Medical Malpractice Lawsuits as Bad Signals: Does the Fear of being Sued Encourage Better Quality of Care?

The public has gained great interest in whether medical malpractice (medi-mal) pressure encourages physicians to practice defensive medicine, and thus drives up healthcare cost. Less attention, however, has been paid to the potential quality signals that medi-mal lawsuits and jury verdicts provide about hospitals that are sued together with physicians. Given the information asymmetry in healthcare markets, patients could potentially view medi-mal and jury verdicts as a signal of bad quality of overall hospital services, and these patients might avoid hospitals that are frequently involved in medi-mal lawsuits.

This paper investigates whether medical malpractice lawsuits changes the nature of hospital competitions and whether higher probability of being involved in medi-mal lawsuits will encourage hospitals to engage in quality competition among privately insured patients in one of the more frequently sued practices, obstetrics. The sample is selected from Pennsylvania inpatient claim data from 1994-2006 (PHC4), and the hospital market competitiveness is estimated using conditional logit model to avoid endogeneity problems.

Overall, I find that hospital competition improves quality. Hospitals in more competitive markets use resources more efficiently and provide better care. Using the number and size of jury verdicts as the likelihood of being sued, hospitals located in markets where likelihood to be sued is higher have a stronger incentive to improve their quality. If hospitals compete with each other, such stronger incentive encourage hospitals to compete more heavily by improving better health outcomes.