A $56 Billion Poison Pill

Malpractice litigation is supposed to remedy the situation where patients are damaged by the negligent behavior of clinicians. Unfortunately, this costly system does a poor job of compensating patients or ensuring safety in patient care.

In an effort to pinpoint potential areas of cost-savings within the health care system, attention has been directed at to decrease the costs of the medical liability system. However, it is difficult to explain how expensive the current liability system is and to estimate the magnitude of cost savings as a result of tort reform. The current study by Mello and others aims to accomplish this feat.

Andrew Kuznetsov (Flickr/CC)

These authors break down the total costs of the liability system into subcategories of indemnity payments, administrative expenses (of insurers and attorneys), and defensive medicine. Notably missing are insurance premiums, which theoretically would equal the amount of administrative expenses plus indemnity payments (and would include malpractice insurance company profits). Additional areas of minor and likely non-quantifiable liability system costs include lost physician work time, increased cost of physician services, and damage to physicians’ reputations and psychological well-being.

The estimate of indemnity payments is based on the National Practitioner Data Bank (NPDB) of the Health Resources and Services Administration (HRSA). Every time a physician makes an indemnity payment, it is mandated to be reported to the NPDB database. Physicians pay an estimated $2.4 billion in indemnity payments annually. However, this does not include payments made by hospitals, which are the paying defendants in about 30 percent of cases. Adding hospitals, the estimated total rises to $5.7 billion in indemnity payments each year. It is interesting to subdivide these total payments into economic, non-economic, and punitive damages. Unfortunately these data are not generally available because the great majority of cases are settled out of court, where the breakdown of payment amounts is not necessarily made transparent. In addition, these ratios vary greatly based on the type of case (scars in an adult versus neurological deficits in an infant) as well as the presence or absence of non-economic damage caps in each state. Of note, economic and non-economic damages are estimated to be roughly 55 percent and 42 percent of indemnity payments, respectively, whereas punitive damages represent a very small portion of these payments.

Administrative expenses include plaintiff’s and defense attorney fees, the overhead costs of insurers, and of risk management programs. Attorney fees tend to be 20 to 40 percent of award payouts, with plaintiff’s attorneys at the higher end and defense attorneys at the lower end of the spectrum. Since hospitals are named as sole defendants in approximately 30 percent of cases, it is assumed that the general capacity and annual financial support of risk management programs based at hospitals across the country ($1 billion) is much more substantial than quality improvement programs would be in a non-litigious environment.

Of note, defensive medicine costs are estimated to be, by far, the largest portion of liability system costs, but at the same time have the least data to support their actual cost. Defensive medicine is estimated to cost $46 billion annually, whereas indemnity payments and administrative costs are estimated at $6 billion and $4 billion, respectively. In this study, these defensive medicine estimates are subdivided into hospital services ($39 billion) and physician services ($7 billion). Hospital estimates are based on the most widely cited set of studies regarding the costs of defensive medicine by hospitals, which examines expenditures on care for cardiac disease in Medicare patients before and after tort reform in certain states. The concluded that there was a 4 to 9 percent reduction in spending on cardiac disease in those states that underwent tort reform. Data on costs of physician defensive medicine is extrapolated from increased reimbursement rates from Medicare Part B over time and the correlating increases in malpractice premiums or award payments over that same period of time, with the former assumed to be a result of the latter.

Commentary
This study defines the actual costs of America’s medical liability system according to the best available evidence (estimated at $56 billion). Arguably the largest factor in medical liability, defensive medicine by hospitals, has the least reliable data on which to base these estimates. Noteworthy is the fact that the results by Kessler and McClellan showing substantial cost savings opportunities through hospital expenditures after tort reform have not been generalizable in other studies looking to validate their findings.

This study estimates that 2.4 percent of total health care costs are due to medical liability. What’s more, a study by Thomas et. al. in the same issue of Health Affairs estimates that even if malpractice premiums were reduced significantly, it would only reduce total health care costs by less than 1 percent. Even if tort reform were to completely erase the $56 billion in medical liability costs, it is debatable how significant a 2.4 percent reduction in overall health care costs would be.

Although there may be many reasons to pursue tort reform, the evidence as it stands today does not support large system-wide reforms based on the oft-touted-presumption that would significantly decrease.

Health Affairs. 2010; 29(9):1569-77.

Health Affairs. 2010; 29(9):1578-84.

commentary by Lisa Maurer

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