Malpractice law, physicians’ financial incentives, and medical treatment: How do they interact?

The effects of malpractice law and financial incentives on physicians are typically studied independently. This paper shows that to make both positive and normative statements about medical malpractice liability, one must consider physicians’ legal and financial incentives jointly. I develop a simple model to show that when treatment is unprofitable at the margin, mitigation of liability lowers treatment levels; conversely, when treatment is profitable, mitigation of liability raises them. Motivated by this simple theoretical framework, I analyze the impact of a tort reform in Texas that mitigated malpractice liability. Consistent with the theory, the rate of cesarean sections among commercially insured mothers, for whom the procedure is considered profitable, increased by 2 percentage points relative to the rate of cesarean sections among mothers covered by Medicaid, for whom the procedure is thought to be unprofitable.