Defensive medicine is 4% or 5%

In Mayhew On Insurance by David Anderson

One of my Duke Margolis colleagues, the economist Michael Frakes in conjunction with Jonathan Gruber at MIT took advantage of a really interesting identification opportunity to estimate the impact of defensive medicine.  Their results are at NBER. 

A key question surrounding this debate, however, is just how large these costs really are.
Some have argued that defensive medicine is the major driver of excessive health care spending in the U.S. Former Congressman (and former Secretary of the Department of Health and Human Services) Tom Price suggested in 2010 that as much as 26 percent of all money spent on health care is attributable to this phenomenon.
Others have argued that, while it may exist, it has at most a small impact on spending.
The most important arbiter of this debate, the Congressional Budget Office, predicted in 2009 that a proposed aggressive package of liability reforms would lower medical costs by only 0.3% through reduced defensive medicine…
The structure of malpractice protections under the Military Health System (MHS) provides a novel opportunity to answer this policy relevant question. The MHS is a $50 billion program that provides insurance for all active duty military and their dependents. For those who seek care at Military Treatment Facilities (MTFs), this care is provided by government employees or contractors; for those who use purchased care outside of MTFs, the MHS pays for their costs through a contract with a private sector managed care plan.
Most importantly for our purposes, the MHS provides what is missing in previous studies: a true “treatment group” of patients who cannot sue for malpractice. Pursuant to a long-standing and highly controversial federal law, active-duty patients seeking
medical treatment from active duty physicians at military facilities have no recourse under the law—i.e., they can sue neither the physician nor the government—should they suffer harm as a result of negligent medical care.
Malpractice protections are afforded, however, to dependents and retirees treated at military facilities and to all patients—active-duty or not—that receive care from civilian facilities….
Our findings are striking. We consistently estimate that the liability-immunity treatment group—active duty patients treated on the base—receive less intensive health care. Our central estimate is that the intensity of medical care delivered during inpatient episodes measured in various ways—is roughly 4-5% lower for this treatment group.

When I saw this presented in seminar last year**, I updated my priors. This is a big deal. It is a rigorous study with good methods that provides a solid estimate of defensive medicine costing the system an order of magnitude more than than the cost of jury awards.

There are several major questions that have to be asked about this study.

  • Is the effect purely a rational choice cost-accounting exercise or is it more of a behavioral response?
  • What does the presence of liability caps do (this really is a sub-question of the first question)
  • If we move to a no liability system, how does society take care of people who are hurt by the medical system
  • How many more people are we willing to see get harmed by the medical system in a no liability system?
  • How do we screen out and get rid of the docs that repeatedly cause preventable harm without a liability system to flag them as potential trouble?

I have no good answers to any of these questions but this study prompts a these types of policy relevant questions because it gives a good estimate of an effect where the previous estimates ranged from almost nil to ridiculously huge.  I would love to see the behavioralists dig into the first question.  If this is a rational choice response to liability, then the policy solution of liability caps makes some sense while if it is primarily a non-financial response based on fear, then liability caps don’t make as much sense.

For those with NBER access, go read this paper, it is good!



** The Margolis Center runs a health policy seminar every other Friday.  That 90 minutes is the most amazing part of my job as I get to listen to really smart, passionate people talk about wicked awesome things that I don’t know much about.  I learn every seminar and my brain hurts by the end.