The Optimal Negligence Standard ein Health Care under Suply-Side Cost Sharing

Abstract

This paper elaborates on the optimal negligence standard in a world where physicians choose damage prevention subject to erroneous court judgements and to the degree of supply-side cost sharing. Liability uncertainty in malpractice lawsuits leads some physicians to provide excessive prevention and others to underprovide, which results in a welfare loss compared to the pooled first-best equilibrium under perfect information. The standard that minimizes the welfare loss depends on the cost share: Under traditional, close to full cost reimbursement it is lower than the first-best standard, while under substantial supply-side cost sharing it increases and may exceed the first best.