Mandatory Spending

Multiple Budget Functions

Limit Medical Malpractice Claims

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Mandatory Outlaysa 0 -0.2 -1.6 -4.3 -6.9 -7.6 -7.9 -8.1 -8.9 -9.5 -13.0 -54.9
Change in Revenuesb 0 0.1 0.3 0.5 0.8 0.9 1.0 1.0 1.1 1.1 1.7 6.9
  Decrease in the Deficit 0 -0.3 -1.9 -4.8 -7.7 -8.5 -8.9 -9.2 -10.0 -10.6 -14.7 -61.9
Change in Discretionary Spending                        
  Budget authority 0 * -0.1 -0.2 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.5 -1.9
  Outlays 0 * -0.1 -0.2 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.5 -1.9

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.

This option would take effect in January 2018.

* = between –$50 million and zero.

a. Includes estimated savings by the Postal Service, whose spending is classified as off-budget.

b. Estimates include the effects on Social Security payroll tax receipts, which are classified as off-budget.

Sometimes people are harmed in the course of their medical treatment. In such cases, state laws permit patients to undertake legal action against physicians or other health care providers and to seek monetary compensation for their injuries. The laws that govern medical malpractice claims have twin objectives: to deter providers’ negligent behavior (by forcing those who are found at fault to pay damages) and to compensate patients for economic losses (such as lost wages and medical expenses) and noneconomic losses (often called pain and suffering). Malpractice claims are generally pursued in state, rather than federal, courts.

To reduce the risk of having to pay malpractice claims on their own, nearly all health care providers purchase malpractice insurance. Those purchases affect medical costs when they are passed along to health plans and patients in the form of higher charges for health care services. Providers’ efforts to reduce their risk of facing malpractice claims also can lead to patients’ using more health care services than would be the case in the absence of that risk.

Starting in 2018, this option would:

  • Cap awards for noneconomic damages at $250,000;
  • Cap awards for punitive damages either at $500,000 or at twice the value of awards for economic damages (such as for lost income and medical costs), whichever is greater;
  • Shorten the statute of limitations to one year from the date of discovery of an injury for adults and to three years for children;
  • Establish a fair-share rule (under which a defendant in a lawsuit is liable only for the percentage of a final award that is equal to his or her share of responsibility for the injury) to replace the current rule of joint-and-several liability (under which each defendant is individually responsible for the entire amount of an award);
  • Allow evidence of claimants’ income from collateral sources (such as life insurance payouts and health insurance reimbursements, which can reduce the costs to claimants of being harmed) to be introduced at trial; and
  • Cap attorneys’ fees. (Typically, attorneys charge fees equal to one-third of total awards and waive their fees if no award is made; the cap would reduce that percentage for larger awards.)

Some states place limits such as these on malpractice claims; others have fewer restrictions. This option would help standardize medical malpractice laws across the country.

Placing federal limits on malpractice claims would reduce total health care spending in two ways, the Congressional Budget Office estimates. First, premiums for malpractice insurance would cost less as average malpractice awards became smaller and fewer people filed claims (because of the diminished incentive to sue), and that cost reduction would generally accrue to health plans and patients in the form of lower charges for health care services. Second, research suggests that placing limits on malpractice claims would decrease the prescription, and therefore the use, of health care services to a small extent because providers who faced a smaller risk of legal action might order fewer diagnostic procedures, for example.

Together, those two factors would cause this option to reduce total health care spending by about 0.5 percent, CBO estimates. (For this option, CBO expects that changes enacted in late 2017 would take full effect after about four years, allowing time for insurance companies to adjust malpractice insurance rates and providers to modify their practice patterns.) Because study results differ on whether the effects on Medicare spending would be proportionally larger or smaller than those for other payers, CBO estimated that the percentage reduction in total spending would be the same for all payers, including Medicare. On the one hand, Medicare’s spending is largely determined by the costs of providing care in the fee-for-service part of the program, which does not generally use the mechanisms employed by many private plans to limit the use of services that offer little or no benefit to patients. By itself, that consideration would suggest that the effects of the option on Medicare spending would be larger. On the other hand, Medicare beneficiaries are much less likely to sue for malpractice (all other factors equal), suggesting that the effects would be smaller.

This option would reduce mandatory spending by $55 billion between 2017 and 2026, CBO projects. That estimate accounts for the effects on outlays for Medicare and Medicaid, subsidies for nongroup coverage purchased through the health insurance marketplaces established under the Affordable Care Act, and health insurance for retired federal employees. Savings in discretionary spending, including outlays for health insurance for current federal employees, for example, would amount to approximately $2 billion over that 10-year period if the amounts appropriated for federal agencies were reduced accordingly.

By decreasing private-sector spending on health care, this option also would affect federal revenues. A substantial amount of health care is covered under employment-based health insurance, a nontaxable form of compensation. Because the premiums that employers pay are excluded from employees’ taxable income, lowering that cost to employers would boost the share of employees’ income that was subject to taxation. That shift, combined with the effect on revenues of the reduction in premium tax credits for coverage purchased through the marketplaces, would increase federal tax revenues by about $7 billion over the next 10 years, CBO estimates.

A rationale in favor of this option is that the resulting lower cost of malpractice insurance would help increase the supply of some specialists in certain regions of the country. For example, some obstetricians, who could be deterred from practicing in places where the annual cost of malpractice insurance is particularly high (premiums can exceed $200,000 in some areas), might relocate or leave the practice of medicine altogether. Limits on malpractice claims also could curtail the provision of unnecessary or redundant services. Yet another rationale is that such limits could discourage some lawsuits in cases where negligence did not actually occur.

An argument against this option is that limiting malpractice claims could make it harder for people to obtain full compensation for injuries that are caused by medical negligence. Another argument is that reducing the size of awards might cause health care providers to exercise less caution, which could increase the number of medical injuries attributable to malpractice. However, conclusions published in the economic literature about the effects of changes in malpractice laws on health are mixed—perhaps because some types of limits on medical malpractice claims cause providers to reduce the intensity of services but also avert the risk of unintended, harmful side effects of those services. Some people might oppose this option because it would be a federal preemption of state laws. Currently, many states either specify higher limits on liability, loss, or damage claims than those proposed in this option or do not limit such claims at all.