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Want To Cut Medical Costs?

Economic Trends


Put a lid on malpractice suits

One of the hottest issues in the U.S. debate over rising medical costs is the impact of malpractice suits. Critics claim the malpractice system vastly boosts health-care outlays by inducing doctors to practice defensive medicine--that is, prescribing tests and treatments with little or no benefit in order to ward off lawsuits. Defenders say it reduces negligence while providing injured patients with redress for doctors' mistakes.

Moreover, since the total cost of the malpractice system, including claims paid and lawyers' fees, comes to less than 1% of the nation's medical bill, its supporters argue that its effect on expenditures is highly exaggerated. Indeed, up to now, there has been little hard evidence to show how much--or even whether--doctors resort to defensive medicine.

In a new study, two Stanford University economists--Daniel P. Kessler, who is also a lawyer, and Mark McClellan, who is also a doctor--seek to fill this gap. Their findings suggest that defensive medicine has been a widespread and costly practice, one that could be reduced through liability reforms.

Kessler and McClellan analyzed hospital expenditures for all elderly Medicare patients hospitalized in 1984, 1987, and 1990 with recently diagnosed heart attacks and other serious heart ailments. Controlling for patients' age, race, and sex, they compared states that had implemented malpractice reforms with those that had not, in terms of how much their spending per patient grew and how the patients fared.

The results: In states that adopted reforms limiting liability awards, the growth in hospital outlays slowed appreciably for several years--lowering such expenditures by 5% to 9% relative to the levels reached in states with no reforms. In both groups of states, patients did equally well--measured by mortality rates and rehospitalizations.

Although the spending slowdowns that followed reforms may not have affected the long-term upward trend in medical costs, they did seem to provide a lasting one-time saving. Extrapolating from their results, Kessler and McClellan theorize that nationwide comprehensive limits on malpractice awards could reduce annual health-care outlays by as much as $50 billion.

In fact, the recent slowdown in U.S. medical expenditures may partly reflect the malpractice reforms adopted by many states over the past decade--as well as the huge growth in managed- care plans, which closely monitor physicians for signs of excessive use of tests and costly treatments.BY GENE KORETZReturn to top

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Suburbanites are spending, too

The common view, says economist Gilbert Choy of ING Baring Securities Ltd., is that China's growing consumer market is tied to its urban population, which represents about 20% to 25% of the nation's 1.2 billion people. With annual per capita disposable income of about $465 (and much more in purchasing-power), urban dwellers reportedly earn about 21/2 times as much as their poverty-stricken rural cousins.

The trouble with this picture, says Choy, is that it not only undercounts city dwellers but also misses a huge adjunct to the main consumer market: an increasingly affluent suburban economy that has sprouted on the fringes of the cities but is often classified as part of the rural economy. According to ING Baring, suburbanites and better-off peasants number some 384 million and enjoy average per capita incomes of $450, almost as much as urbanites.

Counting the urban and suburban groups together, Choy estimates they exceed two-thirds of China's population and account for some 80% of its gross domestic product. Their purchasing power helps explain why real retail sales on the mainland continue to grow at a hefty 10% annual pace despite the nation's recent austerity policies.BY GENE KORETZReturn to top

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