This Article provides an economic analysis of optimal negligence liability for physicians and managed care organizations (MCOs), explicitly modeling the role of physician expertise (and inadvertent error) and MCO authority. Professors Arlen and MacLeod find that even when patients anticipate the risks imposed on them, physicians and MCOs do not take optimal care absent sanctions for negligence because markets and contracts cannot regulate their non-contractable, post-contractual actions that are essential to optimal care. Negligence liability can induce optimal care if damage rules are optimal. Optimality generally will require that MCOs be held liable for negligence by affiliated physicians, in addition to their own negligence. Moreover, Professors Arlen and MacLeod find that MCOs should be liable even when they do not exert direct control over physicians. Finally, they show that it may be optimal to preclude physicians and MCOs from obtaining liability waivers from patients, even when patients are fully informed and waive only when it is in their interests to do so at that moment.