1. The Impact of Malpractice Reforms on the Supply of Physician Services David Becker, UC-Berkeley Daniel Kessler, Stanford GSB William Sage, Columbia Law School

2. Outline Introduction Models Data Results Discussion

3. Introduction “Positive” defensive medicine involves the use of tests or procedures with little expected medical benefit in effort to avoid malpractice claims. “Negative” defensive medicine involves declining to supply care that has expected medical benefit in order to avoid malpractice.

4. Introduction In this paper we focus on a particularly important form of “negative” defensive medicine – the physician supply decision. We estimate the effects of “direct” and “indirect” reforms in state malpractice tort law on the supply of physicians at the state level from 1985 to 1995 –“Direct” reforms include caps on damage awards, abolition of punitive damages, abolition of mandatory prejudgment interest and collateral-source rule reforms. –“Indirect” reforms include caps on attorneys contingency fees, mandatory periodic payment of future damages awards, joint- and-several liability reforms, and patient compensation funds.

5. Models We model the number of active physicians in state s in year t (N st ) as a function of: –State- and year-fixed effects (α s and θ t ) –Population of state s in year t (P st ) –Legal political characteristics of state s in year t (e.g political parties of state’s governor and legislature, W st ) –Whether or not managed care enrollment in state s in year t was above the median level (M st ) –The presence of “direct” and “indirect” malpractice reforms (from a maximum-liability regime) in state s in year t which occurred between 1986 and 1995 (L 1st and L 2st, with L st =[L 1st | L 2st ]

6. Models: Other Specifications In addition to looking at the total number of active physicians, we also examine: 1)Subpopulations particularly prone to malpractice pressure: –Non-group practice physicians. –Physicians in specialties with highest malpractice premiums: anesthesiology, OB/GYN, radiology, emergency medicine, surgery and radiology. 2)Short-run and long-run effects of tort reform. 3)Effects of reforms in high- versus low-managed care states. 4)Decomposition of net effect of reform into entry/retirement and moves.

7. Data AMA Physician Masterfile provides counts of physicians involved in direct patient care. Provides state of residence, years of experience, specialty and employment type. Data on state malpractice laws and legal/political and other health care market characteristics comes from earlier work by Kessler and McClellan (Journal of Public Economics, 2002) State-level HMO penetration data comes from Interstudy.

8. Results

11. Key Findings In regression models, physician supply rose by 2- 3% more in states which adopted direct liability reforms during our study period. Effect of direct reforms is greater (3-4%) amongst non-group practice physicians. Reforms have a larger effect on physician supply three or more years after their adoption than two years or fewer after adoption. Positive effects of direct reforms are greater in high- versus low-managed care states. Direct reforms have a greater effect on entry and retirement decisions than on the movement of physicians between states.

12. Limitations We do not assess the impact of reforms on costs of care or on health outcomes –If physicians induce demand for their own services beyond point of medically necessity, reform induced increases in physician supply may be socially harmful. –However, if competition among health care providers leads to lower prices and higher quality, than tort reform induced expansions in physician supply may be welfare enhancing.