An Economic Assessment of the Impact of Malpractice Liability on the Practice of Defensive Medicine

Many argue that incentive costs of the malpractice system, namely practices such as defensive medicine, account for a substantial portion of growth in healthcare costs. However, aside from increasing healthcare costs, defensive medicine may also have negative effects on patients’ health outcomes, if increases in liability cause providers to administer unnecessary harmful treatments or if they forgo risky but beneficial ones. All of these negative effects cause the issue of defensive medicine to be a crucial policy concern. This paper will test the validity of the argument that the fear of litigation drives medical providers to practice defensive medicine and that tort limits would reduce this perceived threat among physicians and thereby reduce utilization and spending. Using data from the 2000 Nationwide Inpatient Sample (NIS), this paper aims to answer the question of whether or not increases in malpractice liability change the way medicine is practiced by physicians’ increased use of certain procedures. Although the regression results do not provide any direct evidence that the existence of a cap on non-economic damage awards in a particular state reduces the likelihood of a physician to practice positive defensive medicine, this does not rule out the possibility of the existence of defensive medicine in said state.