Tort Reform, Medical Malpractice and Health Care Costs

1. Tort Reform, Medical Malpractice and Health Care Costs SCMA Annual Meeting April 26, 2019 Stephen P. Williams, JD

2. Earlier work suggested that certain malpractice tort reforms have the intended effect on malpractice losses reported by insurance companies. Caps on non-economic damages and limits on joint and several liability are associated with lower levels of reported losses. Because reported losses are heavily weighted toward reserves for claims to be paid in the future, the earlier work largely measured the effect that insurers predicted that tort reform would have on damage awards and settlements, as opposed to the actual effect that tort reform had on awards and settlements.

3. Using developed losses, this research confirms that tort reforms do have the intended effect on the overall level of awards and settlements that insurers pay, and the effect appears to be even larger than insurers predicted. But the effect is not evenly distributed throughout the insurance market. In general, insurers with the largest losses obtain the greatest reductions in those losses from tort reform, suggesting that the impact of tort reform is greatest on large claims.

4. Source: HARVARD’s JOHN M. OLIN CENTER FOR LAW, ECONOMICS, AND BUSINESS THE EFFECTS OF TORT REFORM ON MEDICAL MALPRACTICE INSURERS’ ULTIMATE LOSSES Patricia Born, W. Kip Viscusi & Tom Baker Discussion Paper No. 554 07/2006 Harvard Law School Cambridge, MA 02138

5. A society is judged by its ability to compensate those who have lost something due to another’s fault. It has been this way from the time of Leviticus. Reforming our civil justice system on the basis of deceptive, misleading and false notions, shifting the costs of responsibility to the taxpayer, is manifestly unfair. by Alan H. Figman '82Figman & Epstein, LLP Cardozo Law School Law Review

6. Seventy-seven percent of doctors said they won’t stop practicing defensive medicine with the enactment of traditional tort reform, according to a nationwide physician survey conducted in 2012 by Jackson Healthcare. Texas doctors also had an identical response with 77 percent saying a high-profile statute to limit damages in that state did not change their practice of defensive medicine. Source: Physician’s Weekly June 1, 2017

7. Does Tort Reform Reduce Health Care Costs? • The authors begin by observing that tort reform must have an impact on medical practice - as opposed to solely on medical malpractice - in order to yield nontrivial reductions in healthcare costs. Direct costs of malpractice, which include premiums, damage awards in excess of premiums, and associated litigation costs, represent no more than two percent of health care costs. Thus, tort reforms can have a substantial effect on health care costs only if they affect the amount of healthcare services provided

8. The authors explain that the effect of tort reform on health care costs is theoretically ambiguous. On the one hand, providers' sensitivity to liability may lead them to provide excessive care, resulting in higher health care costs. Eliminating this practice of "defensive medicine" is a primary justification for tort reform. On the other hand, however, liability creates incentives for providers to take greater precautions and avoid unnecessary risks. By this logic, reducing liability could increase costly medical errors and encourage providers to recommend profitable but unnecessary and even risky treatments, increasing health care costs and lowering the quality of care. Thus the effect of tort reform on costs is an empirical question.

9. The previous literature on this topic has largely focused on the effect of tort reform on treatment intensity for particular medical conditions with a large number of malpractice claims, such as pregnancy. These studies may not be representative of the effect on health care at large and have led to wide variations in the estimated impact of reform. The current study is the first to look at the aggregate effect of reform on costs.

10. To do so, the authors use a database of employer-sponsored health plans covering over 10 million non-elderly Americans annually for the period 1998 to 2006. The authors focus on four types of reforms-caps on non-economic damages (such as for pain and suffering), caps on punitive damages, collateral source reform (which reduces plaintiffs' awards if they receive public or private insurance benefits), and joint and several liability reform (which limits plaintiffs' ability to go after those parties with "deep pockets")

11. The authors basic approach is to make use of differences in the timing of adoption of these reforms by the states to identify the effect of reform on premiums. In their first key set of results, they find that each of the reforms except for the cap on punitive damages lowers health insurance premiums by 1 to 2 percent. This result applies to self-insured plans, those health plans for which the sponsoring employer directly pays realized health care costs of enrollees rather than paying an insurance carrier to bear this risk

12. By contrast, the authors find that tort reforms have no effect on premiums of fully-insured plans. Since almost ninety percent of fully-insured plans in their data are managed by Health Maintenance Organizations (HMOs), this finding suggests that HMOs may reduce defensive medicine without tort reform through monitoring of care. The authors test this hypothesis directly by comparing the effect of the reform by insurance plan type within the sample of self-insured firms. They confirm that responses to the reforms are concentrated among plan types other than HMOs, such as Preferred Provider Organizations (PPOs)

13. Another interesting hypothesis the authors test is whether post-reform premium reductions are steeper in more competitive insurance markets, as measured by the number of insurance carriers. They find that this is the case. This suggests that when insurers possess market power, the pass-through of cost reductions due to tort reform will be incomplete.

14. In sum, the authors find that caps on non-economic damages, collateral source reform, and joint and several liability reform reduce self-insured premiums by 1 to 2 percent each. These findings indicate that tort reform reduces treatment intensity, as the drop in premiums is larger than the savings that would arise from reduced direct liability costs. These reductions are concentrated in PPOs rather than HMOs, suggesting that HMOs can reduce "defensive medicine" even in the absence of tort reform.

15. The authors observe that their findings "constitute the first evidence that tort reform reduces healthcare expenditures broadly (albeit not in a managed-care environment)." However, they caution that "to understand the social welfare implications of these reforms... additional research on health outcomes and long-run costs is needed. • Source: The National Bureau of Economic Research

16. True Cost of Health CareDavid Belk, MD

20. So even in the states where medical malpractice costs are the highest doctors are paying less, on average, for their malpractice premiums and are less likely to get sued than they were just a decade ago. Now this should be good news for doctors everywhere. Fewer paid malpractice cases and lower overall malpractice costs have long been one of the AMA’s solutions for rising healthcare costs in the U.S. It appears as though they’re winning this battle so, why aren’t we hearing more about this? Possibly because healthcare costs in the U.S. have risen considerably since 2003 in spite of the drop in medical malpractice costs. That would appear to deflate one of the main arguments that’s been used against medical malpractice: That it’s a major factor in why healthcare costs so much in the U.S

21. The Real Impact of Medical Malpractice In fact, the total amount spent in the U.S. for medical malpractice (including the amount spent by hospitals as well as legal costs) was estimated to be about $10 billion in 2010. We can assume it’s less than that now, since these costs have been dropping. But even if it’s the same amount, $10 billion is only about 1/3rd of one percent of the more than  $3 trillion total spent on health care in the US in 2016. That’s hardly a huge factor.

22. Most practicing physicians have been faced, at some point, with a patient whose disease defied the protocols. Such patients don’t show any of the classic signs or symptoms of their disease, causing doctors to miss important opportunities to diagnose and treat them as early as possible. Whenever this happens, the doctor will feel blindsided and a lot less certain when dealing with future patients. No doctor wants to miss an important diagnosis and this is true even if there were no malpractice attorneys.

23. It’s the uncertainty doctors feel when dealing with potentially life threatening conditions that probably makes them so defensive. If a doctor is worried that he might be missing something in a patient who “feels ill” for no clear reason, he’s likely to order another test just to be sure. If the extra test isn’t part of an established protocol, the doctor can just blame the lawyers. Everyone is used to hearing that excuse, so it works. If defensive medicine really were exclusively about the fear of malpractice then it should be easy to show that, in the states with higher malpractice costs, far more medical tests and procedures are done. So far, I’ve seen no evidence of that being the case, though.

24. The direct cost of medical malpractice is only about 1/3rd of one percent of our overall healthcare costs in this country. Since medical malpractice costs have such a remarkably small effect on the cost of healthcare overall in the U.S., the small benefit these tort reform laws have on malpractice costs should barely effect healthcare costs at all, which is what we’re seeing. What’s more, if the risk of medical malpractice were actually driving up healthcare costs through the cost of defensive medicine, then these tort reform laws have been complete failures. A doctor is no less likely to be sued (so presumably no less defensive) in a state that’s enacted a strict tort reform law than in a state with no such law.

25. Conclusion The most obvious conclusion from all of this is that medical malpractice costs have very little impact on healthcare costs overall in the U.S. Even if they did have an impact, medical malpractice costs are going down, so they can’t be responsible for the rising cost of healthcare in the U.S. What’s more, all of the tort reform laws that different states have passed aimed at controlling medical malpractice costs have had, at best, a very muted effect on these costs directly. These laws have also had almost no effect on whether a doctor gets sued in any of those states that have such laws and virtually no effect on healthcare costs as a whole in the U.S.

26. Health Care Delivery is Changing • Clinically Integrated Networks • Migration of providers from sole and group practice, provider owned model, to employed provider model • Advantages: Employer covers malpractice costs, improved compensation for integrated delivery with incentive to attain cost goals

27. Myth of Population Health • Clinically Integrated Network is repackaged HMO

28. Utilization Controls • Does Clinical Integration allow for unnecessary tests and procedures • Does the notion of “population health” control for defensive practices?

29. Who really pays for health care? • Employers (maybe 7.5%) • Employees (Maybe 7.5%) • Taxpayers (Maybe 80% and growing) • “Taxpayers” pay for Medicare, Medicaid, DOD programs, incentives to hospitals for uncompensated care, incentives for medical education • ACA employer mandate repeal may create more uninsured

30. Contribution of malpractice cost to overall health care costs • 0.03% (0.06% if Dr. Belk is only ½ correct) • Incentives to reduce utilization • Utilization control as part of “quality” measures

31. Who employs physicians? • Hospitals • Protection under SC Tort Claims Act • Self-insurance for malpractice • FQHCs, VA, DoD facilities • Protection under FTCA • Paid for by taxpayers • 501 (c) (3) protection as a “charity”

32. Larger Discussion • Ethics, Justice, and Health Care Costs in the context of all of the above