Skyrocketing dollar amounts could give an observer the idea that the pace of medical malpractice litigation is up—yet the opposite is true. Claim frequency is flat or decreasing nationwide.

In the insurance industry, we call this “social inflation.” The term describes periods like this one, in which the costs of medical malpractice claim resolution are increasing faster than general inflation. Social inflation arises from the convergence of various social and economic forces: desensitization to big numbers, third-party investors in litigation, and more.

Social inflation increases the price of healthcare. It ratchets up the costs of doing business for healthcare professionals and organizations, and fear of litigation inspires defensive medicine.

Fortunately, through tort reform, states may be able to contain social inflation’s effects on healthcare costs.

Numbness to big numbers

Our society has become inured to large quantities and large dollar amounts. Professional athletes routinely chalk up tens of millions of dollars per year, and we’ve seen lottery jackpots of over a billion. Most people shrug at a multimillion-dollar verdict.

For decades, researchers in cognition have observed that their fellow citizens experience “number numbness.” We human beings are generally bad at understanding large numbers, and numbers over one million are especially hard to grasp.

Researchers who study risk and decision-making say that some of us are more prone than others to being swayed by moods and narratives, especially in an environment of heightened emotion—and heightened emotion is definitely present in a court proceeding surrounding an allegation of medical malpractice. Whether or not a medical error has occurred, adverse events can happen to patients, and the results are often devastating.

We know that within a cultural setting of number numbness, the courtroom’s environment of strong emotion can further skew our understanding of large numbers. Amplifying this effect, plaintiffs’ attorneys attempt to exploit jurors’ emotions using “reptile theory”: They frame the defendant as threatening, which arouses jurors’ primal sense of fear—thus engaging the more basic parts of the human brain, those responsible for fight-or-flight responses.

The end results are verdicts designed to punish the defendant to deter others. These verdicts go far beyond making the injured party whole. Exploiting jurors’ sense of empathy to achieve high-dollar verdicts might even lead to harming the very people jurors wish to help: patients.

Large verdicts pay attorneys—and investors

Although juries that award large sums to plaintiffs may feel concern for an injured person, up to 40% of that indemnity can go to the plaintiff’s attorney, not the plaintiff.

Further, most Americans are unaware that people invest in medical malpractice lawsuits, but hedge funds and other investors often float plaintiffs’ attorneys’ litigation in exchange for a share of the settlement or jury award. Enriching these third-party funders is probably not what jurors have in mind when they choose massive awards.

Large verdicts promote defensive medicine

Defensive medicine involves adding steps to the course of care out of fear of litigation, rather than hope for a treatment outcome. For instance, many of us are familiar with the idea that doctors may seek to protect themselves by ordering medically unnecessary tests. This increases the cost of healthcare overall.

The exact amount of spending increase is unknown, but some estimate that defensive medicine adds at least $55 billion per year to U.S. healthcare costs. Tort reform measures, including caps on noneconomic damages, can help mitigate these fears and added costs.

The ripple effects spread far beyond the parties to a medical malpractice lawsuit. Eventually, premiums for medical professionals are affected, and increases in premiums for healthcare professionals can affect the cost of care.

And it’s not only healthcare that has to pay the “tort tax.” In 2022, the U.S. Chamber of Commerce Institute for Legal Reform calculated a tort cost equivalent to 2.1% of gross domestic product, or $3,621 per American household.

Steering U.S. healthcare through the challenges ahead

The insurance industry needs our elected representatives to support damage caps and other tort reform measures.

A survey conducted by the American Property Casualty Insurance Association and Munich Reinsurance America indicates that many Americans are not aware of litigation aspects such as third-party litigation funding or the potential impact on their own household costs—but upon learning about these issues, most people surveyed wanted commonsense reforms.

American healthcare has plenty of challenges to navigate—halting social inflation won’t overcome them all. But it will be easier for U.S. healthcare to steer through those obstacles if it is piloted by clinicians who are free from fears of crippling litigation costs.