New from CBO on Tort Reform

CBO sent a letter to Orrin Hatch (R-Utah) today updating their estimates of what tort reform would do to health care costs. In the past, the CBO has focused primarily on the direct costs of the malpractice system (premiums, claims, cost of administering the system) and have been skeptical about the effect of malpractice on health care use (aka defensive medicine). They say that recent research has provided them with more evidence and they are essentially saying they believe there is better evidence that defensive medicine increases costs.

They discuss the various proposals they have considered over time: (1) cap on non-economic damages of $250k; (2) cap on punitive damages at $500k; (3) allowing defendants to argue that persons have other sources of income/coverage for a harm suffered in determining award and/or causing this to be subtracted from awards; (4) statute of limitation reforms (typically 1 year for adults, 3 for children); and (5) so-called fair-share rule, whereby defendant only responsible for the perentage of the harm they caused.

Their conclusions of what would happen if you had a national imposition of the above.

Effect on direct costs. Malpractice premiums for providers would drop by around 10% nationally. This has taken account of the fact that many states have already enacted some or all of the above, so such savings have already been realized. 2009 total direct malpractice costs which are premiums plus settlements, awards at trial, administrative costs not covered by insurance will total $35 Billion, or ~2% of total system expenditures. So, enacting the above package of reform would reduce total system expenditures via drops in premiums of 0.2% (two tenths of one percent).

Effect on indirect costs. CBO has estimated more action or effect of malpractice on use/defensive medicine, which is where the debate tends to focus and says that if a national package similar to the one above were enacted it would reduce national health care spending by around 0.3% (three tenths of one percent) for a total reduction of $11 Billion in 2009 (out of $2.5 Trillion), or around 0.5% (half of one percent).

The total impact of implementing the mix of policies above over 2010-19 would be to reduce the deficit by $54 Billion (over 10 years). That would be $41 Billion in less spending due to defensive medicine and $13 Billion more in collected income taxes as insurance costs declined a bit and folks got less tax free income (aka premiums their employer pays for their insurance.).

They cite studies that reach different conclusions about whether tort reform would harm patients. Darius Lakdwalla and Seth Seabury say health outcomes would get a bit worse in area of infant mortality....but my colleague here at Duke Frank Sloan and John Shadle conclude there are not negative health impacts of tort reform. Here is a great book Frank wrote with Lindsey Chepke on medical malpractice.

So, $54 Billion over 10 years is real money. But, most of the estimates of savings that are thrown about (the highest I have seen is $200 Billion PER YEAR according to Charles Krauthammer quoting Pacific Institute; or differeing by a factor of 20 from CBO) are very much overblown.

I would still be for a malpractice reform, as I have said in the past here, here, and here. But, it won't save that much money, but would save some.