Malpractice litigation ostensibly aims to compensate those who are injured, to hold doctors and other health care providers accountable for errors, and to improve health care by changing physicians’ behavior to avoid future lawsuits.  There is evidence the malpractice system does a poor job of meeting these goals, although it raises health care costs and reduces the quality of care.

The Compensation System for Victims Is Inefficient.  The Harvard Medical Practice Study also found that of the cases in which negligence occurred, less than 2 percent of individuals are ever compensated.¹⁹ Furthermore, one of the Harvard Practice researchers, David Studdert, led a newer study of closed claims among five liability insurers that found:²⁰

• Of 1,452 malpractice claims filed, one-third did not involve medical errors.²¹
• However, of the 889 claims filed that involved injury due to medical errors, about 27 percent were not compensated.²²
• Furthermore, plaintiffs receive less than half of every dollar (46 cents) recovered through settlements or jury verdicts; the rest covers claimants’ attorneys’ fees, court administrative costs and defense costs.  [See Figure I.]

“Malpractice victims receive less than half of every dollar of compensation.”

Many patients (and their families) who believe they have been harmed may be deterred from pursuing claims by the cost, time and stress of litigation compared to the damages they are likely to recover.   Those with limited financial resources must find attorneys who take cases for contingency fees (meaning the attorney is paid from the award or settlement money).  Attorneys who usually work for a percentage of the award have an incentive to take only lucrative cases and avoid those with small potential fees.

The Cost of Malpractice Insurance Is Rising.  Malpractice litigation has not only become more pervasive, but more costly to doctors.  Over a six-year period, the median jury award doubled from one-half million dollars to $1 million in 2000.²³ [See Figure II.]

As a result of the increasing litigation and rising jury payouts, physicians’ malpractice insurance premiums have risen precipitously:

• The median malpractice insurance premium rose 13 percent from 2003 to 2005, faster than the increase in total health care spending per capita.²⁴
• Premium increases for certain specialties were much higher — for example, premiums increased 165 percent for obstetricians/gynecologists, 220 percent for internists and 235 percent for general surgeons. [See Figure III.]

“The median jury award doubled over six years.”

Premiums for some specialties average well over $100,000 a year, and in some regions are much higher.²⁵ Florida’s largest insurer, for instance, charges a base rate of $201,000 annually for obstetricians and gynecologists in Dade County (Miami), twice the amount it charges OB/GYNs in the rest of the state.  Moreover, premiums in Dade County increased 75 percent for general surgeons from 1999 to 2002.  By comparison, malpractice premiums for general surgeons in Minnesota increased only 2 percent over the same period.²⁶ The variation in premiums tends to reflect variations in insurance costs.

Insurance Markets Are Less Competitive.  Some critics argue that malpractice insurers are responsible for rising premiums and health care costs. During the 1960s and 1970s, physicians successfully pressured states to regulate increases in insurance premiums.²⁷ As a result, many insurance companies left the market, creating a shortage of insurance providers.  In some areas, no providers remained.  In spite of efforts to keep premiums low, they increased during the 1980s and 1990s.²⁸

“Malpractice insurance costs are especially high for some specialties.”

According to the U.S. Government Accountability Office, the number of malpractice insurance carriers has fallen since 1999 due to declining profitability.²⁹ Higher losses have forced many insurers to leave the medical malpractice market, resulting in fewer suppliers and less price competition.  The St. Paul Companies, once the nation’s largest medical malpractice insurer, stopped underwriting all medical malpractice insurance by 2002.³⁰

In addition, malpractice insurance premiums are usually community rated, meaning all physicians in a particular specialty or geographic area pay the same rate.  Community rating shifts the cost of errors (higher premiums) and the financial reward of avoiding errors from the individual to the group.  This reduces the financial incentive of doctors to invest in quality-improving measures (such as electronic medical recordkeeping).

Surveys of physicians in several states have found that almost two-thirds of physicians would react to a rise in malpractice premiums by increasing their patient caseloads, presumably in order to raise their incomes to compensate for higher costs. About 47 percent of physicians said they would delay or cancel outlays for capital improvements in their offices.³¹ Higher caseloads and reduced investment in such things as computerized patient records and new diagnostic equipment can affect the quality of health care.

Patient Fees Are Higher.   Who pays the cost of medical malpractice premiums?  The evidence suggests that physicians are able to pass on the increasing cost of malpractice premiums to patients without sustaining a permanent reduction in their net incomes.  Researchers Patricia Danzon, Mark Pauly and Raynard Kington found that between 1976 and 1983, during a period of rapidly rising premiums, patient fees increased about 10 percent per year, while physicians’ net incomes changed very little.³² This still seems to be the case.  Using data from 1994, 1998 and 2002, Pauly and his colleagues found that higher malpractice premiums do not significantly reduce physicians’ incomes.  Rather, physicians offset rising premiums by increasing their fees and the quantity of services.³³

Doctors Practice Defensive Medicine. The malpractice tort system raises health care costs by encouraging unnecessary tests and treatments.  A 2002 survey by Aetna reports that 79 percent of physicians ordered more tests than they felt were necessary in order to protect themselves from malpractice suits.³⁴

“Physicians practice defensive medicine — ordering unnecessary tests and procedures to protect themselves from claims of negligence.”

The cost of defensive medicine is difficult to determine, but the most commonly accepted estimate is substantial.  In 2002, economists Daniel Kessler and Mark McClellan examined survey data on the effects of defensive medicine on physician productivity, as well as its impact on health outcomes for heart patients.³⁵ They used Medicare claims data from 1984 to 1994 for two types of patients:  those who were hospitalized with acute myocardial infarction (AMI), and those with ischemic heart disease (IHD).³⁶ Kessler and McClellan found:

• A 1 percentage point increase in the probability of a physician defending against a claim results in a 2.4 percent increase in treatment expenditures for AMI patients, and a 1.6 percent increase for IHD patients per year following each patient’s hospital admission.
• A 1 percentage point increase in a physician’s probability of paying a claim in any given year results in a 4.3 percent increase in treatment expenditures for AMI patients, and a 2.9 percent increase for IHD patients.
• Overall, Kessler and Mark McClellan found that about 5 percent to 9 percent of total health care expenditures on myocardial and ischemic heart disease patients are due to defensive medicine costs.³⁷

Treatment for heart disease is widespread, with hundreds of thousands of procedures performed annually in the United States.  Thus, other researchers have felt comfortable extrapolating these results to the health care system as a whole.³⁸

• Applying the Kessler and McClellan estimates to total U.S. health care spending, total defensive medicine costs were about $100 billion to $178 billion in 2005, the most recent year for which data are available.³⁹
• In addition, the consulting firm Towers Perrin estimates the cost of defending against malpractice claims, paying compensation and added administrative costs were about $29.4 billion in 2005 and are increasing by about 11 percent annually.⁴⁰
• Combining these two estimates, in 2006 the medical tort system added at least 6 percent, or $191 billion, to the cost of health care — roughly $1,700 to $2,000 a year for every household in America.

“The estimated cost of the tort malpractice system is roughly $200 billion — an amount approaching $2,000 a year for every household in America.”

The practice of defensive medicine carries risks.  Take cesarean sections, for example.  In the United States, about 29 percent of all births are performed via C-sections.⁴¹ Although C-sections are recommended for a variety of medical reasons, such as high-risk pregnancies, medical experts believe many more are performed than necessary.  Based on the number of high- and low-risk pregnancies in the population, medical experts say that the C-section rate should be no greater than 15 percent of all births.⁴² Furthermore, the use of C-sections varies widely across the country and is especially prevalent in some localities known to be particularly litigious (for example, see the discussion below regarding El Paso, Texas).  Experts suggest the widespread use of C-sections is due to obstetricians practicing defensive medicine — performing surgery so that they cannot be accused of withholding potentially beneficial treatment in the event a child is born with a medical condition.  For example, a 2003 analysis of New Jersey births showed that cesarean births reduced the risk of uterine rupture for some women.  But defensive C-sections also carry risks; the same study found that C-sections slightly increase the incidence of brain hemorrhage in infants delivered by less-experienced physicians.⁴³ C-sections also require longer hospital stays, which increase the risk of infection.

“Shortages are appearing in specialties at high risk of malpractice lawsuits.”

A Growing Shortage of Medical Specialists.  The American Medical Association reports that 21 states are in “crisis” due to the malpractice liability climate.  The frequency and severity of lawsuits and judgments imposes costs on physicians who are innocent of wrongdoing.  Physicians have an incentive to avoid high-risk surgeries and specializations, particularly obstetrics.  As a result, according to the AMA, “patients are losing access to care because the nation’s out-of-control legal system is forcing physicians in some areas of the country to retire early, relocate or give up performing high-risk medical procedures.”⁴⁴ Furthermore, because malpractice insurance premiums are community-rated, premiums are not risk-rated according to the characteristics of the individual physician, such as age, experience and claims frequency.  Furthermore, physicians are charged the same premiums regardless of their patient loads, so older physicians, in particular, have an incentive to retire rather than practice part-time and pay the same premiums as full-time physicians.  Thus, the only way physicians can lower their insurance class rating and premiums is to avoid risky surgeries and medical specialties.⁴⁵

The malpractice system, which encourages physicians either to avoid certain specialties or to retire, is affecting the supply of physicians, particularly specialists.  Researcher Robert Quinn found that in various states:⁴⁶

• The number of family physicians practicing obstetrics declined by over 11 percent from 1987 to 1992, and the number of family physicians performing surgical procedures declined 4 percent.
• In addition, Quinn found that the number of physicians practicing obstetrics in a state declines by 0.9 percent for every $1,000 rise in the state’s insurance premiums.

Similarly, a 2003 nationwide survey found that 43 percent of neurosurgeons no longer perform surgeries considered “high-risk,” such as brain aneurysms and complex spinal surgery, for fear of litigation.⁴⁷ These outcomes obviously have the potential to greatly reduce health care quality and access to care.