Liability, insurance and defensive medicine: new evidence

For the first time, we test for effects of liability on hospital care using measures of current perceptions of litigation risk at hospital level; in particular, the risk-sharing arrangements agreed between hospitals and their insurers. GMM and ML estimators are used to allow for possible endogeneity of risksharing arrangements. Our findings are consistent with the exercise of liabilityinduced discretion by hospitals, especially regarding use of costly diagnostic imaging. Hospitals facing higher expected litigation costs also use these tests more frequently, after controlling for activity levels, casemix and treatment outcome; the latter indicating that defensive medicine may be present. We also find evidence of fewer new claims against these hospitals, given adverse events, which may indicate the increased use of claims management processes by hospital managers concerned at the expected cost of litigation.