tice lawsuits. The malpractice crisis illustrates one of the critical issues of managerial decision making. The exposure to liability creates an environment of uncertainty for hospital administrators. In such an environment, there are several possible outcomes of healthcare decisions and the probability of each outcome is unknown: "Risk refers to the amount of variability among the outcomes associated with a particular strategy." In today's litigious environment, many physicians and nurses tend to shy away from high-risk cases, particularly if they have previously been involved in malpractice lawsuits. Hospitals generally require that all physicians have malpractice insurance as a prerequisite of employment, and the day may be imminent when this requirement will apply to nurses as well.
Hospitals require physicians to carry malpractice insurance even though the majority of malpractice cases do not result in defense verdicts. This is an example of risk-averse behavior. Medical doctors pay an estimated $4 billion a year in malpractice premiums, yet only about $1.4 billion a year is paid out in claims: "Thus the average physician pays an insurance premium of about $3 for every dollar of loss expected." A typical doctor will spend $30,000 annually against possible claims of $10,000. Physicians who practice in high-risk specialties often pay premiums of up to $50,000 per year. The utility of these expenditures is questionable, given the actual percentage of claims; however, hospitals, like most institutions in society, equate risk aversion with prudence.
The Elements of Malpractice Lawsuits
Generally, malpractice lawsuits consist of four elements. First, a preliminary determination that a defendant has a specific duty to a particular patient must be established. Second, it must be established that a breach of that duty occurred or that the defendant failed to follow the standard of care. The third element of mal...