It seems self-evident: states that pass laws protecting doctors from large malpractice awards will attract more doctors than states without malpractice liability limitations. Accordingly, the U.S. Department of Health and Human Services favors limiting the monetary damages available to patients affected by medical malpractice, arguing that the supply of doctors will shrink in states without damage caps and increase in states that enact damage caps. Furthermore, President George W. Bush has proposed a nationwide cap on noneconomic damages available in malpractice lawsuits.
Yet a recent study by Kellogg School of Management finance professor David A. Matsa shows no statewide increase in the number of physicians who choose to practice within the states that pass laws capping damages.

To examine the relationship between damage caps and the supply of physicians, Matsa examined county-level, specialty-specific annual counts of physicians from 1970 to 2000. In a paper recently published in the Journal of Legal Studies, he reports that there is no increase in the statewide supply of physicians in states that pass damage caps.

Liability Damage Caps
Matsa explains that reforms such as liability damage caps do not produce all their intended effects because physicians may raise their fees to adjust to changes in malpractice litigation costs. “It turns out that the average decrease in premiums in areas that adopt these reforms is equivalent in dollar terms to about one patient visit a week or about a 1 percent change in the fee charged for a typical office visit,” Matsa says. And he states, “Given the magnitude of recent increases in health care costs, changes in malpractice insurance premium costs due to tort reform are unlikely to have a significant impact on most physicians.” In addition, the market demand for health care is generally considered to be highly inelastic. Matsa adds, “As a result, most physicians’ net incomes are effectively insulated from the malpractice environment, and tort reform damage caps have no significant effect on most physicians’ location decisions.”

Supplies of some types of physicians increase in the most rural areas of states that adopt damage caps.In contrast to the statewide findings, Matsa found that supplies of some types of physicians do increase in the most rural areas of states that adopt damage caps. He looked at how damage caps affect physician supply in counties according to regional population density. He divided the counties into four groups, based on the population per square mile. Within these divisions, he examined the supply of physicians in four categories: (1) family/general practice physicians; (2) medical specialists, including internists and pediatricians; (3) surgical specialists; and (4) support specialists, such as anesthesiologists, neurologists, pathologists, psychiatrists, and radiologists.

Matsa found a statistically significant increase in the supply of surgical specialists and support specialists in the least densely-populated areas of states that adopted damage caps. (The counties in the least densely-populated areas—frontier rural areas—had fourteen or fewer persons per square mile.) Figure 1 illustrates the statewide findings compared with the findings in the least densely-populated regions.

Figure 1: Change in number of physicians after enactment of tort reforms

Matsa identified some factors specific to practicing medicine in very rural areas that may account for the increase in the supply of specialty physicians in these areas. By analyzing information from the National Practitioner Data Bank, a comprehensive clearinghouse of information about physicians, Matsa found that the frequency of malpractice claims per doctor is greatest in the most rural areas. “These patients don’t seem to be more litigious, because there are fewer claims per capita,” Matsa explains. “Rather than rural patients being more likely to sue, it seems that larger patient loads for rural physicians lead to the typical physician facing a greater number of claims.”

Because of the greater number of claims per doctor, Matsa concludes that liability costs likely constitute a greater share of the marginal costs of practicing medicine for rural physicians. He explains that physicians incur nonmonetary costs when they face a lawsuit, such as time off from their practices to go to court, the emotional distress of having to defend themselves, and the effect on their reputations. It is likely that these uninsured costs are disproportionally greater for doctors in the most rural areas. In addition, there is evidence suggesting that the market demand for health care is more elastic in the most rural areas of the United States. Matsa explains that this may exacerbate the effects of medical malpractice liability by preventing the complete pass-through of malpractice litigation costs to patient fees.

National Liability Damage Caps
If a national damage cap were enacted, Matsa estimates that the typical resident of a frontier rural area of a state that has not otherwise adopted such a law would see an increase of about 13 percent in the supply of surgical and support specialists. He notes that these gains would come in places that arguably have the greatest need. However, he points out that while these areas represent 25 percent of U.S. counties, their residents represent only 3 percent of the total population.

Matsa explains that malpractice laws are intended to provide fair compensation to people who are harmed and to give physicians appropriate incentives for exercising a reasonable degree of caution within their practices. He cautions that a reform of the liability system is likely to impede those objectives. And he says, “There are other reforms or targeted policies that could be used to increase physician supply in rural areas. If we’re worried about physician supply in these areas, it may be best to focus policy on those communities without also distorting the liability system everywhere else.”