[Joint House and Senate Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 109-53



                        MEDICAL LIABILITY REFORM

=======================================================================

                                HEARING

                               BEFORE THE

                        JOINT ECONOMIC COMMITTEE

                     CONGRESS OF THE UNITED STATES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 28, 2005

                               __________

          Printed for the use of the Joint Economic Committee



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                        JOINT ECONOMIC COMMITTEE


    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]


HOUSE OF REPRESENTATIVES             SENATE
Jim Saxton, New Jersey, Chairman     Robert F. Bennett, Utah, Vice 
Paul Ryan, Wisconsin                     Chairman
Phil English, Pennsylvania           Sam Brownback, Kansas
Ron Paul, Texas                      John E. Sununu, New Hampshire
Kevin Brady,  Texas                  Jim DeMint, South Carolina
Thaddeus G. McCotter,  Michigan      Jeff Sessions, Alabama
Carolyn B. Maloney, New York         John Cornyn, Texas
Maurice D. Hinchey, New York         Jack Reed, Rhode Island
Loretta Sanchez, California          Edward M. Kennedy, Massachusetts
Elijah E. Cummings, Maryland         Paul S. Sarbanes, Maryland
                                     Jeff Bingaman, New Mexico



               Christopher J. Frenze, Executive Director
                  Chad Stone, Minority Staff Director


                            C O N T E N T S

                              ----------                              


                     Opening Statements of Members


Representative Jim Saxton, Chairman, a Representative in Congress 
  from New Jersey................................................     1
Senator Jack Reed, Ranking Minority Member, a U.S. Senator from 
  Rhode Island...................................................     3
Representative Maurice D. Hinchey, a Representative in Congress 
  from New York..................................................    18

                               Witnesses

Statement of Mark McClellan, M.D., Ph.D., Administrator, Centers 
  for 
  Medicare and Medicaid Services.................................     5

                       Submissions for the Record

Prepared statement of Representative Jim Saxton, Chairman........    29
Prepared statement of Senator Jack Reed, Ranking Minority Member.    35
Prepared statement of Mark McClellan, M.D., Ph.D., Administrator, 
  Centers for Medicare and Medicaid Services.....................    36
Information provided to Mr. Hinchey from Dr. McClellan, from the 
  Office of the Actuary, U.S. Department of Health and Human 
  Services.......................................................    44
U.S. Department of Health and Human Services Report entitled 
  ``Securing the Benefits of Medical Innovation for Seniors: The 
  Role of Prescription Drugs and Drug Coverage,'' provided to Mr. 
  Hinchey........................................................    46

 
                        MEDICAL LIABILITY REFORM

                              ----------                              


                        THURSDAY, APRIL 28, 2005

                    United States Congress,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:05 a.m., in 
room 2226, Rayburn House Office Building, the Honorable Jim 
Saxton, Chairman of the Committee, presiding.
    Present: Representatives Saxton, Hinchey, and Cummings. 
Senator Reed.
    Staff present: Chris Frenze, Dan Miller, Brian 
Higginbotham, Colleen Healy, John Kachtik, Tom Miller, Chad 
Stone, John McInerney, Daphne Clones Federing, and Nan Gibson.

        OPENING STATEMENT OF REPRESENTATIVE JIM SAXTON, 
                            CHAIRMAN

    Representative Saxton. Good morning, Dr. McClellan. 
Welcome.
    Dr. McClellan. Good morning. Thank you, Mr. Chairman.
    Representative Saxton. We will begin the hearing. I would 
like to make a short statement which emphasizes what I think is 
the tremendous importance of the subject that we are here to 
discuss today.
    In doing so, it is a pleasure to welcome Dr. Mark McClellan 
to the Joint Economic Committee. Dr. McClellan brings a wealth 
of experience and knowledge to bear on the subject of medical 
liability insurance, tort medical liability reform. Currently, 
Dr. McClellan serves as Administrator of the Centers for 
Medicare and Medicaid Services, overseeing approximately one-
third of the health care spending of the U.S. In addition to 
being a board-certified physician of internal medicine, Dr. 
McClellan is a Ph.D. economist. He has previously served as the 
Commissioner of the Food and Drug Administration and as a 
member of President Bush's Council of Economic Advisers.
    There is little doubt that our Nation's medical liability 
laws need reform. Over the past few years, premiums have 
skyrocketed. In just the last 5 years, total medical liability 
costs jumped 47 percent to a record high of $27 billion.
    I would just like to refer everybody to this chart. Maybe 
you could turn it so that we can see it here and they can see 
it in the audience perhaps a little bit better than that.
    In looking at this chart this morning, I was absolutely 
amazed. I knew that medical liability malpractice costs had 
gone up, but when I looked at this and saw that kind of in the 
middle, among the middle bars there, there is a $9.2 billion 
mark; that was 1990. Today, medical malpractice costs are 
almost $27 billion. So since 1990, medical malpractice costs 
have actually tripled in just those few years. This is indeed 
an issue that bears close examination.
    One of the central cost drivers is rising claims costs. 
According to the legal research firm Jury Verdict Research, the 
median trial award for medical liability claims stands at an 
incredible $1.2 million, and a recent Department of Justice 
study reported that nearly two-thirds of medical liability 
trial awards exceed $250,000.
    Here is another chart that shows growth in median liability 
claims. As recently as 1997, the median liability claim, as 
represented by the shortest bar to the left of the chart, was 
$500,000.
    Today, as I mentioned a minute ago, the median trial award 
for medical liability claims stands at an incredible $1.2 
million. Once again, just since 1997, these claims have more 
than doubled. This rise in costs has reached the point where 
the quality and availability of health care suffer. Faced with 
premiums increasing 20 to 30 percent a year, many doctors are 
cutting back on the scope and availability of their services. 
Nowhere is this trend more apparent than in obstetrics, where 
numerous OB/GYNs have decided it is just easier to drop OB 
altogether. Some doctors have elected early retirement or have 
relocated away from high litigation areas.
    Emergency rooms and trauma centers have also been hurt by 
the current crisis. The threat of lawsuits has made the 
practice of defensive medicine commonplace, and as a result, 
patients are subjected to more tests and procedures than may be 
warranted by clinical factors alone.
    Despite the rise in costs, the system is not better at 
compensating the negligently injured. The typical time that 
elapses between the date of injury and a verdict is close to 5 
years. And, of course, legal fees go on during that period of 
time.
    Moreover, it is widely recognized--and this is an 
unbelievable fact that we came across in studying this subject 
a year or so ago--it is widely recognized that only a small 
fraction of negligently injured patients even file a claim. At 
the same time, a large majority, around 80 percent, of medical 
liability claims do not even involve negligent injuries. One 
study even found that more than half of all medical liability 
claims do not involve an injury at all.
    The shortcomings in the current tort system are such that 
The Washington Post has noted that, and I quote: ``The 
staggering costs of America's civil justice system are 
unacceptable. The tort system is something of a casino, 
offering windfall judgments to a small number of claimants and 
nothing to others--with the merits of cases seeming almost 
irrelevant to their valuation.''
    Although each State faces its own set of challenges and 
problems, the medical liability crisis has nonetheless reached 
national proportions.
    I wonder if we could put the chart up of the map of the 
U.S. so that I can just point out that some States have taken 
steps to mitigate the problem. The States in red are 
represented--this is an American medical liability cost and 
national view put out by the American Medical Association, just 
so that everyone knows its source.
    But those States that are depicted in red are States that 
are actually in crisis. I am from New Jersey; it is red. The 
States that are showing the probability of moving toward crisis 
are in yellow and States that have stepped up to the bar and 
have done something about it are actually in white.
    I might note that in California--if we can look at the next 
chart, California is one of the States that did something about 
this problem. The red line indicates the national statistics 
and how this problem has exacerbated itself. We see that the 
increases that start during the 1970s were gradual at first, 
but as we move forward, the premium growth during the 1990s and 
now in the 2000s is just shooting upward. Contrast that with 
what happened in California, which is shown by the blue line.
    In the 1970s and 1980s, the costs of premiums for medical 
liability insurance began to increase. But in 1975, California 
enacted a cap. We can see that the premium growth stabilized 
right after that reform occurred, and we have not seen the kind 
of growth in California that we have seen nationally. So there 
are solutions apparently to this problem.
    [The prepared statement and charts submitted by 
Representative Saxton appear in the Submissions for the Record 
on page 29.]
    Thus, we want to thank Dr. McClellan for being here today 
to provide some insight into the problem and the direction of 
reform. Before we go to Dr. McClellan, we will turn to my 
friend, Senator Reed----
    Senator Reed. Thank you very much.
    Representative Saxton [continuing]. ----Whom I might 
publicly congratulate. He got married last weekend, a great 
wedding at West Point, I hear.
    Senator Reed. For the first time.

            OPENING STATEMENT OF SENATOR JACK REED, 
                    RANKING MINORITY MEMBER

    Senator Reed. Thank you very much, Mr. Chairman, and thank 
you, Dr. McClellan. Welcome.
    On the campaign trail last year, President Bush repeatedly 
criticized trial lawyers for filing junk lawsuits that he said 
were responsible for rising health care costs. The centerpiece 
of the Administration's medical liability reform would cap non-
economic damages at $250,000 and institute a 3-year statute of 
limitations on most lawsuits.
    The 2004 Economic Report of the President stated that the 
President's reform plan would lower the cost of providing 
health care. However, there is little, if any, evidence to 
support that claim. Hopefully, Dr. McClellan, you can shed some 
light on that.
    While it is certainly troubling that medical malpractice 
premiums for doctors have been rising rapidly in recent years 
and many physicians in my State have informed me of the cost 
burden and potential impact on access to care for patients, it 
is far from clear that jury awards are the sole driving force 
as the President suggests.
    In 2003, the Government Accountability Office studied 
States with and without caps on non-economic damages and found 
that the States with caps had lower premium increases than 
those without caps. However, GAO did not have enough data to 
show a direct link between malpractice award caps and premiums.
    Similarly, the Congressional Budget Office has found that 
there are potential savings for malpractice premiums by 
limiting the amount of malpractice awards, but they are 
skeptical that a cap would provide relief for health care costs 
in general.
    Malpractice costs were $24 billion in 2002, less than 2 
percent of total national health care spending of $1.4 
trillion, according to CBO. Reducing malpractice awards by 30 
percent would only lower health care costs by approximately 0.5 
percent, or about $7 billion. Granted, any lowering of health 
care costs would be an encouraging sign.
    CBO also finds that limiting physicians' malpractice 
liability would not have much impact on ``defensive medicine,'' 
such as providing unnecessary tests or procedures to avoid a 
lawsuit because physicians do so more often out of concern for 
patients or to generate additional income than because they 
fear liability.
    Dr. McClellan, I know you have studied the issue of 
defensive medicine and malpractice, so I will be particularly 
interested in your opinions about the amount of health cost 
savings caps on non-economic damages would produce. I believe, 
however, that there are some other reasons for the latest 
increases in medical malpractice insurance premiums that would 
not be addressed by the kinds of reforms the President is 
advocating. The GAO, for example, points to slower growth in 
insurance company investment income and reduced competition in 
the liability insurance market as other potential drivers 
behind rising malpractice premiums.
    We also should not lose sight of the fact that this issue 
must be considered in the context of medical errors and the 
quality of patient care, which are inextricably linked to 
physician accountability. A study by the Institute of Medicine 
reported in 2000 that between 44,000 and 98,000 people die 
every year because of preventable medical errors. These 
statistics point to a need to link any discussion of tort 
reform to the issues of medical errors, public safety and 
physician accountability.
    In the last Congress, the Republican leadership sent narrow 
medical liability legislation for OB/GYNs directly to the 
floor, thereby sidestepping serious committee deliberation and 
inquiry into the nature of and possible solutions for rising 
insurance premiums. While it is hard to see how the President's 
proposal for medical liability reform will make more than a 
dent in spiraling health care costs, this is an important issue 
that lawmakers must be allowed to investigate thoroughly.
    Again, your presence here today, Dr. McClellan, as the 
Chairman said, is an important step in this inquiry. I 
appreciate your willingness to testify.
    I hope you will also be open to questions regarding your 
oversight of CMS, which raises questions now and again. I have 
a number of questions regarding the $500 billion of Federal 
spending that you administer at CMS that undoubtedly has a 
bigger impact on physician behavior and overall health spending 
than medical malpractice costs.
    I look forward to your testimony.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Reed appears in the 
Submissions for the Record on page 35.]
    Representative Saxton. Dr. McClellan, welcome once again. I 
understand that your statement may take more than 5 minutes. 
That is fine. We have all morning. We are anxious to get 
started. You may begin, sir. The floor is yours.

           STATEMENT OF MARK McCLELLAN, M.D., Ph.D., 
   ADMINISTRATOR, CENTERS FOR MEDICARE AND MEDICAID SERVICES

    Dr. McClellan. Mr. Chairman, thank you for this 
opportunity.
    Mr. Chairman, Senator Reed, Representative Hinchey, 
distinguished Members of the Committee, thank you for inviting 
me here today to discuss medical liability reform and, Senator 
Reed, congratulations, and I hope this isn't part of your 
honeymoon.
    As President Bush and many in Congress and across the 
country recognize, our current liability system does not serve 
the needs of patients and needs reform. It is not simply an 
issue of reducing health care costs by lowering the costs of 
medical liability. More importantly, it is about improving 
patient safety and quality of care.
    The Medicare and Medicaid programs are not immune from the 
costs created by our liability system. The Congressional Budget 
Office has estimated that if legislation the House has 
considered, and that you just mentioned, Senator Reed, were 
signed into law, it would result in savings to the Federal 
Government alone of more than $11 billion for the 2004 to 2013 
period.
    But this figure only considers premium reductions. It 
doesn't take into account the far greater savings possible as a 
result of reducing defensive medicine. Peer-reviewed research 
that I conducted with Professor Dan Kessler at Stanford 
University found that capping non-economic damages and revising 
joint and several liability rules could reduce the practice of 
defensive medicine so that overall hospital expenditures would 
drop by between 5 and 9 percent.
    During fiscal year 2004, we spent more than $133 billion on 
hospital care in our fee-for-service Medicare program, and so 
that would translate to annual savings of between $6 and $11 
billion. Other peer-reviewed studies have reinforced the 
importance of liability pressures driving broader cost 
increases in our health care system.
    Right now, Medicare faces a real challenge with physician 
payments. Spending on physician services during 2004 rose by 
approximately 15 percent from the previous year. As we work on 
solutions to the physician payment problem, we can no longer 
afford to pass by opportunities where there is overwhelming 
evidence of billions of dollars in cost savings without 
compromising patient health.
    For example, a significant driver of the past year's 
increase is the fact that more patients are receiving more 
complex and more frequent diagnostic imaging services. This is 
exactly the kind of medical practice that is aggravated by 
liability concerns.
    Doctors understandably worry about being sued for bad 
outcomes rather than bad care, since that is mainly what 
happens in our current system. Doctors worry about being sued 
even when they follow state-of-the-art medical practice because 
that is what happens.
    In fact, physicians get a double whammy. These liability 
pressures drive up costs without increasing quality, and 
because of the way our physician payment systems work in 
Medicare, when that happens, physicians get hit with reductions 
in payments on top of it. That can worsen the problem of 
access. We just can't afford to do this anymore.
    The problem is seriously aggravated by the disturbing 
recent trends in liability settlements and awards. Mr. 
Chairman, you put up some of the figures showing up through 
2003, which were very concerning, but on top of that, the 
Physician Insurance Association of America, a main insurer of 
physicians for liability costs, has recently noted that the 
average jury award increased by 46 percent between 2003 and 
2004, to over $439,000, and that includes an increase in the 
very large awards that you mentioned. So on top of the big 
increases in settlements and awards in the preceding years, I 
fear the quality and cost problems caused by our liability 
system will continue to worsen.
    With the new Medicare law and our proposals for Medicaid 
reform, we are taking many steps to support prevention-oriented 
care and promote better quality and safety, but it is hard to 
do that in an environment where legitimate worries about 
liability stand in the way of quality and safety improvement. 
That is the main reason we need liability reform through such 
proven measures as caps on non-economic damages.
    Liability reform will improve health care quality and 
access and costs, leading to better health for Americans. In 
saying that our liability system needs reform now, I want to be 
very clear that I fully support the goals of liability law. 
These are the right goals. Patients who are injured deserve to 
be compensated when they are treated negligently, and we need 
to provide strong measures to assure that physicians and other 
health professionals provide high-quality care and face 
consequences when they are negligent. But the fact is our 
liability system is failing miserably at both goals.
    For example, one of the most definitive studies, the 
Harvard Medical Practice Study, reported that, on average, it 
takes more than 5 years for an insurer to pay a malpractice 
claim after the date of the incident, and when an injured 
patient does finally successfully settle or win the case, the 
patient doesn't get most of the money.
    Even worse, only a tiny fraction of those who are injured 
due to negligent care get even this delayed and incomplete 
compensation, as you noted, Mr. Chairman. So in the system we 
have now, most of the money that is finally awarded goes to 
lawyers and to patients who were not injured negligently. These 
are the features of a long, slow and costly lottery.
    The liability system is not achieving its goals. Because 
doctors know they can and will be sued even when, in fact, 
mostly when they don't do anything wrong, it is no surprise 
that the result is higher health care costs and quality and 
access problems. The defensive medicine resulting from our 
liability system includes the costs and risks of unnecessary 
procedures, and it includes problems in access to care. In 
emergency care, in obstetrics, in neurosurgery and in other 
specialties in many areas of the country, as your chart showed, 
the result of high liability premiums and frustration over 
lawsuits is simply less access to physicians. And even if you 
can get access to care, it means higher costs.
    Our legal system simply does not serve the needs of 
patients and it does not encourage physicians to practice 
science-based, quality medicine. The evidence is clear that 
Congress could reduce health care costs and improve quality by 
passing legislation that puts in place reasonable caps on non-
economic damages and revises the joint and several liability 
rules that encourage lawyers to collect several times over for 
the same damages. Such reforms would still allow patients to 
get very large recoveries for their injuries, including full 
compensation even for services like child care that do not come 
with a paying job.
    There are other steps that can be taken, as well, that 
would also help our liability system do what it is failing to 
do today, without adding unnecessary costs or compromising 
quality of care like the current system does. For example, in 
late 2004, the Department of Health and Human Services 
announced a voluntary early offers program.
    Under this program when someone files a claim against the 
department, for example, for care in a community health center 
or through the Indian Health Service, HHS will evaluate the 
claim and then send that person a notice telling them about the 
option of using an early offer. Then both sides have 90 days to 
submit a confidential settlement offer to an independent third 
party. If the offers match or they overlap, the case is settled 
and HHS immediately pays the amount requested with much more of 
the money going much faster to the injured patient. If there is 
no match, the case can proceed as usual.
    The goal of this program is to do what our liability system 
is failing to do, provide prompt and predictable settlements 
for injured patients without the delays and the uncertainty of 
trying to go to court. And these patients will not have to turn 
over a large part of their settlement to their lawyers. We need 
to support more steps like this.
    Some time ago, Johns Hopkins Hospital began requiring non-
emergency patients who came to them for elective procedures to 
sign an agreement to take any malpractice claims to mediation 
prior to going to court. In 2003, 24 cases went to mediation 
and 21 of them were resolved promptly. As a result, the 
experience for Hopkins Hospital in 2003 claims decreased in 
expense by almost 30 percent.
    Mediation is typically much faster than a court case and 
involves far lower attorneys' fees. In short, patients who are 
injured get compensated at a higher level and in a shorter 
amount of time. Costs are lower and more predictable, improving 
the delivery of care.
    We are looking at ways to encourage such steps toward 
better compensation and lower costs to the liability system in 
the Medicare program. For the sake of our patients and for 
quality of care, we can't afford to pass up these opportunities 
anymore.
    Another promising idea is the establishment of special 
health boards or courts devoted to hearing cases involving 
claims of medical malpractice. These specialized courts would 
employ specially trained judges with health care expertise and 
background and would deal only with liability cases. Judges 
could be selected through a non-partisan process. Their 
expertise and impartiality would provide the predictability, 
the timeliness and the fair compensation that simply don't 
exist in our current system.
    Besides looking at opportunities to provide a better 
compensation system for injured patients, we are also taking 
many steps at CMS to help patients actually get better care. 
This includes new systems for reporting information on the 
quality and safety of care in hospitals, in nursing homes, in 
home health agencies and, soon, in ambulatory care as well. It 
includes quality improvement initiatives and more coordinated 
work with State oversight agencies. These are effective ways to 
increase provider accountability.
    I am also pleased about the bipartisan congressional 
interest in patient safety legislation that includes a 
mechanism for allowing anonymous reporting of errors and risky 
situations, and anonymous systems to help prevent those errors 
in the future. It protects these badly needed data from 
discovery. We don't have as much of this preventive information 
as we should because health professionals rightly fear that it 
would be used not to improve quality, but as the target of a 
fishing expedition for lawyers. The same concerns are slowing 
the adoption of electronic health information systems that can 
improve quality and safety. As the Institute of Medicine has 
noted, if we don't take these steps, we will keep missing 
opportunities to improve patient safety and quality.
    Mr. Chairman, we are increasingly using performance 
standards in our health care system. We need to subject our 
liability system to this same kind of performance review. Its 
very low levels of performance in terms of compensating injured 
patients and encouraging quality care mean that it is blocking 
progress toward better care.
    The current medical liability system is not meeting the 
needs of patients and it is costing those patients and the 
Federal Government and other payers billions of dollars because 
it causes unnecessary care and problems in access to care, and 
it is providing no reliable compensation to patients who are 
injured. We know how to do a lot better and we are looking 
forward to working with you toward liability reforms that 
improve quality and access to care and reduce health care 
costs.
    I would be pleased to take any questions that you all may 
have.
    [The prepared statement of Dr. McClellan appears in the 
Submissions for the Record on page 36.]
    Representative Saxton. Dr. McClellan, thank you very much 
for an excellent statement. Let me begin by referring to 
something that you alluded to and that I mentioned in my 
opening statement.
    It is quite surprising to me to find that a large majority, 
according to some studies, of doctors who have been subject to 
lawsuits--that something in the neighborhood of 80 percent of 
the medical liability claims don't involve negligent injuries. 
This has been something that I have found hard to understand. 
In fact, as I pointed out in my opening statement, one study 
found that more than half of medical liability claims don't 
involve any injury at all.
    Can you talk a little bit about this and explain how this 
can be and what kind of a problem? It is obviously a big 
problem.
    Dr. McClellan. Mr. Chairman, your figures are right. They 
are drawn from studies like that Harvard Medical Practice Study 
that took a systematic look at the cases that were coming to 
court. They reviewed all of the cases over a certain time 
period in some specific States or a large sample of cases, 
including cases in New York, and they found the kind of results 
that you are talking about.
    And other follow-up studies have yielded similar results, 
that very often cases are brought when there are bad outcomes, 
even if there was no medical negligence involved, and very 
often there may not even be actual harm demonstrated. It may be 
a claim that the patient was perhaps someday at risk of harm 
even when, again, the physician has followed appropriate 
medical practices.
    The system that we have now does not screen out these kinds 
of cases. It doesn't encourage us to focus, most importantly, 
on cases where there has been true negligence and, as a result, 
doctors should be held accountable. If we did a better job of 
that, we could compensate the patients who are truly injured 
negligently much more effectively, and we could provide more 
predictability to the doctors.
    They wouldn't have to worry that when they are providing 
care that is up to standards and doing what they think is right 
from the standpoint of their medical expertise, they will be 
able to practice appropriately. They won't be hauled into court 
for it.
    Representative Saxton. How did these studies arrive at the 
conclusion that all of these cases did not involve any 
negligent behavior?
    Dr. McClellan. They involved a kind of medical review that 
ought to be a more systematic part of our approach to medical 
liability and medical negligence. They had independent expert 
reviewers, multiple reviewers, look at all of these cases, look 
at all the documentation and reach conclusions about whether 
appropriate medical practice was followed or not and whether 
the alleged injury was, in fact, from a medical standpoint, 
related to the actions of the doctor. It is that kind of expert 
involvement that we don't have in our liability system today.
    Representative Saxton. Of this large percentage of cases 
that don't involve negligent injuries, do many of them result 
in awards to the claimant?
    Dr. McClellan. Yes. Most of the awards that do occur are 
for cases where there was no negligence by the physicians. A 
lot of these cases end up being dropped or end up being settled 
for little or no money; but many of them do end up in large 
settlements, and even in the cases that don't end up giving 
money to the plaintiff, they do end up taking a lot of time and 
effort on the part of the doctor and the doctor's medical 
staff, and they do end up with a lot of the money going to the 
lawyers that are involved.
    Representative Saxton. On the other side of this coin, I am 
told it is widely recognized that only a small fraction of 
negligently injured patients file a claim.
    How can this be so backwards?
    Dr. McClellan. Well, it is a very difficult system to 
navigate because the costs are so high, and it takes so long, 
and there is so much burden. There is a burden on the doctors. 
There are also burdens on the patients for going through this 
long process. A lot of them don't bother with the effort. That 
is why I think that some of the steps that I outlined in my 
written and my oral statements are so important.
    If we can take steps to take these out of the court system, 
that is a 5-year-long process that has a lot of burdens along 
the way, and have a quicker approach, like this Early Offers 
system that I mentioned or approaches that rely on mediation, I 
think more patients who are truly injured negligently could get 
compensated, and more of the money would actually go to them. 
It wouldn't go to the costs of administering this very long and 
complicated system. It wouldn't go so much to the lawyers 
involved.
    Representative Saxton. So to conclude this point, I guess, 
there are a large number of people who receive, for lack of a 
better term, negligent treatment who are not compensated, and 
there are a large number of people who receive very adequate, 
non-negligent treatment who get compensated.
    Dr. McClellan. And then a lot of money goes to the lawyers 
in the process, at least 30 to 40 percent of any settlements 
that occur. And then there are other administrative costs for 
the lawyers on the other side, the courts and so forth.
    Most of the money in the system doesn't end up going to 
patients, and you are right that only a very small fraction of 
it actually goes to patients who are injured negligently.
    Representative Saxton. Now, of course, I am not a doctor; 
but I am a human being, and if I were a doctor, it would seem 
to me that I would go to my practice each day with a list of 
things that I needed to do, and perhaps one of the most 
important--maybe the most important--is to protect myself from 
potential claims. And if I were a doctor, not being one, how 
would I do that?
    Dr. McClellan. Well, there are steps that you could take to 
protect yourself from claims. I think people who have studied 
this issue talk about positive and negative defensive medicine.
    ``Negative defensive medicine'' is that you just stop 
taking the cases. If there are high-risk procedures, cases 
where there is some real chance of a bad outcome, like in 
neurosurgery or in obstetrics or in some types of emergency 
care, there are many doctors who are just leaving those 
practices.
    I have talked to physicians in different parts of the 
country, the Mississippi Delta, the Las Vegas area, parts of 
Ohio, Pennsylvania, other parts of the country where there are 
now real access problems, particularly for certain kinds of 
specialties and certain kinds of procedures from doctors just 
staying away from them. It is not worth the risk. They can't 
afford the insurance. They don't want to go through the hassle 
when they are practicing good care.
    On the other side, so-called ``positive defensive 
medicine'' costs, or extra tests and extra procedures that 
might be ordered not because that is what the medical 
guidelines say, but just because a doctor wants to be protected 
in the event of a suit being brought, that is where we see 
maybe extra cases of imaging procedures being done.
    I talked about some of the rapid growth we have seen in the 
past year in the Medicare program, in the use of advanced 
imaging procedures that are very costly, and in some cases, 
when a patient comes in with a headache or another problem like 
that, that just aren't medically warranted. So we would like 
doctors to come to practice every morning thinking about, 
``What are the things that I can do today that are going to do 
the most for my patients at the lowest cost?'' This system 
creates some very different kinds of pressures on how they make 
their decisions.
    Representative Saxton. Your answer reminded me of an 
incident that occurred in New Jersey.
    We have neurological physicians, of course, in New Jersey. 
At one time we had around 90. Now, I understand we have less 
than 60. One of the hospitals that lost their neurological 
surgeon had a need for one. A lady was admitted to the hospital 
and there was no neurological surgeon to treat her. So they 
literally had to get a helicopter and fly her across the river 
to Philadelphia for treatment. It seems to me that that would 
create a situation where people don't actually have access to 
proper care.
    Dr. McClellan. It is.
    On the one hand, it is higher cost because she had to get 
all that extra transportation. At the same time, it is worse 
quality of care. Many neurologic procedures are urgent. The 
transportation time, the disruptions that can occur in moving a 
patient can compromise quality of care. And so from both a 
quality and a cost standpoint, it is a real problem.
    Representative Saxton. On the positive side, the things 
that you referred to as positive steps that can be taken, I 
suspect that very thorough examination and testing would be a 
way to protect myself if I were a doctor.
    Dr. McClellan. That is right. And very thorough examination 
and testing is appropriate in many medical cases. We want 
doctors doing a thorough job of working up a patient 
appropriately, according to the latest medical science. But 
their decisions ought to be determined by the medical science, 
not the latest court verdicts where doctors are being sued 
successfully. So often when there hasn't been any actual 
medical negligence, when they are being sued unsuccessfully in 
a lot of cases where there is no negligence--but they still 
have to be dragged into court, it still takes a lot of time and 
effort, it still adds to their liability cost--you end up with 
different kinds of pressures on the way the doctors are 
practicing. And that is what we would really like to avoid.
    Representative Saxton. It seems to me that one of the 
downsides of doing too many tests would have to do with 
expense. That goes without saying. You do tests that are, 
quote, ``unnecessary'' to protect oneself, the doctor. It is 
going to cost more.
    Any other downsides?
    Dr. McClellan. You can get into a vicious cycle. Very often 
when these imaging procedures are done, there may be an anomaly 
on the test. No test is perfect. No test is right 100 percent 
of the time.
    If you are doing a diagnostic test on a patient that has 
got a very low likelihood of actually having a real problem and 
you see something anomalous, probably in many cases it is just 
going to be the fact that a test isn't perfect. But if you see 
that, if you have done the test in part because of liability 
pressures, you are going to have to do something else about it. 
So you may end up in a situation where you are going just from 
ordering an MRI to then having to go on to further workup of a 
patient, a biopsy procedure, other types of services that carry 
with them their own risks and potential for harm and additional 
costs.
    Representative Saxton. A large percentage of the American 
population pays for medical care through Medicaid and Medicare. 
It seems to me that since older folks, in terms of Medicare, 
receive a very large percentage of medical treatment in this 
country, for obvious reasons, that there would be a particular 
concern with regard to the implications for Medicare and 
Medicaid.
    Can you speak to that subject? What does it do to the 
system that you oversee?
    Dr. McClellan. When you take account of these defensive 
medical costs, it means higher costs in a couple of ways. One 
is the higher costs associated with the extra procedures, the 
extra tests and so forth. Another is the higher costs 
associated with complications of problems of access to care. If 
patients can't get access to the neurosurgical services they 
need, or the emergency services or other problems, that can 
lead to higher costs as well. It certainly leads to quality 
problems.
    Some of the studies that I have been involved with, these 
peer-reviewed studies published in academic journals, suggest 
that we could have an impact on Medicare costs of 5 percent or 
more, at least for hospital costs, by addressing these 
defensive medicine problems, by reforming our liability system.
    Even if you are only looking at the direct costs of the 
higher liability premiums and the costs of the liability system 
itself, again money that is mainly not going to care for 
patients and not going to compensate patients who are injured 
negligently, even there you can save billions of dollars in 
program reforms as that CBO study that Senator Reed mentioned 
documented. There are real opportunities for lowering costs, 
and that is something that we need to be paying a lot of 
attention to right now when we are struggling to find ways to 
pay our physicians appropriately, and when we are trying to 
take steps to make our program as sustainable as possible.
    Representative Saxton. Tell us about the effect on the 
Medicare trust fund.
    Dr. McClellan. The savings that these reforms would 
engender, the billions of dollars in savings, according to CBO 
estimates, the even larger savings that could result from 
really doing something about defensive medicine, would assist 
the trust funds. That would reduce the pressure that the trust 
funds are facing.
    I won't say this is the only step that we need to take to 
make sure Medicare is sustainable. We also need to bring our 
benefits up to date and take other steps that promote higher-
quality care as I talked about.
    But we really want to create an environment that encourages 
high-quality medical practice and that avoids unnecessary 
costs, and the liability system that we have today is standing 
right in the way of that goal.
    Representative Saxton. One of the answers to this problem 
appears to be something that is referred to as ``caps on non-
economic damages.'' These caps have been touted as an important 
element of effective medical liability reform, and I referred 
to the one chart.
    Maybe we could put that chart back up again, the one that 
is right there in the front. That is good.
    The national average for premium growth since 1976 up until 
2003 is demonstrated here by this chart as a relatively flat 
line in the case of California, which enacted caps in 1975 and 
a very steep inclining rate of growth for the national average.
    I am told that Kenneth Thorpe of Emory University 
recently--and incidentally a former Clinton Administration 
health official--came to the conclusion that premiums in States 
with a cap on awards were significantly lower, as is depicted 
by this chart, than States without caps.
    Would you discuss this?
    Dr. McClellan. It is not just Dr. Thorpe's conclusion. It 
is also the conclusion of studies that have been done by the 
policy and evaluation office in the Department of Health and 
Human Services. It is the result of studies that we have done 
and that have been published in peer-reviewed academic journals 
before I came to work in Government. It has been the result of 
other studies by other distinguished economists and health 
policy researchers.
    From these studies, together they show that these kinds of 
caps on non-economic lead to changes in physician behavior 
because the physicians feel less pressured to deal with 
liability and more focused on providing care for their 
patients. They lead to lower costs of defensive medicine, as we 
have already talked about a little bit. They lead to lower 
liability premiums because they reduce the costs of our 
liability system. And they lead to greater access to care.
    A recent study by the Agency for Health Care Research and 
Quality showed that in States that have implemented these 
liability reforms, they have a significantly larger number of 
physicians in practice. So you have less situations like the 
one that you described in New Jersey where a patient can't get 
access to the care they need.
    Representative Saxton. If caps were successful in bringing 
about these changes in medical care and the performance and 
activities of physicians, would it also be fair to say that it 
would have the effect of reducing the costs of the actual 
premiums charged to doctors?
    Dr. McClellan. It would have a direct effect on reducing 
the premiums; that is correct.
    The beneficiaries in the Medicare program pay a quarter of 
the costs for Medicare Part B, and that is the cost of 
physician services and all the other outpatient services, 
including all those imaging procedures and lab tests and so 
forth. So it would have a direct effect on premiums.
    Representative Saxton. Would it have an effect on the cost 
to the consumer?
    Dr. McClellan. It would also have an effect on the cost to 
consumers. Not just because of lower premiums, but because if 
they are undergoing fewer tests, if they are getting medical 
care that is practiced more efficiently where they can get the 
relief they need for their health problems at a lower cost--
that is, lower copays, as well, and lower out-of-pocket 
payments for that reason, too.
    Representative Saxton. In your opening statement you 
mentioned--along with caps for medical liability tort reform 
involving caps on non-economic damages, you also mentioned 
mediation.
    Dr. McClellan. Yes.
    Representative Saxton. Would you explain the effect of how 
you see mediation working?
    Dr. McClellan. Mediation is just a better environment for 
getting to resolution of issues in a way that reflects the 
medical science. Mediation is led by an independent expert, 
someone who knows the field of medicine and who is not on one 
side or the other, who can work to try to bring the different 
sides together.
    I mentioned the Johns Hopkins Hospital case where now this 
is mandatory for patients who are coming in for elective non-
urgent procedures. They have time to think about whether they 
want to get care this way, and mostly, generally, they decide 
that they want to.
    The cases--if there is a problem of a bad outcome or other 
dispute, go to mediation instead of going straight to a court 
in that long, 5-year-or-longer, lottery to get to resolution. 
The mediation can take place in a matter of a few months 
because there is less court time and less lawyer time involved.
    The money involved in the mediation settlement goes to the 
patient who is injured, and because you have got an independent 
expert involved in getting to a conclusion, you are more likely 
to reflect the actual medical facts and have a decision that is 
predictable based on what medical science says it should be.
    Representative Saxton. I apologize to Senator Reed. I have 
one final question and then we will go to Senator Reed.
    We know that the medical liability crisis has not hit all 
specialties in the same way. Obstetricians, orthopedic 
surgeons, neurosurgeons and radiologists have been hit 
particularly hard. It would seem that the higher premiums 
charged to these specialties would have an impact on which 
areas of the medical profession students choose to enter. So 
the question is fairly obvious.
    Looking down the road, do we see any problem in finding 
specialists in certain areas that are especially hit negatively 
by this medical malpractice situation?
    Dr. McClellan. It is certainly a concern. When I talk to my 
colleagues who are still in academic medical practice, they 
note that this is having an impact on student decisions. That 
will have consequences down the road. But I think even more 
worrisome is, it is having some consequences now.
    I have talked about some of the evidence on different 
levels of access to physicians in conjunction with whether or 
not a State has reformed its liability system; and as you put 
up on your chart earlier, there are areas of the country where 
physicians are leaving practice, particularly in these 
specialties, where they are not taking the more complex cases 
in these specialties right now.
    So this isn't a problem that is just down the road, that 
will be aggravated by the decisions that medical students are 
making today about specialties to avoid because of liability 
concerns; it is a problem right now in many areas of the 
country.
    Representative Saxton. Thank you very much.
    Senator Reed.
    Senator Reed. Well, thank you, Mr. Chairman. I wonder if we 
could have a second round, and I can limit my questions and 
allow my colleagues to ask their questions without an extended 
period.
    Thank you very much, Dr. McClellan, for your testimony and 
for your work. In fact, back in 1996, you and Dr. Kessler did a 
path-breaking study of the effects of defensive medicine. You 
estimated the costs to be somewhere between 5 and 9 percent. 
Others have looked at the same issue, CBO for one, and have not 
found as great an impact.
    Do you have any insights as to why CBO would find a much 
less----
    Dr. McClellan. Senator Reed, I know you pay a lot of 
attention to these economic issues, and I appreciate the 
question. We had a little bit of discussion of this in my 
written testimony. When CBO looked at the same conditions we 
did, they found similar results.
    So looking just at heart disease--these are pretty well 
defined cases. There is an event that occurred, a patient 
having a heart attack or other serious heart problem, then we 
tracked after that. When CBO looked in the same way, they found 
the same kinds of effects.
    But the problem with the CBO study is that it also looked 
at other types of cases, just sort of the overall population of 
patients; and that is a very heterogeneous set of patients, 
some of which have certain diseases, others have other 
diseases. And there are a lot of things that influence costs of 
care in these patients and their outcomes of care. And so, in 
economic terms, that means this is a noisier or less precise 
estimation situation.
    They also had only a proportion of the cases, not the whole 
larger sample that we looked at. And so it is probably not 
surprising that they didn't get to as statistically significant 
results.
    The other thing is that in the cases that we were looking 
at, these were cases where people were already getting care. 
They had come into the hospital with a very serious medical 
problem.
    In the cases that CBO looked at, they would also pick up 
cases where people may not get treatment. Remember, there are 
two kinds of defensive medicine. There is defensive medicine 
that leads to higher costs and perhaps a worse outcome, and 
there is also defensive medicine where the doctors just don't 
take the cases, that leads to less access to care. They 
probably were mixing up some of both. There may well be some, 
quote-unquote, savings from doctors not seeing patients. But I 
am not sure that is a good thing.
    The bottom line, though, is that CBO concluded, as you 
mentioned earlier, that reforming the liability system would 
save Medicare billions of dollars. We can argue about what the 
magnitude of those savings should be, but there is no question, 
all these studies say ``significant savings,'' and that is 
something that I think is really important to take advantage 
of.
    Senator Reed. But your study was more precisely related to 
those heart procedures?
    Dr. McClellan. Those heart conditions, right.
    Senator Reed. That is where you would see that, based on 
your----
    Dr. McClellan. Potentially in others. I think there have 
been some other studies done of care for patients with other 
particular conditions, obstetrical conditions, deliveries, 
where you see similar kinds of effects. More use of Cesarean 
sections, for example, in States that haven't reformed their 
liability systems.
    When you look at particular types of illnesses where we can 
really define the cases clearly, there is not this big 
heterogeneity problem. You tend to see effects.
    Senator Reed. One of the other measures of whether this 
works or not is what the actors in the economic system do. 
Interestingly enough, in Texas, which adopted caps on non-
economic damages, GE Medical Protective, a large insurer, made 
a regulatory filing where they estimated that capping non-
economic damages will show loss savings of 1 percent. Again, 1 
percent of a big number is real money, but they requested a 
premium increase of 19 percent 1 year after Texas capped their 
non-economic damages.
    One of the assumptions implicit in most of the discussion 
we had this morning is that if you cap non-economic damages, 
you will reduce premiums for malpractice insurance. Here is a 
situation where they are asking--and they are economic actors 
looking at their costs--for a significant increase and they 
estimate that there is a saving from the cap, but relatively 
small.
    What is going on down there?
    Dr. McClellan. Well, I think they are looking at the so-
called ``direct liability costs'' or this impact on liability 
premiums, and there are other savings that would come from the 
impacts on defensive medicine. That is not something that the 
liability insurer is actually going to see. That is something 
that our health care system is going to see as a result of 
differences in medical practice.
    But as you have said, a percentage point reduction in 
medical spending, that is still real money, and in a big health 
care system, that is still billions of dollars.
    They also are facing price increases in Texas for other 
reasons. That Texas liability reform didn't do everything that 
I think the kinds of damage caps that we have talked about 
would do. But just to put this in perspective, if you look at 
the 75-year actuarial deficit for the Hospital Insurance trust 
fund, that is, the Medicare Part A trust fund that people are 
really concerned about because it is scheduled to become 
insolvent in 2020, we could get rid of two-thirds of the 75-
year deficit by reducing the rate of growth in medical spending 
by 1 percentage point.
    So if we change the way medicine is practiced, even if it 
is incremental, it really adds up to savings over time.
    Senator Reed. Let me focus on the point that there is an 
implicit assumption that if you cap medical non-economic 
awards, you will reduce medical premiums; and here you have a 
company who is saying, ``You've done that. Terrific. Now give 
us a 19 percent increase.''
    I would also suggest, as many others did, that the 
California experience was shaped not just by the 1985 law 
capping damages, but by the 1988 law that actually imposed 
limits on the increasing size of malpractice premiums.
    Dr. McClellan. As you saw from the chart, the slowdown in 
growth started before 1988, and it has continued well after.
    Senator Reed. But my point with respect to the premiums 
that physicians are paying is that the result was not simply 
the adoption of caps on non-economic damages, but also limits 
on malpractice premiums.
    Would you support, in conjunction with a proposal for tort 
reform or insurance reform, putting caps on insurance premiums?
    Dr. McClellan. I certainly want to see how such a proposal 
would actually work. If you put caps on premiums, but don't 
change the liability system, for example, you will end up with 
insurers not being able to cover the rapidly rising costs of 
claims that we are seeing.
    If you look at the claims growth in recent years, including 
that 40 percent increase that I mentioned between 2003 and 
2004, you are going to end up without liability insurance and 
then you are really going to end up with doctors out of 
practice.
    Senator Reed. But the other side of the equation is, if you 
cap non-economic damages, but don't put any limits on insurance 
premiums, you could have the situation as there seems to be in 
Texas with GE Medical where they get the benefit of the law and 
they still ask for a 19 percent increase. That, I think, would 
be unfortunate because, again, a lot of this debate is being 
driven by the implicit and sometimes explicit assumption that 
if you cap damages, you lower premiums to physicians and 
hospitals and other health care providers, and they go on their 
merry way. Which raises the other issue behind why premiums are 
going up, why medical costs are going up, and that is the 
technology, allowing increased procedures.
    It is interesting. You mentioned the diagnostic imaging 
procedures. I had my radiologists from Rhode Island in. Their 
major comment--I won't say ``complaint'' because they never 
complain--their comment was internists, general practitioners 
are now getting very good, digitized equipment to do 
radiological procedures. It is not the old bulky kind that 
required a little more practice and training. It is secondhand 
equipment, though it is still adequate; and because they are 
under acute pressure in their offices to generate income, they 
are doing tests which before they might not do. Because it is 
so easy to do it, they can step in the next room and now give 
you a little scan with their radiological equipment.
    How much of these costs and these increased procedures are 
being generated by access to technology and the pressure, 
because of the way we pay people through Medicare, to generate 
these procedures to get more income?
    Dr. McClellan. Senator Reed, I think you are right that the 
way that we pay in Medicare also doesn't necessarily focus on 
getting the best-quality care at the lowest cost.
    We are having some discussions right now with the 
radiologists, with other medical groups, about how we can get 
to a better system, where our payment rules are focusing more 
on supporting doctors, delivering high-quality care at a low 
cost.
    I would be delighted to continue to work with you on that 
issue. But I think the fact remains that you are right, that it 
is easy now for physicians to obtain this imaging equipment and 
to bill for it. But the liability pressures on top of that are 
just going to encourage that even more. So I think we should be 
looking at better ways to formulate Medicare payments, to 
support and reward doctors that are really trying to do the 
right thing.
    But we can also do that by reforming the liability system. 
If we do both together, we are going to have a much better 
effect.
    Senator Reed. Again, I think what your comments suggest and 
what my instincts are is, this is a multifaceted problem 
requiring multifaceted approaches. But we seem to hear the 
Administration use one approach, which is basically, if we just 
rein in those junk lawsuits, everything is fine, when in fact I 
think you would concede, we have a complicated medical delivery 
system that has all sorts of different incentives and 
disincentives.
    Dr. McClellan. That is true, but I also think if we rein in 
the lawsuits, we will get higher-quality care, better access 
and lower cost.
    There are other things that we should be doing to achieve 
that goal as well. I hope we can work together on them, too.
    Senator Reed. Well, Mr. Chairman, again I think this is 
very productive. I appreciate Dr. McClellan's presence. But I 
would--in lieu of a second round, let me just stop and let my 
colleagues go.
    Representative Saxton. Mr. Hinchey.
    Representative Hinchey. Good morning, Dr. McClellan, thank 
you very much for your testimony.
    The licensing of professionals, including medical 
professionals and specialties in medicine, and the regulation 
of those professions is an activity that is carried out by the 
various States. And various States, as we have seen in one of 
the charts, have taken various steps over the years to deal 
with the problem of medical malpractice, including the 
regulation of lawsuits, as well as other steps.
    Why is this a Federal issue? Why should the Federal 
Government be involved in trying to limit people's access to 
the courts?
    Dr. McClellan. Two reasons. One is that the Federal 
Government is involved in providing access to medical care for 
these individuals. In our Medicare programs and our Medicaid 
programs, we are the primary insurer. And how we provide this 
care, how we provide the support for medical care, makes a big 
difference.
    So I care a lot about the quality of care that our 
beneficiaries are receiving. And I also care a lot about the 
cost of these programs. I want to make them as sustainable as 
possible so that Medicare beneficiaries and Medicaid 
beneficiaries, who really need our help, can get the greatest 
help possible, can get the best access to up-to-date treatments 
that are really making a difference in their lives.
    When I look around the country, in these States that 
haven't reformed their liability systems, seeing a lot of the 
money going into areas that are unnecessary procedures and that 
are problems in access to care, I really think we can do 
better.
    Representative Hinchey. I think we can always do better in 
every field. But I still wonder why the Federal Government 
should be putting itself into this situation when it is, 
traditionally, for all the time in our history, that we have 
left this particular situation to the States to deal with, to 
regulate, and they have done so in various ways.
    So I am not convinced that just because we have Medicare, 
we should be stepping in to try to limit people's access to the 
courts. But I do agree with you that we ought to be doing 
everything that we can to try to reduce the cost of our health 
care services.
    I am wondering if you could tell me how much money we would 
save if, say for Medicare particularly, if you were allowed to 
negotiate with the pharmaceutical companies for the cost of 
prescription drugs.
    Dr. McClellan. Well, that is a very good question, one that 
there has been a lot of interest from Congress and the public 
in. For that reason, I have been asking my actuaries, our 
independent actuaries that do these forecasts of Medicare 
costs, about what the impact would be. And I can send you a 
copy of the letter that my chief actuary, Rick Foster, sent to 
me on this very topic back in February.
    What he concluded was that negotiation by the Federal 
Government, on top of, or instead of, all of the negotiation 
that is going on right now as we implement the Medicare drug 
law to get the lowest possible prices to seniors--that 
additional negotiation would not lead to significantly lower 
costs and could potentially cause problems in access to care.
    So the reason for that conclusion is that people have 
looked at what happens when the Government does step in and 
regulate drug prices. In Medicare, what we saw before the 
Medicare law was passed was prices that were higher, much 
higher, than can be obtained in a competitive system for the 
drugs that Medicare covers now under Part B.
    They have looked at problems that could arise in access to 
care. The way that the Government could potentially negotiate 
is by saying, people won't get these drugs unless you give us 
some kind of lower price. And the result would be problems in 
access to the drugs.
    I think it is very important, as we implement the Medicare 
law, that people have access to the medicines that they need, 
that they can get the drugs that best meet their needs. So for 
those kinds of reasons, our independent actuaries concluded 
that this wouldn't lead to more savings.
    The independent analysts at CBO have reached a similar 
conclusion as well.
    Representative Hinchey. Well, I would like very much to see 
that letter.
    Dr. McClellan. I will send it right along.
    [The information referred to can be found in the 
Submissions for the Record on page 44.]
    Representative Hinchey. Sometimes independent actuaries 
turn out to be not quite so independent as you would like them 
to be.
    Dr. McClellan. I think ours have a pretty good tradition of 
speaking what they think is right.
    Representative Hinchey. I would like to see the letter to 
see what the conclusions were that they drew. And particularly 
in light of the fact that in every situation, in every country 
where you have a system of health care, national health care, 
and the price of pharmaceuticals are negotiated by that 
organization, the prices of drugs are very, very much lower 
than they are here, every single country.
    Dr. McClellan. Well, it is true for some new drugs. I don't 
think it is true across the board. And it is certainly not true 
for the generic drugs that make up a majority of the medicines 
that people use in this country.
    When you put price regulations on generics, you end up with 
higher prices, so what we see in these other countries that you 
are mentioning is they may have some lower costs on the new 
drugs that they have access to, but they do not have access to 
as many as we do.
    But they have got higher drug costs and less access to 
generics, and the result is, they are spending money in a way 
that does not lead to the best value for their citizens.
    Representative Hinchey. That is not true in the case of 
Canada, for example. And the Canadians have access to every 
single drug that we have access to.
    Dr. McClellan. We will give you the specifics on that too. 
But there are a number of drugs that are available in the 
United States that haven't been available or are available with 
a significant delay in Canada, and you have to go through a 
Government system for access to many drugs, including proton 
pump inhibitors, AIDS drugs.
    There are some drugs that are non-preferred or off 
formulary in Canada. There is a study. We will get all of the 
specifics; I don't have them all at the tip of my tongue. But 
there is a study done by, again, the Assistant Secretary for 
Planning and Evaluation that documented all of these back in 
2002.
    But there are AIDS treatments that were available only 
after substantial delay, compared to the United States, and 
many of the drugs that are available in Canada you have to go 
through Government processes in order to get. And the generic 
drugs in Canada do average about 40 to 50 percent higher in 
price than the drugs here. And generics account for most 
prescriptions in the United States.
    Representative Hinchey. Well, I have never heard that 
before. That is an interesting point.
    Dr. McClellan. We would like to follow up with you.
    [The information referred to can be found in the 
Submissions for the Record on page 46.]
    Representative Hinchey. When you look at the overall cost 
of prescription drugs, not generics specifically, but generics 
included in the overall cost of prescription drugs, the cost of 
those drugs is substantially lower. That comes about as a 
result of the fact that the agency in charge of the health care 
system there, such as Medicare, has the authority to negotiate 
with the pharmaceutical companies, and therefore they are able 
to bring down the cost of those drugs specifically.
    So you have looked, outside of this letter from the 
actuaries, at the benefits that might accrue, the financial 
benefits, if you were able to negotiate?
    Dr. McClellan. In the process of passing the Medicare law, 
there were a lot of discussions about this in Congress, as you 
know. Subsequently, as we have implemented the law, we have 
asked repeatedly, What is the best way to achieve two goals? 
One, we want to get prices down for drugs as much as possible 
for our seniors; and two, we want to make sure that seniors 
have access to up-to-date medicines.
    What we have seen too often in Medicare, where we have 
relied on Government regulation and statutes only, rather than 
giving people access to choices about how they get their 
coverage, is, the benefits fall way behind. We have fallen way 
behind in prevention, we have fallen way behind on assistance 
for people with chronic illnesses and preventing complications. 
We have fallen way behind on prescription drugs.
    So the steps that we are taking, as reflected in that 
actuarial letter, are the ones that are going to get us the 
best access to medicines and the best prices on those medicines 
at the same time. We need to achieve both goals.
    Representative Hinchey. Well, I look forward to reading 
that letter. When do you think you can get it to me?
    Dr. McClellan. Today.
    Representative Hinchey. There is another aspect to this, 
too, of course. And the availability of drugs does not mean 
that they are available to everyone. There are many people who 
cannot afford drugs that become available. And so the 
consequence is that they are not able to take them; it is not 
likely that you are going to have access to those drugs.
    There is just one other thing that I would like to ask in 
this particular round, if I may, and that is that many of the 
studies that I have seen that have been conducted by States 
indicate that a small portion of the medical profession is 
responsible for most of the malpractice cases and actions. And 
some of those doctors, if they are convicted of medical 
malpractice in one State, move to another State.
    Do you think it would be an idea that we might pursue to 
have someone form a Federal oversight of physicians who are 
guilty of malpractice and who seek to escape that by moving to 
other States?
    Dr. McClellan. I think having better information available 
on the quality of providers, including physicians, is really 
important. And we are taking a lot of steps to make that happen 
right now. We started reporting information, for example, on 
the quality of care on just about every hospital in the 
country. We started that a month ago.
    We are going to expand that. We are going to make this work 
for ambulatory care, as well.
    So I think steps in the direction of providing better 
information so we can identify potentially problematic 
providers is very important. But in terms of the cases that are 
actually brought, while only a relatively small share of 
doctors are sued frequently, in the specialties that we have 
talked about before, in OB, neurosurgery, most doctors have 
been sued at least once, if not more often.
    And that gets back to this lottery problem that I talked 
about. Sure it would be nice to find a system, better ideas for 
targeting those really problematic physicians that are a small 
part of the total.
    But most doctors are being sued. Our current system is not 
doing a good job of targeting in on truly bad physicians.
    Representative Hinchey. True.
    Representative Saxton. If I may, if we can go to Mr. 
Cummings, inasmuch as we are going to have a vote.
    Representative Cummings. Thank you very much, Mr. Chairman.
    Doctor, I want to pick up where you just left off. You say 
that most physicians are sued. And I am just wondering, there 
have been a number of proposals that there be more of a 
screening process early on to eliminate the so-called frivolous 
cases. Do you think that would help?
    Dr. McClellan. I think it could help. And as I mentioned 
earlier and was talked about in my written testimony, right in 
Baltimore at Johns Hopkins Hospital, they have this automatic, 
or this required, process to go to mediation first for elective 
cases, you know, where the patient has a chance to think about 
it and signs a form before they get care at Hopkins, saying 
that they are going to mediation first.
    And that works. The vast majority of complaints that are 
brought, get settled quickly and effectively through mediation. 
They never have to go to court.
    Mr. Cummings. And as one who--I support Johns Hopkins, of 
course, I have a lot of constituents that work there. But Johns 
Hopkins has had its share of suits, too, sadly--I mean, that 
have been--I mean, with substantial awards; and in some 
instances, they basically just about admitted liability from 
the very beginning.
    I can think of two right off the top of my head, and cases 
of death. And that is not knocking Johns Hopkins, because it is 
a great institution. But even in a great institution like 
Hopkins, things do happen.
    I guess, as I sit here and I listen to my colleagues and I 
listen to you, I cannot help but think about something that my 
good friend, Senator Obama, talks about; and he talks about an 
empathy deficit in our country, an empathy deficit.
    You have got the California law that puts a $250,000 cap on 
economic, non-economic loss. That was enacted, when, in 1975?
    Dr. McClellan. Right.
    Mr. Cummings. Do you consider this the gold standard for 
what the country should be doing?
    Dr. McClellan. I think it is one important step the country 
can take to get better quality care, better access and lower 
cost. There are other things that we can do as well.
    Mr. Cummings. Let's talk about the victim for a moment.
    I do not what kind of house you live in. But if you bought 
a house 30 years ago for $50,000, I would hate to think that 
now, today, 30 years later, it is still valued at $50,000, you 
could just sell it for $50,000.
    And I was just wondering, do you think that that figure is 
a little low, considering it is 30 years old, the $250,000?
    Dr. McClellan. We can talk about what the figure is. When I 
think about these cases of damages, what I look at is the 
overall compensation that the victim receives. And the costs 
for raising a child, the cost for losses on the job, the cost 
for other services performed around the home, even for someone 
who is not working, all of those costs are fully compensated in 
this kind of system.
    And those numbers have been going up and up and up, along 
with the economic costs, along with it. And if the costs of a 
house--those are determined by economics. The costs of wages, 
the costs of providing for your child, the costs of caring for 
your child, those have real economic implications; and those 
can all go up over time.
    Representative Cummings. My point is, so you would expect--
we can be 100 years from now and we are still at--in other 
words, at the time that they passed the law, they must have 
felt comfortable about $250,000 and what its value was at that 
moment. I understand they haven't changed it.
    But my point still remains, I just used the house as an 
example that things do go up, we consider it. There is nobody 
sitting in this room that would accept the same salary they 
received 30 years ago, today; they would not do it. Nobody.
    And I know that salary, given inflation and other things 
going up, people expect it to increase. And I am just curious, 
considering that, does it make sense to leave the non-economic 
damages cap there, considering what I just said?
    Dr. McClellan. Well, again for salaries and other things 
like that, those go up with the costs going up in the economy. 
That is not subject to the cap.
    Representative Cummings. You are still missing my point. My 
point is, do you leave it at $250,000 thirty years later.
    Dr. McClellan. Again, if you are looking at a system that 
can lead to lower costs without causing problems with access to 
care, this is definitely something that can do it.
    If I can say just one thing, and I have heard Senator Obama 
talk about the empathy deficit too, and I think the real 
concern here is that patients who are injured negligently just 
have no chance really in the court system. Only a very small 
fraction of them are actually able to bring cases all of the 
way through this very long and complicated and costly process. 
Those that do make it through, most of the money goes to 
lawyers, they don't get any compensation until years after the 
event has happened.
    We ought to be able to do much better than that. The system 
is failing in compensating people who do deserve compensation 
for their negligent care.
    Representative Cummings. Well, Mr. Chairman, I know we have 
got a vote. I will follow up with some written questions.
    Representative Saxton. We do have a vote on a rule for 
consideration of the budget report. So we are going to recess 
for a few minutes. We will recess for about 15 minutes.
    [Recess taken.]
    Representative Saxton. Dr. McClellan, first of all, I 
apologize. Nothing I can do about it, obviously, when we have 
votes. But I apologize to Senator Reed, too.
    I think that Senator Reed may have a couple of more 
questions. So let us go to Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Dr. McClellan, just a couple of follow-up questions. One is 
a point that Mr. Hinchey made.
    One would like to think that every physician in the United 
States is excellently prepared, trained, unburdened by the woes 
of the world, et cetera, but that is not the case. In fact, you 
can probably posit there is a normal distribution of skills and 
of temperamental characteristics.
    It is not surprising, then, that there is a portion on one 
side of the curve that seems to be involved in lots of issues 
of medical malpractice.
    Has anyone done an estimate, since we are talking about 
what we can do to bring down the price of health care, that 
would show the savings through malpractice premiums and 
systemic savings by more thoroughly regulating and identifying 
and either retraining or redeploying these individuals?
    Dr. McClellan. I haven't seen any specific savings 
estimates on that. I can tell you that as long as most of the 
lawsuits that are brought, most of the claims that are brought, 
are not related to negligent care, you know, there is only so 
much that you can do to focus in on providing better oversight 
for those really problematic physicians.
    I think, as part of liability reform, if we were able to 
take a lot of these inappropriate lawsuits off the table, then 
we could really concentrate our efforts on those problem 
physicians.
    Senator Reed. I do not want to be unnecessarily 
argumentative, but based upon observation and not analysis, 
most people understand in the profession, other doctors, who is 
competent, who is attentive. Complaints are made to medical 
societies. This is a mostly secret process at the local level 
by medical societies, and there are reasons for that, 
obviously.
    But it seems to me that you are kind of, you know, missing 
the point if you are suggesting we have to reform the tort 
system before we can focus on what may be another cause of 
medical malpractice, costs, and basic quality of care. Now that 
gets us into a whole set of issues, local licensure versus a 
Federal role, et cetera; but again I think, if we do not look 
at that, then we are not being----
    Dr. McClellan. I think that is a legitimate point. I am 
saying that the tort system as it is now is drawing in a lot of 
physicians who are practicing perfectly good, if not stellar, 
care into lawsuits and into all of those additional pressures 
and costs associated with the liability.
    There is a foundation to build on now. There is now a 
national practitioner database that the Agency for Health Care 
Research and Quality maintains. And that is intended to be a 
repository of information on claims that may be brought in 
different States and so forth. And it can be used by hospitals, 
by other health care organizations, and by States in 
accreditation issues for doctors.
    Senator Reed. My final point, I think it would be extremely 
useful in this overall debate to try to quantify what is going 
on here with respect to the quality issues and the capability 
issues of physicians. Because if there were--I do not know, but 
if there were equal savings in that arena, or even greater 
savings vis-a-vis capping damages, certainly that is something 
that we would want to know about.
    Let me shift gears to something else under your 
jurisdiction, the Part D drug benefit. You are implementing it 
now. Many States, like my own, Rhode Island, have their own 
local programs. We have something called RIPAE, the Rhode 
Island State Pharmacy Assistance Program.
    There is some confusion about benefits. There is confusion 
about who is qualified for what. We have more robust benefits 
at the State level in certain circumstances, the Federal 
program has other benefits.
    Bottom-line question: What are you doing to try to address 
this issue, not just for Rhode Island, but particularly for 
Rhode Island?
    Dr. McClellan. Senator, we are doing a lot. And I hope, if 
you have been talking to any Rhode Island State officials who 
do not feel completely plugged into CMS right now on how to 
make these programs continue to work and actually improve with 
the implementation of the drug benefit, you will get them in 
touch with me and our agency right away.
    I just got back from a conference sponsored by the National 
Governors Association in Chicago, where representatives of 
almost every State government that have been working with us on 
implementing the new drug benefit, came together to take stock 
of where we are and what the further problems are that we need 
to address.
    We had some excellent discussions about the materials that 
we have already prepared for transitioning dual-eligibles, to 
steps that we are taking to make sure that every State saves 
money under the law as intended. And I feel very good about the 
track that we are on.
    In the case of programs that provided prescription drug 
assistance, like the Rhode Island program, the intent of the 
law is to build on that. So instead of the State having to pick 
up all of the costs on their own, the Federal Government is 
going to provide some comprehensive help for low-income 
beneficiaries. The State will have to pay virtually nothing, 
and more than $1,000 worth of help for higher-income 
beneficiaries, so the State can add to that.
    We have guidance and work groups that are working right now 
to make sure that that gets implemented smoothly. So if there 
are any concerns there, they need to come to us. We have got 
processes in place.
    Senator Reed. Thank you.
    Representative Saxton. Thank you. Sorry to have held you 
up, Jack.
    Dr. McClellan, a good doctor-patient relationship has 
always been considered to be a crucial element of a medical 
care program--caring doctors and trusting patients, I would 
characterize it.
    In a recent survey of Pennsylvania doctors, they found that 
75 percent of specialists agreed with the following statement, 
quote, ``Because of concerns about malpractice, I view every 
patient as a potential malpractice lawsuit,'' end quote.
    Seventy-five percent of the doctors agreed with that 
statement. I am wondering, given that, what is the current 
nature of the doctor-patient relationship generally with 
specialists, and are you concerned about it?
    Dr. McClellan. I am very concerned about it. That gets back 
to what you brought up before, Mr. Chairman, about the fact 
that since most of the claims and suits that are actually 
brought do not involve negligent care, doctors have to view 
this sort of system as a lottery, as just a random risk of lots 
of time in court, lots of opportunities for lawyers to rake 
their reputations over the coals unfairly; and that clearly is 
going to have an impact on their relationship with patients, on 
how they practice.
    It can have an impact on how they practice medicine. It may 
have an impact on whether they stay in the profession.
    Pennsylvania is one of the States that is in red because of 
some documented problems in access to care, resulting from the 
rising pressures of medical liability. As I said at the outset, 
I worry that is getting worse. We are seeing big increases--
according to the Physician Insurance Association of America and 
other groups, big increases in the liability pressures that 
doctors are facing, most of it completely unrelated to 
negligent care. That is not a good situation when we are trying 
to really focus on delivering high-quality care at a low cost 
and focusing on fostering that doctor-patient relationship.
    Representative Saxton. Do you have any information relating 
to--obviously, the rising cost of malpractice insurance itself 
is an issue to doctors, and a health care cost driver. But 
there is another set of activities that you have referred to 
today as practice of defensive medicine.
    What percentage of the rise in health costs would you 
attribute--or do you have a way to do this--would you attribute 
to practice of the defensive medicine in conjunction with the 
actual cost of increases in medical malpractice?
    Dr. McClellan. The best estimates from our peer reviewed, 
published studies are that that can be 5 to 9 percent of 
hospital costs for serious medical conditions. Our studies 
looked at heart disease, which is the single most prevalent 
type of illness in the country.
    Other studies have looked at obstetrical care. They find 
increases as well. While the exact number may be hard to pin 
down, it is significant, it is much larger than the costs of 
the liability premiums alone.
    Representative Saxton. Let me turn over to the insurer 
side. One of the issues that occurs, which creates a problem 
and a medical liability crisis, is that insurers actually 
withdraw from the market. Obviously, insurance companies have 
to make a profit or they cannot stay in business. Rising claims 
costs may simply make this line of insurance unprofitable.
    Dr. McClellan. That is correct, and we have seen insurance 
companies pull out of this business. There are, in many States, 
maybe one option available, if that, for getting liability 
insurance. That is not a good recipe for getting liability 
insurance costs down.
    If we had a more predictable liability system, where 
insurers could manage and anticipate the risk more effectively, 
we would see lower liability insurance premiums from more 
competition and a healthier insurance market.
    But the liability insurance market is struggling in many 
States, and that is another aggravation, another consequence of 
the problems that we have with our liability system today. 
Insurers are there to deal with risk, But insurers like 
predictable risk. If you have got a lottery system where in 1 
year costs can increase 40 percent for reasons that have 
nothing to do with things that you can easily predict, like the 
quality of medical practice, then it is a much tougher line of 
business. And we are seeing the consequences of that with 
insurers pulling out, and with some of the premium increases 
that have been mentioned.
    Representative Saxton. Back to the doctors. Most 
malpractice claims are dismissed or dropped before ever 
reaching trial. And among those that do reach trial, most end 
in a verdict for the defense.
    However, even if doctors are exonerated by trial, they 
still suffer significant costs in terms of legal fees, stress, 
time away from their practice, and out-of-pocket expenses.
    Can you discuss, if you would, the impact on doctors of 
being sued, even if the claims are ultimately dismissed?
    Dr. McClellan. There is a lot of good direct evidence on 
that. There have been surveys done nationally. And you can use 
that survey information to compare a doctor's outlook on their 
practice, the way that they practice in States that have 
implemented liability reforms to those that haven't.
    What you see is, in States without reforms, the doctors 
feel the consequences of this pressure more. They feel like 
they have got to do more tests, they feel more frustrated with 
their practice of medicine. They actually spend more time away 
from their patients dealing with the consequences of the 
lawsuits.
    All of these things add to health care costs, without 
improving the quality of medical care, and compromise the 
ability of doctors to deliver high-quality care to all of their 
patients.
    Representative Saxton. There are--as Mr. Reed or Mr. 
Hinchey pointed out, there are a lot of other factors that go 
into what we have seen in the spike in the cost of medical 
care: new kinds of treatment, inflationary pressures of various 
kinds, labor rates, and so on.
    Do you have any information that would help us understand 
how serious the malpractice component is in the overall costs, 
increasing costs of medical care?
    Dr. McClellan. Well, from the previous studies, again 5 to 
9 percent cost differences in hospital spending that can be 
saved by implementing liability reforms. That adds up over time 
to some big savings. As I said before, if we can bring down the 
rate of growth in our hospital costs by 1 percentage point, 
that is two-thirds of the 75-year deficit for Part A, the 
Hospital Insurance trust fund.
    That is a huge impact on medical costs in this country. And 
some of these increases in costs are clearly worth it. Many new 
technologies bring new cures to patients, bring better quality 
of life. But as we spend more on some of these valuable new 
technologies to come along, to keep health care affordable, we 
have got to pay even more attention to getting rid of 
unnecessary costs in the system. That is why I think it is even 
more urgent; especially with the recent increases in liability 
costs that I documented in 2004, it is even more urgent to take 
action on liability reform.
    Representative Saxton. Thank you very much, Dr. McClellan. 
I don't believe that I have any further questions at this 
point. I would just say that we have been dealing with this 
subject on this committee because we think it is extremely 
important, and we thank you for being here today and for your 
input.
    I also suspect that the House will pass a reform measure 
this year. I wish I could suspect that the Senate would do the 
same, but we will see.
    So we thank you for being here today to discuss these 
important matters with us. And we look forward to working with 
you as we go forward.
    [Whereupon, at 11:50 a.m., the hearing was adjourned.]

                       Submissions for the Record

=======================================================================

       Prepared Statement of Representative Jim Saxton, Chairman

    It is a pleasure to welcome Dr. Mark McClellan before the Committee 
this morning to address medical liability reform.
    Dr. McClellan brings a wealth of experience and knowledge to bear 
on this subject. Currently, Dr. McClellan serves as the Administrator 
of the Centers for Medicare and Medicaid Services, overseeing 
approximately one-third of health care spending in the U.S. In addition 
to being a board-certified physician in Internal Medicine, Dr. 
McClellan is also a Ph.D. economist. He has previously served as the 
Commissioner of the Food and Drug Administration and as a member of 
President Bush's Council of Economic Advisers.
    There is little doubt that our nation's medical liability laws need 
reform. Over the past few years, premiums have skyrocketed. In just the 
last five years, total medical liability costs jumped 47%, to a record 
high of nearly $27 billion. One of the central cost drivers is rising 
claims costs. According to the legal research firm Jury Verdict 
Research, the median trial award for medical liability claims stands at 
an incredible $1.2 million, and a recent Department of Justice study 
reported that nearly two-thirds of medical liability trial awards 
exceed $250,000.
    This rise in costs has reached the point where the quality and 
availability of health care suffer. Faced with premiums increasing 20%, 
30%, or more per year, many doctors are cutting back on the scope and 
availability of their services. Nowhere is this trend more apparent 
than in obstetrics, where numerous OB/GYNs have decided it is just 
easier to drop the OB part altogether. Some doctors have elected early 
retirement or have relocated away from high litigation areas. Emergency 
rooms and trauma centers have also been hurt by the current crisis. The 
threat of lawsuits has made the practice of defensive medicine 
commonplace, and as a result, patients are subjected to more tests and 
procedures than may be warranted by clinical factors alone.
    Despite the rise in costs, the system is not better at compensating 
the negligently injured. The typical time that elapses between the date 
of injury and a jury verdict is close to 5 years. Moreover, it is 
widely recognized that only a small fraction of negligently-injured 
patients even file a claim. At the same time, a large majority--around 
80%--of medical liability claims do not even involve negligent 
injuries. One study even found that more than half of all medical 
liability claims do not involve an injury at all.
    The shortcomings in the current tort system are such that even The 
Washington Post has noted that ``the staggering costs and irrationality 
of America's civil justice system are unacceptable. The tort system is 
something of a casino, offering windfall judgments to a small number of 
claimants and nothing to others--with the merits of cases seeming 
almost irrelevant to their valuation.''
    Although each state faces its own set of challenges and problems, 
the medical liability crisis has nonetheless reached national 
proportions. Thus, we are grateful to have Dr. McClellan here to 
provide some insight into the problem and direction for reform.

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               Prepared Statement of Senator Jack Reed, 
                        Ranking Minority Member

    Thank you, Chairman Saxton, for holding this hearing on an issue 
that has received a great deal of attention recently. l welcome Dr. 
McClellan and thank you for testifying today.
    On the campaign trail last year, President Bush repeatedly 
criticized trial lawyers for filing ``junk lawsuits'' that he said were 
responsible for rising health ease costs. The centerpiece of the 
Administration's medical liability reform would cap non-economic 
damages at $250,000 and institute a three year statute of limitations 
on most lawsuits.
    The 2004 Economic Report of the President stated that the 
President's reform plan would ``lower the cost of providing health 
care.'' However, there's little, if any, evidence to support this 
claim. While it is certainly troubling that medical malpractice 
premiums for doctors have been rising rapidly in recent years, and many 
physicians in my state have informed me of the cost burden and the 
potential impact on access to care for patients, it is far from clear 
that jury awards are the sole driving force as the President suggests.
    In 2003, the Government Accounting Office (GAO) studied states with 
and without caps on non-economic damages and found that the states with 
caps had lower premium increases than those without caps. However, GAO 
did not have enough data to show a direct link between malpractice 
award caps and premiums. Similarly, the Congressional Budget Office 
(CBO) has found that there are potential savings for malpractice 
premiums by limiting the amount of malpractice awards, but they are 
skeptical that a cap would provide relief for health care costs in 
general.
    Malpractice costs were $24 billion in 2002, less than two percent 
of total national health care spending of $1.4 trillion, according to 
CBO. Reducing malpractice awards by 30 percent would only lower health 
care costs by approximately 0.5 percent or about $7 billion.
    CBO also finds that limiting physicians' malpractice liability 
would have much impact on ``defensive medicine'' practices, such as 
providing unnecessary tests or procedures to avoid a lawsuit, because 
physicians do so more often out of concern for patients or to generate 
additional income than because they fear liability.
    Dr. McClellan, I know you have studied the issue of defensive 
medicine and malpractice, so I will be particularly interested in your 
opinions about the amount of health cost savings non-economic caps on 
damages would produce.
    I believe, however, that there are some other reasons for the 
latest increases in medical malpractice insurance premiums that would 
not be addressed by the kinds of reforms the President and his 
supporters are advocating. The GAO, for example, points to slower 
growth in insurance company investment income and reduced competition 
in the liability insurance market as other potential drivers behind 
rising malpractice premiums.
    We also should not lose sight of the fact that this issue must be 
considered in the context of medical errors and the quality of patient 
care, which are inextricably linked to physician accountability. A 
study by the Institute of Medicine reported in 2000 that between 44,000 
and 98,000 people die every year because of preventable medical errors. 
These statistics point to a need to link any discussion of tort reform 
to the issues of medical errors, public safety, and, physician 
accountability.
    In the last Congress, the Republican leadership sent narrow medical 
liability legislation for OB/GYNs directly to the floor, thereby 
sidestepping serious Committee deliberation and inquiry into the nature 
of and possible solutions for rising insurance premiums. While it's 
hard to see how the President's proposal for medical liability reform 
will make more than a dent in spiraling health care costs; this is an 
important issue that lawmakers must be allowed to investigate 
thoroughly.
    I appreciate Dr. McClellan's willingness to testify on this issue, 
but I also hope you will be open to questions regarding your oversight 
of the Centers for Medicare and Medicaid Services (CMS). I have a 
number of questions regarding the $500 billion of Federal spending that 
you administer at CMS that undoubtedly has a bigger impact on physician 
behavior and overall health spending than medical malpractice costs.
    I look forward to Dr. McClellan's testimony.

          Prepared Statement of Mark McClellan, M.D., Ph.D., 
       Administrator, Centers for Medicare and Medicaid Services

    Chairman Saxton, Senator Bennett, distinguished members of the 
Committee, I thank you for inviting me here this morning to discuss the 
important topic of medical malpractice liability reform. It is a 
subject to which I have devoted considerable attention, both in my 
capacity as a civil servant and previously as an academic researcher 
and an internist. As President Bush and many in the Congress and across 
the country have recognized, our current malpractice liability system 
does not serve the needs of patients and is in need of reform. It is 
not simply an issue of lowering insurance premiums for physicians. It 
is particularly about patient safety and quality of care, as well as 
reducing unnecessary health care spending. According to the CBO, 
modification to malpractice laws will result in substantial savings to 
the Federal Government as a result of reduced malpractice premiums. My 
own research shows that resulting reductions in defensive medicine may 
also produce savings in both the public and private health care sector 
of up to several billion dollars per year.
    All insurance programs are potentially subject to costs created by 
the liability environment. For example, a recent CMS letter to the 
Medicare Payment Advisory Commission (MedPAC) indicated that spending 
on physician services during 2004 rose by approximately 15 percent. A 
significant driver of this increase is the fact that more patients are 
receiving more complex and more frequent imaging services, such as 
magnetic resonance imaging and computer tomography scans. For several 
years now, in fact, spending for these diagnostic services has been 
rising at a more rapid rate than overall physician expenditures. Based 
on my own research and the research of many academic experts, my 
interactions with other physicians, and my experience as a clinician, 
it is clear to me that the practice of defensive medicine is 
contributing to these cost increases. The evidence suggests that 
reforms to the malpractice system, including caps on non-economic 
damages and revision of the joint and several liability rules can 
reduce defensive medicine, which can reduce unnecessary health care 
expenditures. The CBO scoring of legislation in 2003 estimated that 
Federal expenditures would drop by nearly $15 billion over ten years. 
Those savings depend only on reduced premiums. My own research 
concluded a reduction in defensive medicine could lower overall 
hospital expenditures by between five and nine percent. During FY 2004, 
the Medicare program spent more than $133 billion on hospital fee-for-
service. That would mean potential annual savings of between $6.65 and 
$11.97 billion dollars, just for that program, not to mention the 
private sector.
    Even more importantly, liability reforms will improve quality and 
access to health care, leading to better health for Americans. I would 
urge the Congress to work with the Administration to formulate a plan 
to address the problems with our current liability system and to 
promote a culture of patient safety and quality within the healthcare 
arena. The changes in liability law have the potential not only to 
produce significant savings, but also to simultaneously improve patient 
safety and the quality of care.
    This morning I would like to review some of the systemic problems 
in medical malpractice liability and some innovative alternatives for 
addressing the needs of those who have been medically injured. 
Specifically, I would like to highlight the Department's ``Early 
Offers'' program as one possible way to speed resolution of malpractice 
claims so that patients' needs are satisfied in an effective, efficient 
manner.

                    THE CURRENT SYSTEM DOES NOT WORK

    Malpractice liability laws seek to address two primary goals: 
first, to adequately compensate and care for the needs of patients who 
have been injured due to negligence, incompetence, or other improper 
conduct by a provider; and second, to motivate providers to engage in 
high quality, professional care. The existing system falls far short on 
both of these goals. The current judicial process for addressing 
malpractice needs to be reformed not simply to save money, but also 
because individuals who have just cause to make a claim are not 
receiving the help they need and deserve.
    It is well known that the vast majority of individuals injured by a 
caregiver do not file suit. The 1990 Harvard Medical Practice study 
reported that only 2 percent of individuals experiencing an adverse 
event due to medical negligence filed suit and, of more concern, only 1 
in 14 individuals seriously injured by such an event received any sort 
of compensation. More recent work by some of the same researchers 
confirms these findings.\1\ The Physicians Insurance Association of 
America reports that, on average, it takes more than 5 years for an 
insurer to pay a malpractice claim after the date of the incident--
mostly due to delays in reporting (22 months) and delays in the tort 
system (43 months). When an injured patient does finally successfully 
settle or win a case, lawyers typically take anywhere from 30-40 
percent of those funds as compensation. In short, many of those who are 
injured due to negligent care are simply not receiving justice because 
the system does not work for them.
---------------------------------------------------------------------------
    \1\ Studdert et al., Negligent Care and Malpractice Claiming 
Behavior in Utah and Colorado, Medical Care Vol. 38 No. 3 (2000), pp. 
250-60.
---------------------------------------------------------------------------
    On the other side of the coin, the current system does not do much 
in terms of screening out cases with no medical merit, or in 
differentiating between adverse events due to negligence and 
unavoidable adverse events. A study published in the New England 
Journal of Medicine found ``no association between the occurrence of an 
adverse event due to negligence or an adverse event of any type and 
payment . . . among the malpractice claims we studied, the severity of 
the patient's disability, not the occurrence of an adverse event or an 
adverse event due to negligence, was predictive of payment to the 
plaintiff.\2\
---------------------------------------------------------------------------
    \2\ Troyen A. Brennan, M.D., J.D., M.P.H., Colin M. Sox, B.A., and 
Helen R. Burstin, M.D., M.P.H., ``Relation between Negligent Adverse 
Events and the Outcomes of Medical Malpractice Litigation,'' The New 
England Journal of Medicine, Volume 335: 1963-1967, December 26, 1996, 
Number 26.
---------------------------------------------------------------------------
    The same study reported that 10 of 24 cases involving no adverse 
event whatsoever were settled with a mean payment of nearly $29,000. 
Six of 13 cases involving an adverse event not due to negligence were 
settled with a mean payment of more than $98,000. More broadly, of 
claims filed during 2003, only about a third resulted in some payment 
to the plaintiff, and of the small percentage that go to trial, more 
than three in four resulted in a finding for the defendant, immediately 
leading one to question the validity of the bulk of claims.\3\
---------------------------------------------------------------------------
    \3\ Physician Insurers Association of America, ``PIAA Claim Trend 
Analysis'' 2003 ed. (2004).
---------------------------------------------------------------------------
    Rapidly rising premium rates can have a real impact on patient 
access to care. A study by the Agency for Healthcare Research and 
Quality examined how the supply of physicians varied across states 
between 1970 and the present. The study concluded that states adopting 
caps on non-economic damages experienced about 12 percent more growth 
in physicians per capita than States without caps. Notably, the study 
also found that States with relatively high caps were less likely to 
experience an increase in physician supply than States with lower 
caps.\4\ This sort of disparity can translate into very real access 
challenges. It means that it is more difficult for patients to find the 
types of specialists they need, that they must go further out of their 
way, and take more time from their own lives to access the care they 
require. In some cases, the limitations on access result in negative 
health outcomes as well.
---------------------------------------------------------------------------
    \4\ Hellinger, Fred J., Ph.D., and William E. Encinosa, Ph.D., 
``Impact of State Laws Limiting Malpractice Awards on Geographic 
Distribution of Physicians,'' Agency for Healthcare Research and 
Quality, July 3, 2003.
---------------------------------------------------------------------------
    Just to illustrate, a 2004 survey of Ob/Gyns in Illinois found that 
in the previous two years, 11 percent had stopped practicing obstetrics 
as a result of medical liability concerns. Based on how many office 
visits physicians report in an average month (N=250), that means 46,250 
office visits for Ob/Gyn services were lost across the state during 
those two years.
    The malpractice system has important adverse effects on quality as 
well. In a widely read 1999 report, ``To Err is Human,'' the Institute 
of Medicine (IOM) noted that: [R]eporting systems are an important part 
of improving patient safety and should be encouraged. These voluntary 
reporting systems [should] periodically assess whether additional 
efforts are needed to address gaps in information to improve patient 
safety and to encourage health care organizations to participate in. . 
.reporting, and track the development of new reporting systems as they 
form.\5\
---------------------------------------------------------------------------
    \5\ Committee for Quality Health Care in America/Institute of 
Medicine, ``To Err is Human: Building a Safer Health System,'' 2000.
---------------------------------------------------------------------------
    The IOM emphasized that fear of lawsuits deters doctors and 
hospitals from making reports, even when they are not negligent, 
because in many states such reports can be used against them in court. 
This very understandable concern impedes quality improvement efforts. 
If our liability laws do not encourage error reporting and analysis, 
they serve only to perpetuate the very problems that they ostensibly 
exist to address.
    The truth is that common human decency and professional ethics are 
sufficient motive for the vast majority of physicians to provide the 
best care possible. Most medical errors today are not the result of bad 
doctors or nurses, but rather the result of complex or difficult 
systems in which they work.
    You would think that we would do everything in our power to 
encourage the kind of self-analysis and systems evaluation necessary to 
identifying and addressing systemic errors. Instead, our current tort 
system sets up roadblocks that discourage this very important activity. 
This roadblock needs to be removed.
    Congress should pass patient safety legislation that includes a 
mechanism for allowing anonymous reporting of errors and that protects 
databases of such information from discovery. If we don't collect this 
data, we'll never see the patterns that will allow us to make changes 
to improve patient safety and will never realize the concurrent savings 
resulting from reduced errors.

                    THE COSTS OF OUR CURRENT SYSTEM

    As an acadmic, I conducted my own research on this subject that 
focused on whether, and to what extent, physicians engage in defensive 
medicine as a result of their concerns over being sued. In 1996, 
Stanford University Professor Daniel Kessler and I conducted a study on 
the extent to which physicians engage in defensive medicine.\6\ We 
examined national data on Medicare beneficiaries experiencing a new 
primary diagnosis of serious cardiac illness in 1984, 1987, and 1990. 
We also compiled a comprehensive database of reforms to state liability 
laws and malpractice control policies from 1969 to 1992. Each of the 
observations in the Medicare data set was matched with a set of two 
tort law variables that indicated the presence or absence of direct or 
indirect malpractice reforms at the time of their initial 
hospitalization. Dr. Kessler and I found that direct liability reforms, 
such as caps on damage awards; abolition of punitive damages; and 
mandatory prejudgment interest and collateral-source rule reforms 
reduce hospital expenditures by 5 to 9 percent within 3 to 5 years of 
adoption. The drop in expenditures resulted from a change in physician 
practice patterns that we attributed to a moderation in defensive 
medicine. It is important to note that this shift had no consequence in 
terms of patient mortality or other serious adverse health events--that 
is, reforms made it possible to lower medical costs significantly 
without compromising quality of care. This particular study was peer 
reviewed and published in The Quarterly Journal of Economics. In 1997, 
the International Health Economics Association, a well-known global 
professional association of health economists, presented us with the 
Kenneth J. Arrow Award for this article.
---------------------------------------------------------------------------
    \6\ Kessler, Daniel P. and Mark B. McClellan, ``Do Doctors Practice 
Defensive Medicine?'' The Quarterly Journal of Economics, vol. 111, no. 
2, May 1996.
---------------------------------------------------------------------------
    The article's findings on the impacts of liability reforms on cost 
and quality are supported by a substantial body of other work. In an 
earlier study published in the Journal of the American Medical 
Association, researchers found a positive relationship between 
malpractice claims risk and rates of cesarean sections.\7\ In a 2002 
paper also published in a peer-reviewed economics journal, Dr. Kessler 
and I further explored the role of malpractice reforms in reducing 
defensive practices. Dr. Kessler and I found that malpractice reforms 
affect physician behavior by changing both financial measures of 
``malpractice pressure'' (such as malpractice claims rates and 
malpractice insurance premiums) and non-financial measures (such as the 
time and hassle spent in defending against a claim). \8\
---------------------------------------------------------------------------
    \7\ Localio, Russell et al., Relationship Between Malpractice 
Claims in Cesarean Delivery, JAMA Vol. 269, January 20, 1993, p. 366.
    \8\ Kessler, Daniel P. and Mark B. McClellan, ``How Liability Law 
Affects Medical Productivity,'' Journal of Health Economics, vol 21 
(2002) pp. 931-55.
---------------------------------------------------------------------------
    Based on the work we did, Dr. Kessler and I concluded that if 
direct liability reforms had been adopted nationwide between 1984 and 
1990, it would have resulted in annual savings of $450 million for each 
of the first two years and close to $600 million for each of the 
succeeding years for just the two conditions we studied.\9\ As I 
mentioned earlier, our study concluded that these reforms could 
potentially reduce overall hospital expenditures by five to nine 
percent. Those kinds of savings, if realized, could have a significant 
impact on the fiscal health of the Medicare and Medicaid programs. 
Furthermore, as stated above, these savings would come without any drop 
in the quality of care and outcomes experienced by patients.
---------------------------------------------------------------------------
    \9\ Kessler, Daniel P. and Mark B. McClellan, ``Do Doctors Practice 
Defensive Medicine?'' The Quarterly Journal of Economics, vol. 111, no. 
2, May 1996.
---------------------------------------------------------------------------
    CBO has taken issue with the estimates from the paper written by 
Dr. Kessler and me, contending that tort reform will not reduce 
defensive medicine. CBO used our work as a model, but their efforts are 
hampered by two critical methodological limitations. First, when CBO 
sought to replicate our study on a more recent sample of patients with 
the conditions we examined, it obtained similar results to ours. The 
finding of insignificant effects arose only when CBO sought to re-
estimate our models on a set of patients with very broadly defined 
illnesses. Because hospital expenditures on patients with a broad range 
of illness are likely to be heterogeneous and hard to predict, the 
unexplained variance in hospital expenditures for these patients is 
likely to be large--larger than the unexplained variance in hospital 
expenditures for patients with clearly defined illnesses we studied. 
Since the standard errors of the estimates of the effects of limits on 
liability are proportional to the unexplained variance in expenditures, 
the statistical significance of estimates from models with broadly 
defined illnesses would be less than the significance of estimates from 
models with narrowly defined illnesses.
    Second, we used more comprehensive data, while CBO used data from a 
20 percent random sample of beneficiaries for most (1991-1996) of their 
study period. Third, there was very little variation in states' tort 
laws during the CBO's entire study period (1991-1999)--according to CBO 
staff, only 6 states changed one or the other of the two liability 
system variables under analysis. In the period that we studied (1984-
1994), 33 states changed one or the other of the liability system 
variables under analysis. These two differences--the less comprehensive 
data and the smaller number of ``experiments'' in the CBO analysis--
would also lead the statistical significance of estimates reported in 
their brief to be lower than the significance of our estimates.
    It is important to put the differences between myself and Dr. 
Kessler, and the CBO, in the context of what we focused on. CBO has not 
made estimates of savings from reductions in defensive medicine. They 
have, however, concluded that reduced premiums would save the Federal 
Government billions of dollars. My own research shows the potential for 
billions more in savings as a result of reduce defensive medicine. What 
we both end up saying--along with numerous other researchers--is that 
reforms will lead to billions of dollars in savings each year.

            LIABILITY CONCERNS REDUCE PHYSICIAN PRODUCTIVITY

    Every time our malpractice system ties up a physician in judicial 
or administrative matters, then their clinical skills are temporarily 
removed from the productive pool. Even small drops in the average 
amount of time spent on malpractice claims will have the beneficial 
result of making physicians more productive in terms of patient care, 
which is ultimately where we want them to spend their time. The 2002 
paper with Dr. Kessler that I mentioned, documented how this works: 
reform-induced decreases in the time and hassle spent defending against 
malpractice claims leads to lower health care costs, but not worse 
health outcomes.
    The perceptions of practitioners themselves back up these 
statistical results. A 2002 poll by Harris Interactive found that the 
fear of litigation impacts healthcare administrative issues. Well over 
three-fourths of all physicians and nurses (84% and 81%, respectively) 
reported that they spend more time on paper work, such as medical 
record documentation, because of malpractice concerns than they would 
based solely on the patient's clinical needs. Additionally, nearly all 
physicians (94%) believe that written descriptions of cases are very 
often or sometimes influenced by the fear of litigation.\10\
---------------------------------------------------------------------------
    \10\ Taylor, Humphrey, et. al., ``Common Good Fear of Litigation 
Study: The Impact on Medicine,'' Harris Interactive, April 11, 2002.
---------------------------------------------------------------------------
    In a 1997 paper, Dr. Kessler and I investigated how the 
intrusiveness of the liability system affected physician perceptions of 
medical care. We estimated the impact of liability reforms on objective 
measures of malpractice pressure--such as claims rates--and on 
perceptions of the effects of malpractice pressure on practice 
patterns. The study found that malpractice pressure affects physician 
perceptions of two important dimensions of medical practice: propensity 
to make referrals, and the ability to spend time with patients.\11\
---------------------------------------------------------------------------
    \11\ Kessler, Daniel and Mark McClellan, The Effects of Malpractice 
Pressure and Liability Reforms on Physicians Perceptions of Medical 
Care, Law and Contemporary Problems Vol. 60 (1997) pp. 81-106.
---------------------------------------------------------------------------
    More generally, the legalistic atmosphere in which physicians 
practice warps the physician-patient relationship. Hauser et al. give a 
good example of how fear of litigation can reduce the trust in the 
physician-patient relationship and actually become a barrier to clear 
and effective communication.
    A woman went to a gynecologist for a problem and a minor surgical 
procedure was recommended. At the beginning of the discussion of this 
procedure, the physician commented, ``The law requires me to inform you 
of certain facts about this operation.'' And then, in a perceptible 
alteration of his normal patterns of speech, the gynecologist began to 
chant a litany of side effects, risks, morbidity, mortality, 
percentages, probabilities, etc. The patient later reported that after 
about ten seconds of listening to this, her mind shut down entirely. 
``This appears to be some sort of arcane ritual! The communication was 
not directed to me for any benefit of mine whatsoever.\12\
---------------------------------------------------------------------------
    \12\ Hauser MJ, Commons ML, Bursztajn HJ, Gutheil TG. ``Fear of 
Malpractice Liability and its Role in Clinical Decision Making,'' in 
Gutheil TG, Bursztajn HJ, Brodsky A, Alexander, v. Decision Making in 
Psychiatry and the Law. Baltimore: Williams & Wilkins, 1991.
---------------------------------------------------------------------------
    High-quality medicine requires effective communication with 
patients. The various tests and procedures available to us provide a 
tremendous amount of useful information, but often, a diagnosis, or the 
type of test to utilize, is prompted by something the patient shares 
with the physician in conversation. If, because of liability concerns, 
physicians are unable to discuss the inherent ambiguities and 
complexities of medical practice, and the variety of potential outcomes 
to a given procedure or service, in a manner to which the patient can 
personally relate, then the patient's ability to make informed 
decisions is compromised. Our current system, because it recasts this 
relationship in legalistic terms does not promote mutually beneficial 
exchanges of information.

                  INNOVATIVE PRIVATE SECTOR APPROACHES

    Although those in the private sector cannot modify tort law, a 
number of organizations and providers have begun experimenting with 
mediation, with some success.
    Some time ago, Johns Hopkins Hospital began requiring non-emergency 
patients who came to them for elective procedures (individuals who had 
the option of going elsewhere if they so chose) to sign an agreement to 
take any malpractice claims to mediation prior to going to court. In 
2003, Hopkins mediated 24 cases and resolved 21 of them. As a result, 
Hopkins 2003 claims expenses decreased almost 30 percent. Mediation is 
typically much faster than a court case and involves far lower 
attorney's fees. In short, patients who are injured get compensated at 
a higher level and in a shorter amount of time. Furthermore, this 
reform has helped the hospital communicate more freely with the 
patients, and probably with the professional staff, in order to be sure 
the mediation is successful and the highest possible quality of care is 
achieved.

              TORT REFORM AND LIABILITY INSURANCE PREMIUMS

    As you are well aware, a fairly fierce debate over how the medical 
malpractice system should be reformed has been going on for some time 
now. While more research evidence would help in making the path forward 
obvious to all, there is no question that liability reform has the 
potential to produce significant healthcare savings, as well as reduce 
problems of access and quality care. The time to act on this issue is 
now--from the standpoint of health care quality and cost, we can't 
afford to wait.
    A number of possibilities exist for improving our medical liability 
system. Tort reforms include actions such as capping awards for pain 
and suffering, so called non-economic damages, as well as capping 
punitive damages. In addition, suggestions have been made to reframe 
rules for joint and several liability, such that each actor involved in 
a given episode of care, including the physician, hospital, and payer, 
all bear a level of blame proportional to their share of fault or 
responsibility. Liability for damages would not be joint. As another 
option, attorneys' fees could also be capped, so that more of the 
dollars won by a plaintiff with a meritorious case actually go to that 
individual to address their health needs, and large awards could be 
paid as an annuity, or over a number of years, instead of as a lump 
sum, so that the money is available in the future when the individual 
needs it to pay for care. Collateral source rules, taking into account 
funds coming from health, automotive, or workers' compensation 
insurers, could also be modified to allow reductions in settlements or 
jury awards commensurate with insurers' payments. Alternatively, 
mandatory pre-trial screening by an independent medical expert to weed 
out baseless claims could reduce the number of baseless suits faced by 
physicians. President Bush supports securing the ability of injured 
patients to get fast, unlimited compensation for their economic losses, 
including the loss of ability to provide unpaid services like care for 
children or parents, but has urged the Congress to support a cap of 
$250,000 on non-economic damages, limit punitive damages, eliminate 
joint and severable liability, create a uniform statute of limitations, 
and provide for the structured payment of future damages.
    According to the GAO, the greatest driver of increases in physician 
liability premium rates is losses suffered as a result of malpractice 
claims.\13\ They also concluded that states with tort reforms that 
include certain damage caps had lower growth in liability premiums than 
did those without such caps. Another study by Stephen Zuckerman et al. 
concluded that capping medical liability awards reduced premiums for 
general surgeons by 13 percent in the year following enactment of that 
reform and by 34 percent over the long term. The reforms resulted in 
similarly lower premiums for general practitioners and Ob/Gyns.\14\ A 
2002 HHS study found that during 2001, states with meaningful caps on 
non-economic damages saw average premium increases of 15 percent, while 
states without such caps saw increases of 44 percent.\15\
---------------------------------------------------------------------------
    \13\ Hillman, p. 1.
    \14\ Stephen Zuckerman, Randall R. Bovbjerg & Frank Sloan, 
``Effects of Tort Reforms and Other Factors on Medical Malpractice 
Insurance Premiums,'' 27 INQUIRY 167-182 (19.90).
    \15\ ``Confronting the New Health Care Crisis: Improving Health 
Care Quality and Lowering Costs by Fixing our Medical Liability 
System,'' HHS Office of Assistant Secretary for Planning and 
Evaluation, July 24, 2002.
---------------------------------------------------------------------------
    Like many academic studies, my own research has demonstrated that 
direct tort reform, including capping damages, abolition of mandatory 
prejudgment interest, and collateral source rule reforms reduce premium 
expenditures significantly. The 1997 paper with Dr. Kessler I mentioned 
above showed that in states adopting such reforms, within three years 
physicians saw substantially and statistically significant lower trend 
growth in their real malpractice insurance premiums of approximately 
8.4 percent.\16\
---------------------------------------------------------------------------
    \16\ Kessler, Daniel P. and Mark B. McClellan, ``The Effects of 
Malpractice Pressure and Liability Reforms on Physicians' Perceptions 
of Medical Care.''
---------------------------------------------------------------------------
    Amounts paid on malpractice claims, either in settlement or because 
of a jury award, have been growing substantially in the past few years. 
The Physician Insurers Association of America (PIAA) reports that the 
median jury award in medical liability cases nearly doubled from 1997 
to 2003, increasing from $157,000 to $300,000. The PIAA's as yet 
unpublished report on 2004 indicates that the median jury award during 
that year was $439,400; a one-year increase of more than 46 percent. It 
is notable that PIAA found a 2004 mean payment on a jury verdict of 
$606,907. Such a large difference between the median and the mean 
indicates the existence of a significant number of large awards. The 
size of settlements has similarly increased. Median settlements 
increased from $100,000 to $200,000 between 1997 and 2003. As 
previously noted, these increasing losses drive increases in premiums. 
However, physicians must also pay legal fees. Physicians who win at 
trial have average defense costs of $87,720 per claim and in cases 
where the claim was dropped or dismissed, their costs averaged 
$17,408.\17\
---------------------------------------------------------------------------
    \17\ ``Physician Insurers Association of America, ``PIAA Claim 
Trend Analysis: 2003 ed. (2004).
---------------------------------------------------------------------------
    There is substantial evidence on the positive effects of tort 
reform to provide a basis for congressional action at this time. Not 
only will tort reform result in lower premiums, but, much more 
importantly, it will help foster an environment in which physicians do 
not feel the need to engage in defensive medicine and we will see our 
costs drop as a result. Tort reform will increase access to healthcare 
and it will result in improved quality as providers feel the freedom to 
openly discuss systemic improvements that will lead to a higher degree 
of patient safety. I would urge the Congress to take this issue up and 
act on it.

                      THE IMPACT OF MARKET FORCES

    There is no significant controversy about whether the number of 
claims made against physicians and ballooning settlements and judgments 
has contributed to rising premiums. However, there are others who 
contend that the tort system itself is not the only reason for premiums 
to increase; they argue that the insurance market also contributes to 
the rise in premium rates.
    Insurers typically invest the bulk of their revenues into bonds. 
Some people argue that during the stock market rise of the 1990s, 
insurers realized profits from their investments that allowed them to 
reduce premium rates. They contend that as the stock market has 
suffered declines, insurers have raised their premiums to make up for 
investment losses. In addition, many insurers purchase reinsurance from 
larger entities. Some say that such reinsurance has become increasingly 
expensive in the past few years, particularly after the tragedy on 
September 11, 2001, and that it is also common for insurers entering a 
new market to provide lower introductory rates in order to obtain 
market share, and then raise the rates once they have an established 
client base.
    In addition to business cycle factors, the St. Paul Company, one of 
the larger physician insurers in the country, decided to cease 
providing malpractice coverage at the end of 2002. This action reduced 
competition among insurers and allowed them to, at least temporarily, 
increase their premium rates.
    Critics of tort reform efforts point to all of these factors as 
relevant to the malpractice debate. They argue that we should not 
engage in tort reform if it is not the only driver increasing premiums 
and expenditures.
    The GAO concluded that although none of the companies it examined 
experienced a loss on their investments, a 1.6 percent decline in 
investment return from 2000 to 2002 would have resulted in premium 
increases of 7.2 percent over the same period.\18\ Such a decline would 
not have been outside the realm of possibility given market movement 
during that period. Studies like these lend credence to the argument 
that a component of liability premium increases may result from factors 
other than rising settlements and jury awards.
---------------------------------------------------------------------------
    \18\ Hillman, p. 8.
---------------------------------------------------------------------------
    That said, the present problem in many States is not the result of 
the so-called ``insurance cycle,'' or reckless investments by insurance 
companies. Although we have been on an ``up'' part of the cycle, that 
does not explain extremely high premium increases in the last few years 
in some States that have not reformed their liability system, compared 
to much smaller increases in most of the States that have implemented 
significant reforms. The insurance cycle is not a phenomenon that 
occurs in some States but not others. But the growth in liability 
premiums and even the availability of liability insurance has clearly 
varied substantially across states, in association with differences in 
liability laws.
    Consequently, reforms in insurance would not address the underlying 
causes of the problems of unnecessary costs, lower quality, and less 
access to care that result from our current liability system. Insurance 
market reforms will not change physicians' perception of the liability 
environment in which they work and market reforms will not reduce the 
level of defensive medicine. Furthermore, market based reforms will not 
produce swifter settlement of claims, or improve the equity of injured 
patients' compensation.

            ADDITIONAL STEPS TO IMPROVE OUR LIABILITY SYSTEM

    In late September of last year, then-Secretary Thompson announced 
an HHS initiative to deal with claims made against providers who are 
employees of the Department, including those practicing at community 
health centers or through Indian Health Service programs. To reduce the 
amount of time it takes a patient to receive compensation, HHS designed 
the Early Offers program to encourage rapid settlement of cases, 
provide quick payment in deserving cases, and avoid the delay, cost, 
and emotional distress of litigation.
    When a patient who has been served at a federally-funded health 
center or Indian Health Center facility files a medical malpractice 
liability claim against HHS, we send a standard notice explaining our 
early offers program. Both sides have 90 days to submit a confidential 
offer to a neutral third party who will compare the offers and notify 
both sides only if a match is made. Not only are offers voluntary, 
their amount and existence remain confidential forever if no match is 
made. So neither side tips its hand or loses leverage if the case goes 
to court.
    The program is up and running at HHS and we're hopeful that it will 
show promising results in the months to come. In the meantime, any 
doctor or hospital can set up an early offers program. Because an early 
settlement only occurs when both parties agree, you're not losing any 
options by setting up a program, and no government action is required.
    Evidence on how we can improve quality of care for patients should 
drive our reform efforts. We should be sure that if doctors take steps 
to encourage quality, for example, installing and using electronic 
medical records so that they can more easily track adverse events and 
thereby prevent them, that these physicians are not then punished by 
our legal system. If a physician who is considering such a system has 
in the back of his/her mind the fact that some day an attorney might 
use his data to bring suit, that physician may abandon the idea 
altogether. We should be looking to create systems that support quality 
care, that provide the data that are needed for good decision making.
    To illustrate what can happen when physicians are able to be more 
open with their patients about medical errors, I would point you to the 
experience of the Lexington, Kentucky Veterans Affairs medical center. 
In 1987, after losing two malpractice cases with judgment totaling more 
than $1.5 million, this facility adopted a policy of radical honesty. 
They began to openly and immediately discuss with patients and/or their 
families any errors that occurred during treatment, including giving 
the patient information about their right to file a claim or an 
application for compensation. Furthermore, the facility disclosed 
medical errors when the patient or family had no reason to know one had 
occurred. A 1999 study of the Lexington facility's claims experience 
during the years 1990 to 1996 concluded that the facility did not pay 
any more in malpractice claims than comparable VA facilities, and had 
concurrently avoided significant legal expenditures.\19\ Partially due 
to the success of the Lexington policy, the VA adopted this practice 
system-wide in 1995.
---------------------------------------------------------------------------
    \19\ Kraman, Steve S. and Ginny Hamm, ``Risk Management: Extreme 
Honesty May be the Best Policy,'' in Annals of Internal Medicine, vol. 
131, issue 12, 21 December 1999, pp. 963-67.
---------------------------------------------------------------------------
    The VA is not entirely analogous to the private market, but I bring 
up this example because it demonstrates how the real needs of patients 
who have been injured can be addressed more adequately when systems are 
in place to encourage patient-physician communication.

                               CONCLUSION

    We are considering a variety of administrative ways to test 
innovative ideas that would lead to a solution to the malpractice 
problem.
    Mr. Chairman, the current medical liability system simply does not 
address the needs of patients, and it's costing those patients, the 
Federal Government, and other payers billions of dollars every year 
because it adds to costs and encourages care that does not improve 
health. More importantly, our liability system reduces access and 
reduces quality of care. I would encourage the Congress to take action 
on this issue and would be happy to work with you as you move forward. 
I would be pleased to take any questions at this time.

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