Defensive Medicine and Physician Asset Protection

Many papers, including Kessler and McClellan (1996) and Currie and MacLeod (2008), have analyzed legal reforms affecting physician practice decisions and malpractice premiums.  Malpractice insurance provides compensation to injured patients, but also protects a physician’s personal assets.  Roughly 6-8% of malpractice cases involve expenditures of personal funds by physicians, and indirect costs in the form of time and energy lost defending against lawsuits can be substantial (Lawthers et al., 1992; Seabury et al., 2013).  In this paper, we investigate how changes in the protection of physician personal assets through the bankruptcy system affect malpractice insurance markets and physician medical practice decisions.

            Protecting the personal assets of physicians from lawsuits by patients may impact medical practice in several ways.  Physicians may practice less defensive medicine, as they have less incentive to order tests or procedures that protect themselves from lawsuits.  If supplier-induced demand is a major factor in the number of procedures performed, physicians may order more procedures or riskier procedures for patients since the loss to the physician from patient complications or injuries is smaller while the income gains for the physician remain the same.  Physician willingness to pay for malpractice insurance may decrease, resulting in lower prices, if asset protection and malpractice insurance are substitutes.

            For physicians, the bankruptcy system is a potential alternative source of asset protection against malpractice claims.  A 1998 Supreme Court ruling held that judgments against physicians for malpractice do not meet the Bankruptcy Code’s standard of “willful and malicious injury,” so debts that physicians owe patients from malpractice lawsuits can be eliminated in bankruptcy.  Across states and over time, there are large differences in the amount of personal assets that a debtor physician can hold exempt from the claims of a creditor patient.  Some states allow debtors to shield an unlimited amount of home equity from creditors, making bankruptcy a potentially substantial form of wealth insurance for doctors.  Increased asset protection may lessen liability pressure by causing physicians to expend less in direct or indirect costs to defend against lawsuits or by causing patients not to sue in anticipation of a lower payout, particularly if physicians choose lower malpractice insurance policy limits in response to increasing exemptions.  We posit that asset protection through bankruptcy is a form of wealth insurance freely available from the state and a substitute for malpractice insurance.

            We identify the effect of changes in asset protection available to physicians through changes in bankruptcy exemption levels within states over time, a direct measure of the generosity of asset protection in the bankruptcy system.  Using data on malpractice premiums from the Medical Liability Monitor from 1991-2012 and exploiting variation in pre-1998 lower court rulings on discharging malpractice debts, we find that increases in exemptions lead to decreases in malpractice premiums, consistent with reduced demand.  We find evidence of increased procedure use from Medicaid FFS data, suggesting that physicians induce more demand when asset protections increase.  Further data on procedure use comes from Vital Statistics Natality data and the NHIS.