Thursday, February 1, 1996

Is Medical Malpractice Reform Good Medicine?

STANFORD GRADUATE SCHOOL OF BUSINESS—Medical malpractice liability laws were created for two purposes, both laudable, says Daniel Kessler, associate professor of economics, law, and policy at the Stanford Business School. They compensate patients who suffer harm at the hands of negligent doctors, and they provide appropriate incentives for doctors to be responsible.

But the laws don't always have the desired effect. Sometimes they don't work as well as they should. For instance, one 1990 Harvard study showed that 16 times as many patients suffered injury from negligent medical care as received compensation. On the other hand, the laws sometimes perform all too well. Doctors often point to liability laws as one of the reasons medical costs have skyrocketed over the past decade.

Some of the ways they affect costs are obvious. Doctors take out expensive malpractice insurance to guard against potentially ruinous lawsuits, then pass the costs on to their patients through higher fees. Doctors also say that liability laws drive them to undertake expensive treatments of dubious medical value in order to protect themselves.

"How regulations and government policy affect real economic and social outcomes is a very interesting problem to me," says Kessler, who has both a law degree and a PhD in economics. Together with Mark McClellan, a physician and a Stanford economist, Kessler decided to gather data on the entire population of elderly Medicare beneficiaries suffering from serious cardiovascular illnesses who had been admitted to U.S. hospitals in 1984, 1987, and 1990.

Malpractice laws had been scaled back or reformed in some states, including West Virginia, Wisconsin, and California, where legislators had put caps of between $250,000 and $500,000 on the damages that can be collected for pain and suffering. Others states, like Illinois, had eliminated punitive damages, an award over and above pain and suffering granted to a plaintiff that is intended to punish a reckless doctor. But in a handful of states, including Georgia and Vermont, punitive damages were still on the books.

Kessler and McClellan saw the variation in state laws as a natural experiment. The question, according to Kessler, is: Would medical malpractice liability reforms lead to lower treatment costs - but not worse outcomes for patients? In other words, when liability laws were relaxed, would doctors stop going to expensive lengths to protect themselves from lawsuits, and would patients end up just as healthy?

This is exactly what they found. Reducing malpractice pressure brought down hospital expenditures for elderly people with heart disease by approximately 5 percent, yet didn't leave the patients significantly sicker. Kessler thinks this should send a clear message to policymakers. While various strategies have been proposed for addressing the problem of defensive medicine, he favors the most straightforward: "If malpractice is inducing too much treatment, what you should do is reduce malpractice pressure," he says.

Recently Kessler and McClellan have begun looking at what it is about tough liability laws that seems to frighten doctors most. Is it the size of the awards they might have to pay, or is it the potentially traumatic experience of being sued in court? Although the study is not yet complete, early evidence suggests it is the prospect of a lawsuit that is more dreaded. This makes sense, he says, because doctors are typically insured against financial losses. But there is nothing to shield them from the stress of a court case and the possibility of a ruined reputation.

Related Information

National Bureau of Economic Research

Stanford Center for Health Policy