Liability, insurance and medical practice

We test for effects of tort liability on the use of certain diagnostic procedures, where the health care providers' expected cost of litigation is proxied by the risk-sharing arrangements agreed with their insurers. 2SLS and GMM estimators are adopted to test for possible endogeneity of these risk-sharing arrangements. Our findings are consistent with the exercise of liability-induced discretion by hospitals, especially regarding use of costly diagnostic imaging procedures. Hospitals facing higher expected costs per claim as a consequence of higher deductibles used these tests more frequently, after controlling for activity levels and casemix. These results are consistent with hospitals reacting to the incentives provided by a clinical negligence compensation system.