This article presents a model of physician and insurer behavior in which the practice of defensive medicine, both positive and negative, can arise. Accounting for negative defensive medicine, and insurers' reaction to it, leads to different predictions of the effects of changing malpractice pressure compared to past models. Rising malpractice pressure causes both health care spending and quality to increase up to a threshold, and decrease thereafter. This non-monotonicity implies that malpractice reform is not a "silver bullet" capable of achieving both cost reductions and quality improvements for all consumers. The results can further explain inconsistent findings in the empirical literature and suggest alternative specifications for estimating the effects of malpractice reform.
Keywords: Defensive medicine; Healthcare expenditure; Medical malpractice.