Essays in the Economics of Medical Malpractice Law

This dissertation explores the interaction between medical malpractice law and medical treatment. The first chapter addresses the question: How do malpractice lawsuits affect physician behavior? In this chapter, I study the impact of malpractice claims against obstetricians, a specialty that is regarded as particularly subject to malpractice concerns, on their choice of whether to perform C-sections, a common procedure that is thought to be sensitive to physician incentives. I find that immediately after an adverse event (defined as an obstetrical procedure that ultimately leads to a malpractice claim), C-section rates jump discontinuously by 4%. The increase in C-section rates persists even 4.5 years after the adverse event. Several other findings provide support to the view that fear of litigation and damage to reputation explain the results, rather than a mere response to the negative outcome that brought about the malpractice claim. First, unsuccessful claims, which, at the time of the adverse event, are perceived as less harmful to physicians' reputation, do not lead to an increase in C-section rates. Second, the impact on C-section rates is larger for patients insured by a commercial insurance provider, for which reputational concerns are likely to be stronger, since they are less constrained in their choice of physicians. In addition, the impact is smaller for experienced physicians, but not for those with a prior history of litigation claims. I also find evidence of peer effects: following an adverse event, a physician's colleagues also have higher C-section rates. Overall, this chapter shows that following an adverse event physicians adopt more conservative and costly treatment strategies and that their response is likely to be related to fear of litigation and damage to reputation.The impacts of malpractice regulations and financial incentives for providers are typically studied independently. In the second chapter of this dissertation, I show that in order to make both positive and normative statements about medical malpractice liability, one must consider the legal and financial incentives faced by healthcare providers jointly. I develop a simple model of physician behavior to show that the effect of tort reforms on treatment decisions depends critically on physicians' financial incentives. When treatment is not profitable at the margin, liability reduction leads to a decrease in treatment levels; conversely when treatment is profitable, liability reduction leads to an increase in treatment levels. Motivated by this simple theoretical framework, I analyze the impact of a tort reform in Texas that reduced malpractice liability on C-section rates and common pediatric surgical procedures. Consistent with the theory, the data show that the rate of C-sections for commercially insured mothers, which are thought to be profitable, increase by about 2% relative to the rate of C-sections for mothers on Medicaid, which are considered to be unprofitable. Similarly, the reform increases the incidence of profitable pediatric procedures relative to unprofitable ones. These findings help explain why the existing literature on optimal medical malpractice law is inconclusive and underscore the importance of understanding the economic incentives at play when designing legal regulations.