The Effect of Malpractice Claims on Physicians' Behaviour: A Theoretical Approach

In this paper we present a general model that enables us to better understand the decision made by physicians about the level of medical care provided to their patients when faced with a probability of suit in case of harm done to the patient as a result of the treatment. We first describe the physician behavior in a market where an insurance plan against malpractice claim does not exist. We show that the optimal level of medical care from a physician perspective increases when the potential harm increases (in magnitude or probability) and when the physician’s wealth increases. We also show that an increase in the probability of being sued will increase the level of medical care provided. We examine whether the optimal treatment level from a physician’s viewpoint is also optimal from a societal viewpoint. We show that under different cost sharing arrangements the level of medical care provided by a physician might be either greater or smaller than what is warranted from a societal perspective. An important finding is that an optimal allocation of costs between physicians and patients exists such that physicians behave in the socially optimal way. Finally, we introduce an insurance plan to cover malpractice claims. The model allows for different levels of coverage. We show that an increase in the insurance coverage will reduce the level of medical care provided by physicians. We also show that a larger insurance coverage for medical malpractice claims requires a greater allocation of costs to patients in order to motivate physicians to behave in a socially optimal way.