Tort Reform and Physician Moral Hazard

Posted: 9 Jul 2019 Last revised: 9 Nov 2023

See all articles by Juan Zhang

Juan Zhang

Eastern Kentucky University - College of Business & Technology

Date Written: July 15, 2020

Abstract

States have been enacting tort reforms to reduce the liability of physicians conducting malpractice. However, tort reform may create a moral hazard because physicians may take less care due to reduced liability. This paper investigates whether physician moral hazard presents after tort reform. I study this problem through the lens of medical malpractice insurers who, as the primary payer of medical malpractice claims, have the data and ability to predict the behavioral changes of physicians as well as patients. I look at insurers’ post-reform revisions on loss reserves, which were the overall changes in future expected malpractice losses and can be affected by three factors – physician moral hazard, patients filing fewer claims, and caps on loss payments. Physician moral hazard causes an increase in the expected malpractice losses, whereas the other two factors both lead to reduced loss payments. The loss reserve revision is estimated through the full information reserve revision, which is the reported incurred losses minus an actuarial prediction based on a regression method and previous year’s reserve data. The main identification strategy is a difference-in-difference model. I find that after controlling for state and firm characteristics, insurers adjust loss reserves upward after the enactment of the reform to punitive damages and the reform to joint and several liability rules, indicating the prevalence of physician moral hazard. Punitive damages may unpredictably lead to a catastrophic jury verdict against physicians, and the joint and several liability rules can make physicians liable for losses of others who are jointly liable but bankrupt. The empirical results imply that tort reform that significantly lowers physicians’ financial liabilities can reduce the deterrence effect of law and cause a moral hazard issue.

Keywords: Tort Reform, Medical Malpractice Insurance, Moral Hazard, Full Information Reserve Revision (FIRR)

JEL Classification: D81, G22, G28, G32, K13

Suggested Citation

Zhang, Juan, Tort Reform and Physician Moral Hazard (July 15, 2020). Available at SSRN: https://ssrn.com/abstract=3415742 or http://dx.doi.org/10.2139/ssrn.3415742

Juan Zhang (Contact Author)

Eastern Kentucky University - College of Business & Technology ( email )

Richmond, KY 40475
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,110
PlumX Metrics