Does sorry work? The impact of apology laws on medical malpractice

Abstract

Physicians’ apologies for adverse medical events are acknowledged as a factor in patients’ decisions to litigate. Apology laws which render physicians’ apologies inadmissible in court are written to encourage patient-physician communication and to overcome the physicians’ disinclination to apologize because apologies could invite lawsuits. We present a novel model of apologies and malpractice in order to examine whether state-level apology laws have an impact on malpractice lawsuits and settlements. Using a difference-in-differences estimation, we find that apology laws could expedite the resolution process. We also find that apology laws result in the greatest reduction in average payment size and settlement time in cases involving severe patient outcomes.

Appendix

1.1 Proof of proposition I

1.1.1 Part (a) and Part (b)

The patient decides to settle if the benefit of settling, S, is greater than the benefit of going to trial, $J\left( {h,a} \right) - {c_P} - {\psi_J}(a).$ The probability of settling is given by:

$$ {p_s} = \Pr \left[ {S > \left[ {J\left( {h,a} \right) - {c_P} - {\psi_J}(a)} \right]} \right] $$

(3)

The doctor proposes a settlement S to minimize her expected payment:

$$ Expected Payment = E\left[ {{p_s}S + \left( {1 - {p_s}} \right)\left( {J\left( {h,a} \right) + {c_D}} \right)} \right] $$

(4)

Minimizing the doctor’s malpractice costs from Eq. 2 using the probability of settlement given by Eq. 3 yields the optimal settlement offer:

$$ S* = J(h,a) - \frac{{{c_P} + {{\overline \psi }_J}a - {c_D}}}{2} $$

(5)

Doctors offer a higher settlement when their costs of going to court are higher and a lower settlement when the costs the patient faces are higher. The optimal settlement probability by the patient shows that the patient is more likely to settle as the costs of going to court rise:

$$ p_s^{*} = \frac{{{c_P} + {{\overline \psi }_J}a + {c_D}}}{2} $$

(6)

The patient’s probability of litigating, p _L , is then given by the probability that the expected malpractice payment is greater than the psychic cost of litigating:

$$ p_L^{*} = \Pr \left[ {E\left[ {p_s^{*}S* + \left( {1 - p_s^{*}} \right)\left( {J\left( {h,a} \right) - {c_p} - {\psi_J}(a)} \right)} \right] > {\psi_L}(a)} \right] $$

(7)

Using the assumption that psychic costs follow a uniform distribution and that we have an interior solution, we can reduce this probability to:

$$ p_L^{*} = \left[ {J\left( {h,a} \right) - {c_p} + p{{_s^{*}}^2}} \right] - {\overline \psi_L}a. $$

(8)

Again, ${\overline \psi_L}a$ is the additional psychic cost for the patient to sue if the physician apologizes. Consistent with the empirical evidence (Sloan and Hsieh 1995), the probability of litigation given in Eq. 8 is increasing with more serious health outcomes, decreasing in the costs of going to trial, but increasing in the probability an early settlement is reached.

Combining these results allows us to write the closed form solution for the expected malpractice payments net of costs for patient and doctor:

$$ \begin{array}{*{20}{c}} {{\text{Net}}\;{\text{Gain}}\;{\text{for}}\;{\text{Patient}}:{{{\Pi }}_P}\left( {h,a} \right) = p_L^{*}\left[ {J(h,a) - {c_P} + p{{_s^{*}}^2}} \right]} \\ {{\text{Net}}\;{\text{Cost}}\;{\text{for}}\;{\text{Doctor}}:{{{\Pi }}_D}\left( {h,a} \right) = p_L^{*}\left[ {J(h,a) + {c_D} - p{{_s^{*}}^2}} \right]} \\ \end{array} $$

(9)

Finally, consider the doctor’s incentives to apologize. The doctor will apologize for all health outcomes where Π_D(h, 1) < Π _D (h, 0)³⁰:

$$ {p_a} = { \Pr }[h \in \left\{ {h:{\Pi_{\text{D}}}\left( {h,1} \right) < {\Pi_D}\left( {h,0} \right)} \right\}] $$

(10)

From Eq. 6 we can calculate the difference in settlement probabilities after an apology to see that settlements increase in the event of an apology:

$$ {\left. {p_s^{*}} \right|_{{a = 1}}} - {\left. {p_s^{*}} \right|_{{a = 0}}} = \frac{{{{\overline \psi }_J}}}{2} $$

(11)

However, the effect of an apology on the likelihood of initiating litigation depends on the relative effect of the apology on the psychic costs which makes litigation less attractive, with the effect of the apology on settlement probabilities and judgment payments which makes litigation more attractive. From Eq. 8 the effect of an apology on probability to litigate is given by:

$$ {\left. {p_L^{*}} \right|_{{a = 1}}} - {\left. {p_L^{*}} \right|_{{a = 0}}} = J\left( {h,1} \right) - J\left( {h,0} \right) + \left( {\frac{{{{\overline \psi }_J}}}{2}} \right)\left( {{c_P} + {c_D} + \frac{{{{\overline \psi }_J}}}{2}} \right) - {\overline \psi_L} $$

(12)

The effect of an apology on the probability to litigate is increasing in the effect on judgment sizes—J(h, 1) − J(h, 0)—and decreasing in the psychic costs an apology imposes, ${\overline \psi_L}$. Perhaps more interestingly, apologies make patients more likely to litigate when the costs of going to court (both actual and psychic) are higher due to the fact that one deterrent to litigation is the threat of having to pay high court costs, and apologies reduce the likelihood of going to court in the event of litigation.

1.2 Proof of proposition 2

1.2.1 Part (a)

We can see from Eq. 6 that the apology law reduces the expected payment in case of an apology, Π _D (h, 1), but has no effect on expected payments when no apology is made, Π _D (h, 0), so the set of health outcomes for which the doctor would apologize, {h:Π _D (h, 1) < Π _D (h, 0)}, must be larger than before the laws were passed.

1.2.2 Part (b)

From Eq. 8, a patient decides to initiate litigation if the expected benefit from litigation outweighs the costs of litigation. Apology laws reduce judgment sizes which decreases the benefits of litigation; and thus, the probability that the patient litigates decreases.

1.2.3 Part (c)

From the probability of settlement given in Eq. 6, the likelihood of settlement is always higher in the event of an apology. Since apologies are more frequent, we expect more settlements.

1.2.4 Part (d)

It can be seen from Eq. 5 that settlements are smaller in the event of an apology (which are now more common) and smaller still after a law reduces J(h, 1).

1.2.5 Part (e)

Since the laws increase settlement, reduce probability of litigation, reduce both judgment and settlement sizes, then we see from Eq. 2 that malpractice payments net of costs made by the doctor must also go down.

1.2.6 Part (f)

Given symmetric information and risk neutral parties, the welfare implication of the law is unambiguous: since we assume that doctor effort is unaffected, the only effect of litigation is a transfer from the defendant to the plaintiff that imposes a deadweight loss from the cost of litigation (c _P  + c _D ). Thus the reduced likelihood of litigation and judgment means that the law increases welfare.