ECONOMIC AND BUDGET ISSUE BRIEF A series of issue summaries from the Congressional Budget Office CBO JANUARY 8, 2004 Limiting Tort Liability for Medical Malpractice The past few years have seen a sharp increase in premi- allow evidence of any benefits that plaintiffs collect from ums for medical malpractice liability insurance, which other sources (such as their insurance) to be admitted at health care professionals buy to protect themselves from trial. Limits of one kind or another on liability for mal- the costs of being sued (see Figure 1 on page 2). On aver- practice injuries, or “torts,” are relatively common at the age, premiums for all physicians nationwide rose by 15 state level: more than 40 states had at least one restriction percent between 2000 and 2002—nearly twice as fast as in effect in 2002.2 total health care spending per person. The increases dur- Evidence from the states indicates that premiums for mal- ing that period were even more dramatic for certain spe- practice insurance are lower when tort liability is re- cialties: 22 percent for obstetricians/gynecologists and 33 stricted than they would be otherwise. But even large sav- percent for internists and general surgeons.1 (For a defini- ings in premiums can have only a small direct impact on tion of malpractice and other terms used in this brief, see health care spending—private or governmental—because Box 1 on page 3). malpractice costs account for less than 2 percent of that 3 The available evidence suggests that premiums have risen spending. Advocates or opponents cite other possible ef- both because insurance companies have faced increased fects of limiting tort liability, such as reducing the extent costs to pay claims (from growth in malpractice awards) to which physicians practice “defensive medicine” by con- and because of reduced income from their investments ducting excessive procedures; preventing widespread and short-term factors in the insurance market. Some ob- problems of access to health care; or conversely, increas- servers fear that rising malpractice premiums will cause ing medical injuries. However, evidence for those other physicians to stop practicing medicine, thus reducing the effects is weak or inconclusive. availability of health care in some parts of the country. To curb the growth of premiums, the Administration and Members of Congress have proposed several types of re- strictions on malpractice awards. Bills introduced in the House and Senate in 2003 would impose caps on awards for noneconomic and punitive damages, reduce the stat- ute of limitations on claims, restrict attorneys’ fees, and 2. That number comes from the Congressional Budget Office’s database of state laws on medical malpractice torts. The database 1. The figure for all physicians comes from survey data from the includes information from the National Conference of State Leg- Centers for Medicare and Medicaid Services; the figures for vari- islatures, the American Tort Reform Association, and the law firm ous specialties come from annual surveys conducted by Medical of McCullough, Campbell, and Lane. For a discussion of whether Liability Monitor newsletter. Both sets of surveys collect data on tort liability issues are better addressed at the federal or the state base rates charged by insurers and thus do not reflect discounts or level, see Congressional Budget Office, The Economics of U.S. Tort additional charges applied to individual policies. Moreover, the Liability: A Primer (October 2003). latter surveys do not incorporate the relative market shares of insurers, so the averages are not weighted. (Note that most of the 3. The 2 percent figure is a CBO calculation based on data from numbers reported in this issue brief are for physicians; less infor- Tillinghast-Towers Perrin (an actuarial and management consult- mation is available for other types of health care providers, but ing firm) and the Office of the Actuary at the Centers for Medi- trends appear to be similar for them.) care and Medicaid Services. ECONOMIC AND BUDGET ISSUE BRIEF 2 CONGRESSIONAL BUDGET OFFICE Figure 1. Trends in Premiums for Physicians’ Medical Malpractice Insurance, by Type of Physician, 1993 to 2002 (Index, 1993 = 100) 150 140 130 120 Internists 110 100 All Physicians Obstetricians/ Gynecologists 90 General Surgeons 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Congressional Budget Office based on data from the Office of the Actuary at the Centers for Medicare and Medicaid Services (data for all physicians) and from annual premium surveys conducted by Medical Liability Monitor newsletter (data for physicians by specialty). The Goals and Pitfalls of Tort Liability practice, however, the effect on efficiency depends on the for Medical Malpractice standards used to distinguish medical negligence from Issues surrounding the effects of the malpractice system appropriate care and on the accuracy of malpractice judg- and of possible restrictions on it can be viewed as ques- ments and awards. If malpractice is judged inaccurately tions of economic efficiency (providing the maximum or is not clearly defined, doctors may carry out excessive possible net benefits to society) and equity (distributing tests and procedures to be able to cite as evidence that the benefits and costs fairly). they were not negligent. Likewise, if malpractice is de- Fairness is ultimately in the eye of the beholder. But the fined clearly but too broadly or if awards tend to be too common equity-related argument for malpractice liability high, doctors may engage in defensive medicine, ineffi- is that someone harmed by the actions of a physician or ciently restrict their practices, or retire. Conversely, if other medical professional deserves to be compensated by doctors face less than the full costs of their negligence— the injuring party. because they are insulated by liability insurance or be- The efficiency argument is that, in principle, liability (as cause malpractice is unrecognized or undercompen- a supplement to government regulations, professional sated—they may have too little incentive to avoid risky oversight, and the desire of health care providers to main- practices. For all of those reasons, it is not clear whether tain good reputations) gives providers an incentive to trying to control malpractice by means of liability im- control the incidence and costs of malpractice injuries. In proves economic efficiency or reduces it. ECONOMIC AND BUDGET ISSUE BRIEF LIMITING TORT LIABILITY FOR MEDICAL MALPRACTICE 3 Box 1. Definitions of Some Common Tort Terms Collateral-source benefits: Amounts that a plaintiff damage to the recipient of those services or to those recovers from sources other than the defendant, such entitled to rely upon them.”1 as the plaintiff’s own insurance. Negligence: A violation of a duty to meet an applica- Economic damages: Funds to compensate a plaintiff ble standard of care. for the monetary costs of an injury, such as medical Noneconomic damages: Damages payable for items bills or loss of income. other than monetary losses, such as pain and suffer- Joint-and-several liability: Liability in which each li- ing. The term technically includes punitive damages, able party is individually responsible for the entire but those are typically discussed separately. obligation. Under joint-and-several liability, a plain- Punitive damages: Damages awarded in addition to tiff may choose to seek full damages from all, some, compensatory (economic and noneconomic) dam- or any one of the parties alleged to have committed ages to punish a defendant for willful and wanton the injury. In most cases, a defendant who pays dam- conduct. ages may seek reimbursement from nonpaying par- ties. Statute of limitations: A statute specifying the pe- riod of time after the occurrence of an injury—or, in Malpractice: “Failure of one rendering professional some cases, after the discovery of the injury or of its services to exercise that degree of skill and learning cause—during which any suit must be filed. commonly applied under all the circumstances in the community by the average prudent reputable mem- 1. Bryan A. Garner, ed., Black’s Law Dictionary, 6th ed. (St. ber of the profession with the result of injury, loss or Paul, Minn.: West Group, 1990), p. 959. The costs of court-imposed awards and out-of-court set- total costs (including the cost of providing a competitive tlements for malpractice are reflected in the premiums return to their investors) minus their income from invest- charged for malpractice insurance. If those costs are inef- ing any funds they hold in reserve. In the short term, ficiently high (or low), premiums will tend to be too, on however, premiums may be above or below that equilib- average. But premiums can also be a source of ineffici- rium level, with profits fluctuating or reserves rising or ency themselves. The amounts that physicians pay for falling as a result. malpractice coverage are generally based on broad aggre- A full analysis of the reasons for the recent rise in premi- gates, which reflect factors such as doctors’ medical spe- ums is beyond the scope of this brief. But the available ev- cialties and locations but neglect relevant differences in idence suggests that higher costs for insurers (particularly the quality of their services. Thus, even if premiums are from increases in the size of malpractice awards), lower correct on average, they may be too high for the large investment income, and short-term factors such as cycli- majority of physicians and too low for a minority who are cal patterns in the insurance market have all played major less careful or competent. roles. Increased Costs Why Have Malpractice Premiums Payments of claims are the most significant costs that Risen So Sharply? malpractice insurers face, accounting for about two-thirds Premiums for malpractice insurance are set so that over of their total costs.