Malpractice Laws and Incentives to Shield Assets: Evidence from Nursing Homes

Abstract

Empirical research on medical malpractice liability has largely ignored incentives to restructure to protect assets. This study provides evidence on asset shielding in the nursing home industry. There was a rapid increase in lawsuits alleging patient neglect or abuse in states with plaintifffriendly tort environments beginning in the second half of the 1990s. We document two apparent asset-shielding trends in these states during the 1998--2004 period: (1) sales of homes by large chains to smaller, more judgment-proof owners; and (2) a reduced propensity to "brand" chainowned units with names that linked them directly to the central corporation or sister units. Twelve states enacted tort reforms during the 2003--2006 period that placed caps on noneconomic damages. Using a difference-in-differences (DD) methodology, we find that the trends in asset-shielding behavior abated or reversed in the states that enacted tort reforms. These findings suggest that tort law affects ownership and other organizational choices in this industry.

The Impact of Chain Standardization on Nursing Home Staffing

“…This may be in part because chains focus their attention on avoiding published poor quality associated with lower staffing. 35 While past research had voiced concerns that chains provide poor quality care, this study provides evidence that chains actively reduce variation in nursing home’s staffing when it is low. These effects when a facility’s staffing is low suggest that nursing home chains, not just the facilities themselves, have responded to the strong external pressures during this century again to meet staffing standards and to be sensitive to external definitions of quality.…”

“…These results suggest that even as very large for-profit and nonprofits chains standardize staffing hours per resident day, they do not control staffing mix. In light of other recent research that has found large nursing home chains seek structural changes in facilities to minimize their risks of malpractice, 35 further evidence should explore how and why these organizations drive staffing changes. Especially since staffing controls did not appear equally effective or targeted to controlling staff mix as they are in controlling staff hours per resident day.…”

Malpractice Environment vs Direct Litigation: What Drives Nursing Home Exit?

“… 29 Empirical analyses in the nursing home litigation literature, although limited, showed that the cost of malpractice claims was strongly negatively associated with financial performance of nursing homes, 12 and malpractice litigation induced nursing homes to restructure to protect assets from liability. 20 Consequently, increased malpractice litigation may impact individual providers’ closure or market area exit decisions. Thus, we hypothesize that litigation against a nursing home will increase the probability of that nursing home closing or changing ownership.…”

“…In this article, we assess the impact of malpractice litigation on the probability of nursing home closure or change in ownership in the nursing home industry. We complement the results of Brickley and colleagues 20 by capitalizing on nursing-home-level data on lawsuits filed and aggregating these data to calculate state-level risk as a proxy for malpractice climate. Thus, we are able to parse out the direct effects of litigation against a nursing home from the effects of the malpractice climate, a distinction that is critical to assessing whether litigation plays a role in weeding out poor-performing providers or imposes costs across the board.…”

“… 19 In the most rigorous study of litigation and nursing home exit to date, a paper by Brickley and colleagues examines the impact of the malpractice climate, measured at the state level, on the asset-shielding behavior of nursing homes and finds that large chains were more likely to sell homes in high-litigation states and less likely to brand their homes with the names linked to them. 20 A key limitation of their study is that they lack data on which nursing homes are actually sued. Thus, they assess the effects of the malpractice climate but cannot tease out whether it is the climate or the direct effects of litigation that are responsible for their findings.…”