Corporate and Managed Care

by Michael B. Bogdanow, Esq. and Karen R. Ristuben, Esq.
Meehan, Boyle, Black & Bogdanow, P.C. Boston, Massachusetts
and Emily Daughters, Northeastern Univ. School of Law, Class of 2000

I. Introduction

As we enter the new millennium, new theories of managed care accountability are emerging in cases nationwide, premised on direct corporate liability, vicarious liability and individual liability. For instance, if ERISA preemption can be defeated, an HMO may be held directly liable where it controlled policies, procedures, services and facilities, thereby interjecting itself into rendering medical care. In other cases, plaintiffs have successfully argued that HMOs and other institutional defendants are vicariously liable for the actions of physicians under theories of respondeat superior and apparent authority. Additionally, physicians who sufficiently control institutional policies and procedures may be held personally liable to the plaintiff, despite a lack of a direct doctor-patient relationship. As HMOs and other medical institutions exert greater control over physicians’ practice by contract, by compensation incentives, by practice guidelines and protocols, and by quality assurance programs, greater potential for institutional accountability expands as well.

In Massachusetts, charitable immunity and preemption under 29 U.S.C. § 1144(a) (“ERISA”) remain the primary barriers to holding our institutions accountable for medical malpractice. As our health care systems continue to dissolve into impersonal cost-containing goliaths, yet patient safety rises to the top of our legislative agendas, perhaps expanded corporate liability is on the horizon.

II. Theories of Liability

A. Individual Liability for Institutional Neglect

In Santos v. Kim, 429 Mass. 130 (1999), the Supreme Judicial Court considered whether the absence of a direct doctor-patient relationship precluded a finding for the plaintiffs at trial. In Santos, parents of a child born with severe brain damage who died one day after delivery sued their obstetrical providers and the Associate Chief of Medicine and Director of the Hematology Laboratory at MetroWest Medical Center, Inc. The plaintiffs alleged that institutional lack of policies, procedures or protocols allowed for a two-week delay in the transmission of abnormal test results from the lab to the physicians, resulting in a delay of critical treatment and consequential death of the child. The Court found that the doctor’s position as the laboratory director would not in itself suffice to prove a duty owed to the plaintiff. However, evidence that he was responsible for developing policies and procedures for test result transmission and that he failed to do so until after the death of the plaintiffs’ child, established his personal responsibility for the institutional failure. The Court reasoned that the doctor’s role in the policy-making hierarchy was sufficiently personal, thereby imposing a personal duty owed by him to the patient.

In Derry v. Peskin, No. 97-1720A, 1999 WL 1204013 (Mass. Super. Ct. Nov. 16, 1999), Judge Fecteau of the Superior Court applied the Supreme Judicial Court’s reasoning in Santos and ruled that a doctor may have, in his capacity as St. Vincent Hospital’s Director of the Department of Obstetrics, a personal duty to a patient with regard to the department’s compliance with the Emergency Medical Treatment and Active Labor Act (“EMTALA”). In this case, the plaintiffs brought a wrongful death action against the director alleging that the failure of the hospital to follow the requirements of the EMTALA resulted in the death of their child. The court held that although the director was not present and did not see or treat the plaintiff on the night in question, his responsibilities with respect to the department’s implementation of the EMTALA may have created a duty owed to the plaintiffs, thereby precluding summary judgment for the director. The primary question, therefore, is whether the extent and breadth of the doctor’s duties as director of the department sufficiently created a personal duty.

In both of these cases the courts moved beyond the requirement of a direct doctor/patient relationship as the sole means of establishing liability, and instead relied upon the defendant doctor’s role within the hospital. More specifically, the courts focused on the extent that the doctor’s position affected and/or controlled the hospital’s internal policies and procedures as a way of finding a personal duty owed to the patient.

B. Direct Corporate Liability

Apart from cases alleging vicarious liability, Massachusetts appellate courts have had little opportunity to address the direct corporate accountability of managed care organizations. As in hospital settings, HMOs may be liable for the negligent hiring and supervision of employees; for failure to provide adequate facilities and equipment; and for failure to formulate and enforce adequate policies and procedures.(1) The Pennsylvania Superior Court in Shannon v. McNulty, 718 A.2d 828 (Pa. Super. Ct. 1998) applied a theory of direct corporate liability to an HMO, Health America. In this case, the parents of a child who died following premature delivery brought a medical malpractice action against their HMO alleging that the HMO was corporately liable for its lack of appropriate procedures and protocols when dispensing telephonic medical advice. The plaintiff mother saw her primary physician monthly but also called the HMO phone line a number of times for advice and to schedule appointments with its in-house doctors. Over the span of several days, the plaintiff called her treating physician numerous times complaining of severe abdominal pain, back pain and numbness. The physician either dismissed her complaints or failed to respond altogether, despite the mother’s fears that she was experiencing pre-term labor. Soon thereafter, the plaintiff contacted the HMO informing it of her severe irregular pain and her physician’s failure to respond. The HMO, however, simply told her to continue to communicate with her physician. The patient contacted the HMO again on the following two days. After the first call, the HMO again told her to contact her physician and then following the second call the HMO in-house orthopedic physician told her to drive to a hospital an hour away to get her back examined. The plaintiff delivered her child that night, although he survived by only two days as he was severely premature. The Court found that where the HMO interjects itself into the rendering of medical decisions affecting a patient’s care, as it did here, it must do so in a medically reasonable manner. Recognizing that HMO subscribers are given little or no say in the “stewardship” of their care, the court reasoned that corporate liability duties should “be equally applied to an HMO when that HMO is performing the same or similar functions as a hospital.” Id. at 835; see also Fox v. Horn, No. CIV. A. 98-5279, 2000 WL 49374, * 8 (E.D. Pa. 2000) (extending Shannon to prison medical provider where provider is responsible for inmates’ total health care and where inmates have no meaningful choice in health care); cf. Milan v. American Vision Center, 34 F. Supp.2d 279 (E.D. Pa. 1998) (declining to extend Shannon further to include optometrist’s office because optometrists do not play a role in the “total health care” of their patients as do HMO’s).

C. Vicarious Liability and Apparent Authority

Although the Massachusetts Superior Court in Derry v. Peskin ruled that the defendant Director of the Department of Obstetrics of the hospital may have had a personal duty to the patient, the Court further found that the defendant could not be held vicariously liable for the actions of the plaintiff’s treating physicians. See Derry, 1999 WL 1204013, at *4. The Court reasoned that defendant’s position as director of the department would not, without more, make him liable under the doctrine of respondeat superior. In light of the Santos opinion, it is evident that without a showing that the defendant exercised some form of medical judgment over the other physicians he cannot be held liable for their actions.

Medical practice groups and associations may be held vicariously liable for the negligence of their physicians where the employer has the power of control or direction over the physician’s general activities. Kapp v. Ballantine, 380 Mass. 186 (1980); Gugino v. Harvard Community Health Plan, 380 Mass. 464 (1980); Harnichj v. Children’s Hospital Medical Center, 387 Mass. 152 (1982). In Crooks v. Keene, 1999 WL 605825 (Mass. Super. Ct. Mar. 26, 1999) and Miller v. Kurkjian, 1999 WL 176911 (Mass. Sup Ct. Feb. 23, 1999), Judges Kottmyer and Gants, respectively, denied summary judgment where the corporate defendants had the right to control the physician’s general activities, For instance, if the corporation determines the physician’s method of payment, hours worked, place of practice, supervisory hierarchy, and practice guidelines or protocols, it cannot claim that the physician was an independent contractor.

Apparent authority is emerging as an alternative tool for holding an institution liable for the malpractice of its independent contractor physicians. See Jones v. Chicago HMO, 703 N.E.2d 502 (Ill. App. 1998) (finding a genuine issue of fact existed as to whether doctor acted under apparent authority of the HMO where there was compelling evidence that HMO aggressively marketed physician and represented him to be a good physician); Petrovich v. Share Health Plan of Ill, Inc., 719 N.E.2d 756 (Ill. 1999). In Petrovich, the plaintiff alleged that her HMO was vicariously liable for the actions of the physicians within her plan under an apparent agency theory, notwithstanding their “independent contractor” status. The Court found that in order to establish apparent authority against an HMO for physician malpractice, the patient must prove (1) that the HMO held itself out as the provider of health care, without informing the patient that the care is given by independent contractors (2), and (2) that the patient justifiably relied upon the conduct of the HMO by looking to the HMO to provide health care services, rather than to a specific physician.(3) The Court held that evidence including the HMO’s control over the physicians through its quality assurance program and a member handbook representing the physicians as “health care managers,” was sufficient to support the conclusion that the HMO held itself out to the plaintiff as the provider of her health care. Moreover, the Court found that there was compelling evidence that the plaintiff reasonably relied on the HMO as her provider where the HMO contracted with the plaintiff’s employer to be her sole provider to the exclusion of others and then restricted the plaintiff to its chosen physicians. The Court stated that “HMO’s should not be allowed to hold themselves out as total providers of health care and then seek to avoid liability based on [an independent contractor disclaimer clause].” (4)

There is surprisingly little case law in Massachusetts on the liability of HMO’s for the negligence of their participating physicians under the theory of apparent authority. In Chase v. Independent Practice Association, Inc., 31 Mass. App. Ct. 661 (1991), the plaintiff unsuccessfully alleged that her HMO, Valley Health Plan, and an independent practice association (“IPA”) were liable under apparent authority for the alleged negligence of a physician within the practice group. IPA, which contracted with her HMO to arrange for health services for HMO members, entered into an agreement with Hampden County Gynecological and Obstetrics, Inc. (“HCGO”), whereby HCGO would provide professional services to the HMO members. The court held that there was no factual basis to support apparent authority where the patient merely alleged that she was unaware that her physicians were not employed by her HMO. The court reasoned that there would have to be a showing that the plaintiff relied on representations made by the HMO or IPA that the physicians were employees or agents. Therefore, the court found that without more, neither the HMO or IPA were liable.

III. ERISA Preemption

Where HMO benefits are provided by the patient’s employer, an HMO defendant may contend that state-based medical malpractice claims are preempted under § 514 of the Employee Retirement Income Security Act (“ERISA”) insofar as they relate to the employee benefit plan. 29 U.S.C. § 1144(a). The Supreme Court’s decision in N.Y. State Conference of Blue Cross & Blue Shield v. Travelers Insurance Co., 514 U.S. 645 (1995), sets forth a test that differentiates permissible suits based on quality of care issues from those that are preempted because they essentially allege a failure to provide certain benefits. In the wake of Travelers, when the claim is that the plaintiff was harmed by a denial of benefits, courts have uniformly dismissed the complaint.(5) If, however, benefits have been provided, but the quality of care is at issue, the courts have rejected the preemption defense. For example, in Lancaster v. Kaiser Health Plan, 958 F. Supp. 1137 (E.D. Va. 1997) the court held that the medical malpractice claim for failure to diagnose, and the vicarious liability claims were outside the scope of ERISA because they focused on medical decisions and the quality of the care provided. However, the direct negligence and fraud claims concerning the establishment and concealment of financial incentive programs awarding physicians for not ordering tests fell within ERISA. The court reasoned that these claims challenged administrative decisions that had the effect of denying benefits, falling squarely within the scope of ERISA preemption.

Following Travelers it has become increasingly clear that the nature of the plaintiff’s allegations will generally determine the outcome of the ERISA preemption defense. In Danca v. Emerson Hosp., 185 F.3d 1 (1st Cir. 1999), the First Circuit affirmed the lower court’s decision to dismiss the plaintiff beneficiary’s claim of negligence against her insurer and utilization review administrator. The plaintiff, who had a long history of mental illness, had been recommended by her physician to seek inpatient psychiatric care at McLean Hospital. The utilization review administrator denied the plaintiff’s request. The plaintiff later attempted suicide, allegedly the result of inadequate care. The plaintiff filed suit, alleging that the defendants (1) failed to follow the physician’s recommendations and (2) failed to ensure that competent personnel were overseeing the request. The court found that the alleged conduct was “indisputably part of the process used to assess a participant’s claim for a benefit payment under the plan,” and, therefore, the claim was completely preempted by ERISA. The court continued by stating that although it “recognized that the allegedly negligent decision making and consultation . . . may be characterized as medical in nature, this fact alone does not remove the state causes of actions from the scope of § 502(a).” See also Turner v. Fallon Community Health Plan, 127 F.3d 196 (1st Cir. 1997) (dismissing plaintiff’s claim against HMO where claim for denying bone marrow transplant benefits clearly “related to” the benefit plan); Nascimento v. Harvard Community Health Plan, 1997 LEXIS 166 (Mass. Super. Ct. Sept. 26, 1997) ( tort claims capable of resolution without reference to the health plan’s terms not preempted but breach of contract claims were preempted).

In a scathing indictment of the over-reaching effects of ERISA preemption, Judge William Young of the United States District Court for the District of Massachusetts implored Congress to amend ERISA’s civil enforcement provision to allow recovery against utilization review providers and insurers. SeeAndrews-Clarke v. Travelers Ins. Co., 984 F. Supp. 49 (D. Mass. 1997) (plaintiff without remedy due to ERISA’s preemption of state law breach of contract claims where the decedent was in need of detoxification and rehabilitation benefits).

The distinction between a claim involving the denial of benefits and the negligent provision of such benefits remains unsettled. Furthermore, the preemption clause and the limited remedies under ERISA often leave plaintiffs without a remedy. However, in In re U.S. Healthcare, Inc., 193 F.3d 151 (3d Cir. 1999), the Third Circuit limited the application of the preemption defense. In this case, the day after the deceased child was released from the hospital, and two days after she was born, the plaintiffs noticed that she was ill. They contacted the HMO, requesting an in-home visit by a pediatric nurse, but no such nurse was provided. The District Court ruled that this claim fit within the scope of § 502(a) of ERISA, covering claims “to recover benefits due” under the plan, and was therefore completely preempted. The Third Circuit reversed the District Court, holding that an HMO’s alleged negligence in failing to provide an in-home visit by a pediatric nurse was not completely preempted. The Court explained that the lower court was not “unreasonable” in its holding and that the question was a “close one.” However, it continued by finding that the HMO’s failure to provide an in-home visit supported a claim of adequacy of care and is therefore directed toward the HMO’s action in its capacity as a medical provider, rather than as a benefits administrator. More specifically, the Court characterized the HMO as an “arranger of medical treatment,” determining the appropriate level of care rather than simply a plan administrator determining what benefits are appropriate. The Court concluded that “the mere fact that the [plaintiffs] referred in their complaint to a benefit promised by their health care plan does not automatically convert their state-law negligence claim into a claim for benefits under ERISA.” Id. at 164.

The Third Circuit’s opinion in In re U.S. Healthcare is “instructive in clarifying that the particular role an HMO assumes may determine whether the complete preemption provision of ERISA is implicated.” SeeTiemann v. U.S. Healthcare Inc., No. CIV 99-5885, 2000 WL 62304 at *10 (E.D. Pa. Jan. 11, 2000) (applying the Third Circuit’s opinion).(6) The HMO “may have assumed both the role as a plan administrator and the separate role as a provider of medical services.” In re U.S. Healthcare, 193 F.3d at 162. Thus, the nature of the role the HMO assumed, and its relationship to the plaintiff’s claim, may be dispositive of the ERISA preemption issue.

IV. Conclusion

In light of the case law that has developed in the past few years, practitioners may reasonably expect the courts to continue to grapple with issues of corporate and managed care liability and ERISA preemption. In addition, federal and state legislative bodies will continue to examine these issues, and may pass new legislation or amend existing legislation in ways that may expand institutional accountability for medical errors. Therefore, practitioners must constantly examine judicial and legislative developments to ensure that they remain abreast of this evolving arena.

In Massachusetts, where charitable immunity precludes many claims against institutional defendants, institutional accountability for medical errors is seriously lacking. As our health care is strictly managed by both HMO’s and ever-expanding hospital-based collaboratives, the true definition and purpose of “charity” in health care is becoming increasingly disingenuous. This fact, combined with a growing discord among health-care consumers and a new legislative focus on patient’s rights create a climate ripe for positive change. It is a mere matter of time before the Massachusetts appellate courts are challenged by patients to (once again) abrogate charitable immunity, deny ERISA preemption, or adopt apparent agency as a viable cause of action.


1. See Copithorne v. Framingham Union Hospital, 401 Mass. 860 (1988).

2. Vicarious liability under the theory of apparent authority does not attach if the patient knew or should have known that the physician providing treatment was an independent contractor. See Gilbert v. Sycamore Mun. Hosp., 622 N.E.2d 788, 794 (Ill. 1993).

3. Justifiable reliance is not met if the plaintiff selects his or her own physician and simply looks to the HMO as a “conduit” through which the plaintiff receives medical care. Petrovich, 719 N.E.2d at 768, citing Gilbert, 622 N.E.2d at 796.

4. See also Sword v. NKC Hospitals, Inc., 714 N.E.2d 142 (Ind. 1999) (hospital vicariously liable for anesthesiologist’s malpractice based on apparent authority).

5. A beneficiary may bring an action pursuant to ERISA “to recover benefits due to him [or her] under the terms of his [or her plan],” 29 U.S.C. § 1132(a)(1)(B), or for equitable relief from a breach of fiduciary duty, § 1132(a)(3). See Marcello v. Healthsource NH, Inc. No. CIV 98-291-JD, 1999 WL 1059689 (D. N.H. May 19, 1999) (plaintiffs brought claim under ERISA against their HMO alleging that it failed to carry out the terms and provisions of their policy in good faith). However, no compensatory or other damages are recoverable under either of these sections.

6. Medical malpractice claims where the HMO employees’ actions were not solely administrative but also involved direct medical services will likely escape preemption. See Herrera v. Lovelace Health Systems, Inc., 35 F. Supp.2d 1327 (D. N.M. 1999) ( plaintiffs’ claims for medical malpractice, corporate negligence, and vicarious liability were not preempted by ERISA because the defendants were responsible for the design and delivery of medical services and the claim did not involve the administration, approval or denial of benefits under the plan); Blaine v. Community Health Plan, 687 N.Y.S.2d 854 (N.Y. 1998) (plaintiff survived motion to dismiss where HMO staff failed to provide a physician and to adequately supervise the physician’s assistant).

April, 2000