Physicians’ concerns about malpractice lawsuits contribute to unnecessary testing, higher healthcare spending and potential harm to patients, according to a new Milliman Inc. report examining the forces driving the U.S. healthcare system.

The August report, The Complex Mechanisms Underlying U.S. Healthcare: Dynamics That Drive Our System, estimates that defensive medicine accounts for roughly 2% to 3% of total U.S. healthcare expenditures. One analysis cited by Milliman found that 2.9% of hospital spending was clearly defensive and another 10% potentially fell into that category.

In the section titled “Malpractice & Defensive Medicine: How Liability Concerns Drive Healthcare Costs in the United States,” Brad Schliesmann, ASA, MAAA, JD, a senior actuarial manager at Milliman, wrote that U.S. physicians face a combination of legal, financial, reputational and cultural incentives to practice medicine from a “just in case” perspective.

The civil liability system makes large jury awards possible, while the fee-for-service payment model allows insurers and other payers to absorb the cost of additional testing rather than physicians, the report said. Public rating systems can heighten physicians’ concerns about reputational damage, and medical training may reinforce the belief that ordering too many tests is safer than ordering too few.

Those pressures can lead physicians to test for rare conditions or unusual presentations that fall outside established standards of care. Although such exceptions can be medically significant, routinely searching for them can generate substantial costs.

Malpractice insurance premiums add to the economic burden. The report noted that neurosurgeons in some states face annual premiums exceeding $400,000. A study cited by Milliman estimated that defensive medicine and malpractice insurance premiums together accounted for 2.4% of national health spending, or about $56 billion annually, as of 2010.

The consequences extend beyond spending, according to the report. Unnecessary imaging can expose patients to radiation, false-positive results and anxiety, while unneeded procedures carry the risk of complications without corresponding clinical benefits. Liability concerns also may cause physicians to avoid high-risk patients, potentially delaying needed treatment and worsening geographic disparities in access to care.

Milliman highlighted several approaches for reducing those costs and risks.

New Zealand replaced tort-based malpractice litigation with a publicly funded, no-fault compensation system under its 1972 Accident Compensation Act. The system sharply reduced legal expenses and largely eliminated incentives for routine defensive testing while maintaining relatively high patient satisfaction with compensation, the report said.

Communication-and-resolution programs may provide another path. Such programs encourage early disclosure, apologies and negotiated compensation after adverse events. The University of Michigan Health System reduced liability costs by 41% and new claims by 65% within four years of implementing one, according to research cited in the report.

Johns Hopkins similarly found that training physicians in risk communication, shared decision-making and disclosure reduced defensive ordering and malpractice claims among participating clinicians over five years.

Milliman said no single reform is likely to eliminate defensive medicine. It suggested combining legal safe harbors and other tort reforms with apology programs, alternative dispute resolution and clinician training intended to address risk aversion.

Such an approach could help physicians focus more closely on patients’ needs and less on protecting themselves from litigation, the report concluded.