Medical Malpractice Insurance: The Reputation Effect and Defensive Medicine

Abstract

Medical malpractice insurance differs from most other types of insurance in that it tends to be community, rather than experience, rated. Also unusual is the lack of deductibles and coinsurance as part of the typical malpractice policy. Rather than focusing on the desirability of experience versus community rating, this paper instead examines the characteristics of this market that allow for community rating, as well as the lack of deductibles and coinsurance. Specifically, we present a theoretical model that includes a reputation factor that can lessen, or in some cases eliminate, the moral hazard problem that is so prevalent in other markets. This model also illustrates the incentive to practice various types of defensive medicine, even when the measures are unobservable to insurers. Using state data, the empirical section examines whether reputation factors do increase the use of defensive medicine. The evidence is mixed, indicating that reputational factors do influence whether family physicians engage in the riskier facets of a family practice, such as obstetrics and surgery. There is, however, little evidence, that physicians prescribe additional laboratory testing as a response to reputation factors.