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Abstract: We test for effects of tort liability on the use of certain diagnostic procedures, where the health care providers’ expected cost of litigation is proxied by the risk-sharing arrangements agreed with their insurers. 2SLS and GMM estimators are adopted to test for possible endogeneity of these risk-sharing arrangements. Our findings are consistent with the exercise of liability-induced discretion by hospitals, especially regarding use of costly diagnostic imaging procedures. Hospitals facing higher expected costs per claim as a consequence of higher deductibles used these tests more frequently, after controlling for activity levels and casemix. These results are consistent with hospitals reacting to the incentives provided by a clinical negligence compensation system.

‘Liability, insurance and medical practice’, Paul Fenn, Alastair Gray and Neil Rickman

Journal of Health Economics, Volume 26 Issue 5, September 2007, pp. 1057-70.