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.
Medical Artificial Intelligence (AI) is widely expected to transform clinical practice, yet the decision-making processes of many Machine Learning (ML) models remain opaque. Explainability has been advanced as a partial remedy to clarify why AI generates predictions, particularly in high-stakes contexts. Despite ongoing efforts, debates on what constitutes an adequate medical explanation remain unsettled. Yet, explanation has long been a central topic of inquiry in the philosophy of science and medicine. The insights developed in these fields, however, have been largely overlooked in contemporary explainable AI (XAI) research, leaving its foundational assumptions insufficiently examined. To address this gap, this paper develops a critical review at the intersection of philosophy of science and XAI. It examines prevailing accounts of what counts as an explanation in the health sciences and assesses their adequacy for informing XAI in medicine, arguing that they provide necessary conditions for a philosophically grounded approach to explainability in this domain. Building on this foundational philosophical literature, the discussion identifies three central axes of analysis: the role of causality in medical reasoning, the epistemic and relational dimensions of medical trust, and the criteria of explanatory adequacy as shaped by the pragmatic needs of diverse stakeholders. By integrating philosophical analysis with current developments in medical AI, the paper outlines principles for designing XAI systems that offer explanations that are not only epistemically robust but also aligned with the epistemic and practical requirements of clinical decision-making, shaping ongoing debates in medical XAI toward underexplored conceptual foundations.