The efficiency of medical malpractice law: A new appraisal

Published date06 September 2000
Date06 September 2000
AuthorReed Neil Olsen
Reed Neil Olsen
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
increases in physician liability are consistent with the model, further
questions the existence of a medical malpractice crisis.
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,
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,

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