CBO Report Raises Estimate of Savings From Medical Malpractice Reform

October 12, 2009

October 12, 2009 — Medical-liability reforms such as capping noneconomic damages and tightening the statute of limitation for filing a suit would trim $54 billion from the federal deficit over 10 years, largely by curbing defensive medicine, according to a report released Friday by the Congressional Budget Office (CBO).

Overall, tort reform would reduce the nation's healthcare spending by 0.5%, the report stated. Forty percent of these savings would stem from lower malpractice insurance premiums for providers. The rest of the savings would result from lower use of healthcare services, as providers would order fewer tests and procedures intended simply to avoid a lawsuit.

The CBO estimate of tort reform's potential to reduce the deficit is roughly 10 times greater than what it projected last December (a reduction of $54 billion instead of $5.6 billion). At that time, the agency said that evidence about the extent of defensive medicine — and how tort reform could reduce it — was murky. However, more recent research suggests that "lowering the cost of medical malpractice tends to reduce the use of health care services," according to the latest CBO report.

Many States Have Already Enacted Tort Reform Proposals in the Study

The CBO's number-crunching assumes that 5 tort-reform proposals are enacted nationally:

  • Cap noneconomic damages — in other words, for pain and suffering — at $250,000;

  • Cap punitive damages at $500,000 or 2 times the award for economic damages, whichever is greater;

  • Modify the so-called "collateral source" rule so that juries who are setting malpractice awards must subtract the income that injured plaintiffs collect from health, life, and automobile insurance and workers' compensation, or at least be informed of that income;

  • Set the statute of limitations for filing a malpractice suit at 1 year for adults and 3 years for children from the date an injury is discovered;

  • Replace "joint-and-several" liability, which makes any defendant in a suit liable for all the damages, with a fair-share rule that sets damages for a defendant in proportion to his or her share of responsibility for the injury.

The CBO notes that many states have already adopted such reforms, with roughly one third limiting noneconomic damages and two thirds rewriting their laws on joint-and-several liability.

Tort Reform Could Reduce Malpractice Insurance Premiums by 10%

Although the CBO now believes that tort reform would significantly curb defensive medicine and its cost, the agency's numbers are still far short of the savings claimed by some advocates for tort reform. For example, a 2007 study by the National Center for Policy Analysis, a conservative think tank, put the annual cost of defensive medicine in 2005 between $100 billion and $178 billion. In contrast, the CBO priced defensive medicine in 2009 at $6.6 billion.

However, healthcare providers would enjoy a 10% cut in their malpractice insurance premiums if tort reform was enacted, according to the CBO. In Miami, where premiums are the highest in the nation, that reduction would save $5800 for a general internist currently paying a base rate of roughly $58,000, according to Michael Matray, editor of Medical Liability Monitor. Minnesota general internists, whose base rate is $4500 per year, would save $450.

The $54 billion that tort reform shaves from the federal deficit over 10 years includes not only $41 billion in reduced spending for Medicare, Medicaid, and other government programs but also $13 billion in increased tax revenue. The CBO reasoned that decreased private-sector spending on healthcare would cut the cost of employer-based coverage, which represents taxable compensation. As a result, taxable wages would increase, boosting federal tax revenue.

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