Are HMOs liable for acts of independent contractor physicians?

HMOs, particularly IPA models, have viewed themselves as largely insulated from their contracting physicians' negligence under legal doctrines concerning independent contractors. Under those traditional notions, a master could be held liable for its servant's acts undertaken within the scope of employment, but an employer generally would not be held responsible for the acts of independent contractors. However, a recent case decided by the United States Court of Appeals for the District of Columbia Circuit, Schleier v. Kaiser Foundation Health Plan, demonstrates that there are limitations on the independent contractor defense that must be considered by all health care providers.

Mr. Smith, the patient in the Schleier case, was a paid subscriber of the Kaiser Foundation Health Plan, a group model health maintenance organization whose physicians are generally its employees, but that uses the services of consulting physicians. Complaining of abdominal pain, Mr. Smith first was treated at a Kaiser clinic. Two months later, still experiencing stomach pain, Mr. Smith spoke with a Kaiser nurse.Two days after that, after he had a 45-minute episode of radiating chest-shoulder pain, Kaiser referred Mr. Smith to the emergency department of a local hospital. An ECG administered there was inconclusive as to whether Mr. Smith had suffered a heart attack, but a Kaiser staff physician admitted him to the hospital's coronary care unit.

The next day, Dr. Sherber, a cardiologist who was an outside consultant, not a Kaiser staff member, was brought in to examine Mr. Smith. Dr. Sherber initially concluded that Mr. Smith had not suffered a heart attack, but he scheduled additional tests, including a MUGA test to measure the heart's contractibility and pumping ability and a stress ECG.

Dr. Sherber found the MUGA test results normal but the stress ECG results abnormal. He nevertheless concluded that it was not likely that Mr. Smith had coronary heart disease, and he did not recommend any further testing or any curtailment of Mr. Smith's activities.

Following Dr. Sherber's exam, Mr. Smith complained to Kaiser physicians of profuse night sweats but was told, on the basis of his medical charts, that the sweats were not cardiac related. Several weeks later, after a day of household chores, Mr. Smith became weak and exhausted. The next day he complained of nausea and sweats. Another call to Kaiser proved futile, and an ambulance was called. Mr. Smith lost consciousness, stopped breathing, and died en route to the hospital.

Mr. Smith's wife, having obtained medical evidence that night sweats could be a symptom of severe coronary artery disease, asserted that Dr. Sherber was negligent in his diagnosis and treatment. However, the estate did not simply bring an action against the physician. It sued the HMO as well, and the jury in the case returned an $825,000 verdict against Kaiser.

In seeking a directed verdict, Kaiser had argued unsuccessfully that it could not be held vicariously liable for the negligence of Dr. Sherber because he was an independent contractor. On appeal, the Circuit Court found this contention "insubstantial." The court upheld liability without rejecting the idea that Sherber was indeed an independent contractor. The court ruled that the requisite "masterservant" relationship existed between Kaiser and Dr. Sherber, based on consideration (though not necessarily on the applicability) of five factors:

* Selection and engagement of the servant.

* Payment of wages.

* Power of discharge.

* Power to control the servant's behavior.

* Whether the work is part of the regular business of the employer.

While the evidence was inconclusive on certain aspects of the relationship, the appellate court found that Kaiser had sufficient control over Dr. Sherber; Dr. Sherber was working under Kaiser physicians, Kaiser could discharge him, and Dr. Sherber's activities fell within the scope of Kaiser's regular business function. The court adopted the reasoning of a Maryland case in which a hospital was held table for its emergency department doctors, even though they were independent contractors.

The court further opined that, because Dr. Sherber was brought in to consult with Kaiser physicians, Mr. Smith had every reason to believe that the doctor was a Kaiser agent and that the referral clearly fell within the scope of Kaiser's normal business. Based upon an amalgam of these factors, the court easily satisfied itself "of Kaiser's liability for Sherber's negligent treatment of Smith."

The Schleier case is significant for HMOs of any model and for hospitals. It is difficult to conceive of a situation in which a referring entity would not be the recipient of reports from a physician to whom a referral is made or in which the referring entity could not terminate the services of such a physician. Nor, inasmuch as health care is the normal business of any referring entity, would a referral be made outside the scope of regular business.

The upshot of Schleier is that, in the District of Columbia or anywhere else where the precedent is followed, the traditional protection as to independent contracting physicians may not be very much protection at all.