The efficiency of medical malpractice law: A new appraisal

• DOI: https://doi.org/10.1016/S0193-5895(00)19007-4
• Published date: 06 September 2000
• Date: 06 September 2000
• Pages: 247-273
• Author: Reed Neil Olsen

THE EFFICIENCY OF MEDICAL

MALPRACTICE LAW: A NEW

APPRAISAL

Reed Neil Olsen

ABSTRACT

This paper analyzes the perception by researchers, public policy makers,

and physicians that the medical malpractice system is in disarray and in

need of reform. The perception of a medical malpractice crisis arose

because of what was viewed as sudden and dramatic increases in

physician liability for malpractice. Contrary to the common perception,

however, previous research has shown that historical growth rates in

physician liability are similar in magnitude to current growth rates. This

paper focuses on explaining the conditions under which increased

physician liability would be optimal. According to the theoretical model,

increased physician liability would be optimal when (1) physicians

become more adept at curing patients, especially by increased techno-

logical ability, (2) the costs of physicians' time increases, or (3) the cost

to physicians of defending against malpractice claims decreases. The

paper carefully examines the available historical evidence that indicates

that these three reasons account for much of the increased liability of

physicians in the United States. The finding that much of the historical

An earlier version of this paper was presented at the Western Economic Association's annual

meetings in Lake Tahoe in July of 1993. Research support was granted by the Graduate Studies

and Research Office, Southwest Missouri State University.

Research in Law and Economies, Volume 19, pages 247-273.

Copyright © 2000 by JAI/Elsevier Inc.

All rights of reproduction in any form reserved.

ISBN: 0-7623-0308-5

247

248 REED NElL OLSEN

increases in physician liability are consistent with the model, further

questions the existence of a medical malpractice crisis.

I. INTRODUCTION

The occurrence of medical malpractice claims before the 1960s has been

perceived to be quite rare and to have had an insignificant impact on the

practice of medicine (Danzon, 1985, 1988; Sloan et al., 1991; Weiler, 1992).

However, beginning in the 1960s the frequency with which patients filed

malpractice suits, the proportion of suits won by patients, and the average size

of the dollar award for paid malpractice claims all began to rise at what was

thought to be unprecedented rates (Danzon, 1985; Olsen, 1996; Peterson, 1987;

Weiler, 1991). As a result of these changes, physician liability for malpractice

rose dramatically. For example, by 1984 medical malpractice premiums, which

had averaged less than 1% of a physician's total costs in the 1950s, averaged

9% of a physician's total costs (Sloan et al., 1991, GAO, 1986b).

These increases in physician liability led researchers, public policy makers,

and the medical profession to conclude that the medical malpractice system

was in disarray and in need of reform. 1 In fact, numerous medical malpractice

reforms have been proposed in the past three decades and a significant number

of reforms have been passed by state legislatures. 2 By 1986, for example, all

states had enacted at least one major medical malpractice reform and had, on

average, enacted four out of ten major reforms (Olsen, 1996). Currently,

medical malpractice reform is being debated at the federal level (White House,

1993).

Recent research has demonstrated, though, that the impetus behind the

reforms, the perception of a crisis in the malpractice system, may be incorrect.

Although it appears clear that physician liability has reached an unprecedented

high over the past three decades, recent growth rates in malpractice claim

frequency and the average size of paid claims are consistent with the history of

medical malpractice in the United States (Olsen, 1996). Given that neither

malpractice litigation nor large growth rates in physician liability are recent

phenomena, the explanation for both recent and past increases becomes

somewhat puzzling. It seems implausible that the medical malpractice system

could have been dysfunctional throughout most of United States history.

This paper develops an alternative scenario to the prevailing view of a

malpractice system in crisis. Rather, the theoretical model developed below

focuses on predicting the conditions under which increased physician liability

would be optimal. Assuming that enhanced liability deters medical accidents,

the mode/demonstrates that physician liability should increase, for example,