PRELIMINARY AND INCOMPLETE PLEASE DO NOT CITE How Does Proactive Disclosure of Medical Error Affect Settlement, Suit, and the Accuracy of Compensation and Deterrence?

The current system of resolving allegations of medical malpractice neither reliably compensates injured patients nor reliably deters negligence on the part of providers. Recently, a few hospitals have begun experimenting with a change from a policy of categorically denying fault and refusing payment to a policy of routinely and fully disclosing all unexpected adverse events to patients, even admitting fault if warranted, and offering a financial settlement. These providers effectively move from a reactive strategy of responding to plaintiffs’ demands for compensation to a proactive strategy of always preempting plaintiffs’ demands by offering to settle. I model this change in policy as a change from a game of screening for negligence by plaintiffs to a game of signaling negligence by defendants. I show that while the plaintiff’s compensation is more, the defendant’s expected payment is less in the signaling equilibrium than in the screening equilibrium. Signaling will yield both more accurate deterrence and more accurate compensation than screening when the plaintiff’s litigation cost is very small relative to the defendant’s litigation cost. When the parties’ relative litigation costs are reversed, screening will be more accurate.