Many papers have analyzed legal reforms affecting medical malpractice insurance markets such as tort reforms and damage caps, looking for impacts on insurance prices, physician insurance coverage decisions, and physician treatment choices.  Malpractice insurance protects physician assets from patient lawsuits and provides compensation to injured patients.  Physicians with little or no insurance may also impose an externality on other physicians and taxpayers through state medical malpractice funds used to pay judgments beyond physician coverage levels.  For physicians, the bankruptcy system serves as a potential alternative source of asset protection against malpractice claims.  In this paper, we provide policymakers with evidence of the effectiveness of bankruptcy laws as a new tool for states to affect malpractice insurance markets and physician treatment choices.

More generous asset protection from the bankruptcy system may affect physician practice in several ways.  First, physicians may practice less defensive medicine, as they have less incentive to order extraneous tests or appointments that serve mainly to protect against lawsuits rather than increasing patient health.  Second, physician willingness to pay for malpractice insurance may decrease.  In the states that allow physicians to practice without insurance, this may lead to a reduction in the number of insured physicians.  Third, even if states mandate insurance coverage for doctors, there may be a decrease in the price of insurance. 

A 1998 Supreme Court ruling held that judgments against physicians for malpractice do not meet the Bankruptcy Code’s standard of “willful and malicious injury,” and so any debts physicians owe patients as a result of malpractice lawsuits can be eliminated in bankruptcy.  Across states and over time, there can be large differences in the amount of assets that a debtor physician can hold exempt from the claims of a creditor patient.  Some states even allow a debtor to shield an unlimited amount of home equity from creditors, making bankruptcy a substantial source of wealth insurance that is freely available to physicians.  Filing for bankruptcy after an unfavorable judgment is an option available to physicians with and without malpractice insurance, so even physicians in states that mandate high levels of malpractice insurance coverage can benefit from generous bankruptcy laws.

We identify the effect of state bankruptcy asset protections on physician insurance and practice decisions using variation within states over time in bankruptcy exemption levels, a direct measure of the generosity of asset protection under bankruptcy laws.  We look for evidence of effects on the malpractice insurance market using data on insurance prices from the Medical Liability Monitor over 1991-2011, exploiting the timing of the Supreme Court decision as well as pre-1998 variation in lower court rulings on discharging malpractice debts.  We also use data on OB-GYN insurance coverage purchasing decisions from surveys of the American Congress of Obstetricians and Gynecologists, as OB-GYNs have been shown in previous research to be at high risk of malpractice claims.  Data on defensive medicine comes from Medicare utilization and expenditure data in the Dartmouth Atlas of Health Care and Vital Statistics natality data.