Do Medical Malpractice Costs Affect the Delivery of Health Care?

Rapidly rising medical malpractice premiums have become an issue of increasing concern for physicians, policy makers, and the general public. Premiums rose by an average of 15 percent between 2000 and 2002, according to the Congressional Budget Office, while physicians in certain medical specialties and geographic areas experienced far greater increases - for example, premiums for general surgeons in one Florida county rose by 75 percent, to nearly $175,000 per year. Some policy makers and interest groups have called for tort reform measures, such as caps on non-economic damages in malpractice suits, to limit the growth of premiums.

The growth in malpractice premiums has the potential to profoundly affect the health care system. Premiums may influence physicians' decisions to join and leave the labor force, their choice of a medical specialty, and their decision of where to locate, creating the potential for underserved patient populations in certain specialties or geographic areas. Rising malpractice premiums may also encourage physicians to practice "defensive medicine," performing more tests and procedures than necessary in order to reduce exposure to lawsuits. Both rising malpractice premiums and defensive medicine practices may contribute to the increase in health insurance premiums.

In The Effect of Malpractice Liability on the Delivery of Health Care (NBER Working Paper 10709), Katherine Baicker and Amitabh Chandra explore the relationship between the rise in malpractice costs and the delivery of health care along these dimensions.

Using various sources, the authors assemble annual state-level data on malpractice premiums, payouts from insurers for malpractice claims, the number of practicing physicians, and the frequency of various medical treatments. The authors' strategy is to examine whether the change in premiums between 1993 and 2002 is related to changes in these other variables over the same period. One advantage of this approach is that it controls for any unobservable characteristics of states that might affect both premiums and the other variables of interest, so long as their effect is unchanged over the period.

The authors first explore one potential cause of rising malpractice premiums, escalating payments from insurers to malpractice claimants. They find that while premiums do respond to increases in payments, they do not increase dollar for dollar. This suggests that other factors may also be important in explaining the recent jump in malpractice premiums, such as a less competitive insurance industry or a decline in insurers' investment income.

The authors then turn to the consequences of increasing malpractice premiums, looking first at their effect on the size and composition of the physician workforce. They find no evidence that changes in malpractice premiums are linked to changes in either the total number of physicians or the number of physicians working in obstetrics/gynecology, surgery, or internal medicine. There is weak evidence that the entry decisions of young physicians and the exit decisions of older physicians may be affected by malpractice premiums. However, there is stronger evidence that rural physicians are sensitive to change in premiums - a 10 percent increase in premiums results in a 1 percent decrease in rural physicians per capita and a 2 percent decrease in older rural MDs.

The authors also explore the effect of rising malpractice premiums on the frequency of various medical treatments. Although there is no change in the frequency of most treatments, there is increased use of mammography, suggesting that physicians may increase the use of screening procedures in response to higher premiums. The authors find no effect of premiums on total Medicare expenditures, suggesting that the costs associated with defensive medicine practices may be small, at least for this age group.

The authors caution that their results may not capture the full effect of rising malpractice premiums if doctors respond to the medical liability situation in states other than their own. Nonetheless, they conclude "the arguments that state tort reforms will avert local physician shortages or lead to greater efficiencies in care are not supported by our findings."

This research was funded in part by the National Institute on Aging (grant P01-AG19783-02).