Critics charge that the current system is subjective and too costly and that excessive damage awards have increased health care spending, both directly (through higher premiums for malpractice insurance) and indirectly (by leading doctors to order additional tests or procedures in an attempt to diminish their risk of being sued so-called defensive medicine). Other charges are that legal fees consume too large a share of awards and that many patients and their families receive little or no compensation when malpractice occurs. Doctors and hospitals generally have malpractice insurance to protect against the financial risk of a lawsuit, but they have raised concerns about the rising costs of that insurance.

Some proposals would address concerns about the malpractice system by establishing tort limits, such as caps on damage awards. Although some studies have found that tort limits have substantial effects on health care spending, CBO’s own analysis has yielded mixed results partly reflecting the difficulty of disentangling the impact of those limits from other factors that affect spending. Overall, the analysis indicates that tort limits would reduce malpractice premiums but might not have a broader impact on the use of health care services.

Other approaches could be taken to address concerns about the malpractice system. Those approaches include subsidizing medical malpractice premiums or regulating their growth; creating alternative processes for dispute resolution; providing malpractice protection to physicians and hospitals in return for compliance with national guidelines for clinical practice; and establishing a "nofault" system, which would provide compensation for all medical injuries regardless of whether any negligence was involved. Some states have already taken similar steps, but CBO has not yet analyzed their effects and would have to draw on those experiences as well as other research in evaluating any new federal proposals.

Background
In 2003, about 181,000 severe medical injuries occurred in U.S. hospitals (representing 0.5 percent of all hospital admissions) that were attributable to negligence (see Table 7-1). Only about 17 percent of affected patients chose to file a malpractice claim. Patients who did not file a claim may have been unaware that negligence had occurred, or they may have been discouraged from filing a lawsuit because of the time, effort, and expense involved.

From the point of view of many physicians and hospital officials, the medical malpractice system is a "lottery" in which being sued depends on factors beyond their control. To some extent, data on malpractice suits supports that perception. One study found that among the malpractice claims filed in 2003, only about half were associated with a severe negligent injury. That study also estimated that about 12 percent of indemnity payments in medical malpractice cases went to claimants who did not suffer an injury because of negligence. Examined in another way, however, the same data indicate that the filing of malpractice claims and the payment of claims are not random. Hospital stays during which a severe negligent injury occurred were about 250 times as likely to result in a malpractice claim when compared with stays in which such an injury did not occur. In addition, that study found that claimants in cases in which a negligent injury occurred were about two and a half times as likely to receive a payment compared with claimants in cases without such an injury. In 2008, health care providers are likely to spend more than $30 billion to defend against and pay medical malpractice claims. Although that amount of money is substantial, it represents about 1.5 percent of national health expenditures and less than 3 percent of total payments to doctors and hospitals. Administrative costs in the medical malpractice system including legal fees, administrative costs for malpractice insurers, and court costs have been found to account for about half of the total spending on malpractice claims. That high percentage primarily reflects the current legal process of determining whether negligence occurred and what the compensatory payment should be.

In theory, new tort limits could lower overall spending for health care in two ways. (See Box 7-1 for a description of commonly proposed limits.) First, tort limits would reduce premiums for malpractice insurance by decreasing the size of the average award paid by malpractice insurers to claimants and perhaps also by reducing the probability that a medical provider would be sued for malpractice. A drop in malpractice premiums would tend to reduce the prices that providers and insurers negotiate for health care services. (It would also decrease Medicare spending, because Medicare’s payments rates for physicians’ and hospitals’ services include an amount to pay for malpractice premiums.) Second, changes in tort law could decrease health care spending by reducing the intensity and volume of health care services provided. The argument for such a utilization effect is built on two premises: that fear of litigation drives medical providers to deliver additional and often unnecessary medical services, and that the proposed tort limits would lessen that perceived threat among physicians and thereby reduce utilization and spending. Note, however, that imposing limits on malpractice torts could also constrain the ability of injured patients to collect compensation and might lead to more negligent care.

Summary of Evidence
Several studies have examined the experience of states that have implemented tort limits and found that various types of restrictions on malpractice liability can reduce total awards and thereby lead to lower premiums for malpractice insurance. The Office of Technology Assessment issued a report in 1993 summarizing the first wave of studies on the experience of states that set limits on malpractice liability in the 1970s and 1980s. The report concluded that caps on damage awards consistently reduced the size of claims and, in turn, lowered rates for malpractice insurance premiums. Furthermore, it found that limits on the extent to which various parties could be held liable were also effective in slowing the growth of premiums. Similarly, a 2004 study that examined state data from 1993 to 2002 found that a cap on noneconomic damages reduced malpractice insurance premiums by more than 15 percent.

In previous analyses, CBO considered the effects of limits on tort claims for medical malpractice at the state level and concluded that such limits decreased both malpractice awards and malpractice insurance premiums. In its 2008 report titled Budget Options, Volume 1: Health Care, CBO estimated that imposing limits on torts for medical malpractice cases would lower malpractice premiums nationwide by about 6 percent, on average, from the levels likely to occur under current law. (The savings in each state would depend in part on the restrictions already in effect.) Savings of that magnitude would have only a modest impact on total health care expenditures, however reducing total health care spending by less than 0.2 percent.

CBO and other researchers have also used the variation in state laws to assess whether tort limits on malpractice claims have broader effects on health care spending. One prominent set of studies examined the relationship between state tort limits and Medicare spending on hospital care for patients with heart disease and concluded that those limits would ultimately reduce such spending by between 4 percent and 9 percent. Other studies have found much smaller effects.

After carefully considering the economic literature and conducting its own statistical analysis of the data, CBO has not found consistent evidence that changes in the medical malpractice environment would have a measurable impact on health care spending. In part that is because the estimated effects of limits on malpractice torts vary substantially across different measures of health care spending and across different types of tort limits. In some cases, specific tort limits appear to be associated with reductions in health care spending; in other cases, there appears to be no relationship; and in still other cases, tort limits appear to be associated with higher spending (a finding that is counterintuitive). That data analysis also indicated the challenges involved in using statistical methods to separate the effects of tort reforms from the impact of other factors that might affect spending on health care.

CBO has not yet analyzed in detail other approaches to change the malpractice system or offset effects that are perceived to be adverse. Most of those approaches—such as restricting the increases in premiums made by medical malpractice insurance carriers or creating special courts for malpractice cases or processes for alternative dispute resolution—have already been adopted by one or more states. In addition, a no-fault compensation fund is in place for injuries related to vaccines. CBO would consider the evidence from those examples in estimating the effect of enacting one or more of the approaches into federal law.

From: CBO, Key Issues in Analyzing Major Health Insurance Proposals, December 2008, pages 150-154 (footnotes and tables omitted).