The Effects of State Government Policy on Operations Performance in the Hospital Industry

As malpractice liability increases, physicians order more and more diagnostic tests/procedures to avoid potential lawsuits. Given the waste/costs of defensive medical practices, some U.S. states enacted tort reform to reduce malpractice liability. As key healthcare providers, hospitals face significant malpractice liability. Despite the fact that a vast amount of medical malpractice occurs in hospitals, the effects of tort reform on hospital performance have not been studied. This study examined tort reform's effects on four hospital cost/efficiency related measures (defensive medicine (DM) costs, occupancy rate (OR), operating cost (OC), and full-time equivalent (FTE) employees/bed) and two patient-centered measures (experiential quality (EQ) and patient satisfaction (PS)). Considering both cost and quality measures enabled an examination of whether a trade-off arises under tort reform—a trade-off uniquely relevant at the hospital-level. The research applied difference-in-differences methodology to longitudinal data from multiple sources and addressed methodological weaknesses in prior studies preventing causal attribution. The results showed that tort reform reduced DM costs, with an average savings of $372 per patient stay and a savings of $238 million for an average-sized hospital, decreased hospitals’ OC, with an average savings of $664 per patient stay and $4.23 million for an average-sized hospital and is associated with 0.22 fewer FTEs per bed. However, tort reform's reduction in OR was not statistically significant. The findings indicate that conclusions drawn from single medical specialty studies do not necessarily translate to hospitals with a full spectrum of healthcare services. With respect to the patient-oriented measures, experiential quality and patient satisfaction fell by 3.53% and 5.63%, respectively. The study is particularly germane given the challenges hospitals face in meeting both the cost and quality mandates of the Affordable Care Act's (ACA's) Value-based Purchasing (VBP) program and provides valuable insights for policymakers (at both government and hospital levels) for improving hospital performance.