Daniel Kessler: Evaluating Options for Reform of the Medical Malpractice System

Evidence from several studies suggests that wisely chosen malpractice reforms have the potential to reduce health care spending significantly with no adverse impact on patient health outcomes.

April 09, 2011

| by Bill Snyder

It’s not hard to find critics of the medical malpractice system in the United States. There is widespread agreement that it simply does not do what it should. “It both fails to compensate patients who have suffered from bad medical care, and compensates those who haven’t,” writes Daniel P. Kessler, a professor at Stanford GSB and Stanford Law School, and senior fellow at the Hoover Institution.

Moreover, malpractice issues add significant costs to the health care system. Although the amount of money devoted to legal costs and the settlement of malpractice claims is less than 1% of the nation’s health care spending, the cost of unnecessary treatments (known in the literature as “defensive medicine”) by doctors who fear they might be accused of negligence is staggering — approximately $50 billion a year, or 2-3% of total health spending, says Kessler.

Understanding why the system performs so badly, and what might be done to improve it, is more difficult than simply recognizing the problem. In a recent paper, Kessler reviews the work of more than 60 researchers to understand the operation of the malpractice system and the empirical evidence about its effects. He then explores the major efforts to reform the system and evaluates their potential for success.

“Evidence from several studies based on variation in states’ laws suggests that wisely chosen reforms have the potential to reduce health care spending significantly with no adverse impact on patient health outcomes,” he says. 

“Evaluating the Medical Malpractice System and Options for Reform” was published in the Spring 2011, issue of the Journal of Economic Perspectives.

Most physicians carry malpractice insurance, but the costs vary greatly across specialties and location. In 2009, for example, premiums in Suffolk County, New York, for specialists in internal medicine and obstetrics were $33,000 and $178,000, respectively, while premiums in Colorado were approximately one-third as much.

To win a malpractice claim, a claimant must show that the patient suffered an adverse event that was cause by the provider’s action or inaction and that the provider was negligent. In theory, this “negligence rule” should provide compensation to patients who were injured in the course of medical care, and encourage doctors to take appropriate precautions. “In practice, however, the rule performs poorly on both dimensions,” says Kessler.

According to the literature:

  • Injury due to malpractice is quite common. One study showed that 3.7% of admissions to hospitals in New York State involved an injury due to medical care, and about one-quarter of those were attributed to negligence.
  • Only one in fifteen patients who suffer an injury because of medical negligence receive compensation, and five-sixths of the cases that receive compensation have no evidence of negligence.
  • Awards for medical malpractice claimants are subject to lengthy delays: on average, it takes about four years to resolve a claim.
  • For every dollar spent on compensation, 54 cents went to litigation expenses and other transaction costs.

Research on different states’ malpractice systems has yielded two major lessons. One is that the extent of economic losses from medical expenses and lost wages — instead of the fault of physicians — is the most important characteristic of claims in determining the probability and size of award. The other lesson is that traditional reforms to liability law that directly reduce expected malpractice awards — such as caps on damages for pain and suffering — have the greatest effect on the prevalence of defensive medicine, says Kessler.

Starting in the 1990s, Kessler began working with Mark B. McClellan, a physician and economist who was then a professor in the economics department at Stanford (now the director of the Engelberg Center for Health Care Reform at the Brookings Institution) to investigate how these reforms work.

In one of the first papers on the topic, they examined the records of essentially all elderly Medicare beneficiaries hospitalized for serious cardiac illness over a number of years and matched that data with information on states’ reforms.  They compared trends in health care costs and health outcomes for patients from states that did and did not adopt reforms.

They found that “direct” reforms such as placing financial caps reduced hospital expenditures by 5-9% in the late 1980s, but had no statistically or economically significant effect on patients’ health outcomes. At the same time, reforms that limited liability only indirectly, such as caps on plaintiffs’ attorney fees, had no effect.

Subsequent studies using more recent data have confirmed their initial result. In 2009, the Congressional Budget Office concluded that: “the weight of the empirical evidence now demonstrates a link between tort reform and the use of healthcare services.”

According to Kessler, approaches other than traditional tort reform hold significant promise, although less is known about their likely effects. Although traditional reforms reduce the prevalence of defensive medicine, they do not address the current system’s high transactions costs, medical error rates, and slow compensation of injured patients. He mentions four in particular:

  • Guidelines-based reforms would presume that physicians and hospitals who complied with a clinical practice guideline to be non-negligent. (Clinical practice guidelines are written statements of what constitutes appropriate treatment for a specific illness, set of symptoms, or type of patient.) Supporters of guidelines argue that they inform physicians of best practices and increase the predictability of awards. A small number of states have experimented with this method, but studies of the results have not been conclusive.
  • Enterprise liability would assign some of the liability for malpractice that is traditionally borne by doctors to hospitals or other large health care organizations.  Supporters of enterprise liability argue that assigning responsibility for medical errors to institutions would lead to a more thoughtful, systems-based approach to quality improvement. No states have adopted legal reforms to impose or facilitate enterprise liability, so there is little systematic empirical evidence about its effects.
  • Alternative dispute resolution would use an arbitrator or some party other than a court to resolve disputes over alleged malpractice. Kessler says that there is “a surprising lack” of recent empirical evidence about the effects of alternative dispute resolution, especially in the realm of medical malpractice.
  • The most radical proposed change is to replace the current tort system with an administrative compensation system. These systems take two forms. The “health courts” model substitutes a specially trained judge as the finder of fact and arbitrator of law for the current system’s judges and juries. The “no fault” model uses an administrative body rather than a court. Studies suggest that a no-fault system that costs approximately as much as the conventional malpractice system could provide somewhat less-generous compensation to a much greater number of patients — three to six times as many patients — with substantially lower transaction costs per case.

“Deterring providers from practicing negligently and fairly compensating injured patients is a difficult policy problem, and one that has grown in importance as medical technology has advanced,” says Kessler. “There is no perfect answer, but research on and experimentation with new approaches is essential to our system’s future.”

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