Wisconsin State Compensation Caps Held Unconstitutional

Matthew Ferdon was injured at birth due to medical malpractice. Despite subsequent surgeries, he has a partially paralyzed and deformed right arm. A jury awarded him $403,000 for future medical expenses, and $700,000 in noneconomic damages. The noneconomic damage award was based on the jury's calculation that, with a life expectancy of 69 years, $10,000 per year was the reasonable amount necessary to compensate the plaintiff for having to live every day of his life with a partially functioning, deformed right arm.

After the verdict the Wisconsin Patients Compensation Fund (the Fund), a state-created entity that pays medical malpractice claims exceeding primary insurance thresholds established by statute, moved to have the noneconomic damages reduced pursuant to the limitation established in Wis. Stat. ” 655.017 and 893.55(4)(d) (2001-2002). These laws combined capped noneconomic damages in medical malpractice suits to $350,000 in 1995 dollars, to be adjusted for inflation. The statutory limitation on the jury award would have meant that Matthew Ferdon would receive an award of approximately $5900 a year as the reasonable amount necessary to compensate him rather than the $10,000 per year the jury imposed.

Ferdon's representatives challenged the statutory limitation on several constitutional grounds, only one of which the court reached: that the statutory cap violates the equal protection guarantees of the Wisconsin Constitution. Before laying out its decision and reasoning, the court made clear that it did not consider the case to be about whether all caps, or even all caps on noneconomic damages, are constitutionally permissible. The question before it was a narrower one: Is the $ 350,000 cap (adjusted for inflation) on noneconomic damages in medical malpractice cases set forth in Wis. Stat. ” 655.017 and 893.55(4)(d) constitutional?

The Analysis

The court determined that a 'rational basis' test, the lowest level of scrutiny, was the appropriate one and noted that the rational basis standard in the equal protection context does not require that all individuals be treated identically; only that any distinctions must be relevant to the purpose motivating the classification. In essence, the rational basis standard asks whether there are any real differences to distinguish the favored class from other classes who are ignored by the statute.

The main classification in Ferdon was the distinction between medical malpractice victims who suffer over $350,000 in noneconomic damages, and medical malpractice victims who suffer less than $350,000 in noneconomic damages. Severely injured victims with more than $350,000 in noneconomic damages receive only part of their damages; less severely injured victims with $350,000 or less in noneconomic damages receive their full damages. Thus, the cap's greatest impact falls on the most severely injured victims. In addition, an important sub-classification was created because a single cap applies to all victims of a medical malpractice occurrence regardless of the number of victims/claimants. Because the total noneconomic damages recoverable for bodily injury or death may not exceed the $350,000 limit for each occurrence, the total award for a patient's claim for noneconomic damages (such as pain, suffering and disability) and the claims of the patient's spouse, minor children, or parents for loss of society and companionship cannot exceed $350,000.

With these classifications in mind, the court turned to the legislature's objectives in enacting the cap. What it found were the now-familiar arguments for damage caps in the case of medical malpractice: that judgments and settlements have increased, leading to increased insurance premiums whose cost is passed on to patients, and that these premium increases prompt doctors to curtail or discontinue their practices or to decide not to enter into practice within the state. The legislative intent in enacting the caps, the court therefore found, was to: 1) Ensure adequate compensation for victims; 2) Enable insurers to charge lower rates by reducing malpractice awards; 3) Keep the Fund's annual assessment to health care providers at a low rate and protect the Fund's financial status; 4) Reduce health care costs to patients; and 5) Encourage health care providers to practice in Wisconsin.

With respect to the first legislative objective, the court asked whether a rational relationship existed between compensating victims fairly and the classification of medical malpractice victims into two groups ' those who suffer noneconomic damages under $350,000 and those who suffer noneconomic damages over $350,000.

Who falls into the group whose noneconomic damages exceed $350,000, the court asked? According to a 1992 report by the Wisconsin Office of the Commissioner of Insurance, children from ages 0 to 2 with medical malpractice injuries comprise less than 10% of malpractice claims, yet their claims comprise a large portion of the paid claims and expenses of insurers and the Fund. Young people are most affected by the $350,000 cap on noneconomic damages, not only because they suffer a disproportionate share of serious injuries from medical malpractice, but also because many can expect to be affected by their injuries over a 60- or 70-year life expectancy. Furthermore, because an injured patient shares the cap with family members, the cap has a disparate effect on patients with affected families. Looking at it this way, the court found that the legislature's shifting of the economic burden of medical malpractice from insurance companies and negligent health care providers to a small group of vulnerable, injured patients, was not rational. 'Limiting a patient's recovery on the basis of youth or how many family members he or she has does not appear to be germane to any objective of the law,' stated the court.

The second legislative intent ' to reduce malpractice awards so that insurers can charge lower premiums ' was also not advanced by the classification, according to the court, because multiple studies have shown that many other factors, such as investment returns and competition, have a far greater impact on premiums than do high malpractice payouts. 'Based on the available evidence from nearly 10 years of experience with caps on noneconomic damages in medical malpractice cases in Wisconsin and other states, it is not reasonable to conclude that the $350,000 cap has its intended effect of reducing medical malpractice insurance premiums,' wrote the court. 'We therefore conclude that the $350,000 cap on noneconomic damages in medical malpractice cases is not rationally related to the legislative objective of lowering medical malpractice insurance premiums.'

The third legislative objective ' to keep the Fund's annual assessment to health care providers at a low rate and protect the Fund's financial status ' was not persuasive in legitimizing the classification. The court found that the Fund had flourished both with and without a cap, to include a time prior to enactment of the present laws when the cap was set at $1 million. The decision stated, 'If the amount of the cap did not impact the Fund's fiscal stability and cash flow in any appreciable manner when no caps existed or when a $1,000,000 cap existed, then the rational basis standard requires more to justify the $350,000 cap as rationally related to the Fund's fiscal condition.'

The court could also find no rational relationship between the classification and the legislative objective of decreasing overall healthcare costs for consumers. Studies in evidenced showed that in Wisconsin, of every $100 spent on health between 1987 and 2002, less than one dollar could be traced to medical-malpractice related costs. Therefore, even if the $350,000 cap on noneconomic damages would reduce medical malpractice insurance premiums, this reduction would have no effect on a consumer's health care costs. Accordingly, there the court could find no objectively reasonable basis to conclude that the $350,000 cap, which does not appreciably lower patient costs, justified placing such a harsh burden on the most severely injured medical malpractice victims, many of whom are children.

As to the question of medical providers choosing not to practice in Wisconsin if the cap were not in place, the court found most studies had seen little or no relationship between medical malpractice damage caps and providers' decisions to practice in one state vs. another. For all these reasons, the Wisconsin Supreme Court found the damage cap limitations in medical malpractice cases unconstitutional beyond a reasonable doubt.

Impact

The Ferndon case was decided solely on the basis of the Wisconsin Constitution, not the Federal Constitution. Its direct impact on national med-mal compensation caps is non-existent because the court was careful to limit its basis for decision to state law alone, leaving no federal avenue for appeal. Its indirect impact on nationwide impact on the debate about noneconomic damage caps may prove to be substantial, however.

The Ferndon decision runs to more than 140 pages in length and includes well-reasoned rationales for its findings, which were based in large part on analyses of federal, state and other studies. It provides ample fodder for plaintiff attorneys' arguments against damage caps in any state. On the other hand, the dissenting opinions are also well reasoned, offering defense counsel a few choice arguments of their own to work with.

The American Medical Association immediately condemned the decision, saying it opens the door for a medical liability crisis in a state that had enjoyed one of the most stable medical establishments in the country. Having lost one of its most shining examples of the benefits of tort reform in the debate over federal medical malpractice damage caps, the group called for an even greater push for federal liability reforms.

Meanwhile, the Wisconsin Medical Society almost immediately began its campaign for a new damages limitation. In an August 25 release, the group published results of its poll of 500 Wisconsin voters that it said showed 66% favor caps. The question posed to those voters, however, according to the release, was 'whether Wisconsin should cap non-economic damages to prevent both higher health costs associated with frivolous lawsuits and unnecessary medical testing.' Were the question worded another way ' for example, 'Should Wisconsin not institute damage caps so that it can ensure the most severely injured patients are not left to pay for the most egregious medical errors, especially in light of evidence showing that caps have little effect on insurance premiums?' ' would poll respondents' answers have been the same? It is this question that the Wisconsin Supreme Court answered for itself in the negative.

Dr. Susan Turney, CEO/EVP of the Wisconsin Medical Society, sees the Ferndon decision as a cataclysm. In a joint release on behalf of the Wisconsin Medical Society and the Wisconsin Hospital Association she said, “Both groups fear that the court's decision will force a wave of doctors to retire early or stop performing high-risk procedures, such as delivering babies, especially in rural areas '. Wisconsin had it right. We had a balanced medical liability system, including unlimited economic damages and a cap on non-economic damages. It was a rational way to protect injured patients economically, while not harming patient access to important medical care.”

“I'm very nervous about the future,' said Turney. A lot of medical practitioners, insurers and health care consumers are too.

But not everyone sees the decision as a problem. The Wisconsin Academy of Trial Lawyers (WATL), which submitted an amicus brief to the court in Ferndon, is among those who viewed the cap on noneconomic damages to be an unnecessary hindrance to victim compensation. 'This is a tremendous victory for our jury system, an important victory for ordinary citizens' stated David Skoglind, president of the WATC. 'This is a decision that balances the scales of justice after 10 years of watching our state's legal system be blatantly tilted in favor of the insurance companies against ordinary citizens.'

Janice G. Inman is Editor-in-Chief of this newsletter.

Doctors in Wisconsin and in other states are not the only ones worried about the Wisconsin Supreme Court's recent decision invalidating caps on noneconomic damages in medical malpractice cases in that state. Patient advocates, insurers and other business group representatives are also very concerned that the strides they've made in reigning in malpractice insurance premiums are in jeopardy.

Tort reform is, of course, a hot topic all over the country, with numerous states having already passed legislation limiting awards for noneconomic damages in medical malpractice cases. These laws have been challenged in various courts, but the majority of state courts that have grappled with the legality of tort reform measures have held that state legislatures have the right to impose such limitations ' even if they apply only to medical malpractice lawsuits and not to other types of torts ' because lawmakers have a legitimate government interest in ensuring doctors can and will continue to practice in their states. Now that concept has been challenged in a state that had for many years found nothing wrong with its medical malpractice damage caps. The decision rendered in Ferdon v. Wisconsin Patients Compensation Fund, 2005 WI 125 (7/14/05), has many wondering if the tables are going to turn against federal and state tort reform legislation.

The Case: Ferdon v. Wisconsin Patients Compensation Fund

Matthew Ferdon was injured at birth due to medical malpractice. Despite subsequent surgeries, he has a partially paralyzed and deformed right arm. A jury awarded him $403,000 for future medical expenses, and $700,000 in noneconomic damages. The noneconomic damage award was based on the jury's calculation that, with a life expectancy of 69 years, $10,000 per year was the reasonable amount necessary to compensate the plaintiff for having to live every day of his life with a partially functioning, deformed right arm.

After the verdict the Wisconsin Patients Compensation Fund (the Fund), a state-created entity that pays medical malpractice claims exceeding primary insurance thresholds established by statute, moved to have the noneconomic damages reduced pursuant to the limitation established in Wis. Stat. ” 655.017 and 893.55(4)(d) (2001-2002). These laws combined capped noneconomic damages in medical malpractice suits to $350,000 in 1995 dollars, to be adjusted for inflation. The statutory limitation on the jury award would have meant that Matthew Ferdon would receive an award of approximately $5900 a year as the reasonable amount necessary to compensate him rather than the $10,000 per year the jury imposed.

Ferdon's representatives challenged the statutory limitation on several constitutional grounds, only one of which the court reached: that the statutory cap violates the equal protection guarantees of the Wisconsin Constitution. Before laying out its decision and reasoning, the court made clear that it did not consider the case to be about whether all caps, or even all caps on noneconomic damages, are constitutionally permissible. The question before it was a narrower one: Is the $ 350,000 cap (adjusted for inflation) on noneconomic damages in medical malpractice cases set forth in Wis. Stat. ” 655.017 and 893.55(4)(d) constitutional?

The Analysis

The court determined that a 'rational basis' test, the lowest level of scrutiny, was the appropriate one and noted that the rational basis standard in the equal protection context does not require that all individuals be treated identically; only that any distinctions must be relevant to the purpose motivating the classification. In essence, the rational basis standard asks whether there are any real differences to distinguish the favored class from other classes who are ignored by the statute.

The main classification in Ferdon was the distinction between medical malpractice victims who suffer over $350,000 in noneconomic damages, and medical malpractice victims who suffer less than $350,000 in noneconomic damages. Severely injured victims with more than $350,000 in noneconomic damages receive only part of their damages; less severely injured victims with $350,000 or less in noneconomic damages receive their full damages. Thus, the cap's greatest impact falls on the most severely injured victims. In addition, an important sub-classification was created because a single cap applies to all victims of a medical malpractice occurrence regardless of the number of victims/claimants. Because the total noneconomic damages recoverable for bodily injury or death may not exceed the $350,000 limit for each occurrence, the total award for a patient's claim for noneconomic damages (such as pain, suffering and disability) and the claims of the patient's spouse, minor children, or parents for loss of society and companionship cannot exceed $350,000.

With these classifications in mind, the court turned to the legislature's objectives in enacting the cap. What it found were the now-familiar arguments for damage caps in the case of medical malpractice: that judgments and settlements have increased, leading to increased insurance premiums whose cost is passed on to patients, and that these premium increases prompt doctors to curtail or discontinue their practices or to decide not to enter into practice within the state. The legislative intent in enacting the caps, the court therefore found, was to: 1) Ensure adequate compensation for victims; 2) Enable insurers to charge lower rates by reducing malpractice awards; 3) Keep the Fund's annual assessment to health care providers at a low rate and protect the Fund's financial status; 4) Reduce health care costs to patients; and 5) Encourage health care providers to practice in Wisconsin.

With respect to the first legislative objective, the court asked whether a rational relationship existed between compensating victims fairly and the classification of medical malpractice victims into two groups ' those who suffer noneconomic damages under $350,000 and those who suffer noneconomic damages over $350,000.

Who falls into the group whose noneconomic damages exceed $350,000, the court asked? According to a 1992 report by the Wisconsin Office of the Commissioner of Insurance, children from ages 0 to 2 with medical malpractice injuries comprise less than 10% of malpractice claims, yet their claims comprise a large portion of the paid claims and expenses of insurers and the Fund. Young people are most affected by the $350,000 cap on noneconomic damages, not only because they suffer a disproportionate share of serious injuries from medical malpractice, but also because many can expect to be affected by their injuries over a 60- or 70-year life expectancy. Furthermore, because an injured patient shares the cap with family members, the cap has a disparate effect on patients with affected families. Looking at it this way, the court found that the legislature's shifting of the economic burden of medical malpractice from insurance companies and negligent health care providers to a small group of vulnerable, injured patients, was not rational. 'Limiting a patient's recovery on the basis of youth or how many family members he or she has does not appear to be germane to any objective of the law,' stated the court.

The second legislative intent ' to reduce malpractice awards so that insurers can charge lower premiums ' was also not advanced by the classification, according to the court, because multiple studies have shown that many other factors, such as investment returns and competition, have a far greater impact on premiums than do high malpractice payouts. 'Based on the available evidence from nearly 10 years of experience with caps on noneconomic damages in medical malpractice cases in Wisconsin and other states, it is not reasonable to conclude that the $350,000 cap has its intended effect of reducing medical malpractice insurance premiums,' wrote the court. 'We therefore conclude that the $350,000 cap on noneconomic damages in medical malpractice cases is not rationally related to the legislative objective of lowering medical malpractice insurance premiums.'

The third legislative objective ' to keep the Fund's annual assessment to health care providers at a low rate and protect the Fund's financial status ' was not persuasive in legitimizing the classification. The court found that the Fund had flourished both with and without a cap, to include a time prior to enactment of the present laws when the cap was set at $1 million. The decision stated, 'If the amount of the cap did not impact the Fund's fiscal stability and cash flow in any appreciable manner when no caps existed or when a $1,000,000 cap existed, then the rational basis standard requires more to justify the $350,000 cap as rationally related to the Fund's fiscal condition.'

The court could also find no rational relationship between the classification and the legislative objective of decreasing overall healthcare costs for consumers. Studies in evidenced showed that in Wisconsin, of every $100 spent on health between 1987 and 2002, less than one dollar could be traced to medical-malpractice related costs. Therefore, even if the $350,000 cap on noneconomic damages would reduce medical malpractice insurance premiums, this reduction would have no effect on a consumer's health care costs. Accordingly, there the court could find no objectively reasonable basis to conclude that the $350,000 cap, which does not appreciably lower patient costs, justified placing such a harsh burden on the most severely injured medical malpractice victims, many of whom are children.

As to the question of medical providers choosing not to practice in Wisconsin if the cap were not in place, the court found most studies had seen little or no relationship between medical malpractice damage caps and providers' decisions to practice in one state vs. another. For all these reasons, the Wisconsin Supreme Court found the damage cap limitations in medical malpractice cases unconstitutional beyond a reasonable doubt.

Impact

The Ferndon case was decided solely on the basis of the Wisconsin Constitution, not the Federal Constitution. Its direct impact on national med-mal compensation caps is non-existent because the court was careful to limit its basis for decision to state law alone, leaving no federal avenue for appeal. Its indirect impact on nationwide impact on the debate about noneconomic damage caps may prove to be substantial, however.

The Ferndon decision runs to more than 140 pages in length and includes well-reasoned rationales for its findings, which were based in large part on analyses of federal, state and other studies. It provides ample fodder for plaintiff attorneys' arguments against damage caps in any state. On the other hand, the dissenting opinions are also well reasoned, offering defense counsel a few choice arguments of their own to work with.

The American Medical Association immediately condemned the decision, saying it opens the door for a medical liability crisis in a state that had enjoyed one of the most stable medical establishments in the country. Having lost one of its most shining examples of the benefits of tort reform in the debate over federal medical malpractice damage caps, the group called for an even greater push for federal liability reforms.

Meanwhile, the Wisconsin Medical Society almost immediately began its campaign for a new damages limitation. In an August 25 release, the group published results of its poll of 500 Wisconsin voters that it said showed 66% favor caps. The question posed to those voters, however, according to the release, was 'whether Wisconsin should cap non-economic damages to prevent both higher health costs associated with frivolous lawsuits and unnecessary medical testing.' Were the question worded another way ' for example, 'Should Wisconsin not institute damage caps so that it can ensure the most severely injured patients are not left to pay for the most egregious medical errors, especially in light of evidence showing that caps have little effect on insurance premiums?' ' would poll respondents' answers have been the same? It is this question that the Wisconsin Supreme Court answered for itself in the negative.

Dr. Susan Turney, CEO/EVP of the Wisconsin Medical Society, sees the Ferndon decision as a cataclysm. In a joint release on behalf of the Wisconsin Medical Society and the Wisconsin Hospital Association she said, “Both groups fear that the court's decision will force a wave of doctors to retire early or stop performing high-risk procedures, such as delivering babies, especially in rural areas '. Wisconsin had it right. We had a balanced medical liability system, including unlimited economic damages and a cap on non-economic damages. It was a rational way to protect injured patients economically, while not harming patient access to important medical care.”

“I'm very nervous about the future,' said Turney. A lot of medical practitioners, insurers and health care consumers are too.

But not everyone sees the decision as a problem. The Wisconsin Academy of Trial Lawyers (WATL), which submitted an amicus brief to the court in Ferndon, is among those who viewed the cap on noneconomic damages to be an unnecessary hindrance to victim compensation. 'This is a tremendous victory for our jury system, an important victory for ordinary citizens' stated David Skoglind, president of the WATC. 'This is a decision that balances the scales of justice after 10 years of watching our state's legal system be blatantly tilted in favor of the insurance companies against ordinary citizens.'

Janice G. Inman is Editor-in-Chief of this newsletter.