Broad Matters Season 9 Episode 6: The Cost of Care

Hospitals sit at the center of the U.S. healthcare system, accounting for nearly one-third of total healthcare spending. But behind the scenes, how hospitals operate, from the tests doctors order to how care is delivered, is shaped not just by medicine, but by policy.

New research from Michigan State University’s Broad College of Business shows that when states implement tort reform – policies that limit malpractice liability – the effects ripple throughout hospital operations, reducing costs while also slightly lowering patient satisfaction.

In a recent study published in Production and Operations Management, Broad researchers Sriram Narayanan, John H. McConnel Endowed Chair of Business Administration, and Shawnee Vickery, Demmer Legacy Chair in Supply Chain Management, along with Deepa Goradia from Georgia State University, examined how tort reform affects hospital performance across the United States.

Sriram Narayanan, John H. McConnel Endowed Chair of Business Administration, shared his research on the latest episode of Broad Matters

When doctors and hospitals face high malpractice risk, they often practice defensive medicine, which can include ordering additional tests, procedures or admissions primarily to reduce the risk of lawsuits rather than to improve patient outcomes.

“Defensive medicine is a well-documented driver of healthcare costs,” said Narayanan. “The question we wanted to answer was: when you reduce that legal risk, how does hospital behavior actually change?”

Analyzing data from thousands of hospitals over multiple decades, the researchers found that tort reform significantly reduced hospital costs.

On average:

• Hospitals saved $372 per patient stay in defensive medicine-related costs
• Operating costs declined by $664 per patient stay
• Hospitals used fewer staff per bed, improving labor efficiency

“These are meaningful savings,” Narayanan said. “For an average hospital, that translates into millions of dollars annually.”

The findings show that when malpractice pressure is reduced, hospitals adjust how they deliver care by ordering fewer unnecessary services and operating more efficiently.

But the story doesn’t end with cost savings.

The study also examined how these changes affected patient-centered measures, including experiential quality and patient satisfaction, that are increasingly tied to hospital reimbursement and performance under federal programs.

The researchers found that both measures declined slightly after tort reform:

• Experiential quality decreased by 3.53%
• Patient satisfaction decreased by 5.63%

“This points to an important trade-off,” Vickery explained. “When hospitals reduce unnecessary care and streamline operations, patients may perceive that they’re receiving less attention, even if the care itself is still appropriate.”

In other words, efforts to eliminate waste can unintentionally affect how patients experience their care.

For hospital administrators, the findings highlight a critical balancing act.

Improving efficiency is essential, especially as healthcare organizations face increasing pressure to control costs. But patient experience also plays a key role in both outcomes and financial performance.

“Leaders need to think carefully about where they reduce costs,” Narayanan said. “Eliminating waste is important, but not at the expense of the aspects of care that patients value most, like communication, responsiveness and support.”

“It’s not about choosing between cost and care,” he continued. “It’s about designing systems that can deliver both.”

The study also underscores how public policy shapes how organizations operate day to day.

“Tort reform is a legal change, but its effects show up operationally,” Narayanan said. “It influences how hospitals staff, how they manage resources and how care is delivered.”

For policymakers, the findings highlight the importance of considering both cost and quality outcomes when designing healthcare regulations.

“Policies aimed at reducing costs can have unintended consequences,” Vickery explained. “Understanding those trade-offs is essential for making better decisions.”

For patients and their families, the research offers a new perspective on how healthcare systems function.

At some point, nearly everyone will interact with a hospital — whether for themselves or a loved one. The experience they may have is shaped by a complex set of incentives behind the scenes.

“More care isn’t always better care,” Narayanan said. “Sometimes additional tests or procedures are driven by risk, not necessity.”

The goal, he added, is not to reduce care, but to improve it.