Malpractice Laws and Incentives to Shield Assets: Evidence from Nursing Homes

Abstract

Empirical research on medical malpractice liability has largely ignored incentives to restructure to protect assets. This study provides evidence on asset shielding in the nursing home industry. There was a rapid increase in lawsuits alleging patient neglect or abuse in states with plaintiff‐friendly tort environments beginning in the second half of the 1990s. We document two apparent asset‐shielding trends in these states during the 1998–2004 period: (1) sales of homes by large chains to smaller, more judgment‐proof owners; and (2) a reduced propensity to “brand” chain‐owned units with names that linked them directly to the central corporation or sister units. Twelve states enacted tort reforms during the 2003–2006 period that placed caps on noneconomic damages. Using a difference‐in‐differences (DD) methodology, we find that the trends in asset‐shielding behavior abated or reversed in the states that enacted tort reforms. These findings suggest that tort law affects ownership and other organizational choices in this industry.