Incentive effects of medical malpractice. The effects of malpractice litigation on physicians' fees and incomes.

For many years physicians and other medical providers in the United States have been subject to a negligence rule of liability. Under a negligence rule, patients who suffer an adverse outcome are entitled to compensation if they can show that they incurred an injury that was caused by the physician's failure to take due care, defined as departure from the customary standard of care of physicians in good standing in the profession. The traditional tort standard of damages is full compensation for monetary and nonmonetary loss. There have been no major doctrinal shifts in the law expanding liability for medical malpractice over the last decade-indeed, many states have enacted tort reforms designed to reduce the number and size of claims. Nevertheless, from 1975 to 1984, claims per physician rose at an average rate of 10 percent a year; between 1982 and 1986 claim frequency per 100 physicians rose from 13.5 to 17.2 a year. (See Danzon, 1988, and sources cited therein.) Claim severity (average amount per paid claim) increased at roughly twice the rate of the CPI from 1975 to 1984. In 1984, the median and mean payment were $18,000 and $80,741, respectively. There remain large differences among states and among specialties in claim frequency and severity. Costs of malpractice insurance have also increased dramatically, but more erratically than claims costs. Following the malpractice "crisis" of the mid-1970s, when rates increased by over 300 percent in a single year in some states, rates remained stable or actually fell in the late 1970s, but resumed an upward trend in the 1980s. Between 1977 and 1984, rates for basic limits of coverage increased by 109 percent for the lowest-risk specialists, such as GPs doing no surgery, 180 percent for obstetricians, and 189 percent for the highest-risk surgical specialists. Although malpractice insurance is still less than 2 percent of total health care expenditures, many observers argue that medical malpractice is a major factor contributing to rising health care costs. One implication of such arguments is that virtually all the cost is borne by patients. This seems at odds with arguments made by others, that a significant fraction of physicians are giving up practice, or at least high-risk procedures, because of liability. Full and automatic pass-through of costs is also potentially at odds with the deterrent purposes of the negligence rule of liability, which is to correct the potential underprovision of care in a market with asymmetric information and systematic underestimate of risk by consumers. With a shift from no liability to a perfect negligence system, we might observe an increase in preventive measures by physicians, an increase in prices, and an increase in gross revenues. This would occur if patients perceived the improvement in quality and valued it at cost, and the tDiscussants: W. Kip Vicusi, Duke University; Charles Phelps, University of Rochester.