Tort reform is not the ‘Silver-Bullet’ that will simultaneously drop insurance premiums and save healthcare costs. A familiar theme among doctors and insurance companies is that insurance premiums are so high because medical malpractice lawsuits are draining the healthcare system of money. Spurred on by these interest groups, Legislators use lawsuits as a common scapegoat to avoid enacting real reforms.
Instead, the real reason for the significant rise in healthcare costs is due to an unacceptably high error rate and the economics of providing health care.
Hospital Error Rates
According to a study conducted by the Institute of Medicine of the National Academies, one-third of admitted patients are harmed during their stay. The Institute found that up to 98,000 patients die due to medical errors every year. The Institute’s findings were supported by another review conducted by the RAND Corporation which determined that there needs to be a greater focus on improving patient safety.
New York Presbyterian Hospital undertook a major reform program of the obstetrics department. New York Presbyterian introduced interdisciplinary training, hired a full-time laborist, implemented emergency drills, and transitioned to electronic records. These changes reduced medical malpractice claims by 99 percent or $25 million a year.
Lobbyists counter that no amount of reform can reduce costs because doctors practice defensive medicine. Defensive medicine occurs when a physician orders an excessive number of tests to triple and quadruple confirm diagnoses. The purpose is to preempt any legal arguments that the doctor failed to consider alternative diagnoses properly.
The result is that defensive medicine drastically increases costs to patients and insurers. Therefore, the lobbyists argue, if medical malpractice suits are severely curtailed or eliminated, doctors will not practice defensive medicine and healthcare costs will go down.
However, a multitude of studies call these conclusions into question. A 2003 Government Accountability Office review found that the prevalence of defensive medicine is not reliably measured because studies examined physician behavior in specific clinical situations and therefore cannot be applied across the entire healthcare system. Furthermore, a study by the Congressional Office of Technology Assessment found that fewer than eight percent of all tests are attributable to liability concerns.
These studies illustrate that contrary to doctors’ and hospitals’ positions, healthcare costs are more affected by factors other than medical malpractice. Furthermore, these studies demonstrate reducing a person’s ability to pursue compensation for their injuries will, at best, slightly reduce healthcare costs.
Economics of Lawsuits
Many law firms that practice medical malpractice litigation represent their clients on a contingency fee basis. Contingency fee arrangements allow people who normally would not afford an attorney, access to the civil justice system. In many contingency fee arrangements, the law firm advances all of the costs of litigation and only receives compensation when they win the case.
Most medical malpractice lawsuits cost more than $50,000 which is not paid unless the attorney succeeds therefore, attorneys are selective in the cases they accept because the risk is so high. The very nature of medical malpractice litigation weeds out frivolous lawsuits because attorneys cannot bear the risk of too many losses.
Economics of Healthcare
According to the Congressional Budget Office, defensive medicine may be motivated more so by the income that it generates for physicians. Doctors, on the whole, are paid on a per-procedure basis. Therefore, the more tests that a physician order, the more she is paid. Doctors are incentivized to order frivolous procedures whereas attorneys are dissuaded from pursuing any claim that doesn’t have a reasonable chance of success and of exceeding base costs of prosecuting the case (i.e. making over $50,000).
The insurance industry points out that, 4 out of 5 cases verdicts are for the defendant as evidence that the majority of suits are frivolous. However, that figure ignores several important caveats.
First, 95 percent of medical malpractice suits are settled. So 95 percent of cases do possess, at a minimum, some merit or else there wouldn’t have been a settlement.
Second, most medical insurance policies give the defendant physician final authority over whether or not to settle a case. Moreover, many doctors are penalized for settling cases. Therefore, they are de-incentivized from settling frivolous suits.
Civil litigation serves an important check and balance on bad behavior. It punishes the irresponsible for their bad habits. For example, in 1992 a person sued McDonalds and received $2.7M because she suffered severe burns after coffee spilled in her lap.
The verdict was panned by critics as evidence of litigation run amok. However, the critics overlooked critical facts. For example, the coffee was significantly hotter than industry standards and she suffered third-degree burns. Moreover, McDonalds was a party in over 700 previous lawsuits involving the same issue and never changed its practice.
Finally, after more than 700 lawsuits, McDonalds changed its bad behavior to the betterment of society.