Earlier this month the Congressional Budget Office released a study estimating that the enactment of federal tort reform legislation would lower the cost of medical care in the United States by one-half of one percent. That report is described below.
On October 9 Douglas Elmendorf, Director of the CBO, wrote a letter to Senator Orrin Hatch (R-UT) in response to Senator Hatch's question about the effect that "tort reform" would have on the cost of medical care in the United States. Elmendorf estimates that if Congress enacted broad tort reform legislation that capped the amount of money that plaintiffs could recover from doctors and hospitals, provided shorter statutes of limitation, deducted health insurance, life insurance, auto insurance, and workers compensation payments from medical malpractice awards, and replaced joint and several liability with a fair-share rule, it could result in savings of as much as one-half of one percent of all the money that is spent on health care – savings of approximately $11 billion annually.
Here is how that figure was obtained. The CBO estimates that the total cost of medical malpractice litigation to health care providers is about $35 billion annually. That includes medical malpractice premiums, settlements, and administrative costs. Because most states have already enacted some form of tort reform, the benefit of federal legislation on the topic would be limited – the CBO estimates that tort reform would result in direct savings of 10% of the total cost of medical malpractice, or about $3.5 billion, which is two-tenths of one percent of total health care expenditures in the United States. In addition, if doctors are less prone to engage in defensive medicine and order fewer unnecessary tests and procedures, there could be additional savings. The CBO estimates that these indirect savings would total about three-tenths of one percent of the nation's total health care expenditures, for a total savings of one-half of one percent annually.
Somehow – and here is where the CBO loses me – the total direct and indirect savings from tort reform would amount to $11 billion annually, which the CBO correctly states is one-half of one percent of all health care expenditures, which is about $2.2 trillion annually. My problem with this arithmetic is that the direct savings of $3.5 billion in lower medical malpractice premium costs is less than two tenths of one percent of $2.2 trillion. Furthermore, the indirect savings from tort reform in reducing defensive medicine would have to total $7.5 billion in order to arrive at a total savings of $11 billion. Are the indirect cost savings resulting from tort reform really double the direct savings? Elmendorf states that the ratio of direct to indirect savings is 3:2, not 2:1. Oh well.
In addition there are two serious matters we have to consider before enacting tort reform legislation, each of which could reduce the savings we would realize from enacting this type of legislation. First, what would be the impact on the nation's health? If the quality of health care goes down as the result of doctors and hospitals cutting corners or not being as careful, what would be the effect on lost income and lost productivity? The CBO ducks this question, saying that there are conflicting studies on the question. In the letter to Senator Hatch, Director Elmendorf states:
Because medical malpractice laws exist to allow patients to sue for damages that result from negligent health care, imposing limits on that right might be expected to have a negative impact on health outcomes. There is less evidence about the effects of tort reform on people’s health, however, than about its effects on health care spending—because many studies of malpractice costs do not examine health outcomes. Some recent research has found that tort reform may adversely affect such outcomes, but other studies have concluded otherwise. Lakdawalla and Seabury (2009) found that a 10 percent reduction in costs related to medical malpractice liability would increase the nation’s overall mortality rate by 0.2 percent. However, Kessler and McClellan (1996 and 2002) and Sloan and Shadle (2009) concluded that tort reform generated no significant adverse outcomes for patients’ health.
The other problem with enacting tort reform is that right now the civil lawsuit is the principal method we use to regulate the quality of care rendered by the medical profession. Malpractice litigation is the mechanism that we use to identify and punish incompetent practicioners. If we reduce the effectiveness of medical malpractice litigation as an enforcement mechanism, we will have to ramp up other efforts – and self-regulation is no more likely to work in medical profession than it is in other industries. At present, state medical boards are effective at identifying problems with addiction, and the Justice Department prosecutes billing fraud effectively, but no government agencies serve as watchdogs to determine whether doctors and hospitals are delivering quality care. That is all left up to patients represented by trial lawyers. Malpractice experience is relied upon by insurance companies, hospitals, and potential employers as the determinant of how competent a physician is. Take that away and the gap will to be filled by some government agency. And that, too, will cost money.
I strongly support tort reform, but it appears that the enactment of a federal law limiting recovery for medical malpractice would have a negligible effect on the overall cost of medical care in the United States, and might end up degrading the quality of medical care unless another oversight and enforcement mechanism is put in place of the civil practice system.
