This is the fourth installment of a nine-part series excerpting the chapter on medical care from the new edition of economist Thomas Sowell's "Applied Economics".

IBD Exclusive Series: Thomas Sowell on The Economics of Medical Care

A major source of the high cost of American medical care is malpractice insurance for doctors and hospitals.

The average cost of this insurance for individual doctors ranges from about $14,000 a year in California to nearly $40,000 a year in West Virginia. In particular specialties, such as obstetrics and neurosurgery, the cost of malpractice insurance can exceed $200,000 a year in some places.

These costs of course get passed on to patients, the government or whoever is paying for medical treatments. Even so, these are not the only financial costs created by medical malpractice lawsuits, nor are financial costs the only costs or necessarily the most important costs.

The threat of lawsuits can impose costs on obstetricians that raise their insurance premiums high enough to cause many of these doctors to stop delivering babies, or to stop delivering them in places where high jury awards on dubious evidence make it uneconomic to continue practicing obstetrics.

The net result of this can be that pregnant women in those places are at more risk than before because now there may be no doctor available in the vicinity to deliver their baby when the time comes.

Nor are obstetricians the only doctors who flee from places where it is easy to file lawsuits and win large damage awards. Pennsylvania, for example, lost one third of its surgeons between 1995 and 2002.

Ideally, juries would award malpractice damages only when the probability that malpractice had actually taken place was sufficiently clear, and the award only at a level sufficient to compensate real damages and deter such malpractice in the future.

In reality, an injured, deformed, or brain-damaged baby and an eloquent lawyer can lead to jury awards in the millions of dollars, even when it is by no means clear that the doctor who delivered that baby was in any way at fault.

A large study conducted jointly by the American College of Obstetricians and Gynecologists and the American Academy of Pediatrics — released in 2003 and reviewed and approved by leading medical authorities in and out of government, as well as from as far away as Australia and New Zealand — concluded that "the vast majority of brain damage and cerebral palsy among these infants originates in factors largely or completely outside the control of delivery room personnel."

According to The Economist, "few clinicians think that babies get cerebral palsy because the obstetrician failed to deliver them by caesarean section." Yet "fear of being sued prompts doctors to perform unnecessary C-sections — a risky and invasive procedure." Nevertheless, "a fivefold increase in C-sections in rich countries in the past three decades has brought no decrease in the incidence of cerebral palsy."

Seventy-six percent of American obstetricians have been sued at least once. The rationale for medical malpractice lawsuits is to force doctors to be more careful and thereby reduce risks to patients. The actual consequences, however, include unnecessary medical procedures, such as delivering babies by Caesarean section, as well as ordering medically unnecessary tests that doctors feel are financially necessary to protect themselves against lawsuits.

There may also be additional risks to patients when substantial numbers of doctors leave an area where malpractice lawsuits are easy to file and win.

Doctors usually win lawsuits that go to trial, but the pressure to settle out of court is substantial, since the average damage award in jury trials is $4.7 million.

Given the size of the damage awards and the resulting escalating costs of malpractice insurance, it is hardly surprising that defensive medicine has become widespread among obstetricians. A study of obstetricians in Pennsylvania found that "54% frequently called for tests, like sonograms, they felt were unnecessary and 38% often admitted to invasive procedures, like biopsies, that were not called for."

Such "defensive medicine" may not make patients any safer and in some cases, such as Caesarean sections and biopsies, can create additional risks. It is not merely the damages awarded in medical malpractice cases that add to the costs of medical care but also the greatly increased costs of defensive medical procedures.

It costs a jury nothing to "send a message" warning doctors to be more careful, and the particular doctor in the case at hand probably has insurance from a company that can pay a few million dollars easily out of its billions of dollars in assets.

Only if the jurors think beyond stage one will they take into account the increased cost of medical treatment brought on by their awards and future non-financial costs to pregnant women unable to find obstetricians at the time of delivery and the lifelong costs to babies who may incur more or worse injuries or disabilities as a result.

This is especially likely to be the end result in states where juries hand out multimillion-dollar awards readily, such as Nevada:

Kimberly Maugaotega of Las Vegas is 13 weeks pregnant and hasn't seen an obstetrician. When she learned she was expecting, the 33-year-old mother of two called the doctor who delivered her second child but was told he wasn't taking any new pregnant patients. Dr. Shelby Wilbourn plans to leave Nevada because of soaring medical-malpractice insurance rates there. Ms. Maugaotega says she called 28 obstetricians but couldn't find one who would take her.

While direct costs of malpractice lawsuits have been estimated as less than 1% of the total cost of medical care in the United States, the indirect costs include expensive tests and procedures, as well as the additional medical risks to patients that some of these tests and procedures pose.

Perhaps the biggest costs are those imposed on patients who cannot find a doctor available because the ease of filing malpractice lawsuits in particular places has led doctors to relocate. These costs are literally incalculable.

There is, of course, genuine malpractice, genuinely deserving of lawsuits and large damage awards. However, the ease of filing and winning lawsuits on the basis of shaky or speculative evidence, or on the testimony of "hired gun" experts who have financial incentives to back up what is said by the lawyer who hired them, has made the connection between malpractice lawsuits and genuine malpractice tenuous.

As in so many cases, political "solutions" to the malpractice problem can create new problems.

One popular political solution has been to put upper limits on the amount of awards for "pain and suffering." But if the carelessness or incompetence of some physician or surgeon has in fact caused someone to be in pain for the rest of his or her life, a quarter of a million dollar cap, as in California, is completely inadequate as compensation and inadequate as a deterrent.

The fundamental problem is not with the amounts of money awarded, as such, but with the fact that there may be no adequate basis for any award at all.

With laws and policies on medical malpractice, as with other laws and policies, what is most important from a political perspective may be the goals and rationales of those laws and policies. But from the standpoint of economic analysis, what is most important are the incentives and constraints created by laws and policies, and the consequences from those incentives and constraints — not only in stage one but beyond.

Tuesday: The real — and underestimated — cost of drug development.

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From the book "Applied Economics"  by Thomas Sowell. Excerpted by arrangement with Basic Books, a member of the Perseus Books Group. Copyright © 2009.