Liability Law Changes Raise Medical Productivity

Summary of working paper 7533
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These changes in incentives lead to reductions in medical expenditures, especially expenditures on diagnostic treatments, with negligible effects on mortality and rates of cardiac complications.

Medical malpractice liability law has two principal objectives: compensating patients who are injured through the negligence of health care providers, and deterring providers from practicing negligently. Considerable evidence suggests that the current liability system in the United States achieves neither goal well -- but is nonetheless extremely costly. In an era of changing markets for health care, what policy reforms might improve the ability of the system to meet its twin goals in a cost-effective way? In two recent NBER working papers, research associates Daniel Kessler and Mark McClellan provide new evidence on the consequences of medical malpractice liability reforms for medical treatment decisions, health care costs, and patient health outcomes. They analyze how statutory reforms to liability law affect doctors' and hospitals' incentives to administer precautionary medical treatments, and in turn how these changes in incentives interact with the characteristics of health care markets to affect the care of elderly Medicare beneficiaries with heart disease.

In How Liability Law Affects Medical Productivity (NBER Working Paper No. 7533), Kessler and McClellan show that malpractice reforms that directly reduce providers' liability lead to reductions in the "malpractice pressures" facing physicians and hospitals - including both financial (for example, average compensation paid to litigated and settled malpractice claims) and nonfinancial (for example, the time spent and amount of conflict involved in defending against a claim) pressures. "Direct" reforms -- such as caps on total or noneconomic damages -- reduce the share of claims resolved with some compensation to plaintiffs, the share of claims with nonzero administrative and legal defense expenses, and the share of claims that take a long time to resolve. In turn, the authors show, these changes in incentives lead to reductions in medical expenditures, especially expenditures on diagnostic treatments, with negligible effects on mortality and rates of cardiac complications. This implies that direct reforms improve medical productivity by reducing defensive medical practices.

Kessler and McClellan note that these estimates can also be used to simulate the effects of untried reforms to the liability system, based on such reforms' predicted effects on the malpractice pressure facing medical providers. For example, at least for elderly heart disease patients, an untried reform such as no-fault malpractice insurance that reduced the legal-defense burden on physicians and hospitals by one-quarter -- which is within the range of policy possibilities -- could be expected to reduce medical treatment intensity by approximately 6.2 percent, but not to increase the incidence of adverse health outcomes. In the same population, a policy that expedited claim resolution by six months across-the-board could be expected to reduce hospital treatment costs by 2.8 percent, without greater adverse outcomes.

In Medical Liability, Managed Care, and Defensive Medicine (NBER Working Paper No. 7537), Kessler and McClellan investigate the extent to which liability reform affects medical productivity differently in areas where health maintenance organizations (HMOs) are more versus less widespread. Because the optimal level of medical malpractice liability depends on the incentives provided by the health insurance system, the rise of managed care in the 1990s may affect the relationship between liability reform and productivity. For example, more parsimonious practices associated with managed care may have reduced physicians' incentive and ability to engage in defensive treatment, thereby reducing the productivity-enhancing effects of liability reform.

The authors find that direct reforms improve medical productivity both in areas with low and with high levels of managed care enrollment. In addition, managed care and direct reforms do not have long-run interaction effects that are harmful to patient health. However, at least for patients with less severe cardiac illness, managed care and direct reforms are substitutes, so the improvement in productivity that can be achieved with direct reforms is smaller in areas with high managed care enrollment.

The authors observe that these results provide little evidence to support the expansion of liability to HMOs, on the grounds that the overall level of liability is insufficient. However, as Kessler and McClellan note, the consequences of a reallocation of liability from doctors and hospitals to HMOs, if the overall level of malpractice pressure were held constant, remain an open question.