HEALTH HAZARD:
Litigation Increases Medical Costs, but Lawyers Block Reform
In his nationally televised speech before both houses of Congress on September 9, President Obama made news by acknowledging that medical-malpractice litigation "may be contributing to unnecessary costs" in the U.S. health-care system. The 
Notwithstanding the president's remarks and popular opinion, Congress has been laboring to expand medical liability against nursing homes, medical-device makers, and military doctors—changes that would be expected to drive up, not down, health-care costs. The reason is simple: with massive campaign contributions and lobbying clout, the organized plaintiffs' bar—whom the Manhattan Institute has dubbed "Trial Lawyers, Inc."—has bought Congressional leaders' support. In the last election cycle, the trial lawyers' political action committee gave over $2.5 million to Congressional Democrats, making the plaintiffs' bar the second largest donor after the electrical workers' union (see graph). Overall, lawyers and law firms gave almost $234 million to federal campaigns in 2008, including almost $127 million to Congressional candidates—more than any other industry group and significantly more than all health-care-related contributions combined (see graph).
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THE COST OF MALPRACTICE LITIGATION
In noting that malpractice lawsuits "may be contributing to unnecessary costs" [emphasis added] in the health care system, the president was needlessly cautious. Thoughtful analysts of varying political stripes understand that litigation matters in explaining America's high cost of health care. The respected left-leaning health economist Uwe Reinhardt, for instance, singles out "our uniquely American tort laws" as one of four "prominent" reasons for "excess" health spending.
Trial lawyer lobby groups—the American Association for Justice and its assorted allies like Public Citizen and the Center for Justice and Democracy—regularly argue that litigation is an insignificant contributor to health care cost escalation because it only accounts for a tiny fraction of health costs. In making this argument, such organizations play the "denominator game": the tiny fraction they point to takes the total $2.2 trillion in U.S. health expenditures as its denominator and an absurdly narrow definition of health-care litigation as its numerator.
To begin with, such groups typically use as a numerator medical-malpractice losses as reported by insurance companies—numbers that ignore legal defense costs as well as the fact that most major health systems in the U.S. cover at least a portion of their medical malpractice losses without insurance. More comprehensive estimates by the insurance consulting firm Tillinghast Towers-Perrin place the total direct cost of medical-malpractice litigation at $30.4 billion annually—an expense that has grown almost twice as fast as overall tort litigation and over four times as fast as health-care inflation since 1975 (see graph).
This direct cost represents only a portion of the cost imposed by medical-malpractice lawsuits. "Defensive medicine"—"the application of tests and procedures mainly as a defense against possible malpractice litigation, rather than as a clinical imperative"—is widespread. In a 2005 survey published in the Journal of the American Medical Association, 93 percent of doctors said they had practiced defensive medicine and 92 percent said they had made unnecessary referrals or ordered unnecessary tests or procedures. The cost of defensive medicine likely exceeds the total cost of malpractice liability itself because doctors themselves bear the cost of any potential litigation (even if their insurance companies cover their losses, doctors must endure the time, stress, and reputational effects of dealing with the lawsuit), while they bear little cost for imposing extra tests and procedures (since patients with low-deductible health insurance are not price-sensitive, in part because the expenses are borne by their insurance companies).
Putting an estimate on the cost of defensive medicine is difficult. Many studies have extrapolated from a 1996 study by Stanford economists Daniel Kessler and Mark McClellan which found that tort reforms lowered costs by 5 to 9 percent without worsening health outcomes. Based on this study, PriceWaterhouseCoopers estimated that 10 percent of all health care spending is consumed by medical-malpractice-liability-related defensive medicine and insurance costs-a total sum of $210 billion, or almost one-third the difference between the cost of U.S. health care and that in other developed nations.
