The insurance industry makes an implausible and poorly documented claim in a new ad saying "lawsuit abuse" by trial lawyers costs every household "$1200 in higher medical bills." The figure is based mainly on a single academic study of a narrow group of patients - the results of which have been contradicted by virtually all other research.
The ad portrays trial lawyers as a shark in a feeding frenzy. The trial lawyers responded in kind, launching their own ad comparing "Big insurance and HMOs" as a huge crocodile "ready to pounce" on consumers, but without offering any facts. Both ads are fishy.
On April 4, the insurance industry group America’s Health Insurance Plans (AHIP) released a TV ad called “Shark Bait” that will run through the entire month on national cable channels, accompanied by print ads appearing in various Washington, DC publications. According to a press release, the ad campaign
highlights the cost of malpractice lawsuits and shows how trial lawyers “have set their sights on opposing medical liability reform.” The sponsor is an association of nearly 1,300 providers of health insurance, including such giants as Aetna, Cigna and many Blue Cross Blue Shield organizations.
America's Health Insurance Plans Ad: "Shark Bite"
Announcer: They're circling. America's trial lawyers are on the prowl. And your health care is still their favorite bait. Their lawsuit feeding frenzy costs every American household up to $1,200 a year in higher medical bills. That's money that could have gone in your pocket. Now it's just fish food. It's time for Congress to stop lawsuit abuse. Because until they do, it won't be safe for anyone to go back in the water.
Fish Food vs. Common Sense
AHIP's ad is a challenge to common sense. They crow that every household sacrifices $1,200 in higher medical bills as “fish food” swallowed up by extra, needless medical costs imposed by trial lawyers. But total income for the median household in the US was $43,318 in 2003, the most recent year on record. Half of all households made more, half made less. So if the ad's claim were true, it would mean that almost 3 percent of the typical American household's income was being lost to "lawsuit abuse" in the medical area alone. Viewers would have to be dumb as an ox not to be suspicious.
And in fact, the lion's share of the $1,200 figure is attributed to "defensive medicine," the supposed tendency of doctors to order up needless tests or procedures to avoid malpractice lawsuits. Thus, AHIP’s ad recycles a theme that President Bush championed during the 2004 campaign. Not to crow about it, but we've addressed that one before. Actually, there's almost no scientific support for the claim that fear of malpractice awards drives up the cost of American health care to any substantial degree.
Although the ad cites "HHS data" (referring to the federal Department of Health and Human Services), it really rests mainly on a nine-year-old study by two Stanford University scholars, which is virtually the only such study to find evidence of major costs from "defensive medicine." The 1996 Stanford study concluded that caps on damage awards could reduce overall health care costs by 5% to 9%, but it was based only on a study of heart patients who were hospitalized. AHIP and others cite this as evidence of a 5% to 9% increase across the entire health care system. However, virtually all other studies of defensive medicine have found no such thing.
Two nonpartisan agencies of Congress have examined the question. In 2004 the Congressional Budget Office found “no evidence that restrictions on tort liability reduce medical spending.” And in 1999 the Governmental Accountability Office evaluated the study and said that the evidence presented was too narrow for estimating the overall costs of defensive medicine.
CBO concluded that “the evidence available to date does not make a strong case that restricting malpractice liability would have a significant effect , either positive or negative, on economic efficiency.” And the earlier GAO report said of the Stanford study:
GAO: Because this study was focused on only one condition and on a hospital setting, it cannot be extrapolated to the larger practice of medicine . Given the limited evidence, reliable cost savings estimates cannot be developed.
Consequently, nearly $1,000 of the insurance industry's $1,200 figure has little basis in fact.
Would You Believe $234?
For the remainder -- $234 -- AHIP relies on another estimate of the direct costs of medical malpractice awards. This estimate comes from Tillinghast-Towers Perrin, a consulting firm that is paid by insurance companies. That doesn't mean the figure is wrong, but the fact that it comes from an industry-friendly group should make anyone wary.
Tillinghast-Towers Perrin released an annual report titled "U.S. Tort Costs," which put the direct cost of malpractice claims for 2003 at $26.5 billion. Tillinghast said that the overall cost of medical malpractice "translates to $91 per person." So for an average U.S. household, which the Census Bureau reported was 2.57 persons in 2003, that figures to $243.
But it turns out, even that $234 figure is too high for measuring "lawsuit abuse" as the ad claims. In fact, the study acknowledges that it includes all claims -- including those in which real malpractice occurred, and those that were settled before they ever resulted in a lawsuit. The introduction states that the costs " include far more than just the claims that are litigated" and "are not a reflection of the litigated claims or the legal system."
The study actually undercuts the ad's claim to some degree. To their credit, Tillinghast explicitly affirms that there are benefits of a tort system, something the ad quite naturally fails to mention. Tillinghast says, "This study makes no conclusion that the costs of the U.S. tort system outweigh the benefits, or vice versa."
Tillinghast-Towers Perrin: Such benefits include a systematic resolution of disputes, thereby reducing conflict, possibly including violence. Another indirect benefit is that the tort system may act as a deterrent to unsafe practices and products. From this perspective, compensation for pain and suffering is seen as beneficial to society as a whole.
That idea is totally ignored in the "Shark Bite" ad, which is aimed at building support for the President's proposal to limit that very compensation for pain and suffering.
American Trial Lawyers Association Ad:
Announcer: Lying in the weeds ... Heading our way. Big Insurance and HMOs are ready to pounce...They've got their eye on you...Price gouging and record profits, ignoring innocent victims of medical negligence, harming health care. Big Insurance thinks you're easy prey. Call Congress...tell them stop feeding the Insurance industry, tell them to stand up for consumers.
A Crass Menagerie
Picking up on the scary-animal theme, the American Trial Lawyers Association responded with an ad of their own portraying the insurance industry as a predatory reptile.
In an ad they call "Big Appetite," the trial lawyers proclaim that "big insurance and HMO's" are "lying in the weeds" and "ready to pounce" on innocent victims.
We smell a rat when the ad claims "record profits" for the industry. In fact, the malpractice insurance industry has been losing money for the three most recent years on record. Figures gathered by the National Association of Insurance Commissioners (the state officials who oversee the industry) medical malpractice insurers lost 4.7 percent of their net worth in 2001 and lost 7.4 percent of their net worth in 2002. In 2003 they nearly broke even but still came out behind, losing 0.1 percent of net worth. (The trial lawyers say they were referring to profits of HMO's, not malpractice insurers, even though the ad is aimed at defeating legislation that would set caps on medical malpractice awards.)
Otherwise, the lawyers' ad is virtually fact-free, playing on prejudice and stereotypes without actually stating anything concrete. It accuses the industry of "price gouging," which is a subjective term that simply means charging more than a customer thinks is justified. In fact, according to the insurance commissioners, in 2003 the medical malpractice insurers paid out nearly $1.29 for every $1 they collected in premiums (counting reserves set aside for future losses.) Despite those losses on insurance operations the industry nearly broke even that year, but that was mainly because insurors received income from a rising stock market, and hardly constitutes evidence of overcharging for insurance.
Our advice: When lobbyists start using animal metaphors -- duck.
Update Apr. 26, 2005: Originally this article referred to the reptile in the ATLA ad as an alligator, and gave the name of the ad as “Alligator.” That was incorrect. We have changed all references to the creature “alligator” to “crocodile.” We were misled by a script of the ad sent to us by ATLA which carried the ad’s title as “Alligator,” as well as by an April 5 ATLA news release announcing the ad. ATLA’s release said “insurance companies are portrayed as alligators” in the ad. The release also quoted ATLA president Todd A. Smith as saying, “Alligators live in a swamp, hide from their prey, and once they've got you, it's too late. The insurance industry and HMOs are just under the surface in the debate about health care.”
ATLA’s public relations department now informs us that the name of their ad is actually “Big Appetite,” and that the animal shown is in fact a crocodile. We are happy to clear up the confusion.
Tillinghast-Towers Perrin, “U.S. Tort Costs: 2004 Update ,” 12 January 2005 .
Daniel Kessler and Mark McClellan, "Do Doctors Practice Defensive Medicine?" Quarterly Journal of Economics, May 1996: 353-390.
Perry Beider and Stuart Hagen “ Limiting Tort Liability for Medical Malpractice ” Congressional Budget Office 8 Jan. 2004 .
US General Accounting Office “ Medical Malpractice : Effect of Varying Laws in the District of Columbia , Maryland and Virginia ” 15 Oct 1999.
"2003 Profitability Report: Medical Malpractice," National Association of Insurance Commissioners, undated.
"2002 Profitability Report: Medical Malpractice," National Association of Insurance Commissioners, Oct 2003.
"2001 Profitability Report: Medical Malpractice," National Association of Insurance Commissioners, 11 Jan 2005.