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Vernellia R. Randall
17 U. Puget Sound L. Rev. 1 (Fall 1993)
Copyright (c) 1994 by Vernellia R. Randall

Third-party payers using managed care products induce, through utilization review and financial risk shifting, health care providers to make health care decisions based on economic pressures. If those decisions result in injury to the patient, under what theory, if any, can a third-party payer be held liable? If theories producing liability exist, a more important issue is whether they will have the effect of promoting safety and spreading the cost of injuries. There are several theories of liability for injury that might be adaptable to cover the problems created by the peculiar relationships among providers, patients, and third-party payers. 

Both insurance and managed care products are in perverse relationships with providers in that they can cause providers to act in unacceptable ways. With insurance, the problem of moral hazard exists. Insurance causes the physician to provide services without regard to cost. Managed care, on the other hand, may cause providers to deny services without regard to need because they act in the best interest of the third-party payer. In a health care system that emphasizes acting in the patient's best interest, current legal theories are adequate. But these theories are inadequate when applied to the perverse relationship between providers and third-party payers. Current legal theories fail to cause third-party payers to act with care when designing utilization review programs or when giving financial incentives to providers to act in the third-party payers' best interest. Furthermore, because patients infrequently recover  from third-party payers under current theories, the theories fail to meet the goal of spreading the risk to those who create it. 

This Part discusses the inadequacy of four traditional theories as they might be applied to cost containment efforts. Section A discusses negligence or direct liability for utilization review and financial risk shifting activities. Section B considers the effectiveness of the corporate negligence doctrine in compensating for cost containment injuries. Section C contemplates the use of the doctrine of respondeat superior. Section D describes the use of the ostensible agency doctrine to compensate for cost containment effects. These traditional theories of liability are inadequate when applied to cost containment efforts because they fail to adequately promote safety, spread the risk, and compensate patients. 

A. Negligence (or Direct Liability) for Injuries Caused by Cost Containment Measures

A party can be held liable for injuries caused by its failure to conform to a standard of care, that is, when the party has been negligent. Negligence, as a theory, has proved inadequate as a risk spreader in health care primarily because medical practice is as much an art as a science. (186) Consequently, the current tort system has difficulty distinguishing between medical judgment and negligent conduct. 

Should a CAT scan be performed to detect the unlikely tumor, even though such a test is expensive and carries with it a small risk of complications including death? ... Should the physician forego the test if the best clinical judgment so dictates, or is the doctor better off ordering the test anyway to protect against a malpractice suit in the event a tumor actually is present?(187)

By deferring to professional practice, negligence theories allow the profession to define the standard of care. Thus, the negligence approach places the patient at a theoretical disadvantage because distinguishing between a judgment call and negligence depends in large part on for whose benefit an expert witness is testifying. Consequently, many injured patients do not file negligence claims, in part because of the problem of  proving negligence.(188) Of those who actually file suit, many patients are not able to establish fault.(189) Finally, even if the injured patient wins at trial, it usually takes many years of litigation before she is compensated.(190) Thus, under the present negligence scheme, compensation resembles a tort lottery.(191) As such, negligence theory is an unreliable source of compensation for patients, including those injured by third-party cost containment efforts. 

Third-party cost containment efforts further complicate this situation because they push more of the provider's practice from clearly negligent behavior to judgment calls. As cost containment measures become more and more prevalent, a component of the standard of reasonable care will necessarily be whether the physician acted in reliance on reasonable cost containment efforts. The leading case as to third-party payer liability for cost containment through utilization review and financial risk shifting activity is Wilson v. Blue Cross.(192)

In Wilson v. Blue Cross, Mr. Wilson, the decedent, had an insurance contract with Alabama Blue Cross, which was administered by Inter-plan Service Benefit Bank.(193) California Blue Cross provided the benefits of the insurance contract between Alabama Blue Cross and Mr. Wilson.(194) The contract provided inpatient hospital benefits as follows: 


While a Member is covered under this Contract and is a registered bed patient in a Hospital, and during such time (subject to the limitations, exclusions, and conditions prescribed elsewhere herein) as the Member's attending physician determines that hospitalization is necessary, such  Member shall be entitled to the following benefits, herein referred to as Hospital Service....(195)

Benefits for mental and nervous disorders were provided as follows: 


Benefits hereunder for mental and nervous disorders or for pulmonary tuberculosis shall be limited to an aggregate of thirty (30) days during any period of twelve (12) consecutive months.(196)

Nothing in the insurance contract permitted review by an outside entity of an attending physician's conclusion that hospitalization was necessary.(197) In 1983, Western Medical, a utilization review consulting firm, contracted with California Blue Cross to perform "utilization review of the 'medical necessity"' of hospitalization.(198) Western Medical did not have a contract with Alabama Blue Cross.(199)

Mr. Wilson suffered from major depression, drug dependency, and excessive weight loss. He was admitted to College Hospital on March 1, 1983.(200) His treating physician, Dr. Taff, decided that Mr. Wilson needed three to four weeks of inpatient care at the hospital.(201) Western Medical performed a "concurrent review" using federal Medicare regulations and decided that the hospitalization was not medically necessary.(202) Ten days later, Mr. Wilson's insurance company refused to pay for any further hospital care.(203) Because neither Mr. Wilson nor his family could afford to pay for any further inpatient hospital care,(204) Dr. Taff discharged him without appealing Western Medical's utilization review.(205) On March 31, 1983, Mr. Wilson committed suicide. (206)

In a suit brought by Mr. Wilson's father, the trial court issued summary judgment for Blue Cross on the ground that Wickline v. State(207) controlled. The Appellate court reversed and remanded, holding that a triable issue existed as to whether the conduct of Blue Cross was a substantial factor in causing the decedent's death.(208) Wickline, the appellate court reasoned, erred in relieving the third-party payer from liability.(209) The Wilson court reasoned correctly. The purpose of utilization review is to affect providers' decisions regarding medical services. When the system works appropriately, third-party payers reap the cost containment benefits. Having initially injected cost containment into medical decision making, third-party payers should not be allowed to cloak themselves with immunity merely because the providers acceded to the cost containment decision of the third-party payer. 

Wickline involved three key components, legal and factual, that the Wilson opinion specifically distinguished. First, Wickline held that as a matter of law, the discharge decision by the attending physician met the medical standard of care for physicians.(210) The Wilson court distinguished Wickline on this point  by noting that no evidence indicated that the discharge decision was within the medical standard of care.(211) To the contrary, Dr. Taff testified that reasonable treatment required inpatient treatment on March 11, 1983, and that had Mr. Wilson completed his planned hospitalization, there was a reasonable medical probability that he would not have committed suicide.(212)

Second, in Wickline, the funding process was based on the state's statutory rather than contractual duty to provide funds.(213) Wilson is distinguishable because, in Wilson, neither a statute nor a regulation affected the duty owed by Blue Cross. Blue Cross's duty to Wilson was based on contract, while in Wickline, a specific statute allowed the denial of benefits to a person seeking acute hospital care when the denial was "in accordance with the usual standards of medical practice in the community."(214)

Finally, in Wickline, the court held that the Medi-Cal review process did not "corrupt medical judgment."(215) In Wilson, Blue Cross argued that, as in Wickline, the physician had sole responsibility for medical treatment decisions.(216) The Wilson court rejected that argument, stating in dicta as follows: 

[T]he argument is likewise invalid because it misconstrues the test for joint liability for tortious conduct. The test for joint tort liability is set forth in section 431 of the Restatement (Second) of Torts, which provides, "The actors' negligent conduct is a legal cause of harm to another if (a) his [or her] conduct is a substantial factor in bringing about the harm, and, (b) there is no rule of law relieving the actor from liability because of the manner in which his [or her] negligence has  resulted in the harm." Section 431 correctly states California law about the issue of causation in tort cases.(217)

Thus, the court held that a third-party payer is responsible when that third- party payer's actions are a substantial factor in bringing about the injury.(218)

The Wilson appellants argued that "public policy considerations which favor the use of the concurrent utilization process should alter the normal rules of tort liability."(219) The court rejected the argument, noting that in Wickline the California Administrative Code and the Welfare and Institutions Code mandated the use of utilization review processes.(220) A specific statute provided for denial of benefits "'in accordance with the usual standards of medical practice in the community."'(221) The court found no "similar clearly expressed public policy that applies to [Mr. Wilson's] contract with Alabama Blue Cross."(222)

Finally, Western Medical argued that Dr. Taff had the responsibility to pursue avenues of appeal when insurance benefits were denied because of the utilization review process.(223) The Wilson court again rejected the Wickline dicta stating that the doctor who "complies without protest with the limitations imposed by a third-party payer, when [her or] his medical judgment dictates otherwise, cannot avoid his [or her] ultimate responsibility for her [or his] patient's care." (224) The court distinguished Wilson as involving a claim by a decedent's estate and relatives directly against insurance companies and their agents, not against a physician, and stated that the informal policy allowing for reconsideration by Western Medical did not warrant granting summary judgment.(225) Thus, summary judgment should not have been granted for Western Medical because there were "triable issues of material fact as to Western Medical's liability for tortious interference with the contract of insurance between [Mr. Wilson] and Alabama Blue Cross and its role in causing the wrongful death of [Mr. Wilson]."(226)

By rejecting Wickline, the court brought the issue of third-party payer liability into focus: Did the third-party payer substantially cause the injuries to the plaintiff, either negligently or intentionally (tortiuously)? This is the issue that all courts should address because, if courts adopt the Wilson reasoning, a significant step in the right direction would be made. Nevertheless, because most courts continue to focus on the character of the decision-making conduct rather than the inevitability of effects on the individual patients, the problems of burden of proof continue to prevent liability from attaching. 

The problems surrounding the burden of proof are particularly severe when third-party payers can make the tort system ineffective by redefining the reasonableness of their behavior in their favor. This problem is evidenced by the retrial of Wilson, when the jury found that Blue Cross had not been negligent.(227) Thus, even direct liability does not adequately address the goals of risk spreading and compensation. Such goals can be met only through an alternative theory of third-party payer liability. 


B. Corporate Negligence Doctrine 

A health care organization can be held liable not only for its own negligence causing harm to a patient, but also as a corporate entity when it fails to adequately protect a patient from harm by others.(228) In the last hundred years, the primary organizational structure for the delivery of health care has been the hospital. A hospital's legal duty to patients was based on the view that a hospital was analogous to an innkeeper in providing facilities for physicians to practice medicine. (229) While the hospital might be liable for harm caused by its physical facilities or  its employees, it was deemed powerless to prevent harm at the hands of the physician.(230) Corporate negligence theory replaced that traditional view with the view that a hospital owes the patient a separate and independent duty to protect her from harm.(231) The hospital's responsibility to the patient extends beyond merely refraining from causing harm. The duty includes a number of responsibilities: to provide proper overall surveillance of the quality of patient care services; (232) to properly review and investigate the credentials and expertise of medical staff applicants before granting privileges;(233) to protect patients from malpractice by members of its medical staff when, through reasonable care, it should have known that malpractice was likely;(234)

to use reasonable care in maintaining the facility and providing medical instruments and equipment;(235) and to use care in selecting and supervising medical personnel.(236)

In Darling v. Charleston Community Memorial Hospital,(237) the first and most widely followed corporate negligence case, the court recognized the hospital's obligation to oversee the quality of patient care services. 

Present-day hospitals, as their manner of operation plainly demonstrates, do far more than furnish facilities for treatment. They regularly employ on a salary basis a large staff of physicians, nurses and [interns], as well as administrative and manual workers, and they charge patients for medical care and treatment, collecting for such services, if necessary, by legal action. Certainly, the person who avails himself of "hospital facilities" expects that the hospital will attempt to cure him, not that its nurses or other employees will act on their own responsibility.(238)

While hospitals are not guarantors of adequate health care, establishing hospital corporate negligence does not turn on the relationship between the physician and the hospital.(239) A primary justification for the corporate negligence doctrine is the  hospital's custody of the patient. (240) Although a managed care product does not have custody, the duty to protect from harm may nevertheless arise from the process of selecting physicians or other medical personnel for the managed care product. This is particularly true when the managed care product restricts a patient's choice of provider.(241) Thus, as with hospital liability, a managed care product should be liable for failing to properly review and investigate the credentials and expertise of provider panel applicants,(242) and for failing to protect its subscribers from malpractice by provider panel members when it knew or should have known, through reasonable care, that such malpractice was likely.(243)

The court in Harrell v. Total Health Care, Inc.(244) discussed the extension of the corporate negligence doctrine to independent practice association model managed care products. 

A subscriber to Total Health Care, or to any other prepaid medical services plan, expects and assumes that the plan will cover the expenses of medical care. To realize the benefit of the Total Health Care plan, the subscriber must, under the plan terms, accept treatment by physicians that Total Health Care has approved. Although Total Health Care argued otherwise, the evidence shows that a subscriber does not have unlimited choice of a specialist physician. To be assured that payment of the charges will be made by Total Health Care, the subscriber must go to the physician referred by his primary care physician and the specialist must have contracted with Total Health Care. Because the subscriber  may select another doctor and pay for the services outside the Total Health Care coverage is irrelevant.(245)

Although the court dismissed the case by using a technical aspect of Missouri law, (246) the court's conclusion in Harrell is an appropriate extension of the corporate negligence doctrine to HMOs. The court concluded that the plaintiff made a case of liability for corporate negligence based on proof that (1) Total Health Care conducted no investigation of the physician's competence, (2) the physician's record of malpractice claims was such that a prudent person would recognize the physician's lack of competence, and (3) Total Health Care did not discharge its duty to the plaintiff as a subscriber to its services to prevent a foreseeable risk of harm. (247)

Because many third-party payers market their managed care products with claims that they determine provider panel competency, continuously evaluate the physician panel, monitor provider performance, and take corrective action, courts may readily extend the corporate negligence doctrine to them. 

Even if extended, however, the doctrine suffers from several problems. For instance, besides establishing organizational negligence, the plaintiff must also prove that the physician was negligent and that the physician's negligence was the proximate cause of the plaintiff's injuries. (248) Thus, the plaintiff faces the difficulty of proving two concurrent negligent acts to establish liability. The focus, therefore, is on the negligent conduct of the physician and not on the utilization review process or financial risk shifting. 

Thus, even if applied, the corporate negligence doctrine would do little to promote safe utilization review processes and limit financial incentives. If the utilization review process is not negligently designed or conducted, but merely defective, there will probably be no liability under this doctrine. Under traditional theories of tort liability, managed care products tend to decrease physician liability because economic considerations and the deference given to professional judgment make physicians' actions seem more reasonable. In addition, because  third-party tortfeasors have always been more difficult to hold liable, managed care products are rarely viable alternative sources of recovery. The results are more injuries to patients and fewer successful lawsuits. As a practical matter, only twenty jurisdictions have adopted the corporate negligence doctrine.(249) Consequently, even if a managed care product is defective, the doctrine would have limited effect. 

C. Respondeat Superior Doctrine 

Another possible theory of liability is the doctrine of respondeat superior, which holds an entity liable for the negligent acts of an employee arising in the course of his or her employment. Historically, hospitals, as the primary organizations for health care delivery, were immune from liability for the negligent acts of physicians. Even after the demise of the doctrine of professional skills(250) and the doctrine of charitable immunity,(251) hospitals continued to enjoy immunity from liability  for the negligent acts of physicians.(252) It was not until 1965 that courts began to extend liability to hospitals on some theory other than the doctrine of respondeat superior. (253)

Up until that time, liability turned on the character of the physician- hospital relationship, that is, whether the physician was an independent contractor or an employee. Hospitals were not liable for the conduct of physicians who were independent contractors or who lacked an apparent employment relationship with the hospital.(254) More recently, courts have held a hospital liable, under certain conditions, for the negligence of a physician who was an independent contractor. (255) The line of respondeat superior cases begun in 1965 holds, for example, that a hospital that negligently selects or retains an independent contractor may be directly liable for injuries resulting from the negligence of that independent contractor.(256) Further, a hospital may be vicariously liable for the negligence of an independent contractor performing nondelegable duties.(257) In recent years, such vicarious liability has also been found under the doctrine of ostensible agency. (258)

 As a theory of liability for cost containment conduct, the doctrine of respondeat superior might subject a third-party payer to liability if a physician were employed by the managed care product and the physician made negligent decisions based on utilization review or financial risk shifting. Increasingly, courts are applying theories of vicarious liability to third- party payers. This is true where the managed care product limits a patient's choice of providers to those who have contracted to provide care to its beneficiaries.(259)

The doctrine presents several problems, however. First, many managed care products, such as preferred provider organizations, do not directly employ physicians.(260) Second, even for employed physicians, many injury- producing decisions fall within a gray area in which the decision, though motivated by considerations other than the patient's best interests, is arguably within the appropriate standard of care. Under such circumstances, third-party payers would escape liability for resulting injuries. Furthermore, cost containment measures move more physician conduct from the clearly negligent arena into the nonnegligent (or judgment) arena, resulting in compensation for fewer injured patients. Consequently, the doctrine of respondeat superior would not be effective in spreading the cost of cost containment injuries to all responsible parties. 

D. Ostensible Agency Doctrine 

Ostensible agency liability is a type of vicarious liability under which a health care organization can be held liable for a health care provider's negligence.(261) The liability of the organization is based on appearances that have "led [a] patient to reasonably believe that [the health care provider] was in [the health care organization's] employ and under its control." (262) Thus, reasonable reliance of the patient may determine liability, even though no employment relationship exists. 

In order to find a hospital liable for the negligent acts of an independent physician with staff privileges, courts have generally required the following:  (1) The plaintiff must show that the hospital or its agent acted in a way that would lead a reasonable person to conclude that the negligent physician was operating as an agent under the hospital's authority; 

(2) Where the acts of the agent create the appearance of authority, the plaintiff must prove that the hospital had knowledge of an acquiesced in them; and 

(3) The plaintiff must have acted in reliance on the ostensible agency relationship.(263)

Thus, ostensible agency turns not on the issue of control, as in the respondeat superior doctrine, but on the appearance of the relationship between the physician and health care institution. 

Courts that have looked at this issue generally have accepted the ostensible agency doctrine on two grounds. First, the courts recognize that the changing role of the hospital in society creates a likelihood that patients will look to the institution and not to the individual physician for care.(264) Second, the courts say that ostensible agency liability should attach when the hospital holds out(265) the physician as its employee.(266)

Will the ostensible agency doctrine be extended to third-party payers? If applicable, will the doctrine be an effective tool to promote safety, to protect the physician-patient relationship, and to minimize access problems? The managed care product market is changing radically and expanding rapidly.(267) This rapid change and expansion, coupled with an increase in the number of inexperienced people who develop and manage managed care products,(268) would seem to create fertile ground for litigation.(269) The courts have heard several cases under the doctrine of ostensible agency.(270) The leading cases are Boyd v. Albert Einstein Medical Center(271) and Williams v. Good Health Plus, Inc.(272)

1. Boyd v. Albert Einstein Medical Center 

Mrs. Boyd died after being treated by physicians who were participants in the "HMO of PA."(273)

In his lawsuit, Mr. Boyd contended that the HMO advertised that its physicians and medical care providers were competent and had been evaluated for up to six months before being selected as HMO providers.(274) He further contended that he and Mrs. Boyd relied on the HMO's representation of quality care in choosing Drs. Rosenthal and Dorstein as their primary care physicians, and that HMO of PA's documents showed both that those doctors were designated care providers and that HMO of PA guaranteed the quality of care.(275)

The trial court granted HMO of PA's motion for summary judgment on the ground that Mr. Boyd failed to establish that the theory of ostensible agency, based on the facts applied to hospitals, applied to the HMO.(276) On appeal, the Pennsylvania Superior Court considered whether the theory of ostensible agency should be applied to an independent association practice model HMO operating with independent contractor physicians.(277)

The Boyd court acknowledged that Pennsylvania recognized the theory of ostensible agency and had applied it to hospitals.(278) It then outlined factors that other courts had considered in determining that an independent contractor could be an agent of a hospital.(279) Among those factors were the likelihood that "patients will look to the institution rather than the individual physician for care" and whether the HMO held out the physician as an employee.(280)

Considering these factors, the Boyd court concluded that ostensible agency should apply if Mrs. Boyd had submitted herself to the care or protection of the primary care physicians in response to an invitation from the HMO.(281) The court decided that there were grounds for an inference that the HMO extended such an invitation to Mrs. Boyd.(282) Furthermore, several facts demonstrated that Mrs. Boyd reasonably could have looked to the HMO for her medical care and that she reasonably could have believed that the physician treating her was an HMO of PA employee.(283) HMO of PA's marketing materials represented to enrollees that its program guaranteed the quality of care.(284) It required enrollees to select a primary care physician from a limited list of physicians approved by the HMO.(285) Finally, HMO of PA employed a gatekeeper system.(286) The court reasoned that "because [Mrs. Boyd] was required to follow the mandates of HMO [of PA] and did not directly seek the attention of the specialist, there is an inference that [she] looked to the institution for care and not solely to the physicians."(287)

The Boyd court concluded that "an issue of material fact [existed] as to whether the participating physicians were the ostensible agents of HMO [of PA]."(288) Thus, the court reversed the trial court's grant of summary judgment to HMO of PA and remanded the ostensible agency question to the trial court.(289) The court, however, did not decide whether Drs. Rosenthal and Dornstein acted negligently nor whether HMO of PA would be liable if they did. 

2. Williams v. Good Health Plus 

In Williams v. Good Health Plus, Inc.,(290) Ruth Williams maintained that her right thumbnail had to be surgically removed after it became infected because of Good Health Plus's and HealthAmerica's negligence. She claimed that the defendants permitted unsanitary conditions to exist in the treatment areas where the nail was treated, and that the defendants placed her on a drug without previously performing necessary tests.(291)

The Williams analysis (unlike Boyd) was based on state laws governing the practice of medicine and governing HMOs. The Texas Medical Practice Act(292) prohibited the corporate practice of medicine and required individuals to satisfy specific licensure requirements to practice medicine.(293) The Act did not provide any means for a corporation such as HealthAmerica to be licensed to practice medicine.(294)

The Texas Health Maintenance Organization Act(295) stated that the Act shall not be construed to: (a) authorize any person, other than a duly licensed physician or practitioner of the healing arts, acting within the scope of his or her license, to engage, directly or indirectly, in the practice of medicine or any healing art, or 

(b) authorize any person to regulate, interfere, or intervene in any manner in the practice of medicine or any healing art.(296)

 The Texas Health Maintenance Organization Act provided that "[n]othing in this Act shall be construed as permitting the practice of medicine as defined by the laws of this state." (297) Perhaps most important was the provision of the Health Maintenance Organization Act that limited the powers of HMOs to the following:  the furnishing of or arranging for medical care services only through physicians or groups of physicians who have independent contracts with the health maintenance organizations; the furnishing of or arranging for the delivery of health care services only through providers or groups of providers who are under contract with or employed by the health maintenance organization. (298)
Based on the court's interpretation of the relevant Texas statutes and the facts, HealthAmerica established that, as a matter of law, it was entitled to summary judgment.(299) The court reasoned that HealthAmerica could not be subjected to liability for any of the alleged negligent treatment because HealthAmerica could not practice medicine.(300) The court gave no credence to the argument that HealthAmerica represented or held out the physicians as its agents. (301) The court did not examine previous cases construing the ostensible agency theory of liability. 

3. Analysis of Boyd and Williams 

While a third-party payer was liable in Boyd, but not in Williams, Boyd and Williams are not inharmonious. Taken together, the cases demonstrate why ostensible agency, though theoretically applicable to third parties, is a weak doctrine. First, the applicability of the doctrine relies on facts within the third-party payer's control that can be easily manipulated. Boyd and Williams were decided under very different factual circumstances. For instance, in Boyd, HMO of PA was more involved in medical decision making, while the third-party payer in Williams exercised very little specific direction and control over the physicians who treated the plaintiff.(302) Furthermore, the Williams court did not rule out the possibility that under the right fact pattern, it might apply the ostensible agency analysis. If true, the alleged acts and omissions of misdiagnosis and medical mistreatment would mean that HealthAmerica engaged in the practice of medicine.(303) HealthAmerica submitted a motion for summary judgment and affidavits establishing that, as a matter of law, HealthAmerica could not practice medicine. When Williams did not respond with additional facts that would establish ostensible agency,(304) the court held that she was "not entitled to claim, in the absence of a response to the motion for summary judgment or any other evidence in the record, that HealthAmerica may be liable on some theory of holding-out or ostensible agency."(305) Thus, it is likely that given the right facts (and possibly better lawyering), Texas, like Pennsylvania, will apply the ostensible agency doctrine. 

Even if applied, however, the doctrine is flawed in its capacity to promote safety, to spread risk, and to minimize the negative effects of cost containment efforts. Because of the holding out requirement, third-party payers can easily restructure their programs to avoid the appearance of agency.(306) The key factor underlying Boyd was that Mrs. Boyd looked to the HMO corporate institution, not to the individual physicians.(307) A well-developed managed care product and a skilled attorney could remove such appearances. For example, how would the Boyd case have turned out if HMO of PA had not promised any quality of care, had given Mrs. Boyd the option of seeking care outside the plan,(308) and had required a disclosure consent acknowledging that the physicians were independent contractors(309) and not agents of the plan? (310)

 Second, the effectiveness of the ostensible agency doctrine can be statutorily negated, as it was in Texas. The court in Williams relied on Texas law that provided that HMOs are not exempt from the corporate practice of medicine rule. That law is unique among laws governing HMOs. Most other states offer HMOs an exemption from the prohibition against the corporate practice of medicine.(311) Thus, courts in most other jurisdictions will make a common law negligence analysis or an ostensible agency analysis and not a statutory analysis.(312) Still, the issue of HMO liability is new, so future decisions are not clearly predictable.

Finally, the ostensible agency doctrine is applicable only to some forms of managed care products.(313) It is, for example, inapplicable to managed care products that hire staff physicians. (314) More importantly, the doctrine of ostensible agency is applicable only when physician negligence exists. Because cost containment activities are not considered when determining liability, there is little incentive for third-party payers to change cost containment activities that result in injuries. Under the ostensible agency doctrine, a court will view physician malpractice as an aberration, not as a symptom indicating a need for systemic change. Furthermore, because not all persons injured by defective cost containment measures can establish ostensible agency, the doctrine is ineffective as a risk spreader. 

E. Summary 

The tort system has developed several theories to facilitate compensation for injuries caused by another. Negligence will compensate for behavior that falls below a standard of reasonable care. Corporate negligence will hold an organization liable for the negligent conduct of a provider when the organization was negligent in hiring or supervising the provider. Respondeat superior will hold an employer liable for the negligent acts of an employee provider even though the employer itself has not acted negligently. Ostensible agency will hold an organization liable for the negligent act of a provider who, even though not an employee, has been held out as an agent of the organization. 

As discussed, negligence, corporate negligence, respondeat superior, and ostensible agency are all inadequate to meet the goals of compensating victims, promoting safety, and spreading the risk. These theories fail to include injuries created by managed care organizations in their cost containment efforts of utilization review and financial risk shifting. To meet these goals, an alternative compensation system must be developed. This is particularly crucial because even if a patient proves a tort claim for injuries, ERISA would raise an additional barrier to recovery.

Go to: ERISA as a Barrier to Compensation for Injuries



186. FN186. S.Y. Tan, Comment, The Medical Malpractice Crisis: Will No-Fault Cure the Disease?, 9 U. HAW. L. REV. 241, 246 (1987). 

187. FN187. Id. 

188. FN188. Id. at 243. 

189. FN189. Jeffery O'Connell, It's Time For No Fault For All Kinds Of Injuries, 60 JAMA 1070 (1974); Tan, supra note 186, at 246; see Clark C. Havighurst, "Medical Adversity Insurance"-Has Its Time Come?, 1975 DUKE L.J. 1233. 

190. FN190. Personal injuries are adjudicated in an average of seven years. Only half of all malpractice cases are closed within 18 months after they are opened, and 10% remain open over 6 and a half years. Tan, supra note 186, at 243 n.13. 

191. FN191. Estimates of the medical malpractice tort system returns on the premium dollar range from 28 cents to 35 cents. Henson Moore & Jeffery O'Connell, Foreclosing Medical Malpractice Claims By Prompt Tender Of Economic Loss, 44 LA. L. REV. 1267, 1270 (1984) (28 cents); William B. Schwartz & Neil K. Komesar, Doctors, Damages and Deterrence: An Economic View of Medical Malpractice, 298 NEW ENG. J. MED. 1282, 1282 (1978) (35 cents). 

192. FN192. 271 Cal. Rptr. 876 (Ct. App. 1990). 

193. FN193. Id. at 880. 

194. FN194. Id. at 878. 

195. FN195. Id. at 880 (emphasis added). 

196. FN196. Id. 

197. FN197. Id. at 881. 

198. FN198. Id. 

199. FN199. Id. 

200. FN200. Id. at 877, 881. 

201. FN201. Id. at 882. 

202. FN202. Id. 

203. FN203. Id. 

204. FN204. When Mr. Wilson was informed that he would "not be covered financially by his insurance company and that the liability [for hospital costs] would then be his," he cried while talking to an aunt. Id. Mr. Wilson's aunt said that the family did not have enough money to pay for the cost of inpatient hospitalization and that Dr. Taff told her "to come and get him." Id. Further, she testified that Dr. Taff told Mr. Wilson's mother and father that Western Medical "terminated his [the decedent's] stay" and that this was a "problem" that had occurred on other occasions. Id. 

205. FN205. Id. 

206. FN206. Id. at 878. 

207. FN207. 239 Cal. Rptr. 810 (Ct. App. 1986). In Wickline, Ms. Wickline's physician requested an eight-day extension of her stay in the hospital. Medi- Cal denied the request and authorized an additional four days of hospital stay beyond the originally scheduled discharge date. Complying with the limited extension authorized by Medi-Cal, Ms. Wickline was discharged on January 21, 1977. At Ms. Wickline's discharge, her leg did not appear in any danger. Ms. Wickline began to experience pain and discoloration soon after arriving home. Nine days after the discharge, she was admitted to the hospital for clotting in the right leg, no circulation to that leg, and an infection at the graft site. After unsuccessful attempts to treat Ms. Wickline's conditions, the doctors amputated her leg above the knee. Id. at 814-17. The court in Wickline held that a person can recover from a third-party payer only if medically inappropriate decisions result from defects in design or implementation of cost containment mechanisms. Id. at 819-20. Such defects are limited to requests for services that are arbitrarily ignored, unreasonably disregarded, or unreasonably overridden. Id. The court held that the state had not unreasonably overridden the physician's decision to discharge Ms. Wickline because the physician had not pursued every avenue of appeal and complied with the third-party payer's decision without protest. Id. The physician could be held responsible for the injury because he failed to protest the third-party payer's decision through all possible steps. Id. 

208. FN208. Wilson, 271 Cal. Rptr. at 885. 

209. FN209. Id. 

210. FN210. Id. at 883. The Medi-Cal standard for determining whether to provide acute care was essentially the same as the medical standard of care. Id. at 879. 

211. FN211. See id. at 881-82. 

212. FN212. Id. at 882. 

213. FN213. Under the California Civil Code, "[e]very one is responsible, not only for the result of his [or her] willful acts, but also for an injury occasioned by another by his [or her] want of ordinary care or skill." Wickline, 239 Cal. Rptr. at 810 (citing Rowland v. Christian, 443 P.2d 561 (Cal. 1968)). As rephrased by the Wickline court, "All persons are required to use ordinary care to prevent others being injured as a result of their conduct." Id. "In the absence of statutory provision [sic] declaring an exception to the fundamental principle enunciated by section 1714 of the Civil Code, no such exception shall be made unless clearly supported by public policy." Id. at 818. In Wilson, however, the Welfare and Institutions Code and Title 22 of the California Administrative Code constituted an exception to the usual standard of tort liability specified in Civil Code s 1714. Wilson, 271 Cal. Rptr. at 878. 

214. FN214. Wickline, 239 Cal. Rptr. at 819 (citation omitted). 

215. FN215. Id. at 820. 

216. FN216. Wilson, 271 Cal. Rptr. at 883. 

217. FN217. Id. (citation omitted). 

218. FN218. Id. 

219. FN219. Id. 

220. FN220. Id. at 879. 

221. FN221. Id. at 878 (quoting Wickline, 239 Cal. Rptr. at 810). 

222. FN222. Id. at 884. 

223. FN223. Id. 

224. FN224. Id. (quoting Wickline, 239 Cal. Rptr. at 810). 

225. FN225. Id. 

226. FN226. Id. at 885. 

227. FN227. Wilson Jury Finds Calif., Ala. Blues Plans Not Liable for Plaintiff's Demise, MANAGED CARE L. OUTLOOK, Apr. 21, 1992, available in LEXIS, Nexis Library, CURRNWS File. The jury found that Blue Cross, Blue Shield of Alabama, and Western Medical Review, Inc. had not caused the plaintiff's wrongful death by refusing to pay for as long a hospital stay as Mr. Wilson's doctor requested. Id. 

228. FN228. Darling v. Charleston Community Memorial Hosp., 211 N.E.2d 253, 258 (Ill. 1965) (holding that hospitals could be found liable for the negligent selection and supervision of medical staff members). Whether a physician is an employee or an independent contractor depends on a number of factors including the degree of control, method of payment, and the ownership and provision of instrumentalities used by the physician. RESTATEMENT (SECOND) OF AGENCY s 220 (1958); David J. Oakley & Eileen M. Kelley, HMO Liability for Malpractice of Member Physicians: The Case of IPA Model HMOs, 23 TORT & INS. L.J. 624, 627-29 (1988); Catherine Butler, Note, Preferred Provider Organization Liability for Physician Malpractice, 11 AM. J.L. & MED. 345, 350-54 (1985). 

229. FN229. Hinden & Elden, supra note 97, at 26. 

230. FN230. See generally McDonald v. Massachusetts Gen. Hosp., 120 Mass. 432, 436 (1876) (frequently cited case regarding origin of hospital immunity in United States). 

231. FN231. See generally Hinden & Elden, supra note 97 at 26-27. But see Rhoda v. Aroostook Gen. Hosp., 226 A.2d 530 (Me. 1967) (holding that the nonliability rule of charitable immunity extends to shelter a hospital corporate charity from liability for its own corporate negligent acts, including the selection, training, and supervision or control of its personnel or employees). 

232. FN232. Fridena v. Evans, 622 P.2d 463 (Ariz. 1980) (finding that a hospital's duty includes an obligation to take reasonable steps to monitor and to review the treatment being received by a patient); Poor Sisters of St. Francis Seraph of the Perpetual Adoration, Inc. v. Catron, 435 N.E.2d 305 (Ind. Ct. App. 1982) (holding that a hospital can be held liable for negligence when a nurse or other hospital employee follows a doctor's orders despite knowledge that the doctor's orders are not in accordance with normal medical practice). 

233. FN233. Jackson v. Power, 743 P.2d 1376 (Alaska 1987) (finding a duty by a hospital to ensure that physicians granted hospital privileges are competent and to supervise medical treatment provided by members of its medical staff); Insinga v. LaBella, 543 So. 2d 209 (Fla. 1989) (holding hospital liable for its negligent decision to grant staff privileges); Joiner v. Mitchell County Hosp. Auth., 186 S.E.2d 307 (Ga. Ct. App. 1971) (finding that a hospital may be held liable for negligent selection of new staff physicians, but not when it selects authorized physicians in good standing), aff'd, 189 S.E.2d 412 (Ga. 1972); Copithorne v. Framingham Union Hosp., 520 N.E.2d 139 (Mass. 1988) (holding hospital liable for the failure to withdraw staff privileges when it has received notice of the misconduct of a staff physician); Blanton v. Moses H. Cone Memorial Hosp., Inc., 354 S.E.2d 455 (N.C. 1987) (holding that a hospital owes duty of care to its patients to ascertain that a doctor is qualified to perform an operation before granting him the privilege to do so); Corleto v. Shore Memorial Hosp., 350 A.2d 534 (N.J. Super. Ct. Law Div. 1975) (holding a hospital liable for negligent selection and retention of a staff physician when the physician's incompetence was obvious); Johnson v. Misericordia Community Hosp., 301 N.W.2d 156 (Wis. 1981) (holding hospital liable when it failed to exercise reasonable care to determine whether physician was qualified to receive privileges). 

234. FN234. Joiner, 186 S.E.2d at 307; see also Sewell v. United States, 629 F. Supp. 448 (W.D. La. 1986) (stating that a hospital can be held liable for a physician's failure to consult a specialist where the failure was below the appropriate standard of care); Ingram v. Little Co. of Mary Hosp., 438 N.E.2d 1194 (Ill. App. Ct. 1982) (holding that a hospital may be liable for a physician or an agent's misconduct as well as a violation of its duty to review and supervise medical care) 

235. FN235. Emory Univ. v. Porter, 120 S.E.2d 668 (Ga. Ct. App. 1961) (holding that a hospital could be held negligent for failing to furnish adequate equipment); Hamil v. Bashline, 485 A.2d 1204 (Pa. 1982) (holding that a hospital is under a duty to adequately procure and maintain equipment). 

236. FN236. Arthur F. Southwick, The Hospital's New Responsibility, 17 CLEV. MARSHALL L. REV. 146, 154 (1968); Jacqueline Hanson Dee, Note, Torts- Corporate Negligence-Wisconsin Hospital Held to Owe a Duty to Its Patients to Select Qualified Physicians, 65 MARQ. L. REV. 139, 143 (1981). 

237. FN237. 211 N.E.2d 253 (Ill. 1965). In Darling, a plaintiff who broke his leg while playing in a college football game was awarded $150,000 by a jury after his leg was amputated because of the attending doctor's negligence. Id. at 255. The court rejected the historical view of a hospital's limited duty. Id. at 257. 

238. FN238. Id. (quoting Bing v. Thunig, 143 N.E.2d 3, 8 (N.Y. 1957)). 

239. FN239. See Purcell v. Zimbelman, 500 P.2d 335, 340-41 (Ariz. Ct. App. 1972). In Purcell, Dr. Purcell, a private practitioner, was selected by Mr. Zimbelman to perform an abdominal surgical procedure for cancer. As a result of the doctor's negligence, Mr. Zimbelman lost a kidney, lost sexual function, had a permanent colostomy, and had urinary problems. Id. at 339-40. The hospital knew that Dr. Purcell's two prior operations for abdominal cancer using the same procedure had resulted in lawsuits, and that two other surgical procedures performed by Dr. Purcell had also resulted in lawsuits. Id. at 343. Even though Dr. Purcell was clearly an independent contractor and no evidence was presented indicating that he may have been an actual or apparent agent of the hospital, the hospital was ultimately responsible for the quality of care provided in the institution. See id. at 341. 

240. FN240. See Reed E. Hall, Hospital Committee Proceedings and Reports: Their Legal Status, 1 AM. J.L. & MED. 245, 252 (1975) (describing the premise of corporate negligence as being that the hospital, by virtue of its custody of the patient, owes a duty to exercise care in the construction, maintenance, and operation of the hospital). 

241. FN241. Harrell v. Total Health Care, Inc., No. WD 39809, 1989 WL 153066, at *4 (Mo. Ct. App. Apr. 25, 1989) (The corporate negligence doctrine "is not a theory limited to claims against hospitals.... The duty of care to protect patients from foreseeable risk of harm, however, finds a common ground" in both hospitals and IPA model HMOs.). 

242. FN242. Benedict v. Saint Luke's Hosps., 365 N.W.2d 499, 504-05 (N.D. 1985) (holding that the hospital will not be liable for negligent selection where the physician exercised the care and the skill ordinarily possessed by other emergency room physicians). 

243. FN243. See supra note 234 and accompanying text. 

244. FN244. 781 S.W.2d 58 (Mo. 1989). In Harrell, the plaintiff brought an action against a health service corporation alleging damages resulting from alleged malpractice. The trial court entered summary judgment for the health service corporation. Id. at 60. The Missouri Supreme Court held that (1) a former statute that exempted health service corporations from some forms of liability for injuries to patients applied to a patient's action that alleged that the corporation was negligent in its selection of the surgeon who treated the patient and (2) the statute was not unconstitutional. Id. 

245. FN245. Harrell v. Total Health Care, Inc., No. WD 39809, 1989 WL 153066, at *5 (Mo. Ct. App. Apr. 25, 1989). 

246. FN246. Id. 

247. FN247. Id. at *5-*6. 

248. FN248. Ferguson v. Gonyaw, 236 N.W.2d 543, 550 (Mich. Ct. App. 1975) (finding that the plaintiff failed to prove that staff privileges would have been denied if the hospital had used reasonable care in evaluating the physician). 

249. FN249. See, e.g., Rule v. Lutheran Hosps. & Homes Soc'y, 835 F.2d 1250 (8th Cir. 1987) (applying Neb. law); Tucson Medical Ctr., Inc. v. Misevch, 545 P.2d 958 (Ariz. 1976); Elam v. College Park Hosp., 183 Cal. Rptr. 156 (Ct. App. 1982); Kitto v. Gilbert, 570 P.2d 544 (Colo. Ct. App. 1977); Register v. Wilmington Medical Ctr., Inc., 377 A.2d 8 (Del. 1977); Insinga v. La Bella, 543 So. 2d 209 (Fla. 1989); Joiner v. Mitchell County Hosp. Auth., 186 S.E.2d 307 (Ga. Ct. App. 1971), aff'd, 189 S.E.2d 412 (Ga. 1972); Blanton v. Moses H. Cone Memorial Hosp., Inc., 354 S.E.2d 455 (N.C. 1987); Corleto v. Shore Memorial Hosp., 350 A.2d 534 (N.J. Super. Ct. Law Div. 1975); Lewis v. Columbus Hosp., 151 N.Y.S.2d 391 (App. Div. 1956); Park North Gen. Hosp. v. Hickman, 703 S.W.2d 262 (Tex. Ct. App. 1985); Pedroza v. Bryant, 101 Wash. 2d 226, 233, 677 P.2d 166, 170 (1984); Sharsmith v. Hill, 764 P.2d 667 (Wyo. 1988). 

250. FN250. Under the doctrine of professional skills, courts held that because of a physician's professional skills, a physician was considered an independent contractor for whose acts a hospital could not be held liable. See Schloendorff v. Society of N.Y. Hosp., 105 N.E. 92, 92-93 (N.Y. 1914), overruled by Bing v. Thunig, 143 N.E.2d 3 (N.Y. 1957). The New York Court of Appeals overturned the old rule of nonliability, noting that "[t]he rule of nonliability is out of tune with the life about us, at variance with modern day needs and with concepts of justice and fair dealing. It should be discarded." Bing v. Thunig, 143 N.E.2d 3, 9 (N.Y. 1957). Other courts began to reject this doctrine as they began to recognize hospitals as highly-integrated systems for the delivery of health care. See Ybarra v. Spangard, 154 P.2d 687, 691 (Cal. 1944) (finding that hospitals operate under highly-integrated systems of medical health care); Moore v. Board of Trustees, 495 P.2d 605, 608 (Nev.) (holding that hospitals are highly integrated community health centers whose sole purpose is to make available the highest possible quality care to patients), cert. denied, 409 U.S. 879 (1972). 

251. FN251. Historically, hospitals maintained as charitable institutions could not be liable for the negligence of their physicians and nurses in the treatment of patients. See, e.g., Schloendorff, 105 N.E. at 92-93 (finding no liability though the patient made some payment to help defray the cost of board); Gartman v. City of McAllen, 107 S.W.2d 879, 880 (Tex. Comm'n App. 1937, opinion adopted by the Texas Supreme Court) (holding that city hospitals operating solely for public benefit could not be held liable). However, later courts have uniformly rejected the doctrine. See, e.g., Flagiello v. Pennsylvania Hosp., 208 A.2d 193, 208 (Pa. 1965) (holding that the negligence of a charitable hospital's employees must be treated the same as the negligence of any other employer's employee); Pierce v. Yakima Valley Memorial Hosp. Ass'n, 43 Wash. 2d 162, 174, 260 P.2d 765, 771-75 (1953) (finding charitable hospital liable if its negligence is the proximate cause of injury); Adkins v. St. Francis Hosp., 143 S.E.2d 154, 163 (W. Va. 1965) (abolishing charitable immunity doctrine, thereby making hospitals liable for negligent acts committed there). 

252. FN252. Schloendorff, 105 N.E. at 94 ("The true ground for the [hospital's] exemption from liability is that the relation between a hospital and its physicians is not that of a master and servant. The hospital does not undertake to act through them but merely to procure them to act upon their own responsibility."). 

253. FN253. See supra part IV.B. 

254. FN254. A basic principle of tort law is that employers are not liable for the negligence of an independent contractor. RESTATEMENT (SECOND) OF TORTS s 409 (1965). 

255. FN255. See, e.g., Arthur v. St. Peters Hosp., 405 A.2d 443 (N.J. Super. Ct. Law Div. 1979); Capan v. Divine Providence Hosp., 430 A.2d 647 (Pa. Super. Ct. 1980); Brownsville Medical Ctr. v. Garcia, 704 S.W.2d 68 (Tx. Ct. App. 1985); Adamski v. Tacoma Gen. Hosp., 20 Wash. App. 98, 579 P.2d 970 (1978). But see Johnson v. St. Bernard Hosp., 399 N.E.2d 198 (Ill. App. Ct. 1979); Reynolds v. Swigert, 697 P.2d 504 (N.M. Ct. App. 1984). 

256. FN256. Albain v. Flower Hosp., 553 N.E.2d 1038, 1044 (Ohio 1990). 

257. FN257. Id. 

258. FN258. Darling v. Charleston Community Memorial Hosp., 211 N.E.2d 253, 257 (Ill. 1965); Arthur, 405 A.2d at 446; Albain, 553 N.E.2d at 1044; Capan, 430 A.2d at 643-49; Adamski, 20 Wash. App. at 111, 579 P.2d at 977. But see Greene v. Rogers, 498 N.E.2d 867 (Ill. App. Ct. 1986). The Greene court specifically refused to apply apparent agency to a hospital and emergency room doctor relationship. "The absence of the power to control the decision making of the emergency room physicians demands that the independent relationship between the hospital and emergency room physician be recognized." Id. at 871. 

259. FN259. See, e.g., Schleier v. Kaiser Found. Health Plan, Inc., 876 F.2d 174, 177-78 (D.C. Cir. 1989) (holding an HMO vicariously liable for the negligence of a consulting physician); Sloan v. Metro. Health Council, Inc., 516 N.E.2d 1104, 1109 (Ind. Ct. App. 1987) (holding that HMOs can be liable for the conduct of employee physicians under the doctrine of respondeat superior). But see Williams v. Good Health Plus, Inc., 743 S.W.2d 373 (Tex. Ct. App. 1987) (holding an HMO not liable for physicians found to be independent contractors). 

260. FN260. Mitts v. H.I.P., 478 N.Y.S.2d 910, 911 (App. Div. 1984) (rejecting the theory of respondeat superior and finding in favor of a staff model HMO in a medical malpractice suit on the grounds that the HMO "does not treat or render medical service or care to anyone"). But c.f. Schleier, 876 F.2d at 174 (holding an HMO responsible for the acts and omission of a consulting physician who had no contractual relationship to the HMO). 

261. FN261. Courts have used various labels to hold hospitals vicariously liable: "ostensible" or "apparent" agency, or "agency by estoppel." Although the terms are often used interchangeably, they are not theoretically identical. The ostensible or apparent agency theory is based on s 429 of the Restatement (Second) of Torts, which provides as follows: 

One who employs an independent contractor to perform services for another which are accepted in the reasonable belief that the services are being rendered by the employer or by his servants, is subject to liability for physical harm caused by the negligence of the contractor in supplying such services, to the same extent as though the employer were supplying them himself or by his servants. 

RESTATEMENT (SECOND) OF TORTS s 429 (1965). In contrast, agency by estoppel is based on s 267 of the Restatement (Second) of Agency, which provides as follows: 

One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such. 

RESTATEMENT (SECOND) OF AGENCY s 267 (1958). Thus, s 429 of the Restatement (Second) of Torts requires that the employer hold out the independent contractor as its own employee, and that the injured person reasonably believe that the services are being rendered by the employer or its agents. In contrast, s 267 of the Restatement (Second) of Agency requires actual reliance on the representations of the employer by the injured person. Some jurisdictions cite s 267, others cite s 429, and still others cite both. 

262. FN262. Earlene P. Weiner, Note, Managed Health Care: HMO Corporate Liability, Independent Contractors, and the Ostensible Agency Doctrine, 15 J. CORP. L. 535, 538 (1990). 

263. FN263. See generally Grewe v. Mt. Clemens Gen. Hosp., 273 N.W.2d 429, 433- 34 (Mich. 1978); Albain v. Flower Hosp., 553 N.E.2d 1038, 1048-49 (Ohio 1990); Capan v. Divine Providence Hosp., 430 A.2d 647, 648 (Pa. Super. Ct. 1980) (citing RESTATEMENT (SECOND) OF TORTS s 429 (1965)); Brownsville Medical Ctr. v. Garcia, 704 S.W.2d 68, 74 (Tex. Ct. App. 1985). 

264. FN264. See Grewe, 273 N.W.2d at 433. 

265. FN265. A "holding out" occurs "when the hospital acts or omits to act in some way which leads the patient to a reasonable belief he is being treated by the hospital by one of its employees." Adamski v. Tacoma Gen. Hosp., 20 Wash. App. 98, 115, 579 P.2d 970, 979 (1978). 

266. FN266. Howard v. Park, 195 N.W.2d 39, 40 (Mich. Ct. App. 1972); Capan, 430 A.2d at 649; Adamski, 20 Wash. App. at 115, 579 P.2d at 978-79; see also Brown v. Moore, 247 F.2d 711, 719-20 (3d Cir. 1957) (applying liability under respondeat superior when a holding out occurs). 

267. FN267. See generally Joanne Stern et al., Health Maintenance Organizations: Development, Growth and Expansion, 8 WHITTIER L. REV. 377 (1986) (presenting a panel discussion of the reasons behind the surge of HMOs in California). 

268. FN268. Ossario, supra note 3, at 198. 

269. FN269. Id. ("Just the fact that there are so many new HMOs and the fact that they are expanding so rapidly creates tremendous problems."). 

270. FN270. See, e.g., McClellan v. Health Maintenance Org., 604 A.2d 1053, 1058 (Pa. Super. Ct. 1992) (holding that an HMO's advertisements that it carefully screened its primary care physicians subjected the HMO to the ostensible agency doctrine). 

271. FN271. 547 A.2d 1229 (Pa. Super. Ct. 1988). 

272. FN272. 743 S.W.2d 373 (Tex. Ct. App. 1987). 

273. FN273. Boyd, 547 A.2d at 1230. At the time of Mrs. Boyd's death, she and her husband were participants in the Health Maintenance Organization of Pennsylvania (HMO of PA), a managed care product. The third-party payer limited Mrs. Boyd's choice of physician to the names provided in a directory. In June 1982, Mrs. Boyd saw Dr. Rosenthal, whom she selected from the directory. Dr. Rosenthal referred Mrs. Boyd to Dr. Erwin Cohen, a participating HMO of PA surgeon as required by the subscription agreement. Dr. Cohen performed a biopsy of Mrs. Boyd's breast tissue on July 6, 1982. During the surgery, he perforated Mrs. Boyd's chest wall with the biopsy needle. Mrs. Boyd was discharged, but continued to have complaints for weeks afterward. On August 19, Mrs. Boyd awoke with chest pain. Dr. Rosenthal examined Mrs. Boyd and diagnosed Tietz's Syndrome. Tietz's Syndrome is an inflammatory condition affecting the costochondral cartilage in women between 30 and 50 years old. He set up a subsequent appointment for tests to be done at his office. Following a series of tests in his office, Dr. Rosenthal sent Mrs. Boyd home. Her symptoms persisted and worsened. That same afternoon, Mr. Boyd discovered Mrs. Boyd dead in their bathroom from a heart attack. Id. at 1229-30. 

In his lawsuit, Mr. Boyd contended that Mrs. Boyd exhibited symptoms of cardiac distress and that Dr. Rosenthal should have sent her to the hospital rather than negligently ordering the tests on Mrs. Boyd at his office. Id. at 1230 n.5. The reasons the test occurred at Dr. Rosenthal's office were disputed. The HMO maintained that the tests were done at Dr. Rosenthal's office because Mrs. Boyd would have been more comfortable. Mr. Boyd maintained that they were done at the office because the HMO required them to be done there to keep medical fees within the HMO. Id. at 1230 n.4. Mr. Boyd contended that the safer practice would have been to perform the tests at the hospital where the results would have been more quickly available and that this negligent treatment caused Mrs. Boyd's death. Mr. Boyd maintained that HMO of PA should be liable for the negligence of its participating physicians because those physicians acted as ostensible agents for the HMO. Id. at 1231 

274. FN274. Id. 

275. FN275. Id. 

276. FN276. Id. 

277. FN277. Id. at 1234. 

278. FN278. Id. at 1231. 

279. FN279. Id. at 1232. 

280. FN280. Id. 

281. FN281. Id. at 1234-35. 

282. FN282. Id. at 1235. 

283. FN283. Id. 

284. FN284. Id. at 1232 n.6 (noting that in a document entitled "Why Offer HMO- PA?," HMO of PA represented to employers that it "[a]ssumes responsibility for quality and accessibility" of health care). 

285. FN285. Id. at 1235. 

286. FN286. Id. at 1233; see supra notes 64-67 and accompanying text. 

287. FN287. Boyd, 547 A.2d at 1235. 

288. FN288. Id. 

289. FN289. Id. 

290. FN290. 743 S.W.2d 373 (Tex. Ct. App. 1987). 

291. FN291. Id. at 374. The Williamses provided the following statement of each act or failure to act: 

Failure to listen to patient complaints and failure to diagnose and properly treat nail staph infections and systemic [l]upus [erythematosus], refusal of treatment. Failure to order the usual and customary lab work for a person taking the medications prescribed to monitor well[-]being of patient and to decrease chance of side effects. Mismanagement of ca[r]e of the nail to the point that correct management of systemic lupus was impossible due to the fact steroids could not be given appropriately. 

Id. at 374-75. HealthAmerica Corporation (HealthAmerica) was the legal successor to Good Health Plus, Inc. Southwest Medical Group (Southwest) was the physician group that gave medical services to Mrs. Williams. The medical services agreement between HealthAmerica and Southwest stated that "under this agreement, physicians 'shall be totally responsible for all medical advice to and medical treatment of members and for performance of medical services within the service area."' Id. at 376. HealthAmerica did not select the physicians who treated Mrs. Williams, and HealthAmerica did not have the right to direct or control "the work or practice of medicine" of the physicians who treated Mrs. Williams. Id. at 377. Neither HealthAmerica nor Good Health Plus employed, paid, or supervised any physicians. In Mrs. Williams's medical records, many progress notes were written on forms provided by Southwest and bore the professional association mark, "Southwest Medical Group, P.A." Id. at 378. Finally, when Mrs. Williams sought care from the "Southwest Medical Group, P.A.," she signed a Consent to Procedure form that contained the following language: "I hereby authorize [the Southwest Group physician] and whomever he may designate as his assistants, to perform upon myself the following procedure ...." Id. 

292. FN292. TEX. REV. CIV. STAT. ANN. art. 4495b, ss 1.01-5.10 (West Supp. 1994). 

293. FN293. Williams, 743 S.W.2d at 375. The provision provided as follows: 

[I]t shall be unlawful for any individual, partnership, trust, association, or corporation by the use of any letters, words, or terms as an affix on stationery or on advertisements, or in any other manner, to indicate that the individual, partnership, trust, association, or corporation is entitled to practice medicine if the individual or entity is not licensed to do so. 

Id. (quoting TEX. REV. CIV. STAT. ANN. art. 4495b, s 3.07(e) (West Supp. 1987)). 

Under the corporate practice of medicine doctrine, a lay corporation cannot "employ a doctor, charge for the doctor's services, pay the doctor a salary, and then keep the profit that is left over." Anthony Hunter Schiff, Provider Discounts, 9 WHITTIER L. REV. 249, 250 (1987). A professional corporation owned by a physician is the only type of corporate entity that can practice medicine and retain profits. Id. However, a corporation can provide health services to employees if it does not charge for the services. Id. The corporate practice of medicine rule generally prohibits corporate entities from employing physicians. The most significant exception to the rule is health maintenance organizations. See Cynthia M. Combe & Neil Krugman, Design and Pricing of the PPO and EPO Products, in MANAGED HEALTH CARE: LEGAL AND OPERATIONAL ISSUES FACING PROVIDERS, INSURERS, AND EMPLOYERS, at 114-16 (PLI Commercial Law and Practice Course Handbook Series No. 393, 1986), available in WESTLAW, TP-All File (discussing the prohibitions against the corporate practice of medicine). This prohibition is based on legal and policy considerations. Legally, statutory licensure requirements for physicians include certain age, educational, and moral character requirements that are "incapable of being met by an artificial [entity] such as a corporation." Id. at 114. Policy considerations include a concern that corporations may control medical decision making to "an unacceptable degree and interfere with the quality of patient care," and that treatment decisions may be "based upon economic considerations, such as shareholder interests, rather than upon patient need." Id. at 114-15; see also CAL. BUS. & PROF. CODE s 2400 (West 1990) (stating that "[c]orporations and other artificial legal entities shall have no professional rights, privileges or powers"). 

294. FN294. See infra notes 295-298 and accompanying text. 

295. FN295. TEX. INS. CODE ANN. ss 20A.02-20A.36 (West 1990). 

296. FN296. Williams, 743 S.W.2d at 375 (quoting TEX. INS. CODE ANN. s 20A.29 (West 1981)). 

297. FN297. Id. (quoting TEX. INS. CODE ANN. s 20A.06(a)(3) (West 1981) (alteration in original)). 

298. FN298. Id. 

299. FN299. Id. at 379. 

300. FN300. Id. at 378. 

301. FN301. Id. 

302. FN302. It is unclear, however, from the facts of Williams whether Mrs. Williams selected Southwest's doctors or was required to use them. Part of the problem with Williams may be in how the plaintiff's attorney formed the case. 

303. FN303. Id. at 375-76. 

304. FN304. Id. at 378. 

305. FN305. Id. at 379. 

306. FN306. See Gnessin, supra note 132, at 410 (advising managed care organizations to inform and to disclose to the patient the exact relationship between the health care provider and the HMO as an effective defense against ostensible agency). 

307. FN307. Boyd v. Albert Einstein Medical Ctr., 547 A.2d 1229, 1235 (Pa. Super. Ct. 1988). 

308. FN308. See id. (indicating that Mrs. Boyd had no choice as to which specialist to use). 

309. FN309. "A hospital would not be held liable for the negligence of a doctor (whether on staff or not) if the patient was aware of the actual relationship between the doctor and the hospital." Stewart v. Midani, 525 F. Supp. 843, 853 (N.D. Ga. 1981); see also Hannola v. City of Lakewood, 426 N.E.2d 1187, 1190 (Ohio Ct. App. 1980) (holding that public advertisements disclaiming agency may serve to insulate the unwilling principals). 

310. FN310. A court could find that even where an individual knew that the managed care organization (MCO) physicians were independent contractors, and not MCO employees, an individual requiring care lacks a meaningful choice because of the financial restraints placed on individuals who opt out of the MCO plan. Under those restraints the court might find ostensible agency despite the knowledge of the individual. See Martell v. St. Charles Hosp., 523 N.Y.S.2d 342, 351 (Sup. Ct. 1987) (holding that even where a patient has the knowledge of emergency room physicians' status as independent contractors, the hospital can be held liable under ostensible agency theory). 

311. FN311. See Pamela S. Bouey & Maureen E. Corcoran, Managed Care Diversification and New Products, in MANAGED HEALTH CARE 1988: LEGAL AND OPERATIONAL ISSUES, at 9, 13 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in WESTLAW, TP-All File (stating that most states exempt HMOs from prohibitions regarding the practice of medicine by lay corporations). But see ILL. REV. STAT. ch. 215, para. 165/26 (1993) (HMOs cannot be found liable for the malpractice of member physicians); Brown v. Michael Reese Health Plan, Inc., 502 N.E.2d 433 (Ill. App. Ct. 1986) (holding that a statute exempting voluntary health service plans from liability was a reasonable exercise of state power and a justifiable method of pursuing cost control). 

312. FN312. Cf. Schleier v. Kaiser Found. Health Plan, 876 F.2d 174, 177 (D.C. Cir. 1989) (holding an HMO liable for the negligence of an independent contractor where sufficient evidence of a master-servant relationship existed). 

313. FN313. The diverse organizational structures make the application of traditional malpractice theories more difficult. See generally Gregory G. Binford, Malpractice and the Prepaid Health Care Organization, 3 WHITTIER L. REV. 337 (1981); Monahan & Willis, supra note 79, at 353; Oakley & Kelley, supra note 228, at 624. 

314. FN314. See Ossario, supra note 3, at 197-98 (distinguishing IPA for-profit HMOs from nonprofit group staff models of the past decade by noting the difference in management controls and financial incentive arrangements). In Boyd, the defendant HMO was an independent practice association model HMO. Boyd v. Albert Einstein Medical Ctr., 547 A.2d 1229, 1232-33 (Pa. Super. Ct. 1988).

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Professor Vernellia R. Randall
Institute on Race, Health Care and the Law
The University of Dayton School of Law
300 College Park 
Dayton, OH 45469-2772
Email: randall@udayton.edu


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