Tort Reform No Miracle Cure
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Policy Strategy Economics Oct 1, 2009

Tort Reform No Miracle Cure

Limiting liability has limited impact on healthcare costs

Based on the research of

Ronen Avraham

Leemore S. Dafny

Max M. Schanzenbach

The lawyers can relax. There’s no need to follow Shakespeare’s advice to kill them after all.

In fact, when assessing out-of-control U.S. healthcare costs, malpractice and related litigation are just “a drop in the bucket,” according to Kellogg School Assistant Professor of Management and Strategy Leemore Dafny.

“These costs, all told, have been estimated to be only about 2 percent of healthcare expenses,” says Dafny, an economist and expert in healthcare competition.

Her own research, drawn from various “demonstration projects” already implemented at the state level, indicates that the most common legal reforms would collectively reduce health insurance premiums by 2 percent. This is “real money,” she admits, given that private insurance premiums now top $800 billion, but still no “silver bullet” solution to the overall healthcare crisis.

The data appear in “The Impact of Tort Reform on Health Insurance Premiums,” a new working paper she has co-authored with Ronen Avraham and Max Schanzenbach, colleagues from Northwestern University’s School of Law. The research evaluates the effect of tort reform on employer-sponsored health insurance premiums of more than 10 million Americans annually between 1998 and 2006.

Quick fix unlikely
Dafny’s findings offer little cheer to anyone seeking a quick legal fix to the challenge of making healthcare more widely affordable.

“This is a very long-term problem and it’s going to take quite a while to see any appreciable difference unless we have some major and drastic reforms,” says Dafny, adding that even some of the proposals that President Barack Obama outlined in his Sept. 9 national address on healthcare would require four years to phase in. “It sounds like a long time, but these things take a long time,” she says.

The ideal — and exceedingly difficult — goal of healthcare reform is to vastly expand coverage to include an estimated 46 million Americans currently without health insurance while simultaneously reducing costs. Some, including President Obama, have considered legal reforms as one way to help make the numbers add up. Dafny’s research suggests that this line of thinking is unlikely to produce anything other than a very modest advantage.

Tort reform — changes to the legal system that, in the case of healthcare, would limit the liability damages of physicians and insurance companies — has been a perennial hot-button issue. Some have argued that such reform would reduce the threat of liability that can drive doctors to prescribe tests and procedures that may not be medically required, but which keep the patient happy and safeguard the practitioner against lawsuits. Tort reform advocates have long argued that this “defensive medicine” contributes to the overall cost burden in the healthcare system without providing much real benefit.

But until now little aggregate empirical data existed to support the claims of either tort reform proponents or detractors. Dafny’s research clearly shows that such reforms would be limited.

“Tort reform’s impact is significant — meaning we can measure it — but significant and small,” says Dafny, who has been among the economic experts talking with senior members of the Obama administration to share research-based recommendations about the best way to improve the nation’s healthcare system. “To the extent that defensive medicine is driving up costs, malpractice reform is not going to curb it very much.”

So what is more likely to have a bigger impact on fixing healthcare? Dafny believes several pieces are critical, including creating incentives that encourage stakeholders to be more aware of cost, which in turn should lead to more thrifty behavior. One possibility is to mandate the purchase of insurance through a regulated exchange. Households choosing less generous coverage would pocket the savings, and the government could provide income-based subsidies. All would be required to have a certain minimum package of benefits. Even this scenario, though, presents challenges, Dafny says: “What we consider a ‘minimum of care’ is still going to be costly to provide.”

Looking elsewhere
Ultimately, she says, fixing the system will require a shift in expectations.

“I think Americans will have to come to accept more limits, more gatekeepers, more utilization review than they have in the past,” Dafny says. “We’ve been content to say that 46 million people don’t have any coverage and the rest of us have everything.”

Bringing those uninsured on board is “untenable,” she adds, if we expect to provide them with the type of care enjoyed by the currently insured.

As the healthcare debate continues, Dafny’s research is part of the discussion. With malpractice reform being such a hot topic, she says it’s important to consider the hard data.

“So many people have blown out of proportion the impact that tort reform could have,” Dafny says. “Now we know. We&rrsquo;ve done some tests and it turns out that it’s not going to be a huge fix. We’ve got to look at something else.”

Featured Faculty

Leemore S. Dafny

Member of the Department of Strategy from 2002-2016

About the Writer

Matt Golosinski, Executive Editor, Marketing & Communications, Kellogg School of Management

About the Research

Avraham, Ronen, Leemore S. Dafny and Max M. Schanzenbach. 2012. “The Impact of Tort Reform on Employer-Sponsored Health Insurance Premiums,” Journal of Law, Economics & Organization, 28(4): 657-686.

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