By Christopher Guadagnino, Ph.D.

Published August 1997

• React to this article in the Discussion Forum.

HMOs have traditionally been insulated from medical malpractice liability, but recent events, both in Pennsylvania and nationally, indicate a trend toward increased HMO exposure to the risk of being sued for medical malpractice. That may not be good news for physicians, however, as HMOs go on the offensive.

"Look at what HMOs are putting in their contracts," says Edward F. Shay, Esq. of the Philadelphia law firm of Saul, Ewing, Remick & Saul. "HMOs are now taking a much more aggressive stance to control their exposure to liability, sometimes shifting it to the provider," Shay warns.

An indemnification clause inserted and then withdrawn from Independence Blue Cross’s (IBC) new Keystone Health Plan East contract with physicians could potentially have left physicians exposed to HMO liability that would not be covered by their malpractice insurance companies. The clause (Section 6.7) read: "Provider agrees to indemnify and hold harmless Independence, its directors, officers, employees and agents from any claim, suit, cost, or expense, including, but not limited to, costs of defense incurred by Independence or such persons as a result of negligent actions or breach of this Agreement by Provider..." The clause also says that Independence agrees to indemnify the provider, in the same way, using the same language.

"When a physician reads it, it looks kind of innocuous—’We’ll hold you harmless, you’ll hold us harmless,’" says an independent practitioner who chose to remain unidentified. "If we made a mistake and were sued, and the patient also sued Keystone or Independence Blue Cross, by signing this hold harmless clause, we would be responsible for all the legal bills that IBC would accrue and for any settlements against IBC. And here’s the worst part about it: your malpractice insurance would not cover it. So you would have a hole in your [insurance coverage]," the physician adds.

While IBC rescinded the clause before it went into effect, developments like this one are likely to recur in some fashion, as it is reasonable to expect HMOs to respond more defensively as they become more exposed to liability. The impending prospect of HMO malpractice liability presents a dilemma for physicians. Without HMO liability, physicians may be held liable for practicing a style of medicine dictated by the HMO. If HMOs are put on the hook, that may lead to more lawsuits and litigation, which could ultimately impact negatively on the physician.

The IBC case illustrates some important points. Physician-supported trends that would place more medical malpractice liability on HMOs could actually lead to increases in physician liability. For recourse against the dangers of looming liability, physicians may have to look in unusual places for bargaining clout.

Growth of HMO Liability

There are abundant indications that greater HMO liability is on the horizon.

The Pennsylvania Supreme Court is currently hearing a case that will determine whether HMOs are protected under federal law from medical malpractice lawsuits. HMOs have dodged such lawsuits, which are argued in state courts, by claiming exemption under the federal Employee Retirement Income Security Act of 1974 (ERISA). As a result, lawsuits against HMOs have been restricted to federal courts for medical benefits awards, and not for damages resulting from malpractice.

The case followed a lawsuit in which an emergency room patient successfully sued a physician and hospital for medical malpractice. U.S. Healthcare, the patient’s insurer, did not authorize the physician’s recommendation that the patient be transferred to a specific facility, and offered alternative facilities. The patient suffered permanent spinal cord damage. Payers of the settlement—the Pennsylvania Hospital Insurance Co. and the CAT Fund—sued U.S. Healthcare on the grounds that its negligence caused the patient’s injuries.

The PMS, along with the AMA, filed a brief in the case arguing that:

• Congress enacted ERISA with the sole purpose of protecting the employment benefits of employees.

• ERISA does not preempt state law in fields of traditional state regulation such as medical malpractice.

• U.S. Healthcare’s refusal to authorize the patient’s transfer to the physician’s choice of facility constituted negligence—which is governed by state law and is not preempted by ERISA.

• A mechanism to hold the managed care companies liable must be established to give patients remedy and give providers standing to assert a claim against managed care companies.

A recent Texas law—the first of its kind in the country—allows consumers in that state to sue managed care companies for injuries caused by their denial or delay of treatment, according to the Wall Street Journal. Aetna Inc., under the argument of ERISA preemption, filed a lawsuit to block the law.

Four federal circuit courts—in Philadelphia, New York, Chicago and Denver—have already granted enrollees the right to hold health plans vicariously liable under ERISA for doctors’ failure to appropriately refer patients. The lawsuits are limited to federal courts for benefits payment awards, however, and not for medical malpractice damage awards such as pain and suffering.

A proposed federal law, the Managed Care Plan Accountability Act of 1997, would: prevent health plans from claiming exemption from malpractice liability under ERISA, amend ERISA to allow patients to sue health plans in federal or state court for cost-driven negligence, and would protect physicians from lawsuits if they failed to recommend a treatment not covered by a patient’s health plan.

Shifting HMO Liability to Physician Liability

While it may seem just to hold HMOs liable for inducing underutilization of medical resources, and to be in physicians’ best interest to do so, this could lead to greater physician liability. Take IBC’s rescinded indemnity clause, for example.

If HMOs are sued more frequently, a hold harmless clause would appear to be a powerful tool for HMOs, as health plans would almost always be able to point to some physician action as negligent, then point to the hold harmless clause, predicts David Lowe, Esq., of the Cohen & Grigsby law firm in Pittsburgh.

Medical malpractice insurers typically exclude coverage of third party contract liability, such as in indemnification agreements with insurers, notes PMSLIC Assistant Counsel Gwendolyn S. Hailey, Esq. If an HMO were to ask a physician to reimburse them for expenses related to a malpractice suit, Hailey explains, the physician cannot submit that request to PMSLIC as a claim, because it is part of a private contract between the physician and the HMO. If a patient sued IBC for a physician’s alleged negligence and IBC enforced the indemnity clause, says Hailey, "PMSLIC will not defend Independence nor pay any award entered against it. We do not insure Independence Blue Cross. Therefore, if this clause were enforced, the physician would personally incur additional expenses associated with the defense and indemnification of Independence."

The hold harmless clause would give an HMO the ability to sue a physician for the cost of defending a malpractice suit that resulted from a physician’s negligence, says Lowe. "Hold harmless" connotes that if the doctor costs the HMO because of his or her negligence, he or she is obligated to make the HMO whole again—to put the HMO back in a position that existed before the harm was done to it, Lowe explains. The fact that the claim is contractually based, Lowe adds, makes it easier for the HMO to collect from the physician. Without a reciprocal hold harmless clause, an HMO would not necessarily have a good cause of action to file a claim against a physician to recover costs of a lawsuit, Lowe indicates.

If an HMO did sue a physician who had not signed any hold harmless agreement and the physician asked PMSLIC for coverage in that suit, PMSLIC would consider such a situation on a case-by-case basis, says Hailey, who points out that PMSLIC has never been presented with such a case. The absence of the hold harmless contract would at least free the physician from having such coverage automatically excluded from his or her malpractice insurance policy.

The Medical Protective Company issued a physician malpractice insurance policy clarification regarding hold harmless clauses in December, 1994 declaring that it would "defend and indemnify any third party with whom you have signed an indemnification agreement—such as a managed care organization or hospital—in any suit brought against that third party based solely on your professional services." A company spokesperson explains that the company covers only the physician’s liability in cases in which an HMO is brought into a lawsuit for physician negligence, and adds that the company has not had such a claim to date. Although perhaps on the immediate horizon, such a theory of vicarious liability—holding an HMO accountable for credentialing competent physiciansyet to be tested in Pennsylvania.

IBC’s indemnification clause poses other potential problems for physicians. It would interfere with the defense of a physician’s malpractice case since it would prevent his or her malpractice attorney from bringing an HMO into the claim even if the facts pointed to HMO negligence, says Hailey.

Further, the indemnification clause would also close off an avenue of redress for the physician who loses a malpractice suit, Shay believes. If a malpractice judgment were made against a physician and he or she felt that an HMO’s involvement in the case contributed to the judgment, he or she could ordinarily bring a right of contribution suit against the HMO for a different damage payment apportionment, says Shay. The indemnification clause prevents that, he observes.

Although the clause appears to protect physicians by giving them reciprocal indemnity for negligence on the part of IBC, that protection could be negated if a component of physician negligence is involved. If an HMO were found negligent for retaining an incompetent physician on its panel, for example, accountability could be transferred to the physician, believes Deborah Robinson, Esq., of the Houston Harbaugh law firm in Pittsburgh. There have been several such cases in hospital settings, says Robinson. "We don’t have vicarious liability for HMOs yet, but that’s where we could be headed," and the legal community is preparing for this route, says Robinson.

Physician Recourse

How can physicians seek protection from having HMO malpractice liability shifted onto them? In the past, hold harmless clauses could be struck from individual contracts through negotiation with the aid of a physician’s legal counsel, according to Michael Burke, Esq., of the law firm of Kalogredis, Tsoules & Sweeney Ltd. in Wayne, PA.

This did not appear to be a viable alternative with the IBC contract, at least initially. One physician, along with a number of his colleagues, each called IBC in order to protest the hold harmless clause. "We were told if we didn’t sign the contract by July 1, we would no longer be in the plan," one of the physicians recounted. So they took up the issue with the Pennsylvania Medical Society (PMS) and the managed care and legal departments of Allegheny University Hospital, Hahnemann and Jefferson Health System.

IBC’s Chief Medical Officer Steven Udvarhelyi, M.D., said that IBC dropped the clause as soon as they found out that it would pose an uninsured risk for physicians. "We did not understand, at the time we put [the hold harmless clause] in, that the malpractice coverage had specific references to indemnification provisions that created a gap for physicians," Udvarhelyi said. "When that was brought to our attention, we removed the clause. It was not, it is not, has never been our intention to put physicians in a difficult position." He adds: "I’ve had praise from physicians in the community that they thought we were responsive, open to dialogue and did the right thing."

One of the physicians who complained to IBC believes that Jefferson and Allegheny had the most impact, though the hospitals declined to comment on their role. It is, of course, no surprise that these large systems would have more bargaining clout than individual physicians. Now that they employ growing numbers of physicians, it will be interesting to see if their bargaining clout will accrue to the benefit of all physicians in other situations, as it appears to have in this case.

PMS, on the other hand, is unable to negotiate on physicians’ behalf, presumably because of antitrust laws. "We don’t negotiate contract language with payors and HMOs. Our role is to inform our members and to pass information on to them so that they can make decisions," said PMS spokesperson Ken Robinson.

Instead, PMS will work on the issue in the courts and legislature. If an indemnity clause were invoked in a lawsuit, PMS would attempt to strike it down in the courts as against public policy interests, says PMS Council Ken Jones, Esq. PMS also seeks laws preventing such clauses in the first place, as well as removing HMOs’ ERISA protection from liability, thereby forcing HMOs to be more concerned about physicians’ clinical decisions and preventing HMOs from improper conduct in the future, notes Elizabeth Metz, Esq., PMS Council for Health Law and Policy.