On November 4, 2014, Californians voted against Proposition 46, an unprecedented statewide ballot initiative that would have, among other things, raised the $250,000 cap on noneconomic damages to $1.1 million and indexed it to the rate of inflation in future years. The margin was significant — 67 percent voted against it.

For nearly 40 years, noneconomic damages, which entail payments to patients for pain and suffering resulting from medical malpractice (as opposed to economic damages such as lost wages and medical costs), have been at the forefront of debates over the U.S. medical liability system. Currently, 22 states have caps on noneconomic damages of varying sizes in place. If it had passed, the ballot initiative would have raised the cap on noneconomic damages in California from among the most restrictive to the least restrictive among all states with caps.

Opponents of Proposition 46, and supporters of malpractice reform more generally, argued that raising the noneconomic damages cap would have increased malpractice awards and subsequently malpractice premiums, which would be passed on to patients and insurers as higher costs.

Proponents countered that the $250,000 cap is outdated and that liability is necessary to compensate patients and provide physicians with incentives to avoid unsafe care. The debate was fierce, with tens of millions spent on outreach and advertisements mostly in opposition. As this is only the latest battle in a longstanding war between proponents and opponents of reform, it is useful to consider the strength and weakness of the evidence supporting the competing views and what it implies for future reform efforts.

Liability Reform and the Potential Impact of Proposition 46

Proposition 46 was perhaps most noteworthy because the 1975 California Medical Injury Compensation Reform Act (MICRA) has long served as a model for advocates of tort reform. The law included several provisions, but the centerpiece was the $250,000 cap on noneconomic damages that applies to jury verdicts in medical malpractice cases. Currently, six states have in place a cap equal to the MICRA level of $250,000. Other types of liability reforms exist, but caps on noneconomic damages are generally thought to have the strongest effects on the size of liability payments and on physician behavior.

One way in which noneconomic damages caps differ across states is whether or not the cap is indexed to inflation. Historically, the California MICRA cap has not been indexed to inflation; Proposition 46 would have raised the cap to reflect inflation since 1975 (approximately $1.1 million) and index the cap to inflation going forward. While the noneconomic damages cap technically only applies to jury verdicts, which represent less than 5 percent of cases, caps can also affect settlements because settlement values reflect expectations about what would happen if a case went to trial.

Our recent paper in Health Affairs suggests that a $250,000 damage cap is associated with a 20 percent reduction in average indemnity payments compared to no cap at all, while a cap of $500,000 or higher is associated with no reduction in payments, primarily because most payments fall well below this amount. From the standpoint of influencing average malpractice award sizes, raising the MICRA cap to $1.1 million would therefore be functionally similar to having no cap at all, and we estimate it would have raised average payments in paid malpractice claims by nearly 20 percent.

Health Care Costs and Patient Safety

Estimating the impact of malpractice liability on health care costs is a complicated and uncertain process, because the effects rely not just on the direct effect of insuring and administering malpractice liability but also on the behavioral response of physicians, i.e. defensive medicine. Estimates of the costs of defensive medicine vary, but most agree that these costs substantially outweigh the direct costs of malpractice liability.

What could have been the anticipated impact of Proposition 46 on health care costs? Lakdawalla and Seabury (2013) estimated the impact of malpractice indemnity payments on overall health care costs and found that a 10 percent increase in malpractice liability payments results in approximately a 0.4-1.2 percent increase in health care costs.

Using these estimates, which have also been used by the Congressional Budget Office to project the cost implications of federal malpractice reform, we surmise that if liability payments in California rose by 20 percent in response to the lifting of the damages cap, health care costs in California would rise by 0.74-2.32 percent as a result. In 2009, the last year for which the data are available from the Kaiser Family Foundation, California’s total health care expenditures were approximately $230 billion, suggesting that raising the noneconomic damages cap could have increased health care spending in California by $1.7-$5.4 billion per year.

It was more difficult to assess how Proposition 46 might have affected other outcomes such as patient safety or quality of care. Most studies fail to find consistent relationships between malpractice liability and health outcomes, though it is unclear whether this is because no such relationship exists or because studies rely on crude measures of health, often mortality, that are largely insensitive to physician practice patterns and result in imprecise estimates.

The aforementioned Lakdawalla and Seabury study found that the cost savings from liability reform were unlikely to offset the potential harms to patients, but the CBO noted that this finding is in conflict with other studies finding no effect on patient outcomes. In the case of Proposition 46, the issue was further complicated by the fact that the proposition included other measures aimed to increase patient safety, including drug testing of physicians and mandated use of prescription drug monitoring programs by physicians. Taking these factors together, it was much easier to make a convincing case that Proposition 46 would increase health care costs than it was to argue that there would be offsetting benefits for patients.

Looking Ahead

The medical malpractice system has long pitted insurers against trial attorneys and doctors against patients. Empirical evidence offers only limited guidance about the merits of raising a noneconomic damages cap. While the evidence is compelling that raising the cap will result in higher health care costs, the implications for patient care are unclear.

It is an empirical reality that it is often easier to estimate the costs than the benefits of malpractice liability, which inevitably advantages proponents of tort reform. And in an environment with such intense concern over the costs of health care, it is perhaps understandable why voters were reluctant to embrace a policy that could have increased spending by billions of dollars per year without clear evidence of benefit.

Perhaps the greater problem is that neither raising the noneconomic damages cap nor keeping it in place addresses the more fundamental problems of the malpractice system. Studies routinely show that the system is inefficient and does a poor job of fairly and quickly compensating patients who receive negligent care. A recent study by Mello, Studdert, and Kachalia (2014) rightfully notes that more comprehensive efforts that consider innovative reforms—such as early disclosure programs or safe harbors—are needed so that the system promotes quality and protects patients without providing physicians with incentives for unnecessary health care.

However, such efforts have not been successful in generating the same level of enthusiasm—for or against—that more traditional forms of tort reform have, perhaps because they do not directly affect the interests of two important stakeholders in the liability system: insurers and attorneys. But until and unless such reforms are made, we are likely to continue waging the same battles over malpractice damage caps for the next 40 years.