This study investigates putative differences in the legal defense of medical malpractice claims between liability carriers with distinct ownership forms: doctor-controlled and commercial-stock. The scope of a carrier's legal defense is determined by claim characteristics, such as injury severity and liability, and possibly the doctor's private costs from settling or losing a claim. When a carrier does not internalize the doctor's private costs from losing or settling a claim, then a conflict of interest arises as the carrier provides a lower level of legal defense than preferred by the doctor (i.e., reverse moral hazard). The perception is that doctor-sponsored carriers mitigate such conflicts of interest. If this is the case, we should expect to see differences in the amount spent by the carrier in defense of the doctor and the propensity to settle claims. To test these expectations, we use medical malpractice claims filed in Florida between 1985 and 1990. We indeed find differences in legal defense in terms of amount spent on legal defense and settlement rate between carriers with different ownership. The doctor-sponsored carrier we investigated was less likely to settle out-of-court, and did spend more on a doctor's legal defense than stock carriers.
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Article provided by Taylor and Francis Journals in its journal Applied Economics.