This Chapter provides an economic analysis of medical error employing a model in which physicians who provide suboptimal medical care may have done so knowingly (as in the traditional model) or accidentally. Accidental medical error is a leading cause of medical negligence: many if not most physicians who provided suboptimal care did not know they were doing so but instead misdiagnosed the patient, unintentionally selected the wrong treatment or erred in treatment provision. Accordingly, in order to promote optimal health care markets, malpractice liability must be structured to both induce physicians to want to provide optimal treatments (when they are informed) and to invest optimally in the expertise and patient safety measures which reduce the risk that they will misdiagnose the patient, select the wrong treatment, or err in the delivery of care. This Chapter shows that negligence liability can achieve both goals, but only if expected damages for accidental negligence are less than the ex post cost of the harm imposed. Malpractice liability can be relied on to induce optimal investment in patients’ welfare only if medical institutions also are directly liable to their patients for harms caused by medical error and if medical providers and insurers are precluded from contracting over liability with patients
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