Medical Malpractice Reform, the Supply of Physicians, and Adverse Selection

Malpractice reforms tend to reduce physician liability for harming patients. Because these reforms are passed at the state level, the costs of harming patients vary widely by geographic location. In this paper, I test whether malpractice reforms affect where physicians choose to practice and whether physicians who relocate in response to reforms are particularly prone to commit malpractice. Because a state’s own reforms can not separately identify moral hazard from adverse selection and because those reforms are likely to have direct impacts on measures of malpractice via the legal market, I focus attention on neighboring states’ reforms. I find that when a state’s neighbor passes a cap on noneconomic damages, both the physician to population ratio and the malpractice rate fall. This suggests that physicians who relocate in response to noneconomic damages caps are more likely to commit malpractice. ∗I would like to thank Gary Becker, Steve Cicala, Jonathan Hall, Devon Haskell, William Hubbard, Steve Levitt, Lee Lockwood, Anup Malani, Casey Mulligan, Derek Neal, Emily Oster, Genny Pham-Kanter, Mark Phillips, Jesse Shapiro, Andy Zuppann, seminar participants at the University of Chicago, and two referees for helpful comments and discussions.