Medical Malpractice and Contract Disclosure: A Study of the Effects of Legal Rules on Behavior in Health Care Markets

A theoretical model is developed to explain 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 patient litigation decisions react to different legal rules. In particular, the model predicts that outcomes in jurisdictions forcing MCOs to disclose contract terms to patients differ from those that do not. Contracts vary depending on the disclosure rule and how treatment costs relates to expected damages and litigation costs. Moreover, the model predicts that jurisdictions forcing contract disclosure observe higher rates of legally compliant treatment and lower rates of medical malpractice claims. 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. MCO contract choices, however, do vary with the composition of the group of potential defendants. In addition, an empirical study is employed to test three predictions of the theoretical model. The study uses data on medical malpractice insurance premiums per physician in the 50 U.S. states for the period 1991-2001 as a proxy for ex ante expected damages arising from medical malpractice claims. The data support the prediction that mandatory disclosure laws (weakly) decrease ex ante expected damages. The data also support the prediction that implementing damage caps in the presence of a disclosure law (weakly) increases ex ante expected damages. The results on the final prediction, that implementing damage caps in the absence of a disclosure law most likely increases ex ante expected damages, are mixed.