An efficient system of medical malpractice liability law should induce physicians to supply precautionary medical treatments as long as the benefits exceed the costs. In practice, the US malpractice system may deviate from this ideal along two dimensions. First, it may create incentives to supply cost ineffective treatments based on fear of legal liability – to practice ‘defensive medicine’ (Kessler, 2011). Defensive medicine can take many forms: too many diagnostic tests, specialist office visits, and even unnecessary surgeries. One recent paper estimates the cost of defensive medicine in the US to be 2–3% of health spending, or over US$50 billion per year (Mello et al., 2010).
Second, it may create incentives to decline to supply cost-effective treatments. This phenomenon is sometimes described as ‘negative defensive medicine,’ to distinguish it from its counterpart above. Negative defensive medicine can also take many forms, including physician avoidance of high-risk patients or procedures, reduction of hours of work, relocation, or exit from the profession altogether. All of these involve a restriction in the supply of physicians0 services that is not in society’s interests.
Thus, the impact of the US malpractice system on physician supply is an important policy issue. This article summarizes the empirical research on this topic. In general, the research finds that higher levels of malpractice liability lead to lower levels of supply. This finding is strongest and most robust for specialists, other physicians who are most likely to be at high risk for a malpractice claim, and for physicians in rural areas. However, the consequences of malpractice-induced reductions in supply on the cost of care and patient health outcomes – and hence on social welfare – remains largely an open question.
The article begins with an overview of the operation of the US malpractice system and a theoretical framework in which its effects on supply can be evaluated. It then summarizes the empirical evidence. It concludes with a discussion of the implications of these findings for social welfare and suggestions for future research.
The US Malpractice System And Physician Supply
In general, malpractice claims are adjudicated in state courts according to state tort laws. (The text in this section borrows heavily from Kessler (2011).) These laws generally require three elements for a successful claim. First, the claimant must show that the patient actually suffered an adverse event. Second, a successful malpractice claimant must establish that the provider caused the event: the claimant must attribute the injury to the action or inaction of the provider, as opposed to nature. Third, a successful claimant must show that the provider was negligent. Stated simply, this entails showing that the provider took less care than that which is customarily practiced by the average member of profession in good standing, given the circumstances of the doctor and the patient (Keeton et al., 1984). Collectively, this three-part test of the validity of a malpractice claim is known as the ‘negligence rule’ (see Budetti and Waters (2005), for a layperson’s explanation).
Even though they share the same basic structure, states` liability laws differ in terms of the level of liability they impose on providers. In particular, several states have changed their laws in ways that reduce liability relative to its historical levels – to adopt ‘tort reforms.’
The consequences of malpractice law and tort reforms for the supply of physician services are theoretically indeterminate. An early model by Danzon et al. (1990) illustrated why it is so difficult to assess the impact of malpractice law on supply a priori. Suppose that physician markets are monopolistically competitive, and states0 liability regimes impose both fixed and variable costs on providers. In this context, the model shows that the extent to which decreases in liability costs lead to increases in supply depends on the magnitude of costs, the extent to which they are fixed or variable, and the effect of variable costs on physicians’ profits. If liability costs are primarily fixed, then decreases in costs would lead to higher profits in the short run and ultimately to increased supply. If liability costs are primarily variable, however, and the marketwide elasticity of demand for physician services is low, then tort reform would lead to a decrease in price with a minimal change in quantity, and hence little change in profits and ultimately supply.
As Matsa (2007) pointed out, extensions of this model suggested that malpractice law may have very different effects across specialties and geographic areas. Malpractice insurance premiums, perhaps the most important cost imposed on providers by the liability system, differ dramatically along these dimensions. For example, in 2009, premiums in Suffolk County, New York, for specialists in internal medicine and obstetrics were US$33 000 and US$178 000, respectively, whereas premiums in Colorado were approximately one-third as much (Medical Liability Monitor 2009). In the Danzon et al. (1990) framework, such differences could imply very different supply responses to similar tort reforms.
Empirical Assessment Of The Effects Of The Malpractice System And Tort Reforms
The extent to which changes in malpractice law lead to changes in supply is, thus, an empirical question. Empirical research on the effects of malpractice law on supply is of three types. The first arm of the literature surveys physicians about their opinion of the role of the malpractice system on their scope of practice, hours of work, or likely future labor force participation (e.g., Mello et al., 2005). Although opinion surveys indicate that physicians believe that the malpractice system has a significant effect on supply, this approach only provides information about physicians’ perceptions, which may or may not be closely related to their economic decisions.
A second arm examines the correlation between supply and measures of malpractice costs such as insurance premiums, claims rates, or average payments per claim. Baicker and Chandra (2005) estimated the relationship between the change in the number of physicians per capita from 1993–2001 by specialty, age, and rural location and the change in these measures of costs across US states. They found that the overall size of the physician workforce does not respond to increases in costs, although in rural areas, the response of the size of the workforce is small but statistically significant. Dranove and Gron (2005) found that the incidence of a high-risk procedure (craniotomy) and women’s travel time for a high-risk delivery did not change in Florida contemporaneous with that state’s dramatic increase in premiums in the early 2000s. Mello et al. (2007) reported similar findings about physicians scope of practice in Pennsylvania contemporaneous with that state’s dramatic increase in premiums, but documented a decline in the number of practicing obstetricians there. In a recent working paper, Reyes (2010) found that increases in malpractice premiums lead to increased specialization among US obstetrician–gynecologists, with some physicians concentrating more in obstetrics and others in gynecological surgery.
However, the possibility that unobserved determinants of supply are correlated with premiums, claims rates, or payments qualifies the results of all these studies. The malpractice costs in a particular area may be increasing because the patients are particularly sick (and hence prone to adverse outcomes and malpractice claims), because the patients have more ‘taste’ for medical interventions (and hence more likely to disagree with their provider about management decisions), or because of many other factors. To the extent that these factors are not captured fully in observational data, estimates of the impact of malpractice costs in the studies above would tend to understate the magnitude of the true effect.
The third arm of the literature addresses this concern by identifying the effect of malpractice costs on supply with variation in tort reforms across states and over time. As Kessler (2011) pointed out, this technique yields unbiased assessments of the impact of the malpractice system under the assumption that the adoption of reforms is uncorrelated with unobserved determinants of supply (see US Congress, Congressional Budget Office (2006) for a criticism of this assumption).
Kessler et al. (2005) estimated the effect of reforms on the number of physicians using individual–physician-level data from the American Medical Association’s Physician Masterfile, matched with data on US states’ tort laws and state demographic, political, population, and health care market characteristics. They grouped reforms into two types – ‘direct’ and ‘indirect’ reforms. Direct reforms directly reduced malpractice awards. The most important reforms of this type are caps on damages that limit a defendant’s financial liability (or some element of liability, like pain-and-suffering or punitive damages) in a successful lawsuit. As the research discussed in Kessler (2011) showed, direct reforms reduce the frequency and size of claims, and insurance premiums. Other reforms that only affect awards indirectly, such as reforms imposing mandatory periodic payments (which require damages in certain cases to be disbursed in the form of annuity that pays out over time), limits on joint and several liability, or limits on the contingent fees that plaintiffs0 attorneys can charge have had a less consistent impact on malpractice costs. They find that 3 years after adoption, direct reforms increase physician supply in the US by 3.3%, all else held constant. They also find that direct reforms had a larger effect on the supply of most (but not all) specialties with high malpractice insurance premiums, on states with high levels of managed care, and on supply through retirements and entries than through the propensity of physicians to move.
Newer work examines the supply response to reforms for different subgroups. Using county-level data from 1985–2000, Encinosa and Hellinger (2005) showed that caps on pain-and-suffering damages lead to increases in supply, especially in rural areas. Using county-level data from 1970–2000, Matsa (2007) found no aggregate effect of caps on damages, but large effects for rural physicians and especially rural specialists; he hypothesized that this is because rural doctors face greater uninsured liability costs and a more elastic demand for medical services. Using state-level data from 1980–2001, Klick and Stratmann (2007) found that caps have a significant effect on the number of doctors per capita, and that this effect is concentrated among the specialties that face the greatest exposure to malpractice risk.
Two other studies assess the extent to which reforms affect physician avoidance of high-risk patients and hours of work. In the only study of its kind, Dubay et al. (2001) examined the effect of tort reforms on the supply of prenatal care for pregnant women. They found that reforms result in prenatal care beginning earlier in pregnancy, especially for women with low socioeconomic status, who may be more likely to file a malpractice claim. Helland and Showalter (2009) showed that reform-induced reductions in liability costs lead to increases in hours, especially for physicians aged 55 years and older.
Conclusions
The small but growing literature on the effect of malpractice law on physician supply reaches two main conclusions. First, tort reforms that directly reduce the costs imposed by the US malpractice system have a small, statistically significant positive effect on the number of physicians per capita, on the order of 2–4%. Second, although there is some debate about the robustness of this result for the overall physician population, there is almost universal agreement that reforms increase supply of certain subgroups that are likely to be sensitive to malpractice incentives. These subgroups include specialists who face substantial exposure to malpractice risk; rural physicians who may be less able to increase their markups to recover the costs of malpractice from their patients; and physicians who serve patient populations that are more likely to file a claim.
If markets for physician services functioned perfectly, these results would imply that tort reforms improve social welfare. Suppose that patients had perfect information about the risks of treatment, and physician services were priced at their marginal cost. In this case, as long as the liability system imposed no transactions costs, tort reforms should not affect supply. Patients and their physicians would make optimal decisions regardless of the level of liability, and any reductions in awards for malpractice would be completely offset by increases in prices. Reductions in liability would only increase supply if the liability system consumed real resources, which would mean that it was, by definition, inefficient.
Of course, there are many reasons why physician markets might not reflect this ideal. Most important, if patients don’t have perfect information about risks, then liability-induced reductions in supply might be optimal. Physicians might not take appropriate precautions in the absence of liability, which could lead to an equilibrium quantity of physician services that was too large. Liability-induced reductions in supply might be optimal for another reason: the widespread prevalence of health insurance, which means that neither patients nor physicians bear the full costs of care in any particular case. Such moral hazard could also lead to a socially excessive supply of services, which might be mitigated by liability costs. The fact that markets for physician services are unlikely to be perfectly competitive adds a third source of indeterminacy. Even simple models of monopolistic competition showed that the free-entry outcome can involve socially too few or socially too many suppliers (Spence, 1976; Tirole, 1988).
Any assessment of the welfare implications of liability induced reductions in physician supply must therefore examine their consequences for health care costs and health outcomes. To date, only two studies have attempted to do so, and their findings are inconclusive. Dubay et al. (2001) found that tort reforms lead to prenatal care beginning earlier in pregnancy, although they fail to reject that this increase in supply led to improved infant health. Along the same lines, Klick and Stratmann (2007) found that reforms lead to an increase in the supply of high-risk specialties, but reported that the effects of reform on infant mortality were mixed.
Investigation of the links between physician supply, costs, and outcomes is therefore an important topic for future research. Future research might also investigate the effect of other, nontraditional reforms to the liability system on physician supply. Kessler (2011) discussed several of these, including restricting the legal discoverability of information gathered as part of private, voluntary efforts to reduce medical errors; allowing evidence of compliance with clinical practice guidelines as an affirmative defense to negligence; and expanding the use of alternative dispute resolution, no-fault, and administrative compensation systems.
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