Contracting (or Arbitrating) Out of Medical Malpractice Liability
Jennifer Arlen came to Temple on Monday to workshop her paper, Contracting Over Malpractice Liability, forthcoming in the Penn Law Review. I was her commentator. Prof. Arlen uses fairly traditional economic analysis, assuming that patients are rational, to argue that it not welfare maximizing to permit patients to contract out of the background medical malpractice regime.
The argument is fairly easily to follow. She argues that tort liability, because it is prospective and systemic, motivates providers to invest in precautions that are general and non-rivalrous: a collective good. Thus, medical safety investments will be underproduced if left to the incentives of individual contracting parties, since each patient will want to free-ride off others’ choices to purchase “liability” from their doctors. Moving liability to managed care organizations doesn’t help matters, it turns out, because it would simply permit the company to segregate between consumers who need liability protection (ones who are, or are likely to become, sick) and those who don’t (the young and healthy). Under such a system, MCOs will package “good” health insurance together with liability, meaning that healthy individuals with a taste for liability coverage will need to pay a premium to access it. This again leads to insufficient amount of liability protection over all patients.
It’s an important paper, not least because the form of argument may generalize to other kinds of contracting over private law. Isn’t it true for most forms of negligence protection that the benefits are non-rivalrous and hard to exclude? If so, permitting any contracting out of tort law likely results in a net loss of socially optimal deterrence. Similarly, contracting out of civil procedure may lead to loss in societal benefits (like, for example, the litigation-generated-spillovers resulting from more information about the content and operation of legal rules.) That said, as I commented to Prof. Arlen, it’s not clear whether she really maintains that patients are rational maximizers, since some of the argument relies on facts about the world (e.g., bad monitoring by insurance companies, insufficient lawsuits) that are difficult to square with rational choice theory. Also, what does medical error mean anyway?
I thought it would be worthwhile to bring this paper to your attention, since we’re living in a world where contract law’s dominance over torts is becoming ever more evident. As this law firm circular points out, doctors are requiring patients to sign enforceable arbitration clauses. It’s my sense that the bleak view that Arlen’s paper gives of contracting out of liability entirely also extends to such agreements.
*Whether they are a true public good or rather a club good is a little bit obscure in the paper.