Tuesday, March 9, 2010

Is Tort Reform Really the Answer to Rising Health Costs?

Is Tort Reform Really the Answer to Rising Health Costs?

Tort Reform is one of the cornerstones of every Republican health care proposal. Normally the tort reform package proposal takes the form of some sort of cap on recoveries. Tort reform is not simply a cost savings device. There are considerations other than cost that weigh heavily in the tort reform debate. My limited concern at this point is whether tort reform can induce meaningful cost savings.

The proponents frequently make the argument that there are too many frivolous malpractice claims. It is true that there are many frivolous claims because, at least in Alabama, the defendant prevails in a very high percentage of the claims filed. Nevertheless, I submit that it is not the frivolous claims that raise the costs most significantly. It is the meritorious claims that cost the big bucks.

Costs of tort reform can be easily identified because virtually every practitioner carries insurance and the premiums define the dominant cost. The complexity comes from the fact that the premiums vary widely based on the specialty. The highest premiums are paid be obstetricians which have been reported to be in the range of $150,000. The reason for this are because babies suffer the most serious damage and have the longest life expectancy extending the time that they may suffer the consequences of an adverse event. Both factors run up the cost of claims dramatically. These premiums are not typical. I suspect that the premiums for pathologists would be toward the bottom of the scale and would be negligible, but other specialties are spread all over the landscape. The point is that there is more need for reform for some aspects of the practice than others.

I cannot figure out whether tort reform would have any effect on the cost of medical services. As I have discussed in another posting, the doctors enjoy monopoly power which means that they can raise their prices above the competitive level. Insurance would be classified as a fixed cost. As I recall from distant studies of price theory the true monopolist will raise prices until the price matches the marginal cost. Marginal cost represent the additional costs for serving one more patient. The cost of insurance does not materially increase when a patient is added.

Put another way. Competitive prices have a close relationship to costs. In a competitive environment additional costs translate into higher prices. On the other hand the monopolist charges what the traffic will bear regardless of total costs. Therefore, it would seem to me that the cost of insurance does not govern the prices set by the medical profession for their services.

I suspect you can detect, that I really do not fully know what the economic impact of tort reform on the cost of health care would be. I would like to find studies done by respectable academicians (who are not employed to find a predetermined answer). Under any circumstances I do not believe that tort reform is likely to produce substantial cost savings..

This is the last posting for the week. I will publish the next one on Tuesday, March 16, 2010 . At that time I will discuss my ideas as to the most effective means of containing health costs.

2 comments:

L. Vastine Stabler said...
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Dorothy Scott said...
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