Malpractice Reform and Higher Deductibles Are Not Enough

When I discuss the rising cost of healthcare with my neighbors, they always bring up the need for tort reform to reduce malpractice insurance costs and the importance of expanding the use of high-deductible health insurance policies in combination with “health savings accounts.” Expanding the use of high-deductible policies would give patients added incentives to economize on medical services by forcing them to pay more of their medical costs “out-of-pocket.” I strongly support both ideas and both should be part of any reform proposal. However, neither is likely to slow significantly the long-run growth in medical costs.

Medical Tort Reform

Our laws governing medical malpractice are a mess. Less than 3% of patients who are injured by medical negligence ever get their cases heard in court and the desire to avoid frivolous lawsuits causes doctors to order unnecessary tests and treatments—driving up costs. David Leonhardt summarizes the evidence in this article.

He writes “[malpractice] jury awards, settlements, and administrative costs … add up to less than $10 billion a year. This equals less than one-half of a percentage point of medical spending.” The cost of the “defensive medicine” practiced by doctors because they fear malpractice suits is much greater and has been estimated at up to $60 billion a year. However, this is still only about 3% of healthcare costs in the U.S.

Tort reform that capped excessive jury awards and provided better protection for doctors who follow “best practice” guidelines would reduce the cost of malpractice insurance and the incentives for unnecessary tests and treatments. However, a successful campaign to reform malpractice laws would be unlikely to reduce overall healthcare costs by more than 3 percent.

Higher Deductibles

Increasing the share of medical expenses paid “out of pocket” would cause patients to think more seriously about whether they should seek medical care. They’d be more likely to object if their doctor ordered low-value tests and treatments. In listening to the discussions of my friends on Medicare, I’ve been surprised by how often even the $30 per visit co-pay causes them to postpone an additional visit to their doctor.

Unfortunately, increasing patients’ co-pays is limited as a way to control costs because of the unique characteristics of the doctor-patient relationship. When a consumer goes to purchase a car or refrigerator, he knows what he wants to buy and can determine whether the value of additional features on more expensive models is worth their higher price. When a patient seeks medical treatment from a doctor, he usually doesn’t know what treatment he needs or its value. In at least 70% of doctor visits, patients don’t go to buy a medical treatment. They go for advice about what treatment they need. The more serious the illness, the more likely the patient is to rely on his doctor’s knowledge and advice. Even with a $5,000 deductible health insurance policy, a patient who receives a cancer diagnosis will usually do what his doctor prescribes, even if the treatment turns out to be very expensive.

Since doctors will be making most of our treatment decisions even when patients are paying the full cost “out of pocket,” the focus of any effort to reduce costs must be on doctors and especially on modifying our fee-for-service payment system so doctors have less incentive to prescribe unnecessary tests and treatments.

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