

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We appreciate your comments.

Requirements of the credentialling process

z Properly constituted credentials committee with terms of reference

z Carefully prepared minutes
z Absolute confidentiality
z Observe the rules of natural justice (ie, a reasonable decision made
after giving the affected parties a right to be heard)
z Highly structured formalised process
z All medical staff subjected to the same process
z All decisions in the form of recommendations to the board
z Procedure-specific decisions to be given in writing to each medical
staff member
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