The Impact of Liability on the Physician Labor Market

This study examines the impact of malpractice reforms on physician behavior using a new measure of liability risk and a nationally representative, individual-level dataset on physician behavior. The authors first develop a theoretic model in which physicians are unable to fully insure against liability risk. They then match their liability measure to data on physician behavior from the Physician Practice Costs and Income Survey (PPCIS). Data from the PPCIS bracket a period of substantial state-level legal reform between 1983 and 1988, which provides identifying variation in their liability measure. They estimate the impact of liability reform on hours worked. They find an estimated elasticity of hours worked to liability exposure of -0.285 for the full sample of physicians. The interpretation is that a 10 percent increase in expected liability costs (not necessarily malpractice premiums) is associated with a 2.85 percent decrease in hours worked. The effect for physicians age 55 or older is much larger: They find an elasticity of -1.224 for this category. They also examine the link between their ‘pure’ liability measure and malpractice premiums. They find that an increase in $1 of expected liability is associated with a $0.699 to $1.05 increase in malpractice premiums, although there remains substantial unexplained variation in premiums after accounting for expected liability and observable demographic characteristics of physicians.