Malpractice laws may shield nursing homes from liability during Covid-19 pandemic

Wednesday, May 13, 2020

As nursing homes continue to emerge as Covid-19 hot spots, allegations of negligence are likely to increase among residents, their families and advocacy groups, according to Barron's.

However, a study co-authored by Susan Lu, Gerald Lyles Rising Star Associate Professor of Management at Purdue's Krannert School, suggests that malpractice laws in many states allowing nursing homes to shield their assets could also decrease potential settlements resulting from the pandemic.

The 2017 study, 'Malpractice Laws and Incentives to Shield Assets: Evidence from Nursing Homes," was published in the Journal of Empirical Legal Studies and co-authored by James Brickley and Gerard Wedig from the Simon School of Business at the University of Rochester. It examines the rapid increase in lawsuits alleging patient neglect or abuse in states with plaintiff-friendly tort environments beginning in the second half of the 1990s.

Lu says asset shielding is important to consider in evaluating malpractice liability because it reduces the deterrent effects of tort laws and makes it less likely that victims will receive compensation.

"We document two apparent asset-shielding trends in 12 states during the 1998-2004 period," she says. "First, large chains sold many homes in high-litigation states to smaller, more judgment-proof owners, that is, owners with fewer assets, little or no liability insurance coverage, and protective legal structures.

“Second, chains in these states reduced the frequency with which they 'branded' their homes with names that linked them directly to either the central corporation or sister units — a potential dimension of judgment-proof behavior not considered in previous studies."

Other firms and professionals, such as attorneys and accountants, have similar incentives to shield assets from tort liability, she says.

"Our study provides new evidence on how the legal environment can affect the horizontal ownership structure of some service industries," Lu says. "It also suggests that future research on brands and chains should move beyond the traditional focus on quality to customers and consider additional audiences and issues, such as potential litigants and tort liability."

In the immediate term, reports Barron's, more than 18 states have given nursing homes some form of immunity from liability related to care provided during the Covid crisis. Meanwhile, industry groups across the country are seeking similar measures for other long-term facilities.

Lu says that could leave many potential plaintiffs with little to no recourse. “If a nursing home appears to have limited assets, no insurance and no affiliation to any large chains, it certainly reduces the incentives to sue,” she says.