NCPA - National Center for Policy Analysis


August 25, 2009

Could tort reform reduce health care costs?  Using the legal system to resolve patient injury claims is expensive and inefficient.  The cost of litigation -- principally attorneys' fees -- raises claim costs, adding billions of dollars a year to premiums for workers' compensation and health insurance, says N. Michael Helvacian, a senior fellow with the National Center for Policy Analysis.

The threat of litigation leads doctors to practice defensive medicine -- ordering unnecessary tests and procedures to avoid lawsuits -- which also adds to the country's medical bills.  In 2003, Florida passed tort reform to tackle the issue of excessive litigation in workers' compensation cases.  The reform law also aimed to contain medical costs for injured workers, which were higher than group health insurance costs for similar injuries.

The reforms lowered workers' compensation costs for businesses.  Employees also have benefited, says Helvacian:

  • Injured workers returned to work sooner, which means they will earn more wages over their work-lives.
  • Workers kept a greater percentage of the amount they were awarded for lost wages.
  • Higher wage-and-employment growth in Florida compared to neighboring states has increased opportunities for all workers in the state.

The results from Florida show the promise of more general tort reforms to reduce the rate of growth in health care spending.

Outside of the workers' compensation system, attorneys' fees in tort lawsuits are typically limited to one-third to one-half of the amount awarded a plaintiff.  In Florida, by contrast, prior to 2003, attorneys involved in smaller workers' compensation claims charged for the number of hours spent litigating a case.  Since attorneys could charge for an unlimited number of hours, their fees could be greater than the benefits received by the injured worker.  On larger claims where there was a lump-sum settlement, an attorney's take averaged about 25 percent of the lump-sum amount, net of other expenses.  For successful claims, the injured worker's employer and the workers' comp insurer paid the fees. 

The new law required attorneys in most cases to base their fees on the value of benefits they secured for their clients -- measured in permanent partial disability claims by the monetary amount ultimately awarded to the claimant above the initial offer by the employer or insurer to settle the claim.  This gave employers and insurers an incentive to make their best settlement offers at the start.  It also discouraged attorneys from representing claimants when it was unlikely their work would add significantly to the final award, says Helvacian. 

Source: N. Michael Helvacian, "How Tort Reform Cut Florida Workers' Compensation Costs," National Center for Policy Analysis, Brief Analysis No. 673, August 25, 2009.

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