Medical Liability Immunity Reduces Defensive Medicine, Costs by 5%

July 25, 2018 - A new working paper by the National Bureau of Economic Research shows that medical liability immunity can change how a provider practices medicine by decreasing defensive medicine use and its associated healthcare costs.

Providers ordered fewer tests and procedures when they were immune from malpractice lawsuits and other liabilities. As a result, inpatient spending fell five percent, revealed the study by Duke University law professor Michael Frakes and MIT economics professor Jonathan Gruber.

In the past, researchers and stakeholders have found it difficult to determine just how much defensive medicine, or the act of providers ordering extraneous tests, procedures, and other healthcare services to avoid malpractice suits and other medical liabilities, actually increases healthcare costs.

Former HHS Secretary Tom Price has said that defensive medicine accounted for as much as 26 percent of money spent on healthcare, while other stakeholders contend that the amount is much smaller.

Notably, the Congressional Budget Office projected in a cited 2009 report that a proposed package of aggressive liability reforms would reduce defensive medicine. But the resulting cost reduction would only be 0.3 percent.

Frakes and Gruber, however, found evidence that defensive medicine exists, and it is significantly driving up healthcare costs. The researchers uncovered this by studying the Military Health System.

The military healthcare program prohibits active-duty patients from suing providers for treatment they receive at military facilities.

The analysis of care provided by providers who faced medical liability immunity and by those who do not revealed that defensive medicine influences the way providers practice medicine.

Researchers consistently found that providers with liability immunity delivered less intensive healthcare to their patients. Intensity of medical care delivered to active-duty patients in military facilities was about four to five percent lower.

“Our analysis demonstrates that the active duty receiving care on the base are treated notably less intensively, without any health outcome consequences,” the working paper stated. “Considering the lack of liability recourse for his treatment group, this pattern of results is suggestive of a strong degree of defensive medicine.”

The effect was stronger when providers performed diagnostic medicine versus ordering non-diagnostic procedures. Researchers also observed a stronger effect in states without caps on non-economic damage awards, which limit malpractice payments.

“Collectively, our results are suggestive that malpractice pressure is a key determinant of medical treatment patterns in the US and that major reforms to the system—that is reforms beyond the more incremental, remedy-focused reforms embraced to date—could have real effects on medical costs without large effects on quality,” wrote Frakes and Gruber.

The researchers advised stakeholders to implement a “safe harbor” policy that includes guidelines that are set at the “natural” point of treatment intensity, or the point at which patients would be treated if they did not have the ability to sue their providers.

A safe harbor policy would have a greater impact on healthcare cost reductions related to defensive medicine than reforms focused on implementing caps, such as the recent “Protecting Access to Care Act,” which the House passed in 2017, the researchers argued.

“On the one hand, our results do not imply that marginal changes to the malpractice environment such as damage caps will move us fully in the direction capturing these potential reductions in defensive medicine, though…they may take us part of the way,” they wrote.

Safe harbor policies would further reduce the healthcare costs of defensive medicine as long as guidelines in the rules are crafted correctly.

“Guidelines set at the prevailing norm, however, which incorporates existing defensive medicine effects, have an ambiguous effect,” warned Frakes and Gruber. “These latter guidelines may provide certainty against lawsuit, which may reduce defensive pressures; however, that certainty may come at the cost of excessive medical delivery among those below the prevailing standard.”