Proposed tax break for lawyers would worsen liability mess

The AMA and other medical organizations say allowing attorneys to deduct expenses in certain liability cases would encourage lawyers to file more lawsuits.

Posted Oct. 4, 2010.

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Lawyers don't need more ammunition to file meritless lawsuits against physicians, but that's exactly what a proposed tax deduction would give them.

The American Medical Association and 90 other medical organizations have told the government that the tax change shouldn't occur in a legal system where physicians already face too many unwarranted lawsuits.

At issue is a proposed change to federal tax policy that would let trial lawyers deduct their expenses in gross fee contingency cases on their taxes before a case concludes. The lawyer agrees to pay litigation expenses upfront for a percentage of the judgment or settlement. These types of cases are an alternative to net fee contingency contracts, where the client reimburses the lawyer for costs and gives the lawyer a portion of the award or settlement.

Existing tax rules let lawyers who pay litigation expenses upfront claim deductions on those expenses if there is no award. But the American Assn. for Justice, which represents trial lawyers, argues that costs in all contingency cases are business expenses that should be deductible.

The U.S. Treasury Dept.'s consideration of a tax revision involves a 1995 case decided by the 9th Circuit Court of Appeals in San Francisco. In Boccardo v. Commissioner of Internal Revenue, the court overturned long-standing policy and said an attorney could deduct costs in a gross fee contingency case as a business expense in the year the money was spent.

The Internal Revenue Service in 1997 told staff to allow such deductions in states the 9th Circuit covers. While attorneys in California, Nevada and a handful of other Western states enjoy the perk, trial lawyers want the deduction to apply nationwide.

On Sept. 1, the AMA and 90 other medical organizations sent a letter to U.S. Treasury Secretary Timothy F. Geithner in opposition. Two weeks later, 76 organizations representing state chambers of commerce, businesses and others sent Geithner a letter voicing their concern. The AMA co-signed that letter, too.

Previously, Sen. Chuck Grassley (R, Iowa) and Rep. Dave Camp (R, Mich.) had urged Geithner not to alter tax policy without clear direction from Congress.

In addition to the government losing more than $1.5 billion over 10 years, the AMA and the other organizations say the tax deduction change would encourage lawyers to file scores of meritless lawsuits, proving costly to doctors and the health care system.

An AMA report issued in August shows just how bleak a litigious climate physicians already face: 42.2% of the 5,825 physicians surveyed had been sued. Although 65% of claims are dropped or dismissed, they come with a hefty price tag. Doctors and their insurance companies, on average, still laid out $22,163 in legal costs.

The fear of baseless lawsuits leads to other costs too, namely defensive medicine. A report published in the September Health Affairs found that liability system costs, including defensive medicine, are about $55.6 billion a year -- 2.4% of yearly health care spending.

Meritless lawsuits against physicians already are a problem, and a proposed tax break would encourage even more costly, time-consuming cases. The Treasury Dept. should not give trial lawyers any more ammunition in pursuing meritless lawsuits against physicians. It needs to deny this tax break request.

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