Medical Malpractice and Contract Disclosure: An Equilibrium Model of the Effects of Legal Rules on Behavior in Health Care Markets

Abstract

This paper develops a theoretical model of how specific legal rules affect the types of contracts managed care organizations (MCOs) use to compensate physicians. In addition, the analysis provides insights into how physician treatment decisions and the rate of medical malpractice lawsuits react to different legal rules. In particular, the model predicts that outcomes in jurisdictions forcing MCOs to disclose physician contract terms to patients differ from those that do not. Contracts vary depending on the disclosure rule and how treatment costs relate to expected damages and litigation costs. Moreover, the model predicts that jurisdictions forcing contract disclosure observe higher rates of treatment and lower rates of lawsuits. The model's results also provide insights into how expected damages affect treatment and litigation decisions. Using these insights, an efficient damage rule is constructed and then compared to two commonly used damage rules to illuminate the rules' inefficiencies. Finally, it is shown that, regardless of the disclosure rule, treatment and litigation decisions do not depend on whether the patient can sue only the physician, only the MCO or both for medical malpractice. MCO contract choices however, do vary with the composition of the group of potential defendants.