Contracting Over Liability: Medical Malpractice and the Cost of Choice

Abstract

Contractual liability proponents claim that states can best reform malpractice liability by allowing patients to contract over, and out of, liability. Proponents assert that informed patients would be better off if allowed to contract over liability than they would if states reformed malpractice liability directly because informed patients would contract for the rules that maximize their welfare. Proponents also claim states reforming malpractice liability could only benefit patients by including a right to contract out of liability. This article demonstrates that these claims are incorrect. Proponents’ faith in informed contracting rests on the incorrect premise that patients obtain the same net benefit from liability imposed by contract as from malpractice liability imposed by the state. Patients who benefit from the deterrence that malpractice liability provides are worse off if required to contract over liability because contractual liability is a fundamentally different, less beneficial, form of liability. Contractual liability is less beneficial and more costly than state-imposed malpractice liability because it is plagued by four inefficiencies: Collective goods, time inconsistency, adverse selection, and network externality problems. Thus, far from expanding choices, the move to contractual liability could hurt patients by forcing them into a form of liability that is both less valuable and more expensive, thereby creating inefficient, welfare-reducing, incentives to waive the right to impose liability by contract for patients who would have benefited from state-imposed liability. This conclusion holds whether patients negotiate liability contracts directly with individual physicians or accept standard form contracts governing malpractice liability offered by their health insurers.