Proponents of damage caps claim that large jury awards increase the cost of healthcare, and higher malpractice insurance rates will be passed on to the consumers. They further claim the fear of lawsuits also drives up costs by forcing unnecessary testing and referrals. These arguments are not supported by the numbers, however. The Congressional Budget Office (CBO) states that malpractice costs account for less than 2% of healthcare spending in the United States. The CBO assumes that caps will reduce malpractice costs by 25% to 30%, resulting in a microscopic savings of 0.4% to 0.5% for the U.S. population. 1 After the expected cut by the insurance and healthcare industry, the consumers will realize little or no savings from damage caps. The CBO further found there was no statistically significant difference in per capita healthcare spending in states with or without limits on malpractice damages. 1
The CBO also addressed the issue of "defensive medicine" and the use of diagnostic testing and referrals. So-called defensive medicine may be motivated less by liability concerns than by the additional income generated by testing or by the benefits to the patients. The CBO believes such savings from reducing defensive medicine would be very small. 1
Does Reform Reduce Cost?
Tort reform proponents often refer to a Health and Human Services (HHS) investigation showing "reform" causes a 5% to 9% reduction in national healthcare costs. 2 A further look at this study shows it is limited to hospital costs for the elderly with two types of heart disease. The General Accounting Office states the savings cannot be generalized across all services, populations, and health conditions. 3 The HHS study was too narrow and it used selective data.
Tort reformers also argue that the number of lawsuits and the amount of verdicts and settlements are continuously increasing. The facts show that payouts of malpractice suits have leveled out over the past several years, and the number of malpractice filings per capita has been stable for the last 10 years. 4
So, what is causing the problems with insurance premiums? There are three strong possibilities: insurers' declining investment income, inflation on economic damage payouts, and less market competition.
Insurers make most of their profits from investment income, not from premiums. Thus, lower premiums can be offered in a strong market. Higher premiums kick in when the stock market is sluggish and interest rates are low-similar to the current economy.
Healthcare costs are experiencing a rate of inflation of 15% to 20% and payouts for malpractice economic damages follow suit. Even the most outspoken reformers say economic damages must not be capped. 5
Like any other business, market competition affects the insurance industry. St. Paul Co., which was a major national malpractice carrier, pulled out of the business and released about $1.1 billion in reserves. Thus, many new carriers were competing for this business and slashing their premiums to the extent they could not cover malpractice claims. This left a huge supply and demand problem in some states. 6
In conclusion, it is tempting to blame lawsuits and settlements on the state of affairs today. However, when presented with the quick fix of damage caps, it is important to see that they do not provide the remedy.
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