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A "business judgment" rule for medical malpractice? III

Peter Nordberg suggests that I haven't "completely grappled with the issue of economic incentives." It seems to me that it's the other way around. Nordberg writes:

One foundational premise of a capitalist economy is that the invisible hand of the marketplace will incentivize the enterprise as a whole to pursue a rationally profit-maximizing course. Malpractice exposure apart, are there really comparable market pressures for health care institutions to make health-maximizing decisions?

Note the bait and switch. True, doctors' interests aren't perfectly aligned with their patients' interests. But officers' and directors' incentives aren't perfectly aligned with their corporations' interests, either. And the question isn't whether those interests are perfectly aligned; nor is it the case that any system that flunks that question merits intervention. The question is whether judicial intervention creates better incentives.

Because the legal system is not well suited to judge complex issues (be they business decisions or medical decisions), it's poorly situated to deter "incorrect" decision-making; rather, liability leads to perverse incentives that further drive a wedge between the interests of the agents and their principals. It's one thing when liability is used to deter the keeping of wild animals in urban areas or drunk driving; it's another when it's used to deter the practice of medicine. When the underlying activity is socially productive, we should be very hesitant about using the liability system to "improve" it. That lesson is equally applicable to the business judgment rule and to medical malpractice litigation.

We can trust the system to resolve questions of self-dealing or of practicing surgery while intoxicated or of poisoning customers with glycol; there's little risk that civil liability will overdeter socially beneficial practices in such and similar instances, because the conduct leading to liability is so unambiguously bad. But can we trust the judicial system to provide the correct incentives for corporate broadband investment or not exposing patients to radiation from unnecessary CAT-scans or producing vaccines or designing automobiles?

Before one answers that question too quickly, let's turn Nordberg's question around: what market pressures exist for legal institutions to make health- (or other social-welfare-) maximizing decisions? Or, setting the bar almost absurdly low, what market pressures exist for legal institutions to make truth-maximizing decisions?



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.