A new study from an interdisciplinary team at Harvard University reports that the medical malpractice system costs close to $60 billion annually. The study is published in the policy journal Health Affairs and is receiving lots of attention in the media. The attention is unwarranted. The study is old news, of questionable validity, and prone to misinterpretation. But that hasn’t stopped the medical lobbying complex from hyperventilating about the findings and renewing its call for massive tort reform.
The study provides no surprises to anyone in the health research or health policy arena who pays attention to malpractice. All of the data are in the public domain and most have been reported in previous studies. (For the past decade I have reported essentially the same findings in my health economics class.)
The most important component of malpractice costs is defensive medicine. The Harvard authors put this at $46 billion, or nearly 80 percent of the total, but this is pure guesswork. Researchers cannot agree on the extent of defensive medicine. The Harvard authors base their estimates on seminal studies by Kessler and McClellan. Their work is seminal largely because it was first, not because it was definitive, and later studies often find far less evidence of defensive practice. The Harvard authors try to be conservative by using the low end of the Kessler/McClellan cost estimates. But truth would have been better served if they had stated that the cost of defensive medicine could just as easily be $16 billion or $76 billion.
Even if we take the $60 billion figure at face value, this represents only 3-4 percent of total health spending. This is hardly earthshaking, but it is enough to raise eyebrows. The Harvard authors acknowledge that the “reforms… have modest potential to exert downward pressure on overall health spending.” In other words, tort reform is no panacea for health care spending inflation. The authors also note that the tangible costs of medical mistakes are perhaps 50% of the costs of malpractice. Add to this the intangible costs of death and morbidity and one might have the beginnings of an argument that we should toughen malpractice laws.
But none of these numbers provide any real insight into policy solutions. We cannot determine whether we should loosen malpractice laws by observing how much we spend on defensive medicine any more than a business can determine whether to hire more workers by knowing how many it currently employs, or I can figure out whether to buy another pair of shoes by counting up how many pairs I currently own. As with all such decisions, we have to ask assess the marginal benefits and marginal costs. If we loosen malpractice laws, will costs actually fall, and by how much? It seems doubtful that tort reform will eliminate all defensive medicine, but who knows? And that is the point. Knowing the current level of defensive medicine does not tell us how much it will change if laws are changed. Will the quality of care fall, and by how much? Again, it is not sufficient to know the current level of medical errors. We need to know whether this will change. The Harvard study provides no answers to these fundamentally important questions. The hyperventilating lobbyists have no right to use the study to justify any policy changes.
My colleague Leemore Dafny and two coauthors from Northwestern’s law school provide half of the answers we need for policy. Their recent study finds that after states enact comprehensive tort reform, health insurance premiums decline by 2-3 percent. Again, not earth shaking, but enough to raise eyebrows. What we need now is evidence on how tort reform affects quality. Until we get that evidence, all the hullabaloo about the new Health Affairs study is really much ado about nothing.
David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including The Economic Evolution of American Healthcare and Code Red. He has a Ph.D. in Economics from Stanford University.