Academic journal article Journal of Risk and Insurance

Alternative Liability Regimes for Medical Injuries: Evidence from Simulation Analysis

Academic journal article Journal of Risk and Insurance

Alternative Liability Regimes for Medical Injuries: Evidence from Simulation Analysis

Article excerpt

deterrence effect of liability (Danzon, 1985).

17 Utility is, of course, unobservable, but a loss in utility may be inferred from physicians' demands for tort reform.

18 Empirical evidence from the 1970s and early 1980s indicates that fees and reimbursement levels did adjust quite rapidly to pass through the cost of rising liability insurance premiums (Danzon, Pauly, and Kington, 1990; Danzon, 1991b). The pass-through of liability costs may now be more constrained as insurers have become more aggressive in controlling fees.

19 [r.sub.p] = 0.4 seems plausible since the probability of injury in the Introduction

Dissatisfaction with the current medical malpractice system in the United States has led to renewed interest in alternatives to the traditional rule of negligence liability for physicians. One extreme alternative is a rule of no liability on health care providers, with or without a special tax-financed program of compensation for patients who suffer iatrogenic injury. At the other extreme is strict liability, with financing through experience-rated liability insurance premiums. Enterprise liability, which would place liability on the health plan or hospital rather than the individual physician (Weiler, 1991) and the administrative fault-based system proposed by the American Medical Association (1988) are hybrids.

Theoretical analyses of liability rules provide insights into the efficiency of alternative rules, under restrictive assumptions. Efficiency is defined as minimizing the total social cost of injuries, including costs of prevention, injury-related losses, and administrative overhead. A rule of no liability leads to nonoptimal levels of care and compensation if consumers misperceive the risk of injury from medical treatment (Spence, 1977; Shavell, 1980). Either a negligence rule or strict liability can induce an optimal level of care in the context of unilateral accidents with risk neutrality or costless insurance.(1) With risk aversion, the evaluation of negligence vs. strict liability also depends on the availability of first-party and liability insurance, on the feasibility of experience rating of insurance premiums (Shavell, 1982), and on the extent to which liability imposes nonmonetary costs on defendants. Administrative costs are ignored in these models.

Several assumptions of these models are questionable in the context of medical injuries. First, in practice, the negligence rule is not a clear threshold standard, because courts lack perfect information in defining the standard of due care and in evaluating the care actually provided. The evidence suggests Type 1 and Type 2 errors in claims filing and adjudication (Danzon and Lillard, 1983; Danzon, 1985; Farber and White, 1991; Weiler et al., 1993). Thus, the status quo is at best a noisy negligence system: the probability of liability, conditional on an injury, depends on factors other than actual care relative to the efficient due care standard.

Second, traditional models of liability assume noncooperative behavior by selfish utility maximizers. However, economic analyses of physician decision making in other contexts often assume that physicians internalize to some degree their patients' well-being, because of either professional norms or altruism (Arrow, 1963; Pauly, 1980; Farley, 1986; Ellis and McGuire, 1986). Danzon (1991b) shows that, when the physician is a partial but imperfect agent for the patient, the effects of alternative liability regimes on levels of care and patient well-being are theoretically ambiguous. Conclusions depend on the magnitude of several parameters and behavioral response functions, for which accurate empirical-based estimates are not available.

This article uses simulation analysis to estimate the effects of alternative liability regimes, under alternative assumptions about physician agency and other variables. In the model, a representative physician chooses a level of patient care (his or her time per patient) and liability insurance coverage to maximize an objective function that depends on the physician's own utility of wealth and leisure and may also depend on the patient's utility, which depends on health and wealth. …

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