Another State Court Expands HMO Liability for Providers’ Actions

Mark D. Abruzzo, J.D.

The Illinois Supreme Court last fall followed a national trend of courts holding managed care organizations liable for medical malpractice under a variety of traditional legal theories.

That court, in Petrovich v. Share Health Plan, ruled that HMOs can be liable vicariously for acts of their contracted physicians under theories of both apparent authority and implied authority.

The court didn’t actually hold the HMO responsible; rather, it upheld an appellate court’s reversal of a lower-court ruling, which held that the HMO should not be held responsible for the negligence of physicians who are independent contractors.

Generally, no liability exists for the actions of one’s independent contractors. However, the longstanding apparent-authority doctrine holds that a principal will be bound not only by the authority that it actually gives to another, but by the authority that it appears to give as well. Implied authority is actual authority, circumstantially proved.

Defendant’s argument

The Illinois Supreme Court had never before addressed the issue of whether an HMO may be held liable for malpractice. The defendant HMO, Share Health Plan, suggested that the court consider that holding managed care companies liable for malpractice will cause health care costs to increase and, inevitably, make health care inaccessible to large numbers of people.

With that consideration in mind, Share — an IPA-model HMO — asked that the court impose only limited forms of liability on HMOs. The state court responded in resounding fashion:

“We disagree with Share that the HMO’s cost-containment role entitles [it] to special consideration. The principle that organizations are accountable for their tortious actions and those of their agents is fundamental to our justice system. There is no exception to this principle for HMOs.”

The facts are that the plaintiff’s primary care physician referred her to an ENT for persistent pain in her mouth. The specialist recommended that the plaintiff undergo an MRI or a computed tomography scan.

The HMO refused to approve payment for the tests. Consequently, the primary care physician provided the specialist with an old MRI test that the specialist then determined to be normal. Six months later, the plaintiff was again referred to the specialist, who performed multiple biopsies on the base of the plaintiff’s mouth. The biopsy results showed that the plaintiff had cancer. The plaintiff underwent radiation treatments and rehabilitation.

The plaintiff sued the HMO, alleging that the physicians negligently failed to diagnose her cancer sooner, and that the HMO was responsible, having had apparent authority over the physicians.

The court ruled that apparent authority can be established if a plaintiff can demonstrate:

  • That the HMO held itself out as a health care provider without informing the plaintiff that its physicians were independent contractors and not agents of the HMO; and
  • That she relied, justifiably, on the HMO, and not her individual physicians, to provide her with health care services.

The state court held that the plaintiff fulfilled the two-pronged test.

First, she demonstrated that the HMO held itself out as a health care provider without informing the plaintiff that its physicians were independent contractors.

Handbook’s language

Here, the plaintiff used the HMO’s member handbook against it. For example, the handbook stated to its members that the HMO “will provide all your health care needs” and “comprehensive high quality service.” The handbook referred to the physicians as “your [HMO] physicians,” “[HMO] physicians,” and “our staff.” The HMO also referred to the physicians’ offices as “your [HMO] physicians’ offices.”

The health maintenance organization typically included in its information packets a subscriber certificate that states that the HMO’s physicians are independent contractors. However, the HMO could not conclusively establish that it actually gave the plaintiff a certificate. In the absence of proof, the court was unwilling to conclude that the plaintiff had knowledge of the precise relationship between the HMO and its physicians.

It is also not entirely clear that, had this been established, the court would have imputed the plaintiff with knowledge of the relationship.

Secondly, the plaintiff proved that she relied, justifiably, on the HMO, and not her individual physicians, to provide health care services. In this case, the HMO contracted with the plaintiff’s employer to become the employer’s sole provider of health care to the exclusion of all other providers. Thus, the plaintiff had no choice of health plans.

The plaintiff selected her primary care physician from a list provided by the HMO. Had she not selected from the list, she would not have been eligible to receive coverage.

The court didn’t actually rule as to whether the HMO controlled the physicians pursuant to the doctrine of implied authority. It did, however, note that the physicians are compensated through capitation, the HMO performs quality assurance reviews, referrals to specialists require approval, and the primary care physicians act as gatekeepers for the HMO. The court said these facts support the plaintiff’s argument that even if the physicians were independent contractors, the HMO could be liable for their actions.

Marketing concerns

The lesson here is that managed care companies must address not only their involvement and influence in the medical decision-making process — direct or indirect — but also the ways in which they market their product to the consumer and the ways in which they communicate with their members.

If the attitude of the Illinois Supreme Court is any indication, the courts are very willing to apply the most traditional of legal theories of liability to hold managed care companies responsible for the acts of the physicians and other providers with whom they contract.

Mark D. Abruzzo, J.D., specializes in health care law at the Berwyn, Pa.-based office of Wade, Goldstein, Landau & Abruzzo.