Medical Liability: Impact on Hospital and Physician Costs Extends Beyond
Insurance (Letter Report, 09/29/95, GAO/AIMD-95-169).

As Congress considers proposals to reduce to tort liability in the
health care industry, little consensus exists on the extent to which
medical liability-related spending boosts hospital and physician
expenditures, a central issue in the debate over health care reform. GAO
found that hospitals and physicians incur a variety of medical liability
costs. Studies attempting to measure such costs have focused on the cost
of purchased malpractice insurance, which is readily quantifiable
because of state reporting requirements. Other hospital and physician
liability costs, however, are impractical and methodologically difficult
to measure with any precision. Such costs include defensive medicine,
liability-related administrative expenses, and medical device and drug
company's liability expenses that are passed on to hospitals and doctors
in the price of products. However, a broader understanding of such costs
and their implications is useful to the ongoing medical liability reform
debate.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-95-169
     TITLE:  Medical Liability: Impact on Hospital and Physician Costs 
             Extends Beyond Insurance
      DATE:  09/29/95
   SUBJECT:  Liability (legal)
             Health care costs
             Insurance premiums
             Physicians
             Hospitals
             Liability insurance
             Medical equipment
             Pharmaceutical industry
             Malpractice (medical)
             Insurance cost control

             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Ways and Means, House of
Representatives

September 1995

MEDICAL LIABILITY - IMPACT ON
HOSPITAL AND PHYSICIAN COSTS
EXTENDS BEYOND INSURANCE

GAO/AIMD-95-169

Medical Liability

(913722)


Abbreviations
=============================================================== ABBREV

  CBO - Congressional Budget Office
  OTA - Office of Technology Assessment

Letter
=============================================================== LETTER


B-260671

September 29, 1995

The Honorable Bill Archer
Chairman, Committee on Ways and Means
House of Representatives

Dear Mr.  Chairman: 

As the Congress considers a number of legislative proposals intended
to reduce tort liability in the health care industry, little
consensus exists on the extent to which medical liability-related
spending contributes to overall hospital and physician expenditures,
a central issue in the health care reform debate.  While such costs
have long concerned hospitals and physicians, some economists and
health care policy analysts assert that medical liability is not a
major factor affecting health care costs.  To provide a more
comprehensive picture of medical liability's impact on hospital and
physician costs, you asked us to identify and describe the types of
medical liability costs that affect hospitals and physicians and to
determine whether existing studies include these costs in their
estimates of hospital and physician liability expenses. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Widely cited estimates of hospital and physician medical liability
costs are often misinterpreted.  These estimates, roughly 1 percent
of national health care expenditures, represent only a portion of all
hospital and physician medical liability costs, generally those
associated with malpractice insurance premiums.  However, hospitals
and physicians incur and pass on to consumers additional expenses
that directly or indirectly relate to medical liability.  Therefore,
estimates of malpractice premiums--taken by themselves--understate
the total effect of medical liability costs on national health care
expenditures. 

A more complete description of these costs would include the
following four categories: 

  medical malpractice insurance costs:  insurance premiums,
     contributions to self- insurance trust funds, and uninsured
     losses;

  defensive medical costs:  medical treatment that would not be
     provided if there were no threat of being sued;

  liability-related administrative costs:  nonmedical activities
     performed to minimize the risk of liability and the expenses
     associated with legal actions that do occur, such as the
     management and settlement of claims; and

  medical device and pharmaceutical liability costs:  manufacturers'
     insurance and liability-related production and warning costs
     passed on in the price of their products. 

With the exception of commercial malpractice insurance premiums, only
a portion of the first category mentioned above, medical liability
costs have not been fully measured.  State insurance laws generally
require licensed insurance companies to report the costs of physician
and hospital malpractice insurance policies and, thus, these costs
are easily quantifiable.  Because these reporting requirements do not
capture other aspects of insurance costs, such as hospital
self-insurance and uninsured losses, those costs are more difficult
to quantify.  In addition, due to the absence of information on
liability costs in the medical device and pharmaceutical industries,
costs that they pass on to hospitals and physicians are also
difficult to quantify.  Furthermore, the cost of defensive medicine
is difficult to measure because it has not been clearly defined and
"defensive" practices cannot be distinguished easily from medical
care provided for clinical reasons.  Similarly, for liability-related
administrative cost estimates, it is difficult to distinguish
hospital and physician activities designed to improve service quality
or adhere to accreditation standards from activities intended to
minimize medical liability. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The major goals of medical tort laws are to (1) deter poor quality
health care, (2) compensate the victims of negligent acts, and (3)
penalize negligent providers.  The system operates under the
assumption that negligent behavior can be controlled and corrected by
the hospitals and physicians themselves.  It relies primarily on
deterrence due to the threat of liability and disciplinary action. 
While this report focuses on the cost of medical liability borne by
hospitals and physicians, the deterrence threat of tort law may lower
costs incurred by consumers by reducing the number and severity of
negligent medical acts.  (See appendix I for a discussion of the
legal basis for medical liability actions.)

At least two factors have prompted calls for medical liability
reform.  First, some research suggests that the medical tort system
is not achieving its goals.  For example, one study reported that
only a fraction of malpractice injuries result in claims,
compensation is often unrelated to the existence of medical
negligence, the legal system is slow at resolving claims, and legal
fees and administrative costs consume almost half of the
compensation.\1 The second factor is the perception among some
hospital officials and physicians that the current tort system places
an unreasonable burden on their industry.  Officials from the
American Hospital Association and the American Medical Association
contend that liability-related costs are too high and unduly
influence the way hospitals deliver services and physicians practice
medicine.  The Congress has before it a number of legislative
proposals that are intended to directly and indirectly reduce tort
liability in the health care industry. 


--------------------
\1 Patients, Doctors, and Lawyers:  Medical Injury, Malpractice
Litigation, and Patient Compensation in New York, a report of the
Harvard Medical Practice Study to the State of New York (Cambridge,
Mass.:  President and Fellows of Harvard College, 1990). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To identify the various types of medical liability costs, we
interviewed and collected data from a variety of sources, including
the American Hospital Association, the American Medical Association,
the American Bar Association, the St.  Paul Fire and Marine Insurance
Company,\2 and individual hospitals and hospital systems.  In
addition, we reviewed recent professional and academic journals, such
as the Journal of the American Medical Association and Health
Affairs. 

From our research, we identified three studies that estimate certain
hospital and physician medical liability costs.  These studies were
prepared by the General Accounting Office (GAO),\3 the Congressional
Budget Office (CBO),\4 and the Office of Technology Assessment
(OTA).\5 We reviewed these studies to determine whether their
estimates included all types of medical liability costs.  In
addition, we examined other studies that (1) estimated components of
medical liability costs not included in these three studies or (2)
used different methodologies to arrive at their estimates. 

We cannot project costs or generalize our findings because we did not
use statistical methods to select the sources of the liability cost
data we collected and did not collect data associated with all four
categories of liability costs we identified.  Also, because our work
often involved data that some sources regarded as proprietary or
sensitive, we agreed not to identify some sources in examples cited
in our report.  We did not verify the accuracy of the data. 

We performed our review from January 1995 through April 1995 in
accordance with generally accepted government auditing standards.  We
discussed a draft of our report with CBO and OTA officials and have
incorporated their comments where appropriate. 


--------------------
\2 The St.  Paul Fire and Marine Insurance Company is the largest
malpractice insurer in the United States.  Its share of the medical
malpractice insurance market was 11.6 percent in 1993. 

\3 Medical Malpractice:  Insurance Costs Increased but Varied Among
Physicians and Hospitals (GAO/HRD-86-112, September 15, 1986). 

\4 A CBO Study:  Economic Implications of Rising Health Care Costs,
CBO (October 1992), and Statement of Robert Reischauer, CBO, before
the Committee on Ways and Means, U.S.  House of Representatives,
Appendix F, March 4, 1992. 

\5 Impact of Legal Reforms on Medical Malpractice Costs, OTA
(September 1993). 


   STUDIES FOCUSED ON PURCHASED
   MALPRACTICE INSURANCE
------------------------------------------------------------ Letter :4

Malpractice insurance is the first category of medical liability
costs we identified and the cost specifically measured by each of the
three studies.  Most physicians and hospitals purchase medical
malpractice insurance to protect themselves from medical malpractice
claims.  In most cases, the insurer will pay any claims up to a
specific limit of coverage during a fixed period in return for a fee. 
The insurer investigates the claim and defends the physician or
hospital.  While hospital and physician insurance contracts can vary
greatly, we have included the following types of costs in the medical
malpractice insurance cost category: 

  premiums for purchased insurance,

  hospital contributions for self-insurance, and

  payments made from hospitals' general revenues and reserves and
     physicians' personal assets to cover uninsured malpractice
     losses. 

(See appendix II for a detailed discussion of the types of hospital
and physician insurance policies and related costs.)


      THE STUDIES MEASURED
      COMPONENTS OF MALPRACTICE
      INSURANCE COSTS
---------------------------------------------------------- Letter :4.1

The CBO and OTA studies estimated costs primarily associated with
purchased insurance.  The CBO study reported the cost of purchased
insurance in 1990, which totaled $5 billion and represented 0.74
percent of national health care expenditures.  The OTA study measured
purchased insurance and self-insurance costs in 1991 and reported
that purchased insurance totaled $4.86 billion in 1991, or 0.66
percent of national health care expenditures.  The study estimated
self-insurance costs at 20 percent to 30 percent of premiums, which
would mean that purchased insurance and self-insurance amounted to
between $5.8 billion and $6.3 billion in 1991, less than 1 percent of
national health care expenditures. 

Other studies that measured purchased insurance and self-insurance
for the same periods studied by CBO and OTA estimated costs to be
higher.  Tillinghast, an actuarial and consulting firm, used its
internal database of state-by-state malpractice insurance costs
rather than insurance industry data because those data do not include
self-insurance.  Tillinghast estimated malpractice insurance costs in
1990 at over $8.2 billion.\6 Another consulting firm, Lewin-VHI,
Inc., used an estimate that malpractice insurance other than that
purchased represents 86 percent of purchased insurance.  This firm
estimated malpractice insurance costs at $9.2 billion in 1991.\7
Table 1 summarizes the estimates of malpractice insurance costs in
1990 and 1991. 



                                Table 1
                
                   Estimates of Costs for Malpractice
                 Purchased Insurance and Self-Insurance
                           for 1990 and 1991

                         (Dollars in billions)

Source of estimate                                              Amount
----------------------------------------  ----------------------------
Estimates for 1990
 CBO                                                            $5.0\a
 Tillinghast                                                      $8.2
Estimates for 1991
 OTA                                                             $4.86
 Lewin-VHI, Inc.                                                  $9.2
----------------------------------------------------------------------
\a The CBO estimate included only the cost of purchased insurance,
not self-insurance. 

Our mid-1980s study measured all elements in our malpractice
insurance cost category.  To obtain information on hospital
malpractice insurance costs, we analyzed data from a randomly
selected sample of 1,248 hospitals.  We obtained physician
malpractice expense data from (1) American Medical Association
reports quantifying expenses incurred by every known self-employed
physician in the United States and (2) information collected from
leading physician malpractice insurance companies.  We reported that
malpractice insurance costs for self-employed physicians averaged 9
percent of their total professional expenses in 1984, while
malpractice insurance costs for hospitals accounted for 1 percent of
their average inpatient per-day expense in 1985.  Insurance company
officials stated that the insurance market has changed since 1985 as
more hospitals have established self-insurance programs and increased
their self-insurance limits, thereby reducing their reliance on
purchased insurance.  However, the impact of this trend on costs has
not been measured. 


--------------------
\6 Tillinghast, Tort Cost Trends:  An International Perspective,
1992. 

\7 Lewin-VHI, Inc., "Response to Medical Malpractice Article,"
memorandum to Jay Michael, President, Californians Allied for Patient
Protection, April 15, 1994. 


      MALPRACTICE INSURANCE COSTS
      AFFECT SOME PHYSICIANS AND
      HOSPITALS MORE THAN OTHERS
---------------------------------------------------------- Letter :4.2

Physician malpractice insurance costs vary by state and can vary
within a state.  Figure 1 presents The St.  Paul Fire and Marine
Insurance Company's 1994 rates for mid-range liability risk
physician\8 mature claims-made policies\9 with limits primarily at $1
million/$3 million.\10 In certain states, lower limits are mandatory
or more common due to patient compensation funds.\11 Variations by
state and within states generally reflect the insurance company's
claims and loss experience. 

   Figure 1:  St.  Paul Fire and
   Marine Insurance Company
   Average Annual Physician
   Malpractice Insurance Rates as
   of July 1994

   (See figure in printed
   edition.)

Note:  The rates are for policies with limits of $1 million/$3
million except for Wisconsin ($400,000/$1 million); Kansas, Nebraska,
and Pennsylvania ($200,000/$600,000); and Indiana and Louisiana
($100,000/$300,000). 

Source:  The St.  Paul Medical Services, Physician and Surgeon
Update, June 1994. 


Table 2 presents the rates the company provided for selected
metropolitan areas that have rating territories separate from the
remainder of their respective states.  Across all rating territories,
the annual premium for $1 million/$3 million coverage under
claims-made policies ranged from a low of $5,388 in Arkansas to a
high of $48,718 in Chicago.



                                Table 2
                
                Average Malpractice Insurance Rates for
                  Physicians as of July 1994 in Major
                   Metropolitan Areas Established as
                  Separate Rating Territories Compared
                            With State Rates

Metropolitan area                Metropolitan rate          State rate
------------------------------  ------------------  ------------------
Bridgeport, CT,                            $19,315             $14,729
Chicago                                    $48,718             $21,764
Houston                                    $37,246             $24,888
Los Angeles                                $43,001             $35,218
St. Louis                                  $28,702             $23,935
San Francisco                              $39,114             $35,218
----------------------------------------------------------------------
Note:  These rates are based on class 3 doctor/mature claims-made
rates with $1 million/$3 million limits. 

Source:  The St.  Paul Medical Services, Physician and Surgeon
Update, June 1994. 

Within each rating territory, physicians' malpractice insurance costs
also vary by specialty.  For example, one insurer's average 1993
mature claims-made rates for policies providing $1 million/$3 million
coverage limits to physicians in Texas ranged from $7,410 (except
$9,877 in Houston) for family practitioners performing no surgery, a
low-risk practice, to $54,834 (except $73,089 in Houston) for
physicians specializing in obstetrics and gynecology, a high-risk
specialty.  While malpractice insurance rates are generally
insensitive to a physician's malpractice history, a physician's
malpractice claims history can lead to denial or termination of
coverage. 

Hospital malpractice insurance costs vary according to claim trends
in the state where the hospital is located, the number of occupied
beds and outpatient visits, the limits of liability selected, the
types of procedures performed, and the number of years the hospital
has been insured under claims-made coverage.  Malpractice insurance
rates for hospitals are also frequently based on the malpractice loss
experience (in terms of the number of claims filed and the amount per
paid claim) of the individual hospital.  Figure 2 presents The St. 
Paul Fire and Marine Insurance Company's per-bed average acute care
rates for mature claims-made coverage at $1 million/$3 million limits
of liability except in states where lower limits are mandatory or in
states with patient compensation funds. 

   Figure 2:  St.  Paul Fire and
   Marine Insurance Company
   Average Hospital Bed Rates as
   of August 1994

   (See figure in printed
   edition.)

   Note:  The rates are for
   policies with limits of $1
   million/$3 million except for
   Wisconsin ($400,000/$1
   million); Kansas
   ($200,000/$600,000); Indiana
   ($100,000/$2 million and
   $100,000/$3 million); and
   Pennsylvania ($200,000/$1
   million).

   (See figure in printed
   edition.)

   Source:  The St.  Paul Medical
   Services Hospital Update,
   August 1994.

   (See figure in printed
   edition.)


Table 3 presents The St.  Paul Fire and Marine Insurance Company's
per-bed average acute care rates for hospitals in selected
metropolitan areas that have rating territories separate from the
remainder of their respective states.  The annual per-bed rates
ranged from a low of $612 in South Dakota to a high of $7,734 in
Detroit.



                                Table 3
                
                    Average Acute Care Bed Rates for
                   Hospitals as of July 1994 in Major
                   Metropolitan Areas Established as
                  Separate Rating Territories Compared
                            With State Rates

                                          Metropolitan
Metropolitan areas                                rate      State rate
--------------------------------------  --------------  --------------
Chicago                                         $3,309          $1,891
Cleveland                                       $2,467          $1,234
Detroit                                         $7,734          $3,040
Kansas City and St. Louis, MO                   $4,472          $1,789
Los Angeles                                     $4,114          $3,291
Miami                                           $3,367          $2,582
New York City                                   $3,424          $1,557
Richmond                                        $1,113            $796
San Francisco                                   $2,797          $3,291
----------------------------------------------------------------------
Source:  The St.  Paul Fire and Marine Medical Services Hospital
Update, August 1994. 


--------------------
\8 A family practitioner performing standard obstetric procedures is
an example of a mid-range liability risk physician. 

\9 Generally, malpractice insurance is written on either an
occurrence or a claims-made basis.  An occurrence policy covers
malpractice events that occurred during the policy period, regardless
of the date of discovery or when the claim may be filed.  A
claims-made policy covers malpractice events that occurred after the
effective date of coverage and for which claims are made during the
policy period.  Because the risk exposure to the insurer is lower,
premiums for claims-made policies are generally lower during the
first year of coverage but increase to approximate those of
occurrence policies after about 5 years--when they "mature."

\10 Policy limits represent the maximum that the insurer will pay on
each claim against the insured (per occurrence limit) and the maximum
amount for all claims against the insured (aggregate limit) for the
policy period.  For example, limits of $1 million/$3 million means
the insurer will pay up to $1 million on a single claim and up to $3
million for all claims during the policy period. 

\11 State-run patient compensation funds intend to limit the
liability of participants to a specific amount and pay the full
excess over that amount of any judgement or settlement against a
member. 


   DEFENSIVE MEDICAL COSTS WERE
   NOT MEASURED
------------------------------------------------------------ Letter :5

Defensive medicine includes the following hospital and physician
actions aimed at reducing the risk of medical malpractice claims: 

  additional or more complex diagnostic tests and procedures and

  additional patient visits and time spent with patients. 

The costs of defensive medicine cannot be easily estimated because of
difficulties in defining it and distinguishing it from clinically
justified medical care.  For example, if the definition includes only
conscious defensive medicine, it could exclude defensive medical
practices acquired during medical training.  Thus, the definition
would need to address the question of the physician's motive for
performing tests:  Should cost estimates for defensive medicine
encompass only procedures performed for "purely" defensive purposes
or should they also include procedures performed for "primarily"
defensive purposes?  Cost estimates would vary greatly depending upon
the definition used.  Also, it is difficult to segregate the costs of
those defensive acts that produce little or no medical benefit from
those that are medically justified, such as additional tests that
rule out certain diagnoses. 

Defensive medical practices can be classified as positive and
negative.  Positive defensive medicine involves tests and treatment
that would not be provided if the threat of being sued were not
present.  For example, physicians may order more tests or procedures,
take more time to explain risks or treatment options, and spend more
time maintaining patient records than they would if there were no
threat of malpractice suits.  Negative defensive medicine involves
not performing services because of the risk of malpractice actions. 
For example, physicians may restrict the scope of their practices to
low-risk patients or procedures.  While positive defensive medicine
drives up the cost of health care, negative defensive medicine
reduces its availability.  The following discussion is limited to
positive defensive medicine. 

Certain physician specialists may practice more defensive medicine
than others.  Defensive medicine is generally considered to be more
extensive in surgery, radiology, cardiology, emergency medicine, and
obstetrics and gynecology.  As we previously reported, in 1990 Maine
imposed practice guidelines\12 by law that state officials expect
will decrease these specialists' motivation to practice defensive
medicine.\13 These practice guidelines are intended to reduce the
number of diagnostic tests and procedures that are performed for
defensive purposes, including preoperative tests, such as some
electrocardiograms and chest x-rays, cervical spine x-rays for some
emergency room patients, some breast biopsies, and some
colonoscopies.  High rates of caesarean section are also cited as
evidence of defensive medicine. 

According to the results of our earlier review,\14 the hospitals we
visited analyzed their physicians' practice patterns in an effort to
reduce costs.  In some cases, the hospitals found that some
physicians provided a significant amount of unnecessary or
excessively sophisticated services but could not determine whether
the provision of these services represents defensive medicine.  For
example, one hospital we visited reviewed its physicians' use of low
osmolality contrast agents\15 in its cardiac catheterization lab. 
Among health care professionals, the widespread use of low osmolality
contrast agents is often viewed as a function of defensive medicine. 
Physicians use the low osmolality agents because high osmolality
contrast agents have been associated with mild to moderate adverse
reactions, such as nausea and vomiting, as well as more serious
adverse reactions.  The average cost of the low osmolality agent used
in that hospital was $146.10, compared to $6.96 for the high
osmolality agent, and represented 95 percent of the contrast media
used in its cardiac catheterization laboratory.  Because numerous
research articles have suggested that the incidence of adverse
effects were easily manageable and did not result in increased
medical costs, the hospital limited the use of low osmolality agents
to the approximately 30 percent of patients considered to be at high
risk.  Because the hospital performs 5,000 procedures in its cardiac
catheterization laboratory annually, it projects yearly savings of
over $400,000.  While hospital officials provided no conclusive
evidence linking the unnecessary costs to defensive medicine, they
stated that the physicians' desire to avoid adverse effects had
prompted their use of the low osmolality contrast agent. 

Neither our 1986 report nor the OTA study estimated the cost of
defensive medicine.  We reported that the cost of defensive medicine
is impossible to quantify with any degree of confidence because of
the difficulty in isolating defensive practices from medical care
provided for clinical reasons.  The OTA study, like our study, cited
the difficulty in measuring the cost of defensive medicine and did
not provide an estimate.  The CBO study concluded that defensive
medicine is probably not a major factor in the cost of medical care
and did not provide an estimate. 

In a separate study,\16 OTA reported that it found evidence that
defensive medicine exists, estimating that as much as 8 percent of
diagnostic procedures result primarily from physicians' conscious
concern about professional liability.  The strongest evidence found
by OTA was produced in a study of caesarean deliveries in New York
State.\17 That study reported that obstetricians who practice in
hospitals with high malpractice claim frequency and premiums do more
caesarean deliveries than obstetricians practicing in areas with low
malpractice claim frequency and premiums.  However, OTA also reported
that it does not know whether the report's findings for obstetricians
and caesarean deliveries can be generalized to other states,
specialties, clinical situations, or procedures.  OTA concluded that
it is virtually impossible to accurately measure the overall level
and national cost of defensive medicine because of the methodological
problems associated with isolating defensive medical practices. 

Through our research, we identified two studies that attempted to
quantify the total cost of defensive medicine.\18 An American Medical
Association study estimated that in 1984, defensive medical costs
were between $9 billion and $10.6 billion for primarily defensive
medicine purposes.\19 The $10.6 billion estimate is based on the
results of a physician survey, which may not accurately reflect the
cost of defensive medicine.  The $9 billion estimate assumes a
statistical correlation between an increase in physician fees and
higher malpractice costs.  This method might overstate the costs of
defensive medicine because increases in fees might result from many
factors besides physicians' defensive medical practices.  A second
study, prepared by Lewin-VHI, Inc., estimated hospital and physician
defensive medicine costs at between $4.2 billion and $12.7 billion in
1991.\20 This estimate is based primarily on the earlier AMA
estimates and is subject to the same methodological limitations. 


--------------------
\12 Practice guidelines are also known as practice standards,
protocols, algorithms, parameters, and preferred practice patterns. 
Maine's practice patterns attempt to resolve malpractice claims by
specifying recommendations for medical treatment which, if followed
by a physician, can be used to demonstrate that any injury to the
patient did not result from negligent care. 

\13 Medical Malpractice:  Maine's Use of Practice Guidelines to
Reduce Costs (GAO/HRD-94-8, October 25, 1993). 

\14 Hospital Costs:  Cost Control Efforts at 17 Texas Hospitals
(GAO/AIMD-95-21, December 9, 1994). 

\15 A contrast agent is a substance used to improve the visibility of
structures during radiologic imaging procedures such as angiography,
computerized tomography, and cardiac catheterizations.  Low
osmolality contrast agents have an osmolality (that is, concentration
of dissolved particles in solution) that is closer to the osmolality
of body fluids than the other contrast agents. 

\16 Defensive Medicine and Medical Malpractice, OTA, July 1994. 

\17 Localio, Lawthers, Begston, Hebert, Weaver, Brennan, and Landis,
"Relationship Between Malpractice Claims and Caesarian Delivery,"
vol.  269, Journal of the American Medical Association,
pp.  366-373, January 20, 1993. 

\18 The Hudson Institute, a not-for-profit research institute located
in Indiana, estimated defensive medicine costs for one large urban
hospital in Indiana.  It reported that medical liability increased
costs at the hospital by 5.3 percent, or $450 per admission.  It
broke down the medical liability cost into two components:  (1)
defensive medicine, which accounted for 3.9 percent of the cost
increase, or $327 per admission, and (2) insurance, payments to
patients, attorney's fees, and the cost of litigation, which
increased costs by 1.4 percent, or $123 per admission.  David
McIntosh and David Murray, "The High Cost of Medical Liability,"
Hudson Briefing Paper, No.  163, April 1994. 

\19 Reynolds, R.A., et al, "The Cost of Medical Professional
Liability," Journal of the American Medical Association, Vol.  257,
No.  20, May 22/29, 1987. 

\20 Estimating the Costs of Defensive Medicine, Lewin-VHI, Inc.,
report prepared for MMI Companies, Inc., January 27, 1993. 


   LIABILITY-RELATED
   ADMINISTRATIVE COSTS WERE NOT
   MEASURED
------------------------------------------------------------ Letter :6

This third category of medical liability costs we identified includes

  certain risk management activities,

  time and travel associated with litigation, and

  creating and maintaining records subject to discovery\21 or
     required for defense. 

Our study and the CBO and OTA studies did not attempt to provide a
measure of liability-related administrative costs.  Nor did we
identify, during the course of our research and discussions, other
studies that estimated hospital and physician liability-related
administrative costs. 

Hospital risk management activities are designed to (1) reduce the
hospital's and its physicians' risk of malpractice suits by
maintaining or improving the quality of care, (2) reduce the
probability of a claim being filed by negotiating compensation with
an injured patient prior to the patient filing a claim, and (3)
preserve the hospital's assets once a claim has been filed.  Risk
management was first applied to health care facilities during the
1970s when jury awards and settlements increased sharply.  During
this period, many insurance companies either substantially increased
hospitals' premiums or stopped writing malpractice insurance for
them.  Many hospitals intensified their risk management activities in
the 1980s when an increasing number became at risk for malpractice
losses as they began to self insure for smaller damage awards and
settlements. 

While hospitals perform some risk management activities specifically
to reduce liability-related costs, they do not segregate the costs of
these activities from the cost of practices designed to promote
quality assurance or to satisfy accreditation standards.  For
example, occurrence screening systems--which are designed to identify
deviations from normal procedures or expected treatment
outcomes--involve costs associated with both promoting quality and
reducing liability risk.  By contrast, claims management is an
example of a purely liability-related risk management cost.  Claims
management activities include claims investigation, claims filing,
damage evaluation and reserve determination, planning remedial
medical care, settlement strategy formulation, settlement
structuring, and negotiating and "posturing" for defense or
settlement. 

Hospital officials and physicians also identified time spent at
trials and other litigation-related events as liability-related
administrative activities.  As with liability-related risk management
activities, hospitals and physicians did not routinely account for
these activities separately.  Examples of these activities include
time and travel expenses associated with answering interrogatories
and depositions.  For instance, if a nurse is a defendant, the
hospital will pay the nurse's expenses and salary while he or she
prepares for and attends trial.  The hospital would also incur
additional costs contracting with a temporary nurse agency or using
its supplemental nurse pool to perform the duties of the defendant
nurse.  Similarly, a defendant physician would have to contract with
another physician to care for patients during litigation. 

Hospital officials also reported incurring additional
liability-related administrative expenses associated with creating
and maintaining records that may be required for defense.  Such
records would include detailed staffing schedules and precisely
worded training, policy, and procedures manuals.  Hospitals archive
these records for decades since they may be needed for litigation
long after an alleged negligent act.  In some cases, hospitals spend
considerable time locating physicians and other staff when
malpractice actions involve events that occurred in the distant past,
such as a law suit filed years after the birth of a child. 


--------------------
\21 The term "discovery" refers to procedures for ascertaining facts
prior to the time of trial. 


   MEDICAL DEVICE AND
   PHARMACEUTICAL LIABILITY COSTS
   WERE NOT MEASURED
------------------------------------------------------------ Letter :7

Hospitals and physicians incur the following types of medical device
and pharmaceutical liability costs in the prices that they pay for
their products: 

  manufacturers' liability insurance and

  costs associated with product design and marketing that would not
     be incurred in the absence of the threat of suit. 

Neither our study nor the CBO or OTA studies estimated manufacturers'
medical device and pharmaceutical liability costs incurred in the
purchase price hospitals and physicians pay for their products. 
During our research and discussions with industry officials, we did
not identify other studies that estimated the liability costs passed
on to hospitals and physicians in the prices of medical devices and
pharmaceuticals. 

Medical device and pharmaceutical industry officials and others we
spoke with expressed concern about liability costs associated with
medical products.  They believe that litigation involving medical
products is extensive and increasing.  Because state product
liability laws differ and most manufacturers sell products in many
states, manufacturers are at risk of simultaneous suits in numerous
jurisdictions with different legal standards.  They also stated that
drugs intended for chronic conditions or devices remaining in the
body indefinitely may be used by patients for periods longer than the
products were tested in clinical trials.  As a result, problems may
not be discovered until decades after use, when many patients may be
using the product.  Because only claims-made insurance is generally
available for medical products, manufacturers with such coverage are
not insured for suits in future years.  When suits appear, the
insurer can refuse to renew the policy, leaving the manufacturer
without insurance.  Medical device and pharmaceutical industry
officials told us that this legal environment drives up the cost of
medical products. 

Manufacturers pass on their liability costs to hospitals and
physicians in their products' prices.  Their liability costs include
insurance and liability-related production and marketing costs. 
Manufacturer insurance costs, like those of hospitals, can include
periodic self-insurance payments, payments made for purchased
insurance, and payments made from general revenues to cover uninsured
losses.  Liability-related production and marketing costs include
expenses associated with actions taken primarily to protect the
manufacturer from liability, such as multiple layers of packaging and
repeated safety warnings.\22

Certain medical devices and pharmaceuticals involve a greater degree
of liability risk than others.  For example, stethoscopes pose little
threat of liability risk.  However, implanted devices such as heart
valves, intrauterine devices, and breast implants have been involved
in the most prominent medical device suits.  Likewise, some
pharmaceuticals like generic drugs and nonprescription drugs
generally involve little risk of liability action.  Most
pharmaceutical litigation has involved brand name prescription drugs,
such as Bendectin.\23

While some medical device and pharmaceutical cases and settlements
have been widely publicized, such as those involving silicon breast
implants and the Dalcon shield, little information is now available
on the prevalence of litigation throughout the industry or the
magnitude of the costs passed on to hospitals and physicians. 
Industry and insurance company officials stated that out of court
settlements are common, and manufacturers are reluctant to disclose
settlement terms for fear of encouraging new suits or inflating
future claims.  Manufacturers are also reluctant to disclose their
pricing strategies because of competition. 


--------------------
\22 Medical device and pharmaceutical industry officials believe that
the threat of liability influences manufacturers' business operations
in addition to imposing costs.  The officials believe that some
manufacturers will (1) not engage in research in areas with potential
high litigation risk, (2) not market high-risk products, (3) withdraw
high-risk products from the market, and (4) attempt to minimize the
use of their products by potentially high-risk patients, such as
children and women of child-bearing age. 

\23 Garber, Steven, Product Liability and the Economics of
Pharmaceuticals and Medical Devices, prepared for the RAND Institute
for Civil Justice, 1993. 


   CONCLUSION
------------------------------------------------------------ Letter :8

Hospitals and physicians incur a variety of medical liability costs. 
Studies attempting to measure such costs have focused on the cost of
purchased malpractice insurance, which is readily quantifiable due to
state reporting requirements.  Other hospital and physician liability
costs, however, are impractical, if not methodologically difficult to
measure with any precision.  Such costs include defensive medicine,
liability-related administrative expenses, and medical device and
pharmaceutical manufacturers' liability expenses that they pass on to
hospitals and physicians in the prices of their products.  However, a
broader understanding of such costs and their implications is useful
to the ongoing medical liability reform debate. 


---------------------------------------------------------- Letter :8.1

As agreed with your office, unless you publicly announce the contents
of this report earlier, we will not distribute it until 30 days from
its date.  At that time, we will send copies to the Ranking Minority
Member of the House Committee on Ways and Means and to other
interested Members of the Congress.  Copies of this report will also
be available to interested parties upon request. 

Please contact me at (202) 512-9542 if you or your staff have any
questions concerning this report.  Major contributors are listed in
appendix III. 

Sincerely yours,

Lisa G.  Jacobson
Director, Civil Audits


LEGAL BASIS FOR MEDICAL LIABILITY
ACTIONS
=========================================================== Appendix I

Generally, medical malpractice suits are based on tort law. 
Plaintiffs select tort theory instead of alternatives, such as breach
of contract,\1 because they may recover larger damages and because
the statute of limitations generally runs from the date the harm was
discovered rather than the date the alleged malpractice occurred. 
When a third party such as a surviving spouse or parent brings suit,
it generally must select tort theory because the plaintiff is neither
a party to the original contract nor a third party beneficiary.\2

Figure I.1 summarizes the types of malpractice action filed against
physicians insured by The St.  Paul Fire and Marine Insurance Company
during the 5-year period from 1989 through 1993. 

   Figure I.1:  Types of
   Malpractice Claims Filed
   Against Physicians Insured by
   the St.  Paul Fire and Marine
   Insurance Company, 1989-1993

   (See figure in printed
   edition.)

Source:  The St.  Paul Medical Services, Physicians and Surgeons
Update, June 1994. 

According to The St.  Paul Fire and Marine Insurance Company, failure
to diagnose was the most common malpractice claim--28 percent of all
claims--filed against physicians it insured during the 5-year period
spanning 1989 through 1993.  Failure to diagnose cancer was the most
common claim in this category.  Other frequent failure to diagnose
claims involved fractures and dislocations, infections, myocardial
infarctions, and pregnancy problems.  Claims stemming from surgical
procedures constituted the next largest category, 27 percent of all
claims.  The most frequent malpractice claim related to surgery was
"postoperative complication." Inadvertent surgical acts and
inappropriate or unnecessary surgeries also were frequent allegations
in this category.  Claims alleging improper treatment represented the
third largest category, making up 26 percent of all claims during the
period.  Most of these claims were birth-related.  Other claims made
up the final category, including adverse reaction to anesthesia,
injection site injuries, and lack of informed consent. 

In addition to asserting physician negligence, plaintiffs may file
malpractice claims against hospitals where treatment was provided
through the vicarious liability\3 doctrine or by establishing
hospital corporate negligence in areas such as the selection and
review of medical staff.\4 In some jurisdictions, hospitals can be
jointly and severally liable, which enables plaintiffs to recover
most or all damages from a hospital even when the hospital was only
partially responsible for the negligent act. 

Plaintiffs can also file claims against medical device and
pharmaceutical manufacturers under various legal theories, such as
negligence, strict liability, and breach of warranty.  Manufacturers
are liable for negligence if they did not exercise due care and this
lack of care caused injury.  Manufacturers are liable under strict
liability if their products are defective, making the products
unreasonably dangerous and causing the injury.  The three types of
defects for which manufacturers can be found to be strictly liable
are (1) a flaw in the product introduced in the manufacturing process
(manufacturing defect), (2) a defect in the design of the product
(design defect), and (3) a failure to adequately warn consumers of
risks or give instructions regarding product use (warning defect). 
Under breach of warranty, manufacturers are liable if the product
fails to work as expressly or implicitly warranted or promised. 


--------------------
\1 Although a written contract between a patient and a physician
generally does not exist, a contract is implied in fact.  If a
contract was not created, a physician would not have a cause of
action for fees against a patient for not paying for services
rendered. 

\2 A third party beneficiary is a third person whom the parties to a
contract intend to benefit by the making of the contract and to
confer upon such person the right to sue for breach of contract, such
as a life insurance contract wherein the insurance company promises
the insured to make payments to the beneficiary. 

\3 Under vicarious liability, an employer or principal can be held
liable for the actions of an employee or agent. 

\4 For example, in Darling v.  Charleston Community Memorial
Hospital, 211 N.  E.  2d 253 (1965), the plaintiff had been admitted
to the defendant hospital for treatment of a broken leg. 
Complications arose shortly after the physician fitted the leg with a
cast.  Ultimately, the plaintiff's leg became gangrenous and had to
be amputated.  The plaintiff then brought a successful action against
the hospital for negligent medical treatment by claiming that the
hospital failed to ensure quality care. 


HOSPITAL AND PHYSICIAN MALPRACTICE
INSURANCE POLICIES AND COSTS
========================================================== Appendix II

Hospital and physician insurance coverage and costs can vary greatly. 
This appendix briefly discusses types of insurance and factors that
can affect their costs. 


   PURCHASED INSURANCE CONTRACTS
   AND COSTS
-------------------------------------------------------- Appendix II:1

Several factors influence the cost of purchased malpractice
insurance.  The number of claims and the average cost per claim are
the primary factors.  However, within the prevailing legal
environment, hospitals and physicians can reduce the cost of their
premiums by purchasing insurance policies with characteristics that
allow them to retain risk or to defer costs to future years. 

One malpractice policy characteristic that influences the cost of
insurance is the amount of coverage provided.  Typically, medical
malpractice insurance policies have a dollar limit on the amount that
the insurance company will pay on each claim against the hospital or
physician (per occurrence limit) and a dollar limit for all claims
against the insured (aggregate limit) for the policy period.  For
example, limits coverage of $1 million/$3 million means that the
insurer will pay up to $1 million on a single claim and up to $3
million for all claims during the policy period.  The higher the
limits, the more costly the policy.  However, since small claims
occur more frequently then large ones, the cost per dollar of
coverage decreases as the coverage limits increase. 

A deductible provision can also influence the cost of purchased
insurance.  Under a policy with a deductible provision, an insurer is
liable only for losses in excess of a stated amount up to the policy
limits.  For example, if a hospital incurred a $300,000 malpractice
loss while insured under a $1 million per occurrence policy with a
$100,000 deductible, the hospital would pay $100,000 of the loss and
the insurer would pay $200,000.  Generally, the higher the
deductible, the lower the premium. 

The type of policy purchased can also influence the cost of medical
malpractice insurance.  Generally, malpractice insurance is written
on either an occurrence or a claims-made basis.  An occurrence policy
covers malpractice events that occurred during the policy period,
regardless of the date of discovery or when the claim may be filed. 
A claims-made policy covers malpractice events that occurred after
the effective date of the coverage and for which claims are made
during the policy period.  Because the risk exposure to the insurer
is lower, premiums for claims-made policies are generally lower
during the first year (approximately 25 percent of occurrence
policies) but increase to approximate the occurrence basis after
about 5 years when they mature.  To cover claims filed after a
claims-made policy has expired--when, for example, a hospital changes
insurers or after a physician retires, the hospital or physician must
purchase insurance known as "tail coverage," which insurance company
officials stated can cost between 100 percent and 200 percent of the
last claims-made policy cost. 


   SELF-INSURANCE COSTS
-------------------------------------------------------- Appendix II:2

To minimize the cost of purchased malpractice insurance, most
medium-size and large hospitals self-insure for smaller settlements
and damage awards.  In many cases, these hospitals establish
self-insurance trusts\1 that they administer themselves or contract
with third parties to administer.  Self-insuring hospitals make
periodic contributions to these trusts to pay for losses as defined
under formal trust agreements.  Generally, the contribution amounts
are generally actuarily determined based upon the estimated present
value of future indemnity payments and expenses.\2

Indemnity payments include amounts that the trusts will pay claimants
as a result of settlements and damage awards.  Expenses include
defense attorneys, medical experts, private investigators, court
reporters for depositions, and court costs. 

Most self-insuring hospitals purchase "excess" insurance to cover
that portion of large losses that exceeds their self-insurance
limits.  Whereas self-insurance coverage typically pays settlements
or damage awards up to a few million dollars, excess coverage pays up
to tens of millions of dollars above the self-insurance coverage
limits.  Some hospitals obtain an additional layer of coverage above
their excess layer, often referred to as "blue sky" coverage, which
pays that portion of settlements or damage awards exceeding the
excess coverage limit up to $100 million.  Generally, the higher the
limits, the more costly the insurance.  However, the cost per dollar
coverage decreases as the limits increase. 

Like purchased insurance, hospital self-insurance costs are
determined by the expected number and severity of claims.  However,
other factors can influence self-insurance costs.  Costs can vary
over time because estimated future losses may differ from actual
losses.  If the hospital incurs fewer losses than expected, the
resulting surplus will enable the hospital to reduce trust
contributions.  If the hospital incurs more losses than expected, the
resulting deficit will force the hospital to increase trust
contributions.  Costs can also vary over time if estimated trust
investment income differs from actual investment income.  If trust
investments return a higher or lower yield than expected, hospitals
may be able to lower, or may be required to raise, trust
contributions accordingly. 


--------------------
\1 Some hospitals have established captive insurance companies, which
operate like self-insurance trusts, to pay for smaller damages and
awards. 

\2 The estimated present value is used because the contributions are
invested into interest- bearing securities. 


   UNINSURED LOSSES
-------------------------------------------------------- Appendix II:3

In addition to self-insurance and purchased insurance, hospitals and
physicians can also incur malpractice liability costs associated with
uninsured losses.  The most common uninsured loss involves
deductibles paid by hospitals and physicians that have purchased
primary coverage.  Hospitals and physicians are also at risk for
losses that exceed the limits of coverage.  Hospitals and physicians
can also incur losses associated with causes of action not covered by
policies. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Shirley Abel, Assistant Director

DALLAS REGIONAL OFFICE

Russell E.  Hand, Auditor-in-Charge
Elaine Coleman, Evaluator
Claudine Makofsky, Evaluator

*** End of document. ***