Effects of Tort Reform on U.S. Health Care Spending

by Holly Hayes

The Congressional Budget Office (CBO) issued an analysis of the effects of tort reform proposals on health care spending. The CBO estimates that implementing a nationwide package of tort reform proposals would result in reductions of health care spending of about 0.5 percent or about $11 billion in 2009. This figure represents a reduction of 0.2 percent from lower medical liability premiums and a 0.3 percent reduction from less utilization of health care services.

CBO’s Analysis of the Effects of Proposals to Limit Costs Related to Medical Malpractice (“Tort Reform”)

Today (October 9, 2009) CBO released a letter updating its analysis of the effects of proposals to limit costs related to medical malpractice (“tort reform”). Typical legislative proposals for tort reform have included caps on awards for noneconomic and punitive damages, rules allowing the introduction at trials of evidence about insurance payments and related sources of income, statutes of limitations on suits, and replacement of joint-and-several liability with a fair-share rule.

Tort reform could affect costs for health care both directly and indirectly: directly, by lowering premiums for medical liability insurance; and indirectly, by reducing the use of diagnostic tests and other health care services when providers recommend those services principally to reduce their potential exposure to lawsuits. Because of mixed evidence about whether tort reform affects the utilization of health care services, past analyses by CBO have focused on the impact of tort reform on premiums for malpractice insurance. However, more recent research has provided additional evidence to suggest that lowering the cost of medical malpractice tends to reduce the use of health care services.

CBO now estimates that implementing a typical package of tort reform proposals nationwide would reduce total U.S. health care spending by about 0.5 percent (about $11 billion in 2009). That figure is the sum of a direct reduction in spending of 0.2 percent from lower medical liability premiums and an additional indirect reduction of 0.3 percent from slightly less utilization of health care services. (Those estimates take into account the fact that because many states have already implemented some of the changes in the package, a significant fraction of the potential cost savings has already been realized.)

Enacting a typical set of proposals would reduce federal budget deficits by roughly $54 billion over the next 10 years, according to estimates by CBO and the staff of the Joint Committee of Taxation. That figure includes savings of roughly $41 billion from Medicare, Medicaid, the Children’s Health Insurance Program, and the Federal Employees Health Benefits program, as well as an increase in tax revenues of roughly $13 billion from a reduction in private health care costs that would lead to higher taxable wages.

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