Medical Liability, Managed Care, and Defensive Medicine

Because the optimal level of medical malpractice liability depends on the incentives provided by the health insurance system, the rise of managed care in the 1990s may affect the relationship between liability reform and defensive medicine. In this paper, we assess empirically the extent to which managed care and liability reform interact to affect the cost of care and health outcomes of elderly Medicare beneficiaries with cardiac illness. Malpractice reforms that directly reduce liability pressure -- such as caps on damages -- reduce defensive practices both in areas with low and with high levels of managed care enrollment. In addition, managed care and direct reforms do not have long-run interaction effects that are harmful to patient health. However, at least for patients with less severe cardiac illness, managed care and direct reforms are substitutes, so the reduction in defensive practices that can be achieved with direct reforms is smaller in areas with high managed care enrollment. We consider some implications of these results for the current debate over the appropriateness of extending malpractice liability to managed care organizations.