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APHA Scientific Session and Event Listing

Medical Malpractice: Examining its Effect on Hospital Efficiency

Shalini Bagga1, Mahmud Khan, PhD2, and Praveen Dhankhar, PhD1. (1) Department of Economics, Tulane University, 206 Tilton Hall, Tulane University, New Orleans, LA 70118, (2) Health Systems Management, Tulane University, 1440 Canal Street, Suite 1900, New Orleans, LA 70112, 504-988-1979, khan@tulane.edu

The main aim of the paper was to examine the effect of medical malpractice on the efficiency of hospitals. Data from four different sources were combined for the analysis. Hospital information was derived from Nationwide Inpatient Sample (NIS), American Hospital Association's (AHA) Annual Survey, and the Medicare Cost Reports, for the year 2001. The malpractice related data, obtained from the National Practitioner Data Bank's Public Use File for the years 1998, 1999, and 2000, were combined with hospital data set. Malpractice variables are entered as a lag since they affect the behavior of individuals after a lag. Our sample consisted of 610 hospitals in 24 states. Efficiency was estimated through the stochastic frontier analysis. While calculating efficiency, we explicitly controlled for output heterogeneity and quality of the services provided. Various controlling factors used were: teaching status, location, ownership, region, insurance status, mortality, and transfer of patients to and from hospitals. Two different types of malpractice variables were used in the analysis: frequency of claims and severity of claims. Severity was in turn represented by mean payments and median payments. Results indicate that greater malpractice severity is associated with higher technical efficiency of the hospitals. The sign of the coefficient for malpractice frequency is also in the right direction, though not statistically significant. This indicates that the system of medical malpractice is a factor leading to an improvement in resource use in US hospitals. A number of studies have demonstrated that the increase in malpractice premiums may be more affected by factors like competition in the insurance market or the underwriting cycle rather than the past or present malpractice payments. Therefore, if the marginal benefit of medical service use exceeds its cost of production, the medical malpractice may actually be beneficial from societal perspective through its impact on hospital efficiency. This implies that medical malpractice reforms should carefully analyze and compare its potential costs and benefits from the perspective of the medical care delivery system in general, rather than focusing narrowly on malpractice and its effect on medical care utilization.

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Applications of Health Economics to Medicare and Hospital Efficiency

The 134th Annual Meeting & Exposition (November 4-8, 2006) of APHA