AbstractThis paper examines the impact of varying levels of malpractice litigation on area medical costs. Using a fixed‐effects model and Medicare Part B as the dependent variable, the results indicate that per enrollee medical expenditures are positively related to the incidence of medical malpractice lawsuits. The higher cost is presumed to be attributable to ‘defensive practices’ by area physicians based on varying degrees of perceived risk. The results suggest the addition to cost is substantial, possibly adding up to 25% in some jurisdictions with the impact exceeding annual dollar amounts of malpractice judgments and settlements. Copyright © 2007 John Wiley & Sons, Ltd.