Patients currently face a substantial risk of being injured by the medical care they receive. These injuries often are the result of medical error that could be reduced by increased investment in care. Tort liability has the potential to reduce unnecessary error. Medical providers can be induced to invest in cost-effective measures to improve medical quality if tort liability ensures that negligent providers pay for the costs they impose on their patients when they fail to provide adequate care.

In practice, the current malpractice liability system has not been effective at reducing error because it is plagued with problems. Effective malpractice reform has proven elusive. Proposals that would improve the system rarely obtain political support. All too often, legislatures focus on reforms that would exacerbate existing problems.

Leading law and economics scholars claim that the best way to achieve malpractice liability reform is to end government control over malpractice liability and permit patients and medical providers to determine the scope of malpractice liability by contract. Contractual liability proposals vary. Some would permit patients to contract over liability directly with their physicians.Others would shift all malpractice liability to large medical care entities (such as hospitals or managed care organizations [MCOs]) and then allow these entities to contract with patients over the scope of malpractice liability for both their own negligence and that of affiliated medical providers.

Despite their differences, these contractual liability proposals share a common economic foundation. The central economic argument for contractual liability is simple and intuitively attractive.