I received an e-mail from a student of mine and thought it would be worth answering for others as well as him. He wrote:

Here are the two sides that I see on tort reform.
1. It is an attempt at regulating the free market by capping the amount people can sue for in the courts. By capping the amount of a lawsuit the law would in effect be providing an “insurance” for a doctor for example. The doctor knows that he cannot be sued for more than X amount of dollars and therefore there is a slight moral hazard incentive, he acts in a way he might not normally because he knows that if he screws
up AND gets sued AND the lawsuit is successful he will only have to pay X amount of dollars.
2. It is an attempt to reign in an undervalued commodity – – the lawsuit. Because lawsuits are relatively (now this is where I might be making a mistake – – – I have not done the research on how much it costs to sue. I am assuming though that most lawyers operate on a contingency basis and only collect or need to get paid if they win the lawsuit) cheap they are almost like a public good. People “over sue” because the
cost of the lawsuit to them is marginal compared to the true value (they do not have to pay for . So what tort reform attempts to do is cap the lawsuit in an effort to reign in, or at least reduce the cost of the public good to the medical community (as an example).

My answer is that it’s an attempt to get rid of, or at least reduce, a forced lottery. Suing a doctor or hospital (or anyone) is like a lottery. The odds are better but the ticket is expensive. There’s a lot of randomness, not just in the way the doctor treats you but also in whether you’ll collect. You might be mistreated and lose the suit or not mistreated and win the suit. You pay for the lottery ticket in the price you pay for the medical services–that is, they price higher to compensate for the risk of getting sued. What makes it a forced lottery is that the courts have made it hard and well nigh impossible to refuse to play. How would one refuse? One would say to the doctor: give me this contract that I sign that obligates me not to sue you in such and such circumstances. I know that if I sign and the contract can be easily enforced, I will be lower-risk for the doctor to treat and his fee to me will reflect that lower risk. But if doctors understand that courts won’t enforce that contract, then we patients are, if we want medical services, forced to buy a sometimes-expensive lottery ticket.

Let’s say that X, in my student’s question above, is $250,000. That’s simply an upper limit on the size of the lottery payoff. As I understand the various proposals for tort reform, no one is advocating that a doctor or hospital not be allowed to put together a contract that allows the patient to sue for more than $250,000. So the bottom line is that this particular tort reform is not a regulation of the free market. It’s actually deregulation, by reducing the size of the forced lottery. Medical providers and patients that want a bigger lottery are free to do so.

H/T to the student, MW.