In theory, the medical malpractice liability system operates according to the “negligence rule”: Doctors are responsible for the costs of injuries that they negligently cause. The negligence rule should lead doctors' private decisions about whether and how to practice medicine to reflect society's overall interests, by leading them to balance the benefits of medical care, the costs of precaution, and the costs of negligence.

Imperfections in markets for health care and the liability system, however, mean that the negligence rule may not provide incentives for appropriate medical care in practice. It may lead doctors to take insufficient precautions against medical injuries or may lead to “defensive medicine” – medical practice based on fear of legal liability rather than on patients' best interests.

This indeterminacy has led to an extensive empirical debate over tort policy. What are the effects of the medical liability system on the cost and quality of care? What reforms to the system have the potential to reduce cost and improve quality?

This chapter reviews existing research on these questions. The first section outlines why understanding the effects of the liability system on the cost and quality of care is an important empirical issue. The second section summarizes the empirical evidence about the effects of the system and the effects of conventional “tort reforms” – changes to state law that seek to reduce liability. In brief, the empirical evidence supports the hypothesis that the existing system encourages defensive medicine, and that tort reforms reduce its prevalence.