One component of the ongoing health care reform debate is the cry for tort reform. While tort reform would certainly be welcome in the health care industry, the need for tort reform is more an issue of justice than controlling health care costs. The Congressional Budget Office (CBO) and the Congressional Research Service provided a report (Medical Malpractice Insurance and Health Reform: e-mail me your fax number if you want a copy) and a CBO opinion letter concluding as follows:
“In terms of direct costs, medical malpractice insurance adds relatively little to the cost of health care.”
The report concludes that currently, the medical liability insurance market is not exhibiting crisis systems and that problems with affordability and availability of malpractice insurance persists, but are less acute compared with previous time periods. It is estimated that tort reform might decrease malpractice premiums by approximately 10% in states which have not already embarked upon tort reforms, and this could reduce total health care costs by .2%, which is an extremely small percentage, but still a lot of money when total health care expenditures are expected to approach $3,000,000,000,000.
With respect to savings through unnecessary utilization, or defensive medicine, CBO predicts a potential .3% decrease in utilization, although probably less in markets which have aggressive managed care organizations which have presumably already reduced unnecessary utilization.
Experience would indicate that the malpractice insurance crisis was more adversely impacted by misguided state intervention in the insurance market, then by unnecessary utilization. Pennsylvania is a case in point. During the late 1980s and 1990s, Pennsylvania elected to attempt to stabilize the malpractice insurance market by establishing a two tiered malpractice insurance structure, in which physicians were required to buy personal insurance for the first level of coverage and the state provided insurance through the Catastrophic Loss Fund (Cat Fund) for a second level of insurance. Unfortunately, the Cat Fund was not managed on a sound actuarial basis. It basically operated on a cash basis, rather than establishing proven actuarial reserves. During the first several years of operation, when there were few claims and even fewer payouts, the state premiums were low. However, when claims and payments started to mount up, the lack of prudent reserves required the state to assess significant and surprising Cat Fund premium surcharges. The significant cost and uncertainty stimulated significant activity in captive insurance programs, so that now all of Pennsylvania’s large integrated delivery systems (e.g. UPMC, WPAHS, Geisinger, etc.) and many of Pennsylvania’s other smaller hospital systems and individual hospitals have captive insurance programs covering all of the physicians who are employed by these systems and many other physicians who participate in those hospital programs. This has relegated the private insurance market to a relatively small percentage of the physicians in the state, reducing competition and choices.
Pennsylvania as much as admitted the mistake when it scraped the Cat Fund and established its successor, the MCare Fund. However, more prudent management and the reduced scope of operations and risk do to the captive insurance market will presumably allow the MCare Fund to avoid the problems encountered by the Cat Fund.