The corporate hospital shell game: hospitals often use a maze of contracts to claim that negligent hospital-based physicians are independent contractors. But the law provides a basis for hospital liability.

More than a third of the U.S. population seeks primary medical care through a hospital. (1) One reason is that the modern hospital is no longer just a building where nurses and doctors provide treatment. Rather, it is a sophisticated business operation competing for insurance and HMO dollars; a real estate entity bargaining for tax breaks while negotiating with doctors to exchange hospital laboratory services for long-term leases on physician suites and first refusal on federal patient programs at the hospital; and a highly leveraged arena of advanced technological equipment, from centrifuges and heart-lung machines to MRI equipment.

To serve these functions and meet the needs of patients, a modern hospital needs specialists, including doctors to interpret X-rays and pathology slides, anesthesiologists to sedate surgical patients, and emergency medicine physicians to evaluate and treat patients who come for emergency care. To patients, these workers appear to be hospital employees--an impression bolstered by phone directories, hospital Web sites, and billboards--but appearances can be deceptive. Hospitals have evolved into complicated networks of contracted and brokered services among physicians and technicians, whose agreements, contracts, and relationships with the hospital are largely unknown to patients.

Although the law and hospital regulations mandate functions for which hospitals are responsible (their nondelegable duties), huge hospital corporations often avoid liability by obscuring their connections to negligent staff, including declaring negligent doctors independent contractors. Plaintiff lawyers must provide courts with the evidence supporting the legal bases for hospital liability.

Hospitals contract with emergency department administrators, who in turn contract with emergency physicians and midlevel providers. Hospitals have contracts with national pathology labs, which have individual pathologists and cytopathologists under contract. Hospitals also have agreements with anesthesiology services, which are responsible for staffing the operating room with anesthesiologists and certified registered nurse anesthetists. And they have complicated service agreements with radiologists, myriad per patient/per diem/per resident agreements with teaching hospitals, and contracts with drug companies for clinical volunteer studies.

All these agreements involve exclusivity. Thus, hospitals effectively select the health care providers who see patients. Patients assume that all of the hospital's functions, equipment, and specialists are part of the "hospital health care package," and, as a practical matter, they are.

The law has historically lagged behind the advancing intricacies of contracts, limited liability corporations, mergers, and agent identities. But opposition to the independent contractor defense is gaining ground. As one writer noted, "If the law does not make good sense, it probably is not good law. Such is the situation when considering the application of the 'independent contractor' defense to hospital-based physicians and physicians who have exclusive contracts with hospitals to provide services within the confines of the hospital." (2)

Some courts have pierced the veil of independent contractor assertions. In one case upholding the plaintiff's right to sue a hospital, the South Carolina Supreme Court observed:

   Today, hospitals compete aggressively in
   providing the latest medical technology
   and the best facilities, as well as in attracting
   patients and physicians who will funnel patients
   to them. Hospitals not only strive to
   be a source of pride in the local community,
   but they also seek to avoid operating at a
   financial loss. Regardless of whether they
   are profit-seeking enterprises, they are run
   much like any large corporation and must
   operate in a fiscally responsible manner.
   Like any business dependent upon attracting
   individual people as customers, hospitals
   in the aggregate spend billions to advertise
   the facilities and services in a variety
   of media, from newspapers and billboards
   to television and the Internet. (3)

The court held that there was a genuine issue of material fact regarding whether the injured plaintiff had selected the emergency department and its staff based on the hospital's ads offering these services to the public as its services. The court posed a classic estoppel paradigm, implying that if the plaintiff had gone to the hospital on the basis of its advertising, the hospital could be held liable, even though it claimed the doctor was not an employee.

When a patient is injured by negligent medical care in a hospital, plaintiff lawyers can consider six potential liability theories. Three are based on direct liability:

* Respondeat superior, where the physician or midlevel provider is an employee of the hospital, a situation enjoying a limited renascence;

* Negligent credentialing or corporate liability for the hospital's decisions to offer particular physicians' services and procedures without ensuring that the physicians and midlevel staff have sufficient training and experience;

* Understaffing, resulting in inadequate nursing care, delays in anesthesia and emergency coverage, or fatal delays in surgical and obstetrical care.

In addition to these three areas of direct hospital liability, three areas of indirect, or vicarious, liability exist: estoppel, joint venture, and nondelegable duty. (4)

Estoppel

When the hospital, by its actions or inaction, leads patients to believe that a physician, therapist, or midlevel provider is employed by the hospital, courts have applied agency law principles to hold the hospital responsible for the provider's conduct, as if the provider were an actual employee. (5)

The hospital's advertising, or "holding out," the provider's services is the essence of this apparent agency. Based on traditional agency principles, the hospital will be estopped from denying the relationship and will be held vicariously responsible for the provider's negligence.

To support a negligence claim under an estoppel theory, the plaintiff must show that

* the hospital was holding out to the public the particular service in dispute

* the plaintiff looked to the hospital, not an individual provider, for care

* a reasonable person in similar circumstances would have believed the provider was a hospital employee.

Evidence of apparent agency includes the following:

* press releases; advertising via billboards, brochures, trade publications, and the Web; and other public statements in which the hospital holds out that it is providing the service

* hospital Web sites portraying the medical staff and hospital as one entity or including a directory for locating "one of our physicians"

* lab coats, scrubs, or hospital uniforms worn by nurse practitioners or physicians bearing the hospital name, regardless of whether the wearer is an employee

* badges bearing the hospital logo worn by employees, as well as hospital-based physicians and technicians

* health seminars, screening events, and wellness days held at the hospital and advertised by it as using "our hospital staff' or "our physicians"

* links between the hospital Web site and particular physician Web sites

* doctors' offices located either in the hospital building or in a building on the campus bearing the same name, suggesting that they are all one entity

* the doctor's curriculum vitae listing the hospital under "employment"

In addition, the financing of hospital ads or Web sites may lead to helpful information. Discovery of ad agency files, public relations consultant records, and Web site preparation records, for instance, can point to efforts to create the impression that the doctors and the hospital are one entity. Find out if the "independent contractors" provided or approved the information published about them on the Web site or billboard.

Joint venture

A joint venture is an association of people or legal entities that intend to engage in business for joint profit. Each party contributes capital, skill, labor, licensing, resources, or knowledge not possessed by the others. (6) However, they do not create a separate partnership or corporation. The intent may be written, but it can also be implied.

Generally, a joint venture is established by the following elements of proof, although these are not uniform throughout the states:

* community of interest in a common purpose

* shared right of control

* joint proprietary interest or joint investment

* a right to share in profits

* a duty to share in losses

The sprawling enterprise that is the modern hospital cannot attract patients without services provided by laboratories, fitness and rehabilitation therapists, diagnostic imaging providers, and physicians, among others. Contracts or letters of agreement--even hospital bylaws and rules and regulations--will state that the hospital provides the facilities, equipment, support staff, and even advertising or public relations efforts and perhaps insurance coverage and per-diem stipends. The hospital-based physicians, staffing corporations, and technicians provide the licensure, knowledge, demand for laboratory services, and expertise to treat patients.

If the venture is a success, the physicians, their corporations, the technicians, midlevel staff, and the hospital reap the financial rewards. On the other hand, if not enough patients come to the hospital for care, all the participants suffer the financial consequences.

No part of a joint venture should escape liability for one participant's negligence when all have agreed to pool resources and share profits. Even though the various participants may call themselves corporations and independent contractors, their business practices can show that they are, in fact, a joint venture.

Look for written evidence of how the participants agreed to manage liability. Usually, each is required to carry liability insurance at a certain level (joint venture protection) and must agree to indemnify the others and to provide shared legal counsel. Also, contracts or agreements among the hospital, the professional practice corporation, the service broker that agrees to operate the emergency department, and the physicians show the means by which these participants intend to function.

Advertising expenses, including those related to the hospital's Web site, can show that the participants share a common budget for a common purpose. A hospital often uses part of its marketing budget to advertise "its" emergency medical services for the benefit of an "independent" professional corporation of emergency physicians because both parties share an interest in attracting patients. The physicians' and practice groups' ad budgets and activities can be telling, too.

In a joint venture, control or right of control is reciprocal. Doctors enter orders for hospital employees to perform lab work, monitor patients, or administer medications. Doctors also have agreements to supervise midlevel providers, who may be hospital employees. On the other hand, the hospital's credentialing requirements, billing services, and risk-management procedures give the hospital the ultimate control and responsibility over a physician's conduct.

Discovery should be directed toward any financial incentives for hospital-based physicians that relate to supervision of other doctors or patient care. For example, one can discover contracts for the doctor to serve as a department chair responsible for peer review and record-keeping in exchange for a stipend per meeting or per month, or contracts to serve as a medical director of an inpatient unit.

The latter may provide that the physician, who maintains his or her private practice outside the unit, is paid a fixed amount per month per patient for all patients in the unit and an additional stipend for each individual patient visit conducted in the unit. The doctor's curriculum vitae may also list the hospital as his or her employer.

Billing procedures can also tell an interesting tale. Sometimes, the hospital provides either a billing service for the doctor or doctor's group, or all billings (hospital staff, pharmacy, doctor, and group) are processed through yet another "independent contractor" whose services are part of a single separate contract with the hospital. In addition, hospitals often form purchasing committees for new equipment, consisting of the administrator, support staff, and physicians.

Follow the money in the joint venture, separating charges by the hospital and physician group for services and equipment that can only be used together; charges for liability insurance as a prerequisite to participate in the venture; and charges for legal services and for indemnity.

Other shared necessities can also show pooling of resources, including laundry services for uniforms, supply services for offices, and even big-ticket items such as office space, equipment, computers, and access to the hospital's computer network and staff.

These areas of inquiry can be expanded. The practical necessity and economic reality is that relationships among a hospital and healthcare providers are often so interconnected that exposing these details clearly documents a joint venture.

Nondelegable duty

A nondelegable duty is one whose proper performance cannot be delegated to another to avoid responsibility. Duty can be separated from performance, however. One who has a nondelegable duty can assign the performance to another but retains the duty to see that the performance is prudent.

Under the law of nondelegable duty, a party has an obligation to perform those acts or duties in a nonnegligent manner. Where a hospital, for example, has a statutory duty to provide physicians or to supervise midlevel staff members, the hospital is legally responsible for the care they give. (7)

State licensing laws and enabling regulations establish minimum standards for the operation of hospitals and surgical centers; they also differentiate levels of care and minimum staffing at community hospitals and regional centers. A regional high-risk perinatal center, for example, must always have anesthesia ready in-house, but a community hospital may be required only to have anesthesia "available."

Hospitals select specialists to satisfy the statutory requirements. A plaintiff lawyer can argue that the hospital has a nondelegable duty to provide prudent anesthesia, surgical, or neonatal services and is liable for the negligence of the "independent contractor" who performed the services.

Likewise, federal statutes, including the Emergency Medical Treatment and Active Labor Act (EMTALA), (8) create a nondelegable duty from which liability can arise. The hospital and its physicians and staff who transfer a patient before stabilizing her, for instance, are liable through EMTALA.

Likewise, participation in the Medicare program requires that the hospital accept responsibility for the services it furnishes, regardless of whether there is a contract for those services. (9) A governing body must ensure that any services performed in the hospital under a contract are provided safely and effectively.

Evidence supporting liability can be developed by deposing the hospital's Medicare billing clerk and the chair of the review committees responsible for ensuring Medicare compliance. Also obtain the hospital's list of all contracted services (the list is required by Medicare (10)) and depose the medical director and hospital administrator about supervision of the providers. This discovery puts the hospital between the rock of legal liability and the hard place of Medicare funding jeopardy.

The most compelling argument for liability emerges when the patient's circumstances are considered. Hospital patients often have no choice of caregivers or therapies, no "playbill" to help them distinguish among the hospital's characters, and no understanding of the business relationships among health care providers. Patients know only that they need care, often urgently.

One New York court summarized well this rationale for holding a hospital responsible for its emergency physicians:

   Here, we are faced with the situation of injured
   or ill patients in need of emergency
   medical treatment. Realistically, a person
   has no meaningful choice under the circumstances.
   He needs treatment and will
   turn to his local hospital to provide it regardless
   of prior notice that the physicians
   are independent contractors. The patient
   thinks of "Lakewood Hospital" in his time
   of need, not the West Shore Medical Care
   Foundation [the independent contractor].
   ... Given the relationship of the emergency
   room to the full-service hospital, and the crisis
   circumstances under which people seek
   emergency treatment, public policy requires
   that the hospital not be able to artificially
   screen itself from liability for malpractice
   in the emergency room. (11)

Although many states have not seen through the fictions that large hospital corporations can create on paper, the legal foundation for liability is unquestionably sound. Recognizing the corporate shell game for the scam that it is makes good public policy in the interest of patient safety: Imposing tort liability on all the players will bring a higher quality of care for all patients.

Notes

(1.) See INST. OF MED., TO ERR IS HUMAN: BUILDING A SAFER HEALTH SYSTEM (L.T. Kohn et al. eds, 2000); David Keepnews & Pamela Mitchell, Health Systems' Accountability for Patient Safety, 8 ONLINE J. ISSUES IN NURSING (Sept. 30, 2003).

(2.) Tom Masterson, Establishing the Hospital's Vicarious Liability for Hospital-Based Physicians, 2002 ATLA ANNUAL CONVENTION REFERENCE MATERIALS, available at www.exchange. atla.org (search for "Masterson" under "CLE Materials") (last visited Mar. 30, 2006).

(3.) Simmons v. Tuomey Reg'l Med. Ctr., 533 S.E.2d 312, 316-17 (S.C. 2000).

(4.) For a deeper exploration of how understaffing leads to malpractice injuries, see S.H. Cho et al., The Effects of Nurse Staffing on Adverse Events, Morbidity, Mortality and Medical Costs, 52 NURSING RES. 71-79 (2003).

(5.) See, e.g., Hardy v. Brantley, 471 So. 2d 358, 371 (Miss. 1985); see also RESTATEMENT (SECOND) OF TORTS [section] 429 (1966). Comments to [section] 429 also apply it to situations where a patient is unable to consent to treatment and a spouse or parent accepts services for the patient based on the belief that the services are being provided by an employee.

(6.) Mango v. Reyka, 507 So. 2d 1211, 1213 (Fla. Dist. Ct. App. 1987).

(7.) See Jackson v. Power, 743 P.2d 1376, 1384-85 (Alaska 1987).

(8.) 42 U.S.C. [section] 1395dd (2004). EMTALA is also known as [section] 1867 of the Social Security Act as well as [section] 9121 of the Consolidated Omnibus Budget Reconciliation Act of 1985.

(9.) 42 C.F.R. [section] 482.12(e) (2005).

(10.) 42 C.F.R. [section] 482.12(e) (2) (2005).

(11.) Martell v. St. Charles Hosp., 523 N.Y.S.2d 342, 351 (Super. Cr. 1987).

LINDA MILLER ATKINSON, a partner in Atkinson, Petruska, Kozma &Hart, practices law in Channing and Gaylord, Michigan.