Practice Location Choice by New Physicians: The Importance of Malpractice Premiums, Damage Caps, and Health Professional Shortage Area Designation

Physician location decisions have long-lasting effects on the supply of health care available in a given market. Once a physician decides on his or her initial location, it is costly to relocate because acquiring a panel of patients and getting credentialed at area hospitals is time consuming for most physicians. Our study is aimed at understanding the factors affecting the choice of initial practice location by new physicians. Three aspects of the physician market are of particular interest: (1) the impact of malpractice insurance premiums, (2) state damage award caps, and (3) federal policies aimed at encouraging physicians to practice in underserved areas. The study of newly graduated physicians represents a distinct advantage over prior research, as understanding the factors that affect initial location choice for physicians is particularly important because of the long-lasting labor force implications of the decision. The literature regarding physician practice location has shown that location and personal characteristics can influence the choice of practice location. A number of location factors and personal characteristics have been studied previously, including population density, hospital location, demographics, and financial factors (Newhouse et al. 1982; Escarce et al. 1998; Polsky et al. 2002;). Krist et al. (2005) showed that Title VII funding for health professionals was significantly associated with the number of family physicians working in rural and low-income areas. Previous studies, however, have not examined the relationship between location choice by new physicians and area characteristics such as malpractice insurance premiums and federal programs, nor have they looked at the potentially interactive effect on location choice of factors including personal characteristics, local characteristics, and malpractice insurance premiums. Considerable attention has focused on the role of malpractice insurance premiums in influencing physicians' decisions to continue to practice in particular areas, alter their medical treatment practices, and retire early; this situation has been termed a “crisis” in both the popular press and the scientific literature (see, e.g., Mello, Studdert, and Brennan 2003; Tabarrok 2006;). Despite the widespread attention there has been little empirical research documenting the impact of recent increases in malpractice insurance premiums on physician behavior. An exception to this is work by Kessler, Sage, and Becker (2005) who found that state tort reform laws intended to restrict the growth of malpractice insurance premiums led to an increase in high-malpractice-premium specialty physicians due to reduced retirements and increased entry into practice. Along with unease regarding malpractice insurance premiums, concern has been raised regarding the inadequate supply of physicians in medically underserved areas. Despite federal and state government programs such as the National Health Service Corps (NHSC), which attempt to address the perceived maldistribution of primary and specialty physicians by encouraging physicians to work in underserved areas, research examining the impact of these federal programs is limited. Previous studies often have been restricted to examining the “stock” of physicians in a given state or city as opposed to the “flow” of new physicians entering a given market. This limitation, consequently, makes it difficult to understand how physicians entering the field make choices regarding their practice locations. In addition, much of the prior research has used the AMA Physician Masterfile, which has some notable shortcomings. The AMA data do not adequately gather information on race and ethnicity, and they provide imprecise location information. Konrad et al. (2000), for example, found that the Masterfile overestimates rural physician supplies by 20 percent. Our study uses a unique dataset to examine the factors affecting the practice location choice of new physicians. Our results indicate that higher malpractice insurance premiums do not appear to be a deterrent to locating in a particular area for obstetrician–gynecologists (OB/GYNs), though they appear to be a significant factor for surgeons. State malpractice damage award caps appear to attract high medical malpractice specialties such as OB/GYNs and surgeons. Health professional shortage area (HPSA) designation appears to attract only those OB/GYNs and primary care physicians (PCPs) without education debt, which would suggest that subsidy and loan repayment programs are not necessarily outweighing the perceived costs of locating in areas designated as underserved.