Malpractice Insurance, Defensive Medicine Apparently Not That Big a Deal

The idea that Medical malpractice costs and defensive medicine are big reasons for higher healthcare costs has long been an attractive bogie for the physician lobby in this country. For as long as I have been covering healthcare (a decade), I've heard true story after true story from the physicians themselves who have had to leave their state because malpractice awards for their profession made malpractice rates too high or made malpractice insurance too unattainable for them to continue to practice there.

I've talked to hospital CEOs who have had trouble hiring or attracting the physicians they need to offer a full array of services because of malpractice premiums. But I'll admit, it's been awhile, which is one of the reasons I've been surprised at the frequency and volume of studies and press releases about this issue I've seen over the past couple of weeks.

Medical malpractice costs (and the defensive medicine they beget) remain a real problem, but not to the crippling degree they appeared to be several years ago. It's not a problem just because greedy, ambulance-chasing lawyers are filing frivolous lawsuits. That happens, sure, but hospitals and physicians sometimes get away with malpractice, too. That doesn't mean the whole system is broken. In fact, it's in a lot better shape than it used to be.

But the fact remains that hospitals and health systems have tackled challenges with high malpractice insurance premiums very aggressively over the years. A large percentage of hospitals are now self-insured for malpractice, greatly reducing the cost to themselves from profit-making companies that sell the insurance.

They make fewer serious errors too. Most hospitals have gotten the message that quality is important and are emphasizing it with data and zeal. Further, the size of the groups of physicians hospitals are able to insure helps smooth out some of the peaks and valleys so that specialties that see a high number of lawsuits (OBGYN, for example) don't have sky-high rates while those that don't get sued often have very low rates.

In fact, with the trend toward hospitals employing more of their physicians, malpractice insurance is often included in the price of doing business—the hospital effectively "pays" it for them through a captive plan.

Still, that didn't stop the American Medical Association from sending a pointed letter to Treasury Secretary Tim Geithner a week ago protesting a proposed change in federal tax policy that will allow a "special tax deduction for trial attorneys who enter into gross fee contingency contracts with their clients."

The AMA says allowing the deduction will reverse decades of precedent maintaining that court and other litigation expenses incurred by trial attorneys are not deductible as business expenses. Currently, attorneys are only able to deduct loans to clients on contingency cases after the case is lost.

The new rule would allow them to deduct the costs whether the case has been resolved or not. Democrats are heavily backed by trial attorneys, so I wouldn't be surprised if the AMA's letter is ignored. Besides, the administration doesn't have to ask Congress to do it.

Maybe the change would wreak havoc on the healthcare industry. It would be marginally cheaper, for example, for attorneys to file lawsuits—both of the frivolous and merited variety. But the bigger issue for policymakers and healthcare consumers, which is to say, everyone, is whether the double-bogeys of frivolous lawsuits and medical malpractice premiums get too much ink for the impact they have on the cost of healthcare in this country.

Understand, I'm not saying it's a good idea, just that I don't think it's going to move the needle much on healthcare lawsuits.

My colleague Cheryl Clark reports on a Harvard University study in the journal Health Affairs showing the price tag of malpractice liability and defensive medicine at $55.6 billion a year, or 2.4% of healthcare spending, far lower than the HHS estimate of between $70 billion and $126 billion.

I've always felt that a simple argument rings true for people on both sides of an issue. This issue is king of that maxim. On one side of the argument, greedy lawyers are seeking to exploit a physician's best efforts to heal his patient. On the other, greedy doctors are looking for ways to escape liability for the harm they've inflicted.

But it's really not that simple. In fact, it's a sideshow compared to some of the major changes that health reform legislation will inflict on the industry. Healthcare reform legislation, with its ban on making coverage decisions based on pre-existing conditions as well as other restrictions on private insurers regarding who will be able to get coverage (basically everyone) will likely move the needle much more significantly than anything tort related.

Many of the insurance industry practices that will now be outlawed are hated for good reason, but they arguably help keep costs down. Even with 2,000 pages of legislation being implemented over the next several years, I don't see a recipe for cost-containment on the immediate horizon. That doesn't mean, however, that we don't have to come up with one.