November 25, 2014
“Fee for service” health insurance plans in which insureds have complete freedom to choose their physicians and insurers exercise little control over physicians’ health decisions are now largely extinct. In an effort to control costs, insurers now offer coverage through managed care organizations (MCOs), a phrase that encompasses a variety of organizations designed to provide health care benefits while containing costs. MCOs manage costs by restricting members to a defined list of providers—sometimes called a “network”—from which the members may seek care. MCO’s relationship with the physicians who serve their members can take a variety of forms, ranging from direct employment to a contractual relationship in which independent physician’s agree to provide members services at a reduced costs.
The control MCOs exercise over the physician-patient relationship gives rise to disputes over the circumstances in which an MCO may be vicariously liable for negligence of their networks’ health care providers. The Maryland Court of Appeals, the state’s highest court, recently examined the factors courts will consider in deciding whether a physician’s negligence should be ascribed to an MCO in Bradford v. JAI Medical Systems Managed Care Organization, Inc., 93 A.3d 697 (Md. 2014).
Wilhelmina Bradford, a 54-year-old widow with an eighth-grade education, received her Medicaid benefits through Jai MCO, a managed care organization. Jai MCO does not employ its own health care providers. Instead, it contracts with physicians to provide health care services to its members. The physicians in Jai MCO’s sign an agreement acknowledging their status as independent contractors. Members choose their primary care physicians and specialists from a directory of physicians who have signed such contracts.
Ms. Bradford’s choice of a podiatrist to remove a bunion from the Jai MCO network directory turned out to be a catastrophic mistake. Due to the podiatrist’s failure to conduct thorough pre- and post-surgical examinations, plaintiff developed gangrene, resulting in partial amputation of her foot and a scar that runs from her right thigh to her ankle as the result of a bypass performed on her leg during the amputation procedure.
Ms. Bradford sued both her podiatrist and Jai MCO for malpractice. The trial court allowed the case to proceed against Jai MCO on an apparent authority theory after a default judgment was entered against the podiatrist. A jury found that the podiatrist was Jai MCO’s “apparent agent” and awarded plaintiff more than $3 million.
MCO May Be Liable for an Independent Contractor Physician’s Negligence under an Apparent Agency Theory
The Maryland Court of Appeals found insufficient evidence to support the jury’s award and, therefore, upheld an intermediate appellate court’s reversal of the jury’s verdict. However, the Maryland high court refused to adopt a categorical rule against imputing an independent contractor network physician’s liability to a MCO under an apparent authority or apparent agency theory. Relying on the Restatement (Second) of Agency § 267, the court held that in order to impose liability on a managed care organization (MCO) under an apparent agency theory for the negligence of an independent contractor physician’s medical malpractice, a patient must show that she had a subjective belief that the physician was the MCO’s agent and that her belief was objectively reasonable.
Insured’s Belief Not Objectively Reasonable
The Jai MCO physician network directory did not, in the court’s view, support a reasonable belief that physician’s listed in the directory were Jai MCO employees, given “the sheer number of physicians, the range of hospitals, medical centers and private offices, and the inclusion of entities such as Walmart, Giant Food, and Rite Aid on the list of network providers . . .” Nor did the circumstances of the podiatrist’s treatment of plaintiff. In contrast to cases holding hospitals liable for the negligence of independent contractor emergency room physicians, the podiatrist did not examine or treat plaintiff in or near any Jai MCO facilities. The initial examination of plaintiff’s foot and post-surgical follow-up took place in the podiatrist’s private offices and the surgery was performed at a hospital that was not part of Jai MCO’s network.
The court could have reached the same result under Restatement of Torts 2d, § 429, which provides:
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.
The reasonableness of the plaintiff’s belief is an element of both § 429 of the Restatement of Torts 2d and § 267 of the Restatement (Second) of Agency, on which the court relied.