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Litigation Raising Health Care Costs, Study Says

An October 2006 report from the Manhattan Institute shows the efforts of trial lawyers to target health care providers for profit are raising U.S. health care costs.

Trial Lawyers, Inc.: Health Care, from scholars at the institute's Center for Legal Policy, concludes this area of litigation is significant because "health care represents over 15 percent of the U.S. economy, up from only 5 percent in 1961" according to U.S. Centers for Medicare and Medicaid Services (CMS) data.

"While the excesses of the litigation industry alone cannot explain America's mounting medical costs," the study notes, "litigation is a large, and growing, contributor to our health-care bill."

'Tort Tax' Raises Costs

Medical malpractice liability--"the 'tort tax' on doctors and hospitals, whose costs constitute the majority of health expenses," as it is described in the report--has grown much faster than overall health care inflation, according to 2004 data from the global management corporation Tillinghast-Towers Perrin. Medical malpractice liability alone constitutes more than 10 percent of the U.S. tort tax, which by 2003 represented more than $3,300 for the average family of four, according to Tillinghast-Towers Perrin.

Medical malpractice tort claims awarded by courts, as well as pretrial settlements, provide U.S. trial lawyers with their largest health care sector revenue stream, according to the Manhattan Institute report. Litigation over pharmaceuticals and medical devices also exacts a staggering cost on the industry, notes James R. Copland, director of Manhattan's Center for Legal Policy.

The drug maker Wyeth, for example, has set aside a reserve of $21 billion to deal with litigation related to the obesity medication Fen-Phen. Merck's exposure to Vioxx lawsuits may total as much as $50 billion, the report notes. "Such figures are astronomical in comparison with these companies' individual budgets, representing nine to twelve times each company's annual research and development costs," the report notes. "In fact, since each drug was widely used for only about four years, the approximate annualized liability cost of these two drugs comes to almost $18 billion--equivalent to 10 percent of the annual revenues for the pharmaceutical industry as a whole."

Looking ahead, the big story for 2006 will be Vioxx litigation, says Center for Legal Policy Director James Copland. "Expect Merck to lose more multimillion dollar verdicts (though it will win its share, too)," Copland predicted. "Unless Congress acts to correct mass tort litigation for pharmaceuticals, the cost of Vioxx lawsuits for Merck will continue to rise--to $50 billion or more."

Defensive Medicine Costly

Medical malpractice liability alone constitutes more than 10 percent of the U.S. tort tax, which by 2003 represented more than $3,300 for the average family of four--Tillinghast-Towers Perrin.

The direct costs of health care litigation only scratch the surface of the toll such lawsuits exact on the U.S. economy and on health care, the Manhattan Institute report emphasizes.

"Med-mal lawsuits tend to inflate health care costs by encouraging 'defensive medicine'--unnecessary procedures and referrals that doctors and hospitals prescribe in order to limit their exposure to future litigation," explains the report. "Studies suggest that defensive medicine costs are several times higher than the direct liability costs themselves."

The report contends consumers are not made safer by product liability litigation over drugs and medical devices: "Such suits inevitably drive innovation from the marketplace that would lead to net health improvements--not only for U.S. society but for the entire world."

Since any drug manufacturer might be held accountable for unanticipated liability of the magnitude of Vioxx and Fen-Phen, the study notes, every drug company will consider such numbers in its research and investment decisions ... and many drugs that would otherwise save lives or improve the quality of lives will never reach the market.

Defenders of tort litigation assert it has a deterrent effect on risky or negligent activity, which it undoubtedly does, Copland admitted. But "in our current civil justice system it also deters any activity that might lead to high-cost lawsuits, which is not at all the same thing as actual risk," he pointed out in an introduction to the report.

When a liability system punishes indiscriminately, it does not efficiently deter bad conduct but rather reduces health care access by reducing the supply of doctors, the report says. Fear of litigation also encourages the use of expensive, unnecessary, and often dangerous procedures, and it lowers the expected return from research into new medicines and medical devices that can save lives.


The report also notes the litigation industry "does a very poor job compensating the victims it professes to be protecting." Most medical malpractice claimants are not harmed by avoidable doctor error, and most medical malpractice victims never sue. Plaintiffs typically wait years to recover damages and typically receive less than 50 cents on the dollar, with lawyers' and administrative fees soaking up the majority of settlements and verdicts.

Lawsuits Threaten Vaccine Production

Medical malpractice litigation will continue to affect targeted specialties, such as obstetrics, neurology, and emergency room care, Copland said. The variation will be sizable among states. Some states, having passed recent tort reform legislation, will get better; others, like Wisconsin, have worsened their situation through judicial activism, noted Copland.

"Nationally, I wouldn't expect as rapid a rise in premiums as we have seen in recent years, because the past few years' rate increases have helped return insurers to a manageable position, and because I expect a flat-to-rising interest rate environment, which lowers the discounted cost of insurers' liabilities," Copland said.

"A key fight at the national level to watch in 2006 is whether the government can craft a coherent response to the potential avian flu outbreak," said Copland. "Vaccines are particularly susceptible to litigation, and although Congress has shielded some existing vaccines from liability, new vaccines and other drugs vital to public health threats remain vulnerable."

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