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Research explores effects of malpractice litigation on medical costs

Note: This column has been modified from “Malpractice Litigation and Medical Costs in Mississippi”, Brandon Roberts and Irving Hoch, Health Economics, forthcoming, available online: http://www3.interscience.wiley.com/cgi-bin/abstract/114084551/ABSTRACT/.

Phrases such as “the home of jackpot justice” and “judicial hellhole” have plagued Mississippi’s legal system over the past few years. This was no more pronounced than in the medical liability debate. Although the result was legislative changes surprisingly little empirical research has been conducted that directly ties litigation to medical costs and availability of medical services. Instead, most arguments for and against tort reform have been comprised largely of anecdotal evidence and subjective measures.

The potential impact of litigation can be evaluated, however. In Mississippi, as well as around the country, certain venues have been identified as being “plaintiff-friendly” — jurisdictions which are known for being favorable to plaintiff outcomes. Within Mississippi, the 9th and 22nd judicial districts and Jefferson and Claiborne counties specifically, have drawn attention from within the state and nationally.

Providing evidence

If lawsuits are indeed a significant factor in medical costs one would expect medical costs to be higher in high litigation areas. Our research, using data for 1998-2002 (prior to tort reform), provides evidence that suggests this is the case.

First, employing both a Mississippi and a nationwide dataset, we found that per capita medical expenditures were higher in jurisdictions in which the level of malpractice litigation was above average. In Mississippi, counties which experienced an annual number of lawsuits per capita greater than the average for all counties had average medical expenditures per person 9% higher than counties whose litigation was at or below average.

Further, after controlling for factors that are known to affect medical costs, such as age, income, poverty, population, educational levels, race and availability of medical services, higher per capita medical expenditures were associated with a greater number of lawsuits per capita.

Additionally, all of the counties in the 9th and 22nd Districts had significantly higher medical expenditures after controlling for the influence of other factors.

The annual estimated impact ranged from 2% to 15% of total medical expenditures in higher litigation counties. Medical care in Mississippi is a $14-billion-a-year industry, which means that cumulatively these costs would be substantial over time.

The estimates indicate that medical malpractice litigation added between $108 and $735 per person to total medical expenditures in higher litigation counties annually.

Drawing conclusions

We draw a number of conclusions from our research.

First, the data establishes statistically the relationship between malpractice litigation and medical costs.

Second, supplementing our Mississippi data with the nationwide analysis, it is the frequency of lawsuits rather than the dollar amounts of the awards that have the most impact. “Defensive” practices by physicians to avoid litigation based on perceived risk appear to account for most of the impact rather than higher malpractice insurance premiums.

Third, counter to the prevailing wisdom in the public policy debate, the true impact of litigation is greater than the amount of annual awards and settlements. At a minimum, the data shows that the true impact is three times the amount of malpractice awards and settlements.

Finally, additional costs due to malpractice litigation are being passed almost entirely to the consumer. This is largely due to the nature of the third-party payment system. Less than 13% of medical expenditures are paid out-of-pocket or directly by the patient thereby insulating them from the true cost. In the typical physician visit, the cost of services may not even be discussed.

The primary weakness in this arrangement is that it facilitates cost increases. Consumers and employers are paying, but doing so indirectly through private or public insurance plans.

The consumer bearing most of these costs has critical implications for business. Medical expenditures comprise 20% of the state gross product and national GDP, meaning one out of every $5 spent goes to medical care. Inflation adjusted medical costs rise each year as do costs as a percent of GDP — a trend which is expected to continue. Because increases will be funded by the labor force and employers through private insurance and taxation, the impact of litigation translates into a substantial economic impact. This effect is further compounded if we assume that litigation also affects other heavily litigated industries.

The tort reform efforts enacted in 2003 were positive steps. National studies indicate medical liability reforms result in medical cost reductions of 1% to 2% annually, and our national study show annual expenditures that are 1.5% lower in areas where liability reforms are in place that include caps on damages.

Examining the experiences of other reforming states, however, suggests that the realized effect of liability reforms require time.

The true solution to the issue may lie in a cultural change. As long as lucrative incentives are in place for litigation (evidenced by significant advertising dollars spent by personal injury lawyers) additional costs imposed by litigation will likely persist.


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