Torts, Expertise and Authority: Liability of Physicians and Managed Care Organizations

Abstract

The goal of this paper is to examine optimal individual and entity-level liability for negligence when expected accident costs depend both on the agent's level of expertise and the principal's level of authority. We consider these issues in the context of physician and managed care organization (MCO) liability for medical malpractice. It is shown that the standard rules for the determination of negligence and damages do not result in an efficient outcome when only physicians are held liable for their torts, but is restored if MCOs are held solely liable for the torts committed by their physicians. There is a damage rule that induces the efficient outcome when physicians are held liable for their torts, however these damages are a complex function of the details of the MCO contract.