Recent decisions have greatly expanded the potential liability of HMOs and other Medical Care Organizations (MCOs) for actions where negligence is alleged. While this new line of decisions implies that the judicial system is catching up to the reality of the healthcare delivery system, the same cannot be said when the conduct complained of is not based in negligence. In fact, both the Illinois Supreme Court and the United States Supreme Court have refused to expand liability when the conduct complained of is breach of fiduciary duty or misrepresentation. The following is a brief explanation of the recent decisions.

In May 1999, the Illinois Supreme Court handed down its decision in Petrovich v. Share Health Plan finding that an HMO may be held vicariously liable for the negligence of its independent contractor physician under the doctrines of implied and apparent authority. This decision was groundbreaking because vicarious liability generally does not apply where an independent contractual relationship exists. A finding of apparent or implied authority, however, overcomes the bar created by the independent contractual relationship and permits plaintiffs to hold HMOs liable for the conduct of a plan physician.

Apparent authority is best described as the authority the physician appears to be given by the HMO. Under this doctrine, a principal is bound not only by the authority it actually gives to another, but to the authority that it appears to give. As such, the court examines the steps the HMO took to inform the patient about that relationship. In addition, the court determines whether the patient went to the HMO to obtain medical care and not because the patient wanted to be treated by that particular physician.

Implied authority is defined as actual authority, circumstantially proven and it is determined by the degree of control the HMO has over a physician. The greater the control, the more likely the HMO will be found liable under this theory. In Petrovich, the defendant HMO argued that medical decision making was entirely left to the physician. The court disagreed and found that Share Health Plan controlled that process by implementing a capitation rate which punished physicians who provided “too much” care. In addition, the court found that the HMO was involved in medical decision making by requiring a group member to obtain a referral from a plan internist prior to seeing a plan specialist. Finally, the plan influenced medical decision making by its policy of annual chart review, done ostensibly for the purpose of determining if “appropriate care” was provided. In that regard, the court noted that “appropriate” medical care could mean cheaper care, as contended by the plaintiff. The overall effect of these methods negated the independent contractor status of the defendant plan physician and thereby permitted the HMO to be held vicariously liable for the defendant physician’s negligence.

The impact of the Petrovich decision is still being felt as many physicians maintain independent contractual relationships with HMOs. In terms of litigation, the practical effect of the decision is that HMOs now face increased potential liability and it is more likely that they will be named as defendants in medical malpractice cases. The addition of more defendants in a medical malpractice claim is often beneficial to the individual physician because it could spread a potential verdict among the parties. Further, juries often view most HMOs as deep pockets and evil corporate entities who create headaches by unwanted and intrusive interference with their previously private relationship with their physicians. As such, we expect to see large verdicts in these types of cases. To combat this, HMOs are taking steps to avoid liability. In regard to apparent authority, HMOs are disseminating materials to plan members in an attempt to disclose the employment status of the plan physicians. Also, HMOs could insist on indemnity agreements in contracts with participating physicians or insist on being named as an additional insured on participating physicians’ malpractice policies.

The other major decision in this line of cases was made by the Illinois Supreme Court in Jones v. Chicago HMO in May 2000. The Jones decision is important because it provides a plaintiff the means to hold an HMO directly liable for injuries allegedly sustained due to the conduct of that entity. Before this decision, an HMO could only be found liable for medical malpractice if the liability was predicated on the negligence of a plan physician. In Jones, the Illinois Supreme Court extended institutional negligence to include HMOs. The doctrine of institutional negligence recognizes that HMOs have certain duties to their members. Most of those duties are managerial or administrative, such as arranging for and providing care for its members. In doing so, the HMO must conform with a standard of reasonable conduct in light of apparent risk. As such, the factual issue in a case based on this theory is whether the HMO was reasonably careful under the circumstances. In Jones, the Illinois Supreme Court permitted the plaintiff to maintain an action directly against the defendant HMO based on institutional negligence. It was reasonably foreseeable that the HMO’s assignment of too many patients to a member physician could result in injury to the plaintiff because the necessary care to an individual member could not be provided. In holding for the plaintiff the court quoted Petrovich by stating that HMO accountability is needed to counterbalance the HMO goal of cost containment and the inherent drive of an HMO to achieve profits.

The courts have been less receptive to claims not based on negligence. In Pegram v. Herdrich, the United States Supreme Court reversed the Seventh Circuit’s determination that a plaintiff could maintain an action against an HMO physician for breach of fiduciary duty to his patient where the physician had financial incentives to keep care costs of patients as low as possible. The court determined that “[e]very claim made by an HMO physician making a mixed decision (about the patient’s eligibility treatment under the HMO and the appropriate decision) would boil down to a malpractice claim, and the fiduciary standard would be nothing but the malpractice standard traditionally applied in actions against physicians.” The reasoning in that decision was recently adopted by the Illinois Supreme Court in Neade v. Portes which it handed down on October 26, 2000. In that case, the plaintiff’s estate alleged that the defendant physician was in breach of the fiduciary duty he owed to his patient because he failed to disclose his interest in the Medical Incentive Fund. That fund gave the defendant physician financial incentives to refrain from providing certain treatments. In dismissing the fiduciary duty claim, the court also noted the Illinois law has never recognized a cause of action against a physician for breach of fiduciary duty. In addition, it stated that the Illinois legislature has placed the burden on disclosing HMO incentive schemes on the HMOs themselves by the recently enacted Managed Care Reform and Patient Rights Act. That Act took effect January 1, 2000 and requires that managed care organizations disclose physician incentive plans to patients.

The Psychiatric/Legal Newsletter is published quarterly and is offered as a free service of Beranek, Feiereisel, Kasbohm & Hammer, 55 West Monroe, Suite 3400, Chicago, Illinois 60603, (312) 782-9255, to interested members of the psychiatric community.  The provision of the information contained within is informational only, and no attorney/client or other relationship is intended or inferred.

If you would like more information about the issues in the above article, or about Beranek, Feiereisel & Kasbohm & Hammer, please address your inquiries to Scott Hammer at shammer@bfkhlaw.com.

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