Sunday, August 15, 2004

TANSTAAFL

A number of my friends have come out in favor of tort reform, for selfish, though quite understandable reasons: it means their medical bills drop in price.

But whenever government action reduces the price, someone is paying. Most likely, it's the people whose bills drop. Assume for a moment that the Bushies succeed in limiting the damages that can be paid in a tort. The argument goes as follows: a reduced payout from a lost suit means a smaller malpractice insurance premium. Such a reduction in the premium would imply the price of medical care would drop equivalently [this assumes exceptionally high price elasticity; I would be willing to bet that a very, very small portion of the savings actually get passed on to consumers, as the market is rather inelastic].

But what of the consequences of reduced premiums? Changing the cost of malpractice should ultimately change the very incentive structure for doctors. As the cost of malpractice drops for doctors, so should the incidence of it rise. So yes, your visits to the doctor will be cheaper, but also riskier.

2 comments:

-Ron said...

For two thoughtful articles on this subject, see the current issue (Summer 2004) of ‘Regulation’ magazine published by Cato. Both address the idea of tort reform.

Those articles are:

Making Lawyers Compete – Is the Market for contingent fee-financed tort litigation competitive? By: Lester Brickman (Cordozo School of Law)

How Lawyers Compete – Can the legal services market become more competitive? By: Michael Abramowicz (George Washington University)

David said...

For all the non-econ geeks that read this blog (and yes, there are legions of you, I swear), TANSTAAFL stands for There Ain't No Such Thing As A Free Lunch. Got it? Good. Learn it, Love it, Live it.