AI Model Design and Physician Liability

Artificial intelligence (AI) is increasingly integrated into medical decision-making, yet its liability implications remain complex, particularly when physicians differ in diagnostic skills and their quality is unobservable. This paper develops a principal-agent model in which a social planner designs medical liability to regulate a physician with private quality information who chooses between a standard treatment, a personalized judgment-based treatment, or following an imperfect AI recommendation. Our analysis yields several novel insights. First, we show that the optimal mechanism under asymmetric information is surprisingly simple: a uniform, one-size-fits-all liability level for all physician types who deviate from the standard of care. Despite physician heterogeneity, this simple policy often achieves the full-information first-best outcome, particularly when standard care is reliable or AI is highly accurate. Second, the relationship between AI accuracy and optimal liability is non-monotonic. Contrary to common intuition, better AI does not always imply more relaxed liability. As AI accuracy increases, the optimal liability either decreases monotonically or follows an inverted-U pattern, depending on the uncertainty of the standard treatment. Third, asymmetric information does not universally reduce social welfare. Welfare loss arises only when standard care is unreliable and AI accuracy is too low; even then, its magnitude follows an inverted U-shape, initially increasing as AI complicates the regulatory problem, but declining as more accurate AI helps mitigate it. Finally, we find that information asymmetry is a double-edged sword in the presence of AI, and greater transparency does not benefit all stakeholders equally.

The integration of artificial intelligence into clinical medicine creates a fundamental tension between algorithmic probabilistic reasoning and the experiential intuition of expert physicians; applying Lawrence Lessig's \enquote{Code is Law} framework, I argue that the architecture of clinical AI systems already functions as de facto medical regulation, reshaping liability and the standard of care. Reframing AI \enquote{hallucination} as structurally analogous to well-documented human cognitive failures such as confirmation bias and premature diagnostic closure, I show that both failure modes demand a unified governance response. I therefore propose a dialectical standard of care that treats the integrated AI-physician dyad as the singular responsible diagnostic entity, mandating the synthesis of algorithmic precision with human interpretive authority within robust data governance and patient privacy frameworks.

Patients increasingly ask large language model (LLM) assistants which doctor to see, making these systems AI infomediaries: algorithms that intermediate one person's choice among other people and thereby decide, silently and at scale, which physicians become visible. We report a prespecified randomized algorithm audit of what causally moves those recommendations. Seven models (six open-weight; gpt-4o-mini) each chose among five synthetic family-medicine physician cards whose attributes were independently randomized across 3,024 choice sets, three patient personas, nine prompt paraphrases and nine experimental arms, yielding 40,068 scored responses; gender and ethnicity were signaled through names following correspondence-audit methodology. Reputation signals dominate: raising a rating from 3.9 to 4.7 increases choice probability by 31.4 percentage points (pp), and raising the fee from $90 to$190 lowers it by 20.0 pp. Demographic parity is rejected, but not in the direction human audit studies predict: female-signaled names gain 2.5 pp, and Hispanic-, South-Asian- and Black-signaled names gain 1.3-2.9 pp over White-signaled names, tilts worth $7-$14 per visit in fee-equivalent terms, and a content-free first-listed position is worth $11. Yet models mentioned gender or ethnicity in at most 0.03% of their stated reasons and abstained in 0.39% of trials, so these effects are invisible in the models' own explanations, and transparency obligations relying on model self-report would not detect them. One reasoning model failed the prespecified auditability gate outright. The frozen design makes the audit repeatable: any new model can be assessed against identical stimuli, making recurring behavioural audit, rather than self-reported explanation, the monitoring technology fit for purpose.