Hoover Daily Report

Tort Liability and the Patients’ Bill of Rights

Monday, January 3, 2000

What is the appropriate medical liability policy in an era of managed care? Would giving patients greater rights to sue their health plans lead to more appropriate care? Or would it lead to increased litigation, higher costs of treatment, and lower rates of health insurance coverage, without commensurate health benefits for patients?

These questions have been at the center of recent debates over the "patients’ bill of rights." Current federal law, in the form of the Employee Retirement Income Security Act (ERISA) of 1974, has been interpreted as preempting most state-law suits against health plans to recover damages for medical injuries. At the same time, ERISA sharply limits plans’ tort liability under federal law. Congress is currently considering expanding patients’ right to sue their plans, by reducing either the scope of ERISA’s preemption of state tort law or ERISA’s limitations on plans’ federal tort liability.

Unfortunately, because this expansion of liability for malpractice has no direct precedent, there is no hard evidence about its likely effects. (Existing state law expansions of plans’ liability, such as those adopted by California, Georgia, Missouri, and Texas, are likely to have less dramatic consequences because their scope is limited by ERISA.)

What do we know about the relationship between malpractice liability and the cost and quality of care? My research with Mark McClellan shows that incremental increases in malpractice liability lead to more "defensive medicine"—precautionary treatments with minimal medical benefit administered out of fear of legal liability. This is true even in areas with high levels of managed care enrollment; more-parsimonious practices resulting from managed care’s incentives have not fully eliminated defensive treatment behavior. Increases in liability cause doctors to practice defensively by affecting the "malpractice pressure" that they face—such as the probability of, the level of compensation paid to, the time spent on, and the amount of conflict involved with defending a malpractice claim.

To the extent that expanding liability for health plans increases malpractice pressure on physicians, it will lead to more wasteful treatment. For example, more liability for plans could lead to more-frequent malpractice claims and more physician involvement with the liability system. Our research suggests that physicians would respond to these changes in incentives with costly increases in treatment intensity that yield few health benefits for patients. But to the extent that expanding liability on plans shifts malpractice pressure from physicians to plans—and thereby decreases the pressure on physicians—it has the potential to reduce the cost of care and/or improve patients’ well-being. Furthermore, if plans have medical decision-making authority in practice, then it may be efficiency enhancing to reallocate tort liability from physicians to plans.

The devil is in the details. On one hand, a patients’ bill of rights that simply expands the number and complexity of malpractice suits has the potential to increase defensive medicine. On the other hand, a reform that lessens the malpractice pressure on physicians could lead to more efficient and effective medical care. Any proposed bill should be evaluated on these dimensions.