Problem: The tort liability system is adding to the cost of health care both through the direct cost of litigation and through the costs of "defensive medicine."

Solution: Give patients the opportunity to circumvent the costs of tort law through voluntary contract and exchange.

Discussion: No one knows how much the tort liability system adds to an average medical bill. Most people think the number is quite large. Apart from measurable items (such as attorneys' fees, court costs, damage awards and settlement checks), there are thousands of unseen ways in which the tort system affects costs. Out of fear that adverse medical events will trigger a lawsuit, physicians order extra tests, perform extra procedures and use resources in other ways in the practice of defensive medicine.

The tort system is not all bad. In a health care system in which third-party payers put enormous pressure on providers to make quality-reducing changes in the practice of medicine, the tort system may be the single most important protector of patient welfare. By contrast, consider a country such as Britain, where the quality-reducing pressures are much greater and the rights of plaintiffs are much more restricted. When British patients sue hospitals, they are actually suing the government. Unquestionably there is far more actual malpractice in Britain than in the United States. [43]

The primary problem with the tort system is that it is another bureaucracy, replete with its own set of perverse incentives. Moreover, it is a bureaucracy that feeds off the health care sector with little consideration of the damage done to others. Juries do not even know (nor are they allowed to consider) that when they give a $5 million damage award the precedent from that decision affects every other patient, every other physician and every other hospital – not just the people who are litigating the specific case.

To make matters worse, patients, physicians and hospitals have no opportunity to avoid the system by voluntary contract. For example, one sensible way to cut down on the litigation costs for simple negligence is to have the hospital take out a life insurance policy on a patient prior to surgery. The hospital and patient (or the patient's family) could agree that if the patient dies for any reason, the family will accept the policy's payment as full compensation, even if there was negligence. Litigation costs would be avoided, and an added advantage is that life insurance companies would become monitors of the quality of care in hospitals. Yet the current tort system does not permit such arrangements. [44]

Not only can patients and medical providers not get around the inefficiencies of the tort system by voluntary agreement, the tort system introduces into the practice of medicine a new set of perverse incentives that can be harmful to patients. Fear of tort liability is one of the principal reasons why medical providers have strong incentives to withhold and conceal information that is vitally important to patients.

Most proposals to solve this problem would place arbitrary limits on the rights of plaintiffs in malpractice suits. Not all of these proposals are bad. But they share the common flaw of attempting to solve problems by bureaucratic fiat rather than by voluntary exchanges that are mutually beneficial to both patients and providers.

A more direct solution is to give patients the right to make contractual agreements in their own interests. Patients should have the same rights as buyers in other markets, including the right to waive certain tort claims in return for reductions in the cost of services or for other monetary compensation.