Medical Malpractice and Physician Liability Under a Negligence Rule

Presenter: Donald Wright, University of Sydney

Abstract

Numerous empirical studies have found surprisingly large rates of medical malpractice. These large rates occurred despite physicians being liable for damage under a negligence rule and are inconsistent with theoretical predictions. The main innovation in this paper is the modeling of a patient's medical malpractice claim decision which, when coupled with physician liability for actual damage, can lead to a negligence rule for damage providing quite weak incentives for physicians to attain the socially optimal level of expertise and quality of service.

It is shown that there exists a payment, for which the physician is liable when a successful medical malpractice claim is made, that results in physicians choosing the socially optimal amount of time to spend on expertise and quality. This payment is similar to that found elsewhere in the literature in that it is the difference between the monetary values of the expected health outcomes under the correct and incorrect decisions scaled up by the reciprocal of a probability.

The problem with this payment is that it is paid whenever medical malpractice is demonstrated regardless of the amount of actual damage done. It is shown that when actual damage is compensated, expected actual damage is only calculated over a subset of the support of the distribution of outcomes given an incorrect decision (because claims are only made if the outcome is bad enough) and so is less than the difference between the monetary values of the expected outcomes under the correct and incorrect decisions. Therefore, compensating actual damage does not provide strong enough incentives for physicians to spend the socially optimal amount of time on expertise and quality, Corollary and Proposition 3.

Compensating actual damage does not provide strong enough incentives for physicians to spend the socially optimal amount of time on expertise and quality because the probability of a patient making a claim, even when an incorrect decision is made, is small. It is argued that the probability of making a claim is small when the probability distributions over health outcomes conditional on correct and incorrect physician decisions are similar.

In practice, the main source of patient information about these distributions is the physician providing the service and the physician has an incentive to argue poor outcomes can occur even if correct decisions are made. By centrally providing information that is publicly available on these distributions, patients can get a more accurate picture of the probability of a poor outcome given a correct decision. This increases the probability of making a claim and in turn strengthens the incentives provided by tort law under a negligence rule.