Policy Economics Jan 1, 2012

Just What the Mar­ket Ordered

How mal­prac­tice law­suits pun­ish neg­li­gent doctors

Based on the research of

David Dranove

Subramaniam Ramanarayanan

Yasutora Watanabe

Debates on med­ical mal­prac­tice reform are filled with sta­tis­tics that fly back and forth, only a few of which man­age to stick. One side claims that mal­prac­tice suits give much-need­ed recourse to patients who have expe­ri­enced neg­li­gence at the hands of bad doc­tors. The oth­er side claims that mal­prac­tice law­suits are cost­ly, inef­fi­cient, and serve only to make doc­tors over­ly fear­ful of being sued. In a debate like this, hyper­bole often over­shad­ows the facts.

Add Insight
to your inbox.

We’ll send you one email a week with content you actually want to read, curated by the Insight team.

Sign up here

Mal­prac­tice law­suits play an impor­tant role in a func­tion­ing health care mar­ket. As in most mar­kets, sell­ers who pro­vide qual­i­ty prod­ucts are reward­ed with high demand, while low­er-qual­i­ty sell­ers see less demand. Law­suits can help sep­a­rate the wheat from the chaff, allow­ing patients to sig­nal when a doc­tor pro­vides bad services.

But the research so far seems to sug­gest that mar­ket effects from law­suits are min­i­mal. Sens­ing that they were not see­ing the full pic­ture, David Dra­nove, a pro­fes­sor of man­age­ment and strat­e­gy at the Kel­logg School of Man­age­ment, Yasu­to­ra Watan­abe, an assis­tant pro­fes­sor of man­age­ment and strat­e­gy at the Kel­logg School, and Sub­ra­ma­ni­am Rama­narayanan, an assis­tant pro­fes­sor at UCLA, devel­oped a more nuanced mod­el of patient demand. They found that the mar­ket actu­al­ly does pun­ish neg­li­gent doc­tors in a way that oth­er stud­ies had glossed over: by tak­ing away their most prof­itable patients.

Law­suits, Recalls, and the Mar­ket

In oth­er indus­tries, law­suits and prod­uct recalls have caused dra­mat­ic decreas­es in demand. In 1982, Tylenol sales plum­met­ed after tam­per­ing caused sev­en deaths in the Chica­go area, and more recent­ly, Toyota’s mar­ket share fell in the Unit­ed States after faulty accel­er­a­tion forced vehi­cle recalls. But in med­i­cine, Dra­nove says, the pic­ture is more com­pli­cat­ed. Some stud­ies have shown that law­suits do not shake the health care indus­try the way they do oth­ers. After a provider has been sued, they don’t tend to lose any patients,” Dra­nove says. Per­haps, he thought, patients do not take law­suits seri­ous­ly or maybe do not even hear about them. Med­ical mal­prac­tice law­suits are also noto­ri­ous­ly inef­fi­cient. For every dol­lar that goes to a harmed per­son, anoth­er dol­lar goes to experts and lawyers,” Dra­nove notes. The prob­lem of demand is com­pound­ed by the exis­tence of dif­fer­ent types of insur­ance. For instance, patients insured by a pre­ferred provider orga­ni­za­tion (PPO) have more per­son­al choice in what doc­tors they see, but some­one insured by a health main­te­nance orga­ni­za­tion (HMO) must choose a doc­tor in a spe­cif­ic network.

The researchers’ mod­el pre­dict­ed that after a law­suit, high-qual­i­ty physi­cians would see both a reduc­tion in their pri­vate­ly insured patients and an increase in Med­ic­aid patients.

These insur­ance types also pay dif­fer­ent ser­vice fees to doc­tors, so the researchers trans­lat­ed the issue of insur­ance type into a deter­mi­nant of doc­tor qual­i­ty. Physi­cians have to lim­it the num­ber of patients they see, but high-qual­i­ty doc­tors can see more patients insured by PPOs, which tend to pay much high­er rates. Obvi­ous­ly a physi­cian can­not work that much, so they are lim­it­ed,” Watan­abe explains. High­er-qual­i­ty ones can select those who will pay more.” Low­er-qual­i­ty physi­cians are less in demand for PPO patients, so they need to fill their case­load with more patients insured by pro­grams like Medicare. Pub­lic pro­grams and HMOs both pay less to doc­tors than PPOs do. Dra­nove, Watan­abe, and Rama­narayanan defined doc­tor qual­i­ty by a ratio of PPO patients to oth­er patients. In their data, high-qual­i­ty doc­tors had about 40 per­cent of their case­load as PPO patients, while low-qual­i­ty doc­tors had only 2.5 percent.

The­o­ry Meets Real­i­ty

Armed with a mod­el that took these dif­fer­ent demand struc­tures into account, the researchers turned to real data. They exam­ined data on mal­prac­tice claims in Flori­da from 1994 to 2003, focus­ing on obste­tri­cians, which they took as doc­tors who per­formed at least 50 deliv­er­ies annu­al­ly on aver­age. Obstet­rics seemed a good choice for sev­er­al rea­sons: patients tend to see one physi­cian reg­u­lar­ly for a long time, mal­prac­tice law­suits are rel­a­tive­ly com­mon, and peo­ple often use refer­rals from friends or oth­er doc­tors to choose an obste­tri­cian. Flori­da is a par­tic­u­lar­ly liti­gious state, and infor­ma­tion on mal­prac­tice law­suits is eas­i­ly acces­si­ble. This info is post­ed online,” Watan­abe adds. You can just go to the state of Flori­da web­site and check each doctor’s his­to­ry of litigation.”’

The researchers’ mod­el pre­dict­ed that after a law­suit, high-qual­i­ty physi­cians would see both a reduc­tion in their pri­vate­ly insured patients and an increase in Med­ic­aid patients. To everyone’s delight, the mod­el proved uncom­mon­ly accu­rate. The data was match­ing so well with what we had expect­ed,” Watan­abe says. The real data also showed that low-qual­i­ty physi­cians see a drop in their Med­ic­aid patients and a slight increase in PPO patients, but a decrease in the total num­ber of patients. After a law­suit, high-qual­i­ty physi­cians do not lose many patients over­all, but they will lose two PPO patients on aver­age per quar­ter and gain an aver­age of 1 HMO and 1.5 Med­ic­aid patients. A low-qual­i­ty physi­cian will lose an aver­age of 2.2 HMO and 2.9 Med­ic­aid patients per quar­ter, and gain an aver­age of 1.65 PPO patients.

For both high-qual­i­ty and low-qual­i­ty physi­cians, this shift­ing demand trans­lat­ed into loss­es in income. Using esti­mates for ser­vice fees from the dif­fer­ent insur­ance types, the researchers cal­cu­lat­ed that a high-qual­i­ty physi­cian with an annu­al income of $400,000 might see his or her income drop to $394,600. A low-qual­i­ty physi­cian with an annu­al income of $320,000 might see his or her annu­al income go to $305,000 after the law­suit. A physi­cian los­es only one to two days of time prepar­ing lawyers for the actu­al law­suit, so the drop in income is a much more impor­tant deterrent.

The study is the first to exam­ine demand effects in such a sys­tem­at­ic way, and it shows one pow­er­ful way that the mar­ket keeps doc­tors on track. Dra­nove already has ideas for future stud­ies about word-of-mouth effects. We’d love to have data that iden­ti­fy bad patient out­comes inde­pen­dent of the pres­ence of a law­suit,” he says. After all, not every­one sues after being a vic­tim of neg­li­gence. This could help researchers find out whether law­suits are the pri­ma­ry rea­son that doc­tors lose patients, or whether cau­tion­ary tales from patients’ own doc­tors are enough.

Of the cur­rent study, Dra­nove said he was espe­cial­ly excit­ed that an eco­nom­ic mod­el he had used to teach in class worked so well in real life. I’m always sur­prised when eco­nom­ic the­o­ry works,” he said. I’m like a lit­tle kid when it comes to these things.”

Relat­ed read­ing on Kel­logg Insight

Tort Reform No Mir­a­cle Cure: Lim­it­ing lia­bil­i­ty has lim­it­ed impact on health­care costs

Does Mal­prac­tice Lia­bil­i­ty Keep the Doc­tor Away? The impact of tort reform dam­age caps

To Set­tle or Not to Set­tle: Nego­ti­a­tions and attor­ney inter­ests in med­ical mal­prac­tice cases

Featured Faculty

David Dranove

Walter J. McNerney Professor of Health Industry Management, Professor of Strategy

Yasutora Watanabe

Member of the Strategy Department faculty until 2014

About the Writer

Catherine Lussenhop is a science writer based in Cambridge, Massachusetts.

About the Research

Dranove, David, Subramaniam Ramanarayanan, and Yasutora Watanabe. 2012. “Delivering Bad News: Market Responses to Obstetricians’ Negligence.” Journal of Law and Economics, 55(1): 1-25.

Read the original

Editor’s Picks


Pod­cast: How to Be a Great Mentor

Plus, some valu­able career advice that applies to just about everyone.


A New Way to Per­suade Kids to Drink More Water and Less Soda

Get­ting chil­dren to make healthy choic­es is tricky — and the wrong mes­sage can backfire.


How Can Social Sci­ence Become More Solutions-Oriented?

A con­ver­sa­tion between researchers at Kel­logg and Microsoft explores how behav­ioral sci­ence can best be applied.


Buy­ing a Com­pa­ny for Its Tal­ent? Beware of Hid­den Legal Risks.

Acquir­ing anoth­er firm’s trade secrets — even unin­ten­tion­al­ly — could prove costly.


Take 5: Tips for Widen­ing — and Improv­ing — Your Can­di­date Pool

Com­mon bias­es can cause com­pa­nies to over­look a wealth of top talent.


Every­one Wants Phar­ma­ceu­ti­cal Break­throughs. What Dri­ves Drug Com­pa­nies to Pur­sue Them?

A new study sug­gests that firms are at their most inno­v­a­tive after a finan­cial windfall.


4 Key Steps to Prepar­ing for a Busi­ness Presentation

Don’t let a lack of prep work sab­o­tage your great ideas.


Video: How Open Lines of Com­mu­ni­ca­tion Can Improve Health­care Outcomes

Train­ing physi­cians to be bet­ter com­mu­ni­ca­tors builds trust with patients and their loved ones.


Here’s a Bet­ter Way to Sched­ule Surgeries

A new tool could dri­ve sav­ings of 20 per­cent while still keep­ing sur­geons happy.

Politics & Elections

Why Eco­nom­ic Crises Trig­ger Polit­i­cal Turnover in Some Coun­tries but Not Others

The fall­out can hinge on how much a country’s peo­ple trust each other.


Build­ing Strong Brands: The Inside Scoop on Brand­ing in the Real World

Tim Calkins’s blog draws lessons from brand mis­steps and triumphs.


How the Cof­fee Indus­try Is Build­ing a Sus­tain­able Sup­ply Chain in an Unsta­ble Region

Three experts dis­cuss the chal­lenges and rewards of sourc­ing cof­fee from the Demo­c­ra­t­ic Repub­lic of Congo.