Fear and Risk Perception: Understanding Physicians' Dynamic Responses to Malpractice Lawsuits

This paper investigates how physicians adjust their clinical decision-making following medical malpractice lawsuits and how these responses are driven by mental rather than financial costs, and do not align with rational expectations. We combine a comprehensive health insurance claim database from a Chinese city with the universe of malpractice lawsuits to study changes in physician behavior and patient outcomes. We find that physicians respond to lawsuits by practicing more conservatively, rejecting high-risk patients, reducing surgery rates, and increasing the use of diagnostic tests and traditional Chinese medicine. These changes are associated with worse patient outcomes, consistent with defensive medicine. The effects are not limited to the directly involved departments but spill over to other departments within the same hospital. In addition, the changes are short-lived, with physicians reverting to their pre-lawsuit treatment patterns in eight weeks. We provide evidence that such responses are likely driven by mental cost (including fear) and deviate from rational expectations. First, physicians in hospitals with more and less frequent lawsuits exhibit similar responses to a new lawsuit; moreover, they respond similarly to winning and losing cases. Second, physicians’ reactions to a patient’s death vary depending on the recency of a salient lawsuit. Lastly, physician responses are especially strong following criminal violence against physicians, which is emotionally and psychologically salient.