If reforms had limited medical malpractice liability throughout the United States from 1984 to 1990, spending on cardiac disease alone would have been reduced by about $450 million per year for each of the first two years and about $600 million per year thereafter.

If the findings on cardiac disease can be generalized to other medical expenditures, reforms in malpractice liability could lead to spending reductions of more than $50 billion per year without serious adverse consequences to patients' health.

These conclusions are based on data on expenditures and medical outcomes for Medicare patients who were admitted to the hospital with either acute myocardial infarction (AMI) or ischemic heart disease (IHD). AMI is the source of the third most prevalent kind of malpractice claim, behind only breast cancer and brain-damaged infants.

The cost of administering the current malpractice system plus the cost of actual compensation to plaintiffs is less than 1 percent of medical expenditures. The larger costs result from the effects of the malpractice system on physicians' behavior. Doctors respond to the threat of malpractice lawsuits by practicing "defensive medicine," administering precautionary treatments with minimal expected benefit for fear of legal liability.

Malpractice reforms that directly reduce providers' liability lead to reductions of from 5 to 9 percent of medical expenditures without substantial effects on medical complications or mortality.

The four kinds of reforms that directly reduce malpractice awards are:

• Caps on damage awards, whereby either pain and suffering or total damages payable are capped at a dollar amount specified in the law.

• Abolition of punitive damages.

• No mandatory prejudgment interest, so that the plaintiff receives interest on a loss from the date of the judgment rather than from the time of the loss or the time the plaintiff filed suit.

• Collateral-source rule reform, whereby total damages payable in a malpractice tort are statutorily reduced by all or part of the dollar value of payments to the plaintiff from other sources such as insurance companies.

In states that have adopted direct reforms, within three to five years:

• Expenditures per AMI case have declined by 5.3 percent relative to that of nonreform states.

• Expenditures per IHD case have declined by 9.0 percent relative to that of nonreform states.

There is a small and statistically insignificant effect of direct reforms on mortality rates. When the effects on expenditures and the effects on mortality are combined, the absence of direct liability reforms causes expenditures per additional one-year AMI survivor to be $500,000. David R. Henderson

Source: Daniel P. Kessler and Mark McClellan, "Do Doctors Practice Defensive Medicine?" NBER Working Paper No. 5466, February 1996, National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138, (617) 868-3900.