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Dr. James Rohack

Medical Groups Oppose Tax Changes That Could Boost Lawsuit Filings

The American Medical Association and 90 medical organizations nationwide have gone on record in opposition of a proposed policy that would allow trial attorneys to deduct litigation expenses from their taxes in certain cases. Healthcare leaders say the tax code changes under consideration would entice trial attorneys to file more lawsuits and add to the overall cost of healthcare.

In a Sept. 1 letter to U.S. Treasury Secretary Timothy F. Geithner, the state and national medical groups wrote in response to recent reports that the Treasury Department was considering a change in federal tax policy to allow a special tax deduction for trial attorneys who enter into gross fee contingency contracts with their clients a policy change they strongly believe “would be ill-advised” and urged Geithner to reject the proposal.

“Changing the tax policy to allow trial attorneys to deduct court costs and other expenses would cost taxpayers $1.5 billion and increase the cost of healthcare in our nation,” said AMA immediate past-president J. James Rohack, MD. “This change would encourage trial attorneys to file more lawsuits.”

The Treasury Department is basing its consideration on a 1995 Ninth Circuit Court of Appeals case, Boccardo v. Commissioner of Internal Revenue, where the court overturned the U.S. Tax Court and long-standing tax policy and held that attorneys are not extending loans to clients under gross fee contracts—distinct from net fee contracts—and therefore may treat litigation costs as deductible expenses in the year they occur.

“This ruling, however, hasn’t been validated by other Circuit Courts,” the letter reads. “Also, the IRS issued guidance in 1997 maintaining the position that litigation expenses advanced by trial lawyers are not deductible regardless of whether a trial attorney uses a gross fee or net fee contract with clients. Further, legislation introduced in the U.S. Senate and House of Representatives that would provide trial attorneys with a statutory tax deduction for litigation costs in contingency fees cases has failed to attract enough support to hold hearings on the issue, let alone be considered by either chamber. Considering these dynamics, we believe that any change in tax policy would be unjustified without a full and public examination of the ramifications.”

Healthcare leaders also expressed concern that a change in tax policy by the Treasury Department would conflict with long-standing state ethics rules against trial attorneys providing financial assistance to clients without the expectation of being paid back upon the successful conclusion of the case.

“These rules are meant to prevent a conflict of interest whereby a trial attorney’s financial stake in a case is put ahead of the client’s desire for justice,” the letter read, citing Rule 1.8(e) of the American Bar Association’s Model Rules of Professional Conduct.



“In other words, the ABA Model Rules consider expenses advanced by trial attorneys to be loans, which the IRS does not consider a deductible expense unless the loan is not paid back. Given that most states have adopted the ABA Model Rules, including some states in the Ninth Circuit, we believe that the Treasury Department is obligated to, at a minimum, consult with the ABA and every state that has adopted the ABA Model Rules to determine whether a change in tax policy, effectively allowing the expensing of costs associated with a client’s claim, would undermine the intent and spirit of the Model Rules or otherwise subvert States’ efforts to protect citizens against unethical practices by trial attorneys,” according to the letter.

Pointing to a recent AMA report that found 95 medical liability claims were filed for every 100 physicians, and that two of three medical liability claims are dropped or dismissed, Rohack said the federal government shouldn’t create new incentives for attorneys to bring lawsuits.

“Many physicians are forced to practice defensive medicine to protect themselves from meritless lawsuits,” said Rohack. “The U.S. government estimates the cost of defensive medicine to be between $70 billion to $126 billion per year.”

Highlights of the AMA report, released in late summer and including data on medical liability claims’ impact by age, gender and practice arrangement for physicians, show:

• Nearly 61 percent of physicians and 90 percent of general surgeons age 55 and over have been sued.
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• Before they reach the age of 40, more than half of OB/GYNS have already been sued.
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• A wide variation exists in the impact of liability claims between specialties. The number of claims per 100 physicians was more than five times greater for general surgeons and OB/GYNS than it was for pediatricians and psychiatrists.
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“Even though the vast majority of claims are dropped or decided in favor of physicians, the understandable fear of meritless lawsuits can influence what specialty of medicine physicians practice, where they practice, and when they retire,” said Rohack.“This litigious climate hurts patients’ access to physician care at a time when the nation is working to reduce unnecessary healthcare costs.”

The number of medical liability claims is not an indication of the frequency of medical error, emphasized Rohack, as the physician prevails 90 percent of the time in cases that go to trial.

In fact, the University of Michigan Health System (UMHS), which launched a comprehensive claims management program that centered on full disclosure with offers of compensation for medical errors in 2001, recently released a report that showed how the model decreased the number of new claims for compensation including lawsuits, reduced the time to claim resolution, and lowered liability costs. The Annals of Internal Medicine published the study, which involved reviewing claims from 1995 to 2007, in its Aug. 17 edition.

“We found a 61 percent decrease in spending at the UMHS on legal defense costs, and this supports the possibility that patients may be less likely to file lawsuits when given prompt transparency and an offer of compensation,” said Allen Kachalia, MD, JD, lead study author and medical director of quality and safety at Brigham and Women’s Hospital.

Any encouragement to increase litigious activity would represent a setback, Rohack said, noting that dropped or dismissed claims have a low estimated defense cost of $22,000, and the cases that go to trial can easily top $100,000.

“Any change to the tax code that encourages more lawsuits is a step in the wrong direction for our healthcare system,” he said. “Instead, the AMA supports proven medical liability reforms already working in California and Texas, as well as testing for innovative reform models, to reduce healthcare costs and keep physicians caring for patients. The Congressional Budget Office found that medical liability reforms that include a quarter-million dollar cap on non-economic damages would reduce the federal budget deficit by about $54 billion over 10 years. As our nation works to reduce the growth in healthcare costs, it’s clear that medical liability reform must be part of the solution.”

Tags:

American Medical Association, Dr. Allen Kachalia, Dr. Bob Rohack, U.S. Treasury Secretary Timothy F. Geithner, University of Michigan Health System.

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