As opposed to the art.


Each player probably means something different by the term “cost control.” Patients mean price; third-party payers mean cost.


Between 1960 and 1983, per capita health care rose from 5% to nearly 11% of the gross national product (GNP). E. Haavi Morreim, Cost Containment and the Standard of Medical Care, 75 Cal. L. Rev. 1719, 1720 (1987). In 1989, health costs consumed 11.6% of the GNP, up from 11.2% in 1988 and up by nearly a point in just three years. Health Law. News Rep., Feb. 1991, at 3; see also Clifford Ossario, Increasing Costs Are Pressuring the Entire Health Care Industry, 9 Whittier L. Rev. 197, 197 (1987). In 1989, total health care expenditures were $604 billion, up by $60 billion or 11% from 1988. Health Law. News Rep., supra, at 3. For most employers, health care expenditures are approaching 10% of payroll costs. Ossario, supra, at 197. In fact, the total worth of the Fortune 500 today is less than the commitment of those companies to health care expenditures for their retirees. Id. at 197-98.

These escalating costs have been attributed to several factors including price inflation, the graying of America, new technologies, and the growth in the number of hospitals. Morreim, supra, at 1720; William B. Schwartz, The Inevitable Failure of Current Cost-Containment Strategies, 257 JAMA 220 (1987).


There are many health care providers (e.g., nurses and chiropractors) to whom this same analysis applies. For the sake of simplicity, this Article refers only to physicians. Similarly, although there are many types of organizations that provide health care (e.g., hospices and nursing homes), this Article refers only to hospitals.


See infra part II.C.


See infra part III.C.


See infra part III.C.3.


While it is true that patients have never had complete control over health care decisions because of their lack of knowledge of the medical system and treatments available, patients exercise control when there are competing therapies with different risks and different outcomes, or when the cost of the preferred treatment exceeds a patient's financial capabilities. Managed care products would remove from the menu of options available to patients those therapies and treatments that the managed care products view as unnecessary.


See infra part III.B.


See infra part III.C.1.


This Article does not address tort liability for interference with the physician-patient relationship. This Article assumes that there has been no tortious interference but that there has nevertheless been injury.


See infra part IV. This Article is limited to a discussion of tort theories of liability. It does not discuss contract theories of liability.


See infra part IV.


29 U.S.C. §§ 1001-1461 (1988).


See infra part V.


Paul R. Torrens, Historical Evolution and Overview of Health Services in the United States, in Introduction to Health Services 3, 3 (Stephen J. Williams & Paul R. Torrens eds., 1980).


See William L. Dowling & Patricia A. Armstrong. The Hospital, in Introduction to Health Services 125, 127 (Stephen J. Williams & Paul R. Torrens eds., 1980).


Moderate-sized cities had almshouses, which were also called poorhouses. These institutions primarily provided food and shelter for the homeless. Medical care was generally only a secondary function. Pesthouses operated as quarantine stations for persons with contagious illness. Usually, mentally ill persons received care at home, at the almshouse, or at the jail. See, e.g., id. at 126-28.


Among the first voluntary hospitals were Pennsylvania Hospital, opened in Philadelphia in 1751; New York Hospital, New York City in 1773; Massachusetts General Hospital in 1816. Id. at 128. During the same time, governmental agencies established city, county, and state mental health hospitals, including ones at Williamsburg, Virginia in 1773; Lexington, Kentucky in 1817; and at Columbia, South Carolina in 1829. Id.


Id. at 127-28. Voluntary hospitals were run as private charities. They were generally crowded and dirty. Most of the persons using them had contagious diseases, and nurses were usually former patients. Unpaid physicians worked out of a mixed sense of charity and the opportunity to practice their cures. Doctors charged medical students for medical training, and the students worked without pay, practicing and learning on the poor. Steven R. Owens, Pamperin v. Trinity Memorial Hospital and The Evolution of Hospital Liability: Wisconsin Adopts Apparent Agency, 1990 Wis. L. Rev. 1129, 1131-32.


Dowling & Armstrong, supra note 17, at 128.




See Sylvia A. Law, Blue Cross: What Went Wrong? 6 (1974); see also Dowling & Armstrong, supra note 17, at 131.


The hospital industry developed the model state legislation necessary to create local nonprofit, tax-exempt corporations for prepayment of hospital services. See Law, supra note 23, at 6-9; Dowling & Armstrong, supra note 17, at 131.


See Paul Starr, The Social Transformation of American Medicine, 215-16 (1982) (describing organized medicine's resistance to health insurance because of the potential for insurers to place themselves between patients and physicians).




Id. at 216-17.


Id. at 306-09.


In 1980, the Blue Cross and Blue Shield plans provided surgical coverage to 74 million individuals while all other companies insured about 101 million. In 1984, commercial insurers collected $43.6 billion in premiums and paid $33.3 billion in claims. During the same period, the Blue Cross and Blue Shield plans had $39.9 billion in subscription income and paid $35.7 billion in claims. Therefore, the commercial insurers paid 76.3 cents in claims of each dollar they collected in premiums. The Blue Cross and Blue Shield plans paid 90 cents of each dollar. Sylvia A. Law & Barry Ensminger, Negotiating Physicians' Fees: Individual Patients or Society? (A Case Study in Federalism), 61 N.Y.U. L. Rev. 1, 7-8 n.31 (1986).


See Minutes of the Eighty-Fifth Annual Session of the American Medical Association, 102 JAMA 2191, 2201 (1934) (recommending that there be “no restrictions on treatment or prescribing not formulated and enforced by the organized medical profession”).


See J. Lundy, Health Insurance: The Pro-competition Proposals 4 (Congressional Research Service Report No. 81046, 1984). As part of employees' fringe benefits, most labor contracts now routinely include health care insurance. William B. Schwartz & Henry J. Aaron, Hospital Cost Control: A Bitter Pill to Swallow, Harv. Bus. Rev., Mar-Apr. 1985, at 160-61 (describing development of health care “payment system expressly designed to shield patients and providers from the cost of hospital care”).


Starr, supra note 25, at 313-15.


An indemnity benefit pays patients directly. The insurance company sets premiums based on risk experience, allowing it to charge lower premiums to groups of reasonably healthy people.


Blue Cross plans negotiated payment rates with participating hospitals. To the subscriber, the plans charged a single community-wide premium rating (community rating). The hospitals were guaranteed payments for the provision of selected services to the subscribers (service benefit).


Starr, supra note 25, at 331-34.


Congress established Medicare to provide medical care to the elderly. The patient's ability to pay was irrelevant. Social Security Amendments of 1965, Pub. L. No. 89-97, 79 Stat. 286 (codified as amended in scattered sections of 42 U.S.C.); see S. Rep. No. 404, 89th Cong., 1st. Sess. 4 (1965), reprinted in 1965 U.S.C.C.A.N. 1943, 1945-46.


Medicaid, a cooperative state-federal program, provides health insurance to income-eligible individuals and families. 42 U.S.C. § 1396 (1988).


Social Security Act, 42 U.S.C. § 13951(a) (1988). Reasonable charges are the lesser of the actual billed charge, the individual physician's customary charge, or the prevailing charge in the community. 42 C.F.R. § 405.502(a) (1993).


42 U.S.C. § 1302 (1988). The states' Medicaid payment levels to physicians may not exceed Medicare's reasonable charges. See Johnson's Professional Nursing Home v. Weinberger, 490 F.2d 841 (5th Cir. 1974) (upholding limitation of Medicaid payments to Medicare standard of reasonable costs). Regulations require physician reimbursement to be “sufficient to enlist enough providers so that services under the plan are available to recipients at least to the extent that those services are available to the general population.” 42 C.F.R. § 447.204 (1993).


Law & Ensminger, supra note 29, at 13. Under a fee schedule, Medicaid sets the fees that it will pay. Relevant to the range of physician fees, schedules can be set high, by using the higher physician fees, or low, by using the lower physician fees. States can adjust fees to account for the patient's diagnosis; the service provided; the physician's training, experience, and specialty; and whether the care was given in a hospital or an ambulatory setting. Id. at 12.


Id. at 13. Charge-based reimbursement bases the payment to the provider on recent historical charges by the individual provider and her colleagues. Private insurance calls this “usual, customary, and reasonable reimbursement (UCR),” and Medicare calls it the “customary, prevailing, and reasonable charge method (CPR).” Id. at 12. When insurance pays charge-based reimbursement, it pays the least of the provider's actual billed charge, the median amount that she customarily charges for that procedure, or some percent of customary community charges for the medical specialty and geographic locality. Id.


See generally Medical Technology Assessment: Hearings on H.R. 5496 Before the Subcomm. on Health and the Environment of the House Comm. on Energy and Commerce, 98th Cong., 2d Sess. 544 (1984) hereinafter Hearings on H.R. 5496; Office of Technology Assessment, U.S. Congress, Medical Technology and Costs of the Medicare Program 45-61 (1984) [hereinafter Costs of the Medicare Program].


Costs of the Medicare Program, supra note 42, at 23.


George J. Annas et al., American Health Law 131 (1990).


The fee-for-service system, euphemistically called the “free lunch” system, has delivered medical care without regard to cost containment and sometimes without regard to medical necessity. Under the fee-for-service system, third-party payers pay health care providers for each discrete item of service. In 1980, 50% of active physicians were compensated by fee for service, approximately 20% were salaried, and the remaining 30% received a mixed form of compensation. Sunny Yoder, Physician Payment Methods: Forms and Levels of Physicians Compensation, in Reforming Physician Payment: Report of a Conference 87, 88 (1984).


Under cost-based or charge-based reimbursement, third-party payers reimburse providers for most of the costs or charges incurred in treating covered patients.


Alexander M. Capron, Ethical Implications, Containing Health Care Costs: Ethical and Legal Implications of Changes in the Methods of Paying Physicians, 36 Case W. Res. L. Rev. 708, 715 (1986).


When insurance induces a person to use more medical care than she would use if she were paying for the services directly, then the insurance is a “moral hazard” with respect to the person's indifference to cost. Mark A. Hall & Ira Mark Ellman, Health Care Law and Ethics 8 (1990).


“Experience rating” means that the annual recalibration of premiums will reflect each insured group's actual claims experience for the prior period. Mark A. Hall & Gerald F. Anderson, Models of Rationing: Health Insurers' Assessment of Medical Necessity, 140 U. Pa. L. Rev. 1637, 1671 n.131 (1992). With experience rating, the insurer has less incentive to refuse payment because all amounts it pays are recouped in next year's premium increases.


See Capron, supra note 47, at 710-11 (stating that the payment system offers incentives for excessive intervention with overpriced procedures).


Kartell v. Blue Shield, 582 F. Supp. 734 (D. Mass. 1984) (testimony of John Larkin Thompson, president of Massachusetts Blue Shield); Law & Ensminger, supra note 29, at 14.


See supra notes 45-49 and accompanying text.


See supra notes 48-52 and accompanying text.


Corporate employers face increasing difficulty when competing in the international marketplace because of spiraling health care costs. Max W. Fine & Jonathan H. Sunshine, Malpractice Reform Through Consumer Choice and Consumer Education: Are New Concepts Marketable?, Law & Contemp. Probs., Spring 1986, at 213-14; Kenneth R. Wing, American Health Policy in the 1980's, 36 Case W. Res. L. Rev. 608, 672-75 (1986).


The spiraling health care costs are pushing governmental programs to the brink of disaster. For example, it is predicted that by the mid-1990s Medicare will face bankruptcy. Board of Trustees Report, A Proposal for Financing Health Care of the Elderly, 256 JAMA 3379, 3379 (1986). State Medicaid programs consume excessive portions of limited state funds. Morreim, supra note 3, at 1720.


See Jon Gabel et al., The Emergence and Future of PPOs, 11 J. Health Pol. Pol'y & L. 305 (1986). In 1989, private insurance and other private payers paid 37% of health care bills, government programs paid 42%, individuals paid 37% (premiums), and business paid 30% of the bills. Health Law. News Rep., supra note 3, at 3. During that year, 39% of the money went to hospitals, 19% to physicians, and 8% to nursing homes.Id.


Harold L. Bischoff, Utilization Review and Health Maintenance Organizations (HMOs) (1989) (unpublished fellowship thesis, American College of Healthcare Executives, on file with the University of Puget Sound Law Review).


See Alexander M. Capron & Bradford H. Gray, Between You and Your Doctor, Wall St. J., Feb. 6, 1984, § 1, AT 24; see also infra note 60 and accompanying text.


But see Tim Healy, High Stakes-For the Self-Insured- Health Costs Push Small Employers to Seek Alternatives, Seattle Times, Feb. 4, 1991, at B1.


Medicare classifies each patient's hospital admission into one of 468 diagnostic groups. Medicare then multiplies the average price and “weight” of the procedure to predetermine the reimbursement the hospital will receive for the care given the patient. Michael Tichon, Current Issues in Reimbursement: Medicare and Medicaid, 6 Whittier L. Rev. 851, (1984). From that payment, the hospital keeps, as profit, moneys not spent on patient care; alternatively, the hospital absorbs any loss. On the positive side, diagnosis-related groups limit hospitalization and the use of costly technologies. See Bruce C. Vladeck, Medicare Hospital Payment by Diagnosis-Related Groups, 100 Annals Internal Med. 576 (1984). However, profit or loss potential creates an incentive for hospitals to discharge patients earlier and perform fewer interventions. Some providers have begun to stabilize the effect by “unbundling” care. See generally Arnold M. Epstein & David Blumenthal, Physician Payment Reform: Past and Future, 71 Milbank Q. 193 (1993).


Bischoff, supra note 57, at 3.


Id. at 4.


Eliminating first-dollar coverage has had limited effect on most patients. In general, unless the deductible is very high, the patient merely incorporates into her decision making only that portion of health costs that she is required to bear. Thus, if the patient must bear the first $300, only that amount affects her overall health care decision making. Such behavior is rational and predictable. Consider how our eating habits would differ if we had to pay only one fifth of our food costs.


Despite the historical opposition by providers to risk shifting, the position of physicians and hospitals has been weakened by the current economic situation. One third of total hospital capacity is permanently idle, and patient days dropped from 280 million in 1980 to 240 million in 1984. By the mid-1990s, it is predicted that the number will drop to 120 million. There are now 2.2 physicians per 1,000 persons, 1.2 physicians more than needed. By the year 2000, it is predicted that we will have 1.5 more physicians than needed. Galen D. Powers, Allocation of Risk in Managed Care Programs, in Managed Health Care: Legal and Operational Issues Facing Providers, Insurers, and Employers, at 279 (PLI Commercial Law and Practice Course Handbook Series No. 393, 1986), available in Westlaw, TP-All File.


Carolyn M. Clancy & Bruce E. Hillner, Physicians as Gatekeepers: The Impact of Financial Incentives, 149 Archives Internal Med. 917, 917 (1989).


See infra part III.B.


The gatekeeping role is not new to physicians. They have used their position in several ways. For instance, physicians have used their authority as health care gatekeepers to resist hospitals' and insurers' efforts to influence medical treatment. Furthermore, they have generally used their role to obtain more services for the patient, not fewer. Now, however, they use their position to save money for third-party payers by ordering fewer services. See Starr, supra note 25 at 26-27; Capron, supra note 47, at 747. Thus, the fundamental change in the basic ethical concern of the system is revolutionary-from the “best interest of the patient” to “cost containment.”


Ossario, supra note 3, at 198; see Marc P. Freiman, Cost Sharing Lessons from the Private Sector, Health Aff., Winter 1984, at 85, 86.


For instance, insurance carriers increasingly attempt to identify inappropriate medical interventions. See, e.g., Capron, supra note 47, at 715.


Essentially, third-party payers reduce provider pay by refining current payment methods, using explicit fee schedules, or bargaining for prices. Refining current payment methods, because it involves only modifying the calculation of the fee paid, provides the least radical change in third-party payer reimbursement. Explicit fee schedules have been used for basic medical expenses, and use of the schedules for provider pay would merely extend their current use. The third-party payer pays the lesser of the actual fee or the scheduled amount for the service. Under an explicit fee schedule, the provider is paid directly. Id. at 718.


Third-party payers attempt to limit their payment for medical services by “bundling” services for reimbursement purposes. By using this payment method, third-party payers attempt to avoid the present excessive incentives to overtreat. Id. at 722.


See Bischoff, supra note 57, at 4-5.


Douglas D. Bradham, HMO and PPO Overview: History, Development and Definitions (Florida Bar 1989). There are five models of HMOs. The staff HMO model delivers services by a physician group that is employed by the HMO, with the hospital usually owned by the HMO plan. The group HMO model delivers services through an outside physician group under contract. Hospital services are usually contracted for as well. While the primary care network HMO model has multiple contracts with physicians, it is the primary care physician who controls all specialty referrals. The Individual Practice Association (IPA) HMO model delivers services through independent practices. These practices can be solo or group practices that have organized to pool the financial risk. The open-ended HMO allows enrollees to select services outside the HMO provider staff, network, or IPA, but coverage is at the traditional indemnity rate and is typically less comprehensive and more expensive than the HMO's standard package. Id. at 1.5-1.6. Methods of payment to a provider are based on the model used. Staff models use salary-based payment almost exclusively; IPA models use both capitation and fee for service; network models use capitation; group models are split among all three. See id.


Id. at 1.2.


Id. at 1.1. But see Sarah Glazer, The Failure to Contain Medical Costs, 2 Editorial Res. Rep. 510, 511 (1988) (giving Dr. Michael A. Shadid the credit for establishing the first prepaid group practice in 1927, also in Oklahoma).


Bradham, supra note 73, at 1.1. The Ross-Loss Health Plan is the oldest HMO still in existence. Milton H. Lane, Legal Relationships and Responsibilities in HMOs, Health Care Mgmt. Rev., Fall 1983, at 53.


Bradham, supra note 73, at 1.1.


Glazer, supra note 75, at 511 (quoting Starr, supra note 25, at 302).


For instance, in the 1930s, in response to a shortage of medical facilities for construction workers, Kaiser Health Foundation Plan originated an HMO in connection with the construction of an aqueduct near Los Angeles, California. The HMO started as a series of capitation agreements with area physician groups under which the group was paid $1.50 per month for each covered employee. As of March 1988, it was the largest prepaid plan in the United States with 4,904,768 members in five states. Jack F. Monahan & Michael Willis, Special Legal Status for HMOs: Cost Containment Catalyst or Marketplace Impediment?, 18 Stetson L. Rev. 353, 359 n.21 (1989).


Health Maintenance Organization Act of 1973, 42 U.S.C. §§ 300e-300aaa (1988). An HMO is defined under the legislation as an organization that provides health services to members in specific geographic areas in return for periodic, fixed prepayment. Id. § 300e. The prepayment is fixed without regard to frequency, kind, or duration of service. Id. § 300e(b)(1). An HMO must (1) assume full financial risk on a prospective basis for the services provided to its members; (2) maintain a “fiscally sound operation”; (3) protect its members from liabilities of the organization; and (4) provide commercial members a comprehensive package of health services, which was specifically prescribed in the legislation. Id. § 300e. Until the HMO Amendments of 1988, Pub. L. No. 100-S17, 102 Stat. 2578 (1988), HMOs were required to use community rate premiums for commercial members. Since 1988, however, HMOs are permitted to develop premiums on the basis of their revenue requirements for providing services to individuals and families of a group. 42 U.S.C. §§ 300e-300q (1988); 42 C.F.R. § 417.104 (1992). Finally, the HMO Amendments of 1988 require employers to make an equal contribution to HMO and other health benefit options and forbid employers to financially discriminate against employees who enroll in an HMO. 42 U.S.C. § 300e-9 (1988). Nothing, however, prevents an employer from financially discriminating against an employee who does not enroll in a managed care product.


Monahan & Willis, supra note 79, at 359.


The number of HMOs rose from 290 to 648 between 1983 and 1988, and enrollment expanded from 13.7 million to 31 million members, averaging a 25% increase per annum. Id. at 360 n.27.


Barry R. Furrow, The Changing Role of the Law in Promoting Quality in Health Care: From Sanctioning Outlaws to Managing Outcomes, 26 Hous. L. Rev. 147, 151 n.16 (1989).


Health Maintenance Organization Act of 1973, Pub. L. No. 93-222, 87 Stat. 924 (codified as amended at 42 U.S.C. § 300e (1988)). This Act delineates the requirements an HMO must meet to become federally qualified according to organizational structure, health care benefits, and the manner of conducting business. Though federal qualification is not intended to represent that the HMO is financially viable, qualification is necessary to receive federal subsidies under the Act. Compliance also serves as a means to demonstrate publicly that the HMO has complied with a federally uniform standard.


While the approach to legalizing HMO authority varied, some states required insurance providers to have a license to market their services. E.g., Tex. Ins. Code Ann. §§ 20A.03-20A.06 (West 1993); Wis. Stat. Ann. § 609.01(2) (West Supp. 1993). Other states required licensing to solicit members and operate. E.g., Knox-Keene Health Care Service Plan Act, Cal. Health & Safety Code §§ 437.02, .12 (West 1990). All states have generally exempted HMOs from state restrictions regarding the corporate practice of medicine. But see Williams v. Good Health Plans, Inc., 743 S.W.2d 373, 378 (Tex. Ct. App. 1987) (noting no liability for IPA because it could not practice medicine in Texas).


Robert B. Friedland, Introduction and Background: Private Initiatives to Contain Health Care Expenditures, in The Changing Health Care Market 15 (Frank B. McArdle ed., 1986).


Monahan & Willis, supra note 79, at 361.


See generally Cheralyn E. Schessler, Liability Implications of Utilization Review As a Cost Containment Mechanism, 8 J. Contemp. Health L. & Pol'y 379 (1992).


Greg de Lissovoy et al., Preferred Provider Organizations: Today's Models and Tomorrow's Prospects, 23 Inquiry 7, 7-8 (1986). Monetary incentives to the patient effectively obviate freedom of choice. If a patient is unable to pay the difference, she will have no choice but to utilize the preferred provider. Approximately 20 states have attempted to resolve this issue by passing laws that limit the reimbursement differential between PPO and non-PPO utilization. It is unclear whether such limitations protect freedom of choice, as the protection limits the effectiveness of managed care products. Norman Payson, A Physician's Viewpoint on PPOs, 6 Whittier L. Rev. 699, 699-705 (1984).


Peter Boland, Myths and Misconceptions About Preferred Provider Arrangements, in The New Health Care Market 500, 501 (Peter Boland ed., 1988).


Nine states (California, Florida, Indiana, Louisiana, Michigan, Minnesota, Nebraska, Virginia, and Wisconsin) have laws that permit prepaid health plans that limit choice of provider. Fifteen states have pending legislation. Congress is also considering legislation that would override state laws inhibiting managed care health plans. Capron, supra note 47, at 721 n.39.


De Lissovoy et al., supra note 89, at 7.


Of the 51 jurisdictions, only 20 states have a regulatory scheme for PPOs. E.g., La. Rev. Stat. Ann. §§ 40:2201-40:2205 (1992); Neb. Rev. Stat. § 44-4106 (1988); N.C. Gen. Stat. § 58-65-1 (1991). Some states have indirectly regulated managed care products. For example, Indiana enacted a law that forbids an insurer from unreasonably discriminating against providers not willing to meet the terms of the agreement offered to them. Ind. Code § 27-8-11-3 (1992). California forbids exclusion from membership based on the category of the license. Cal. Ins. Code § 10133.6 (West 1993).


A 1986 national survey of PPOs classified them as (1) hospital sponsored (including corporate hospital chains and joint sponsorships by hospitals and physicians); (2) physician sponsored (including physician groups); (3) commercial insurance sponsored; (4) Blue Cross/Blue Shield sponsored; (5) investor (entrepreneurial) sponsored; and (6) sponsored by other entities, such as union trusts. Cathy L. Burgess, Comment, Preferred Provider Organizations: Balancing Quality Assurance and Utilization Review, 4 J. Contemp. Health L. & Pol'y 275, 277 (1988).


Powers, supra note 64, at 290-91.


Id. at 290; see infra part III.B.


Initially, managed care products were perceived as a combination of providers offering discounts from customary charges and retrospective utilization review programs for medical procedures and ancillary testing. Richard A. Hinden & Douglas L. Elden, Liability Issues for Managed Care Entities, 14 Seton Hall Legis. J. 1, 2 (1990). Although a significant portion of the marketplace still views managed care as discount medicine, today's managed care products have evolved into entirely different entities where the organization actively sets the parameters of medical practice. Id. at 2-3.


Robert G. Stevens, Managed Care Plans and Participating Provider Agreements 3 (1991) (unpublished manuscript, on file with the University of Puget Sound Law Review).




One author has commented with dismay on the number of “inexperienced people” entering the “business” of managed care. Ossario, supra note 3, at 198.


Richard Blacker, Preferred Provider Organizations, 6 Whittier L. Rev. 691, 692 (1984).


Id. at 692-93. The fact that physicians control the managed care organization does not change the underlying analysis regarding liability. The underlying purpose to control cost remains and the physician's behavior will be essentially the same as other owners.


Id. at 693.






For example, on legal and operational issues facing providers, insurers, and employers, one commentator noted that changing physician practice patterns is more important than thwarting outliers. Joseph J. Martingale, Cost Containment Mechanisms: The Tools of the Managed Health Care Revolution, in Managed Health Care: Legal and Operational Issues Facing Providers, Insurers, and Employers (PLI Commercial Law and Practice Course Handbook Series No. 393, 1986), available in Westlaw, TP-All File. Outliers are services or patterns of practices that fall outside established norms. In general, outliers are statistical observations that are so far away from the rest of the sample that they should be disregarded in statistical calculations. See Thomas H. Wonnacott & Ronald J. Wonnacott, Introductory Statistics 417 (1972).


One recent study of 222 employers noted that utilization review efforts can reduce total medical expenditures an average of 8.3%. Bishoff, supra note 57, at 9 (citing Glenn Ruffenbach, Employers Can Cut Health-Care Costs With “Utilization Review,” Study Finds, Wall St. J., May 19, 1988, at A38). In 1988, another study concluded that nearly 10% of the 800,000 hospital Medicare admissions were not “medically justified.” Id. However, it may be that utilization review can provide only temporary relief and not a cure for increased costs. Id. at 10. That position would seem to be supported by employers' perceptions of the major obstacles to health care cost management: 76%-physician and hospital charges; 70%-costs of sophisticated medical technologies; 59%-an aging population; 49%-an inability to enforce medical performance standards; 42%-a failure of managed care to achieve projected savings. Only 37% and 30% respectively believed that utilization of outpatient care and utilization of inpatient care were major obstacles to health care cost management. Id. at 10. These perceptions would indicate that utilization review is a minor player in health care cost containment. Despite what may be a limited effectiveness of utilization review, the lack of a utilization management program or an inefficient system without supporting data probably disqualifies an entity from being a managed care system. Hinden & Elden, supra note 97, at 50-51.


Boland, supra note 90, at 503.


Pamela S. Bouey, Peer Review in the Managed Care Setting, in Managed Health Care 1988: Legal and Operational Issues (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in Westlaw, TP-All File.


Retrospective utilization management programs analyze data on hospital admissions, patterns of treatment, and utilization of certain procedures. See Bischoff, supra note 57, at 14-15 (providing examples of retrospective review).


Concurrent review (or length of stay certification) determines the medical necessity of a continued hospital stay. Hinden & Elden, supra note 97, at 52. A concurrent review is conducted by a nurse reviewing the patient's treatment plan. The nurse conducts the review at the hospital using established medical criteria. If the nurse judges the treatment plan to be appropriate, she approves the stay until the next review cycle or the patient is discharged. If she does not approve the treatment plan, the nurse refers the case to a physician advisor who either confirms the need for continued treatment or suggests alternate treatment. Bischoff, supra note 57, at 14.


Under a prospective review system, most nonemergency hospital admissions must receive prior approval and an initial approved length of stay is assigned. Hinden & Elden, supra note 97, at 52.


Preadmission review is a form of prospective review. Preadmission review determines the medical necessity of a scheduled inpatient admission, expensive procedures, or outpatient procedures. The initial determination is made by a nurse review coordinator using established criteria. A registered nurse usually conducts offsite preadmission certification. If there is a scheduled admission prior to hospitalization, the patient's physician completes a review form. She describes the patient's medical condition and the treatment plan, and forwards the form to the nurse review coordinator. The nurse notifies the physician, patient, and hospital of her decision regarding the appropriateness of admission and length of stay. Bischoff, supra note 57, at 13-14.


Admission review is a form of concurrent review. Admission review determines the medical necessity of unscheduled inpatient admissions or other admissions not covered by preadmission review. Most managed care products use admission review. The primary exception is hospitals that are paid based on diagnosis related groups.


Except by commercial insurers, second-opinion surgery is used much less often. In 1985, commercial insurers required second opinions in nearly twice as many programs as any other sponsor. De Lissovoy et al., supra note 89, at 11.


See supra note 111.


See supra notes 64-67 and accompanying text.


Retrospective review disallows payments of claims for utilization. Because retrospective review disallows payment after the service has been received, it is not as effective as prospective or concurrent review. Consequently, the use of retrospective claims review is declining. However, it is useful as a tool to research provider claims. For example, it would be useful in determining whether the objective laboratory data (e.g., biopsy) and subjective data (e.g., surgeon notes) are consistent with the length of stay or the length of surgery. See Bischoff, supra note 57, at 15. Consequently, retrospective review can be a very important tool in a managed care product such as an HMO.


See Annas et al., supra note 44, at 193.




42 U.S.C. §§ 1320c to 1320c-12 (1988); Annas et al., supra note 44, at 193.


Interestingly, some commentators believe that allowing the provider to do the utilization review is letting the “foxes guard the hen house.” Burgess, supra note 94, at 283-84. In reality, no review organization is independent. All review organizations are directly or indirectly concerned about encouraging overutilization or underutilization. Hospitals enter PPOs primarily to remedy a decline in patient volume, so they may not be inclined to conduct stringent utilization review, which might further reduce patient volume. De Lissovoy, supra note 89, at 9.


But see Linda L. Kloss, Quality Review and Utilization Management, in The New Healthcare Market 680, 684-85 (Peter Boland ed., 1988) (identifying potential advantages for a PPO that contracts with a hospital for utilization review).


While it is possible to have effective utilization review and high quality health care, without a focus on quality it is more likely that utilization review will work to the detriment of quality care. See infra part III.C.2.


Matthew 6:24.


Edmund D. Pellegrino, Rationing Health Care: The Ethics of Medical Gatekeeping, 2 J. Contemp. Health L. & Pol'y 23, 32-33 (1986).


See generally Capron, supra note 47, at 725; Paul M. Elwood, Jr., When MDs Meet DRGs, Hospitals, Dec. 16, 1983, at 62-63; E. Haavi Morreim, The MD and the DRG, Hastings Center Rep., June 1985, at 30, 34-35.


Rewards can be a predetermined fixed dollar amount, a fixed percentage of the surplus distributed among the risk pool, a bonus based on a physician's productivity, or a combination of methods. Alan L. Hillman, Financial Incentives for Physicians in HMOs: Is There a Conflict of Interest?, 317 New Eng. J. Med. 1743, 1746 (1987). The methods also include increasing fee schedules and allowing practitioners to become investors.


Third-party payers often provide for a portion of payments to providers to be withheld. Other mechanisms used to place the provider at risk include (1) increasing the percentage of payment withheld the following year, (2) placing liens on future earnings, (3) decreasing the amount of the capitation payment the following year, (4) excluding the provider from the program, (5) reducing the distributions from surplus, and (6) requiring providers to pay either the entire amount of any deficit or some set percentage of the deficit. Id. at 1745.


For example, approximately 40% of managed care products require primary care physicians to pay for outpatient laboratory tests directly out of their capitation payments. Id. at 1746. HMOs also use peer pressure as a significant motivator. They develop a reporting system that informs providers of their performance compared with that of their peers. The reporting identifies areas of excessive costs and service intensity. Bischoff, supra note 57, at 12-13.


Powers, supra note 64, at 289-90.


See Alan M. Gnessin, Liability in the Managed Care Setting, in Managed Health Care 1988: Legal and Operational Issues, at 405, 414 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in Westlaw, TP-All File.


A provider, or provider group, is paid a capitation fee per enrollee. The provider group then provides all necessary physician services. Primary care physicians are the gatekeepers to specialists and hospital services and are financially responsible for utilization. Because the amount of payment to the provider group is independent of the actual services rendered, the group takes on the risks of an insurer. Powers, supra note 64, at 298-99; Capron, supra note 47, at 726.


Managed care products can shift the risk by withholding part of the provider's periodic fee-for-service payments for a claim period. The managed care products usually withhold from 5% to 20%. At the end of a claim period, a medical claim trend is determined and compared to a target medical claim trend. If the actual medical claim trend is lower than the target, the withheld funds are paid to the providers. If the actual medical claim trend exceeds the target, the withheld funds are paid to the third-party payer. Powers, supra note 64, at 283-84, 300-301.


The managed care product assumes the risk that the third-party payer's premium will be sufficient to cover hospital charges. However, there is no participation by hospitals in profits of the managed care products. Third-party payers that contract with hospitals without a discount may pressure those hospitals for a discount, but discounted charges may be insufficient to cover the hospital's actual costs. Id. at 294.


Hospitals are paid a flat rate per patient per day, which must cover all necessary services. The advantage of per diem payments is that the hospital is not at risk for the length of stay. However, if the managed care product also has an emphasis on early discharge, the hospital's total income may be reduced. This reduction can occur when the predetermined per diem payments are too low for the hospital to cover its costs and the managed care product requires discharge of the patient before the hospital can break even by averaging cheaper end-of-stay days with the more expensive beginning-of-stay days. Id. at 294-95.


Barry S. Scheur & John H. Hoskins, New Concepts in Physician Reimbursement, in Managed Health Care 1988: Legal and Operational Issues, at 167, 177-78 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in Westlaw, TP-ALL File.


Case mechanisms are similar to diagnosis-related groups. See supra note 60. Based on the diagnosis, a predetermined amount is paid to the hospital for each admission. The hospital is then at risk for the treatment and the length of stay. Powers, supra note 64, at 295-96.


A hospital is paid a lump sum per enrollee in the hospital's service area to provide all covered hospital services required by those enrollees. Because the hospital's payments are independent of the actual services rendered by the hospital, the hospital assumes the role of an insurer. Id. at 296-97.


All methods of payment implicitly involve financial incentives. The fee for service method provides as much incentive to overutilize as withholding can provide to underutilize. Alan L. Hillman et al., How Do Financial Incentives Affect Physicians' Clinical Decisions and the Financial Performance of Health Maintenance Organizations, 321 New Eng. J. Med. 86, 86 (1990).


See supra note 60 and accompanying text.


See Capron, supra note 47, at 735-36 (noting the wide variations in treatment).


Id. at 749-50.


Id. at 750.


Hillman, supra note 128, at 1744.


Ossario, supra note 3, at 199-200.


Burgess, supra note 94, at 289 (quoting AMA Council on Medical Service, Quality of Care, 256 JAMA 1032 (1986) [hereinafter Quality of Care]).


Id. at 289 n.120 (quoting Quality Medical Care: Empiricism v. The Gestalt, in National Health Lawyers Association 1987 Health Law Update 1.3 (1987)).


Id. at 289 (citing Quality of Care, supra note 147, at 1032).


For instance, physicians reviewed the competence of their peers through state agencies and local medical societies. Similarly, hospitals monitored medical staff performance to maintain accreditation and minimize liability. Betsy A. Rosen, Comment, The 1985 Medical Malpractice Reform Act: The New York State Legislature Responds to the Medical Malpractice Crisis with a Prescription for Comprehensive Reform, 52 Brook L. Rev. 135, 144-45 n.49 (1986); see Quality of Care, supra note 147, at 1032.


See Wendy Parmet, The Impact of Health Insurance Reform on the Law Governing the Physician Patient Relationship, 268 JAMA 3468, 3468 (1992); Virendra Sayena, Putting Out the Flames that Threaten Medicine, Am. Med. News, Mar. 22, 1993, at 31, available in Westlaw, Hpd File.


See Burgess, supra note 94, at 288-91. This is in part due to the difficulty of defining and measuring quality. As a result, managed care products have had substantial flexibility in setting quality assurance standards. Id. at 292.




For instance, a California study found that for-profit hospitals had the highest rate of repeat Cesarean sections. Health Law. News Rep., supra note 3, at 5.


Burgess, supra note 94, at 292. In fact, insufficient financial incentives have been connected with the breakdown of several managed care products including SAFECO's United Health Care Experiment. See generally Steven S. Sharfstein, Financial Incentives for Alternatives to Hospital Care, 8 Psychiatric Clinics of N. Am. 449-60 (1985).


Maureen E. Corcoran, Liability for Care in the Managed Care Setting, in Managed Health Care 1988: Legal and Operational Issues, at 425, 427 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in Westlaw, TP-All File.




E.g., Morreim, supra note 3, at 1719 (arguing that the presumption of a unitary standard of care be refutable by appropriate evidence of economic constraints).


See infra part IV.


HMOs are required to administer comprehensive quality assurance to meet statutory and regulatory requirements. Burgess, supra note 94, at 289. Consequently, the National Committee for Quality Assurance (NCQA), incorporated in 1979, has established standards to measure HMOs. Id. at 289-90. However, those standards tend to be targeted on organizational issues and administrative and clinical problems. Id. at 289-91. Another method suggested for monitoring and assessing quality of care is the use of audit reports. Independent physicians examine the managed care products' medical records after the patient is discharged. Id. at 290; see Arnold Milstein et al., Auditing Quality of Care: An Employer Based Approach, Bus. & Health, July-Aug. 1986, at 10. While audits may provide performance snapshots of quality of care, they do not necessarily identify what the quality of care should be. The AMA has proposed that the Joint Commission on Accreditation of Hospitals be given the sole authority to develop standards of care for the health care industry. Burgess, supra note 94, at 290-91.


Stevens, supra note 98, at 9 (emphasis omitted).


Burgess, supra note 94, at 291-92. Twenty-two states actually have enacted enabling statutes for PPOs, but only fourteen have included provisions to protect consumers. Of those fourteen, only two states, Utah and Michigan, have quality assurance provisions that require PPOs to establish programs to review care or services. Id.


Managed care products are increasingly important to providers as more and more of their patients are affiliated with one plan or another. Hillman, supra note 128, at 1747.


See generally Kenneth R. Wing, The Right to Health Care, 2 Annals Health L. 161 (1993).


Capron, supra note 47, at 739-40.


Geoffrey Modest, Financial Incentives and Performance of Health Maintenance Organizations, 322 New Eng. J. Med. 62, 63 (1990) (letter to editor).




Capron, supra note 47, at 737-39. Some authors view trust as a basis for a contractual relationship. E.g., Charles Fried, Contract as Promise: A Theory of Contractual Obligation 16 (1981).

Implicit in such a contract is that the physician can be trusted to treat the patient's health needs and interest as central, thus minimizing the need for the patient to be defensive or to withhold information. Both the status of the physician and the ethical bases of his practice facilitate the patient's willingness to put his health in the hands of the physician with little demand for detailed explanations or monitoring of the physician's decisions. This is not to imply that physicians have always conformed to these ethical mandates or that patients have generally been docile, but only that the physician's authority has been assumed to be part of the ordinary understanding of relationships between physicians and patients and their respective responsibilities.

David Mechanic, Therapeutic Relationship; Contemporary Sociological Analysis, in Encyclopedia of Bioethics 1688 (Warren T. Reich ed., 1978), quoted in Capron, supra note 47, at 737 n.113. The courts have also recognized this trust relationship: “The patient's reliance upon the physician is a trust of the kind which traditionally has exacted obligations beyond those associated with arms-length transactions. His dependence upon the physician for information affecting his well-being, in terms of contemplated treatment, is well-nigh abject.” Canterbury v. Spence, 464 F.2d 772, 782 (D.C. Cir. 1972).


Capron, supra note 47, at 738.


See id. at 737-38.


See id. at 738.


At any one time, up to 25 million Americans lack health insurance. That amounts to about 11% to 12% of the noninstitutionalized population. Because of loss of coverage or change of employment status, in any given year over 16% of Americans will not have insurance. Id. at 740-41 n.119.


Individuals and agencies engaged in utilization review traditionally maintain that they make their decisions for the limited purpose of determining payment, not for the purposes of determining the course of treatment or access to care. Hinden & Elden, supra note 97, at 54. “Just because we refuse to pay for the service,” the argument goes, “does not mean the patient cannot get whatever treatment she desires.” Even if that argument had any validity, the reality is that for many people a denial of payment is a denial of treatment. Id. Thus, a health care system based on third-party payers that ration health care resources on the basis of ability to pay will exacerbate the problem of access. Morreim argues that these changes in the health care delivery system will more heavily burden the indigent. She argues that the problem is not so much one of “pervasive resource shortage” but of “stratified scarcity.” Morreim, supra note 3, at 1722.


If different cost containment programs produce markedly different financial rewards for physicians, then physicians are likely to refuse to participate in programs or to serve the subscribers of those programs that pay them less. Capron, supra note 47, at 751-52; Rand E. Rosenblatt, Dual Track Health Care-The Decline of the Medicaid Cure, 44 U. Cin. L. Rev. 643, 644-45 (1975). Thus, financial risk shifting will widen the gaps between tiers of a multi-tier health care system. At the top tier will be those individuals and companies who can afford to pay top premium for their care. Third-party payers will translate the high premium into better financial payments to the physicians. Better payments to physicians will mean more physicians willing to serve the particular population and, consequently, access to a broader range of health care services. At the bottom tier will be tax-based systems like Medicare and Medicaid that severely restrict payments to physicians. These lower payments will translate into fewer providers and fewer services. Thus, the quality of care that the patient receives is likely to be influenced by the payment source. A study of the hospital records of almost 600,000 patients found a marked difference in outcomes for those who had health insurance and those who lacked it. The uninsured were 1.2 to 3.2 times more likely to die than the insured. Health Law. News Rep., supra note 3, at 4. As health care costs rise, third-party payers will tend to make annual changes to reflect the previous year's experience. Products with the most effective utilization review process are likely to make fewer changes. Still, some programs are likely to make changes frequently. Annual program changes are disruptive, and physicians are likely to avoid serving the patients of a plan that changes often or to leave the system entirely. Capron, supra note 47, at 751-52. For example, the annual program changes that have occurred in Medicare in recent years as a part of congressional budget-balancing efforts have seen an exodus of physicians. Id. Programs that serve the poor are more likely to make annual changes because of smaller profit margins in the care of that population.


Alternative sources of care cannot be expected to fill the gaps of access created by the withdrawal of physicians who do not believe that a particular program rewards them sufficiently. As noted by one author, “patients with ‘substandard’ third-party reimbursement rates have difficulty commanding the attention, much less the loyalty of many physicians.” Id. at 747; see also Peter H. Elias, Physicians Who Limit Their Office Practice to Insured and Paying Patients, 314 New Eng. J. Med. 391 (1986) (letter to editor). Cost containment measures that shift financial risks of treating patients from the third-party payer to the provider may have an effect on access to care that other types of cost containment efforts will not have. Capron, supra note 47, at 751-53. Providers might overcome price-lowering efforts by increasing the number of service units. However, they can only beat risk shifting by excluding high risk patients from their practice. See id. at 728. But see Harold S. Luft, Health Maintenance Organizations and the Rationing of Medical Care, 60 Milbank Memorial Fund Q. 268, 299 (1982) (arguing that providers' disinclination to serve certain populations might be overcome if a higher premium is charged for those enrolled). For example, some cost containment efforts have disincentives that penalize the physician for accepting the sickest and poorest patient, “the very ones who have the hardest time obtaining health care.” Capron, supra note 47, at 752.


See Capron, supra note 47, at 742.


Corcoran v. United Healthcare, Inc., 965 F.2d 1321, 1331 (5th Cir. 1992).


See supra note 110 and accompanying text.


Corcoran, 965 F.2d at 1332.


See supra notes 111-112 and accompanying text.


Corcoran, 965 F.2d at 1332.




Capron, supra note 47, at 753.


Id. at 749.


Soon third-party payers will routinely withhold (or decline to pay for) interventions that might benefit certain patients but that simply cost too much because society collectively may choose not to “check on physicians temptation to place their own interest ahead of their patients' interests. Instead society [attempts] to use physicians' selfish motivation to restrain full pursuit of patients' interest.” Id. at 749.


S.Y. Tan, Comment, The Medical Malpractice Crisis: Will No-Fault Cure the Disease?, 9 U. Haw. L. Rev. 241, 246 (1987).




Id. at 243.


Jeffery O'Connell, It's Time For No Fault For All Kinds Of Injuries, 60 JAMA 1070 (1974); Tan, supra note 186, at 246; see Clark C. Havighurst, “Medical Adversity Insurance”-Has Its Time Come?, 1975 Duke L.J. 1233.


Personal injuries are adjudicated in an average of seven years. Only half of all malpractice cases are closed within 18 months after they are opened, and 10% remain open over 6 and a half years. Tan, supra note 186, at 243 n.13.


Estimates of the medical malpractice tort system returns on the premium dollar range from 28 cents to 35 cents. Henson Moore & Jeffery O'Connell, Foreclosing Medical Malpractice Claims By Prompt Tender Of Economic Loss, 44 La. L. Rev. 1267, 1270 (1984) (28 cents); William B. Schwartz & Neil K. Komesar, Doctors, Damages and Deterrence: An Economic View of Medical Malpractice, 298 New Eng. J. Med. 1282, 1282 (1978) (35 cents).


271 Cal. Rptr. 876 (Ct. App. 1990).


Id. at 880.


Id. at 878.


Id. at 880 (emphasis added).




Id. at 881.






Id. at 877, 881.


Id. at 882.






When Mr. Wilson was informed that he would “not be covered financially by his insurance company and that the liability [for hospital costs] would then be his,” he cried while talking to an aunt. Id. Mr. Wilson's aunt said that the family did not have enough money to pay for the cost of inpatient hospitalization and that Dr. Taff told her “to come and get him.” Id. Further, she testified that Dr. Taff told Mr. Wilson's mother and father that Western Medical “terminated his [the decedent's] stay” and that this was a “problem” that had occurred on other occasions. Id.




Id. at 878.


239 Cal. Rptr. 810 (Ct. App. 1986). In Wickline, Ms. Wickline's physician requested an eight-day extension of her stay in the hospital. Medi-Cal denied the request and authorized an additional four days of hospital stay beyond the originally scheduled discharge date. Complying with the limited extension authorized by Medi-Cal, Ms. Wickline was discharged on January 21, 1977. At Ms. Wickline's discharge, her leg did not appear in any danger. Ms. Wickline began to experience pain and discoloration soon after arriving home. Nine days after the discharge, she was admitted to the hospital for clotting in the right leg, no circulation to that leg, and an infection at the graft site. After unsuccessful attempts to treat Ms. Wickline's conditions, the doctors amputated her leg above the knee. Id. at 814-17. The court in Wickline held that a person can recover from a third-party payer only if medically inappropriate decisions result from defects in design or implementation of cost containment mechanisms. Id. at 819-20. Such defects are limited to requests for services that are arbitrarily ignored, unreasonably disregarded, or unreasonably overridden. Id. The court held that the state had not unreasonably overridden the physician's decision to discharge Ms. Wickline because the physician had not pursued every avenue of appeal and complied with the third-party payer's decision without protest. Id. The physician could be held responsible for the injury because he failed to protest the third-party payer's decision through all possible steps. Id.


Wilson, 271 Cal. Rptr. at 885.




Id. at 883. The Medi-Cal standard for determining whether to provide acute care was essentially the same as the medical standard of care. Id. at 879.


See id. at 881-82.


Id. at 882.


Under the California Civil Code, “[e]very one is responsible, not only for the result of his [or her] willful acts, but also for an injury occasioned by another by his [or her] want of ordinary care or skill.” Wickline, 239 Cal. Rptr. at 810 (citing Rowland v. Christian, 443 P.2d 561 (Cal. 1968)). As rephrased by the Wickline court, “All persons are required to use ordinary care to prevent others being injured as a result of their conduct.” Id. “In the absence of statutory provision [sic] declaring an exception to the fundamental principle enunciated by section 1714 of the Civil Code, no such exception shall be made unless clearly supported by public policy.” Id. at 818. In Wilson, however, the Welfare and Institutions Code and Title 22 of the California Administrative Code constituted an exception to the usual standard of tort liability specified in Civil Code § 1714. Wilson, 271 Cal. Rptr. at 878.


Wickline, 239 Cal. Rptr. at 819 (citation omitted).


Id. at 820.


Wilson, 271 Cal. Rptr. at 883.


Id. (citation omitted).






Id. at 879.


Id. at 878 (quoting Wickline, 239 Cal. Rptr. at 810).


Id. at 884.




Id. (quoting Wickline, 239 Cal. Rptr. at 810).




Id. at 885.


Wilson Jury Finds Calif., Ala. Blues Plans Not Liable for Plaintiff's Demise, Managed Care L. Outlook, Apr. 21, 1992, available in LEXIS, Nexis Library, Currnws File. The jury found that Blue Cross, Blue Shield of Alabama, and Western Medical Review, Inc. had not caused the plaintiff's wrongful death by refusing to pay for as long a hospital stay as Mr. Wilson's doctor requested. Id.


Darling v. Charleston Community Memorial Hosp., 211 N.E.2d 253, 258 (Ill. 1965) (holding that hospitals could be found liable for the negligent selection and supervision of medical staff members). Whether a physician is an employee or an independent contractor depends on a number of factors including the degree of control, method of payment, and the ownership and provision of instrumentalities used by the physician. Restatement (Second) of Agency § 220 (1958); David J. Oakley & Eileen M. Kelley, HMO Liability for Malpractice of Member Physicians: The Case of IPA Model HMOs, 23 Tort & Ins. L.J. 624, 627-29 (1988); Catherine Butler, Note, Preferred Provider Organization Liability for Physician Malpractice, 11 Am. J.L. & Med. 345, 350-54 (1985).


Hinden & Elden, supra note 97, at 26.


See generally McDonald v. Massachusetts Gen. Hosp., 120 Mass. 432, 436 (1876) (frequently cited case regarding origin of hospital immunity in United States).


See generally Hinden & Elden, supra note 97 at 26-27. But see Rhoda v. Aroostook Gen. Hosp., 226 A.2d 530 (Me. 1967) (holding that the nonliability rule of charitable immunity extends to shelter a hospital corporate charity from liability for its own corporate negligent acts, including the selection, training, and supervision or control of its personnel or employees).


Fridena v. Evans, 622 P.2d 463 (Ariz. 1980) (finding that a hospital's duty includes an obligation to take reasonable steps to monitor and to review the treatment being received by a patient); Poor Sisters of St. Francis Seraph of the Perpetual Adoration, Inc. v. Catron, 435 N.E.2d 305 (Ind. Ct. App. 1982) (holding that a hospital can be held liable for negligence when a nurse or other hospital employee follows a doctor's orders despite knowledge that the doctor's orders are not in accordance with normal medical practice).


Jackson v. Power, 743 P.2d 1376 (Alaska 1987) (finding a duty by a hospital to ensure that physicians granted hospital privileges are competent and to supervise medical treatment provided by members of its medical staff); Insinga v. LaBella, 543 So. 2d 209 (Fla. 1989) (holding hospital liable for its negligent decision to grant staff privileges); Joiner v. Mitchell County Hosp. Auth., 186 S.E.2d 307 (Ga. Ct. App. 1971) (finding that a hospital may be held liable for negligent selection of new staff physicians, but not when it selects authorized physicians in good standing), aff'd, 189 S.E.2d 412 (Ga. 1972); Copithorne v. Framingham Union Hosp., 520 N.E.2d 139 (Mass. 1988) (holding hospital liable for the failure to withdraw staff privileges when it has received notice of the misconduct of a staff physician); Blanton v. Moses H. Cone Memorial Hosp., Inc., 354 S.E.2d 455 (N.C. 1987) (holding that a hospital owes duty of care to its patients to ascertain that a doctor is qualified to perform an operation before granting him the privilege to do so); Corleto v. Shore Memorial Hosp., 350 A.2d 534 (N.J. Super. Ct. Law Div. 1975) (holding a hospital liable for negligent selection and retention of a staff physician when the physician's incompetence was obvious); Johnson v. Misericordia Community Hosp., 301 N.W.2d 156 (Wis. 1981) (holding hospital liable when it failed to exercise reasonable care to determine whether physician was qualified to receive privileges).


Joiner, 186 S.E.2d at 307; see also Sewell v. United States, 629 F. Supp. 448 (W.D. La. 1986) (stating that a hospital can be held liable for a physician's failure to consult a specialist where the failure was below the appropriate standard of care); Ingram v. Little Co. of Mary Hosp., 438 N.E.2d 1194 (Ill. App. Ct. 1982) (holding that a hospital may be liable for a physician or an agent's misconduct as well as a violation of its duty to review and supervise medical care).


Emory Univ. v. Porter, 120 S.E.2d 668 (Ga. Ct. App. 1961) (holding that a hospital could be held negligent for failing to furnish adequate equipment); Hamil v. Bashline, 485 A.2d 1204 (Pa. 1982) (holding that a hospital is under a duty to adequately procure and maintain equipment).


Arthur F. Southwick, The Hospital's New Responsibility, 17 Clev. Marshall L. Rev. 146, 154 (1968); Jacqueline Hanson Dee, Note, Torts-Corporate Negligence-Wisconsin Hospital Held to Owe a Duty to Its Patients to Select Qualified Physicians, 65 Marq. L. Rev. 139, 143 (1981).


211 N.E.2d 253 (Ill. 1965). In Darling, a plaintiff who broke his leg while playing in a college football game was awarded $150,000 by a jury after his leg was amputated because of the attending doctor's negligence. Id. at 255. The court rejected the historical view of a hospital's limited duty. Id. at 257.


Id. (quoting Bing v. Thunig, 143 N.E.2d 3, 8 (N.Y. 1957)).


See Purcell v. Zimbelman, 500 P.2d 335, 340-41 (Ariz. Ct. App. 1972). In Purcell, Dr. Purcell, a private practitioner, was selected by Mr. Zimbelman to perform an abdominal surgical procedure for cancer. As a result of the doctor's negligence, Mr. Zimbelman lost a kidney, lost sexual function, had a permanent colostomy, and had urinary problems. Id. at 339-40. The hospital knew that Dr. Purcell's two prior operations for abdominal cancer using the same procedure had resulted in lawsuits, and that two other surgical procedures performed by Dr. Purcell had also resulted in lawsuits. Id. at 343. Even though Dr. Purcell was clearly an independent contractor and no evidence was presented indicating that he may have been an actual or apparent agent of the hospital, the hospital was ultimately responsible for the quality of care provided in the institution. See id. at 341.


See Reed E. Hall, Hospital Committee Proceedings and Reports: Their Legal Status, 1 Am. J.L. & Med. 245, 252 (1975) (describing the premise of corporate negligence as being that the hospital, by virtue of its custody of the patient, owes a duty to exercise care in the construction, maintenance, and operation of the hospital).


Harrell v. Total Health Care, Inc., No. WD 39809, 1989 WL 153066, at *4 (Mo. Ct. App. Apr. 25, 1989) (The corporate negligence doctrine “is not a theory limited to claims against hospitals.... The duty of care to protect patients from foreseeable risk of harm, however, finds a common ground” in both hospitals and IPA model HMOs.).


Benedict v. Saint Luke's Hosps., 365 N.W.2d 499, 504-05 (N.D. 1985) (holding that the hospital will not be liable for negligent selection where the physician exercised the care and the skill ordinarily possessed by other emergency room physicians).


See supra note 234 and accompanying text.


781 S.W.2d 58 (Mo. 1989). In Harrell, the plaintiff brought an action against a health service corporation alleging damages resulting from alleged malpractice. The trial court entered summary judgment for the health service corporation. Id. at 60. The Missouri Supreme Court held that (1) a former statute that exempted health service corporations from some forms of liability for injuries to patients applied to a patient's action that alleged that the corporation was negligent in its selection of the surgeon who treated the patient and (2) the statute was not unconstitutional. Id.


Harrell v. Total Health Care, Inc., No. WD 39809, 1989 WL 153066, at *5 (Mo. Ct. App. Apr. 25, 1989).




Id. at 5-6.


Ferguson v. Gonyaw, 236 N.W.2d 543, 550 (Mich. Ct. App. 1975) (finding that the plaintiff failed to prove that staff privileges would have been denied if the hospital had used reasonable care in evaluating the physician).


See, e.g., Rule v. Lutheran Hosps. & Homes Soc'y, 835 F.2d 1250 (8th Cir. 1987) (applying Neb. law); Tucson Medical Ctr., Inc. v. Misevch, 545 P.2d 958 (Ariz. 1976); Elam v. College Park Hosp., 183 Cal. Rptr. 156 (Ct. App. 1982); Kitto v. Gilbert, 570 P.2d 544 (Colo. Ct. App. 1977); Register v. Wilmington Medical Ctr., Inc., 377 A.2d 8 (Del. 1977); Insinga v. La Bella, 543 So. 2d 209 (Fla. 1989); Joiner v. Mitchell County Hosp. Auth., 186 S.E.2d 307 (Ga. Ct. App. 1971), aff'd, 189 S.E.2d 412 (Ga. 1972); Blanton v. Moses H. Cone Memorial Hosp., Inc., 354 S.E.2d 455 (N.C. 1987); Corleto v. Shore Memorial Hosp., 350 A.2d 534 (N.J. Super. Ct. Law Div. 1975); Lewis v. Columbus Hosp., 151 N.Y.S.2d 391 (App. Div. 1956); Park North Gen. Hosp. v. Hickman, 703 S.W.2d 262 (Tex. Ct. App. 1985); Pedroza v. Bryant, 101 Wash. 2d 226, 233, 677 P.2d 166, 170 (1984); Sharsmith v. Hill, 764 P.2d 667 (Wyo. 1988).


Under the doctrine of professional skills, courts held that because of a physician's professional skills, a physician was considered an independent contractor for whose acts a hospital could not be held liable. See Schloendorff v. Society of N.Y. Hosp., 105 N.E. 92, 92-93 (N.Y. 1914), overruled by Bing v. Thunig, 143 N.E.2d 3 (N.Y. 1957). The New York Court of Appeals overturned the old rule of nonliability, noting that “[t]he rule of nonliability is out of tune with the life about us, at variance with modern day needs and with concepts of justice and fair dealing. It should be discarded.” Bing v. Thunig, 143 N.E.2d 3, 9 (N.Y. 1957). Other courts began to reject this doctrine as they began to recognize hospitals as highly-integrated systems for the delivery of health care. See Ybarra v. Spangard, 154 P.2d 687, 691 (Cal. 1944) (finding that hospitals operate under highly-integrated systems of medical health care); Moore v. Board of Trustees, 495 P.2d 605, 608 (Nev.) (holding that hospitals are highly integrated community health centers whose sole purpose is to make available the highest possible quality care to patients), cert. denied, 409 U.S. 879 (1972).


Historically, hospitals maintained as charitable institutions could not be liable for the negligence of their physicians and nurses in the treatment of patients. See, e.g., Schloendorff, 105 N.E. at 92-93 (finding no liability though the patient made some payment to help defray the cost of board); Gartman v. City of McAllen, 107 S.W.2d 879, 880 (Tex. Comm'n App. 1937, opinion adopted by the Texas Supreme Court) (holding that city hospitals operating solely for public benefit could not be held liable). However, later courts have uniformly rejected the doctrine. See, e.g., Flagiello v. Pennsylvania Hosp., 208 A.2d 193, 208 (Pa. 1965) (holding that the negligence of a charitable hospital's employees must be treated the same as the negligence of any other employer's employee); Pierce v. Yakima Valley Memorial Hosp. Ass'n, 43 Wash. 2d 162, 174, 260 P.2d 765, 771-75 (1953) (finding charitable hospital liable if its negligence is the proximate cause of injury); Adkins v. St. Francis Hosp., 143 S.E.2d 154, 163 (W. Va. 1965) (abolishing charitable immunity doctrine, thereby making hospitals liable for negligent acts committed there).


Schloendorff, 105 N.E. at 94 (“The true ground for the [hospital's] exemption from liability is that the relation between a hospital and its physicians is not that of a master and servant. The hospital does not undertake to act through them but merely to procure them to act upon their own responsibility.”).


See supra part IV.B.


A basic principle of tort law is that employers are not liable for the negligence of an independent contractor. Restatement (Second) of Torts § 409 (1965).


See, e.g., Arthur v. St. Peters Hosp., 405 A.2d 443 (N.J. Super. Ct. Law Div. 1979); Capan v. Divine Providence Hosp., 430 A.2d 647 (Pa. Super. Ct. 1980); Brownsville Medical Ctr. v. Garcia, 704 S.W.2d 68 (Tx. Ct. App. 1985); Adamski v. Tacoma Gen. Hosp., 20 Wash. App. 98, 579 P.2d 970 (1978). But see Johnson v. St. Bernard Hosp., 399 N.E.2d 198 (Ill. App. Ct. 1979); Reynolds v. Swigert, 697 P.2d 504 (N.M. Ct. App. 1984).


Albain v. Flower Hosp., 553 N.E.2d 1038, 1044 (Ohio 1990).




Darling v. Charleston Community Memorial Hosp., 211 N.E.2d 253, 257 (Ill. 1965); Arthur, 405 A.2d at 446; Albain, 553 N.E.2d at 1044; Capan, 430 A.2d at 643-49; Adamski, 20 Wash. App. at 111, 579 P.2d at 977. But see Greene v. Rogers, 498 N.E.2d 867 (Ill. App. Ct. 1986). The Greene court specifically refused to apply apparent agency to a hospital and emergency room doctor relationship. “The absence of the power to control the decision making of the emergency room physicians demands that the independent relationship between the hospital and emergency room physician be recognized.” Id. at 871.


See, e.g., Schleier v. Kaiser Found. Health Plan, Inc., 876 F.2d 174, 177-78 (D.C. Cir. 1989) (holding an HMO vicariously liable for the negligence of a consulting physician); Sloan v. Metro. Health Council, Inc., 516 N.E.2d 1104, 1109 (Ind. Ct. App. 1987) (holding that HMOs can be liable for the conduct of employee physicians under the doctrine of respondeat superior). But see Williams v. Good Health Plus, Inc., 743 S.W.2d 373 (Tex. Ct. App. 1987) (holding an HMO not liable for physicians found to be independent contractors).


Mitts v. H.I.P., 478 N.Y.S.2d 910, 911 (App. Div. 1984) (rejecting the theory of respondeat superior and finding in favor of a staff model HMO in a medical malpractice suit on the grounds that the HMO “does not treat or render medical service or care to anyone”). But c.f. Schleier, 876 F.2d at 174 (holding an HMO responsible for the acts and omission of a consulting physician who had no contractual relationship to the HMO).


Courts have used various labels to hold hospitals vicariously liable: “ostensible” or “apparent” agency, or “agency by estoppel.” Although the terms are often used interchangeably, they are not theoretically identical. The ostensible or apparent agency theory is based on § 429 of the Restatement (Second) of Torts, which provides as follows:

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.

Restatement (Second) of Torts § 429 (1965). In contrast, agency by estoppel is based on § 267 of the Restatement (Second) of Agency, which provides as follows:

One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such.

Restatement (Second) of Agency § 267 (1958). Thus, § 429 of the Restatement (Second) of Torts requires that the employer hold out the independent contractor as its own employee, and that the injured person reasonably believe that the services are being rendered by the employer or its agents. In contrast, § 267 of the Restatement (Second) of Agency requires actual reliance on the representations of the employer by the injured person. Some jurisdictions cite § 267, others cite § 429, and still others cite both.


Earlene P. Weiner, Note, Managed Health Care: HMO Corporate Liability, Independent Contractors, and the Ostensible Agency Doctrine, 15 J. Corp. L. 535, 538 (1990).


See generally Grewe v. Mt. Clemens Gen. Hosp., 273 N.W.2d 429, 433-34 (Mich. 1978); Albain v. Flower Hosp., 553 N.E.2d 1038, 1048-49 (Ohio 1990); Capan v. Divine Providence Hosp., 430 A.2d 647, 648 (Pa. Super. Ct. 1980) (citing Restatement (Second) of Torts § 429 (1965)); Brownsville Medical Ctr. v. Garcia, 704 S.W.2d 68, 74 (Tex. Ct. App. 1985).


See Grewe, 273 N.W.2d at 433.


A “holding out” occurs “when the hospital acts or omits to act in some way which leads the patient to a reasonable belief he is being treated by the hospital by one of its employees.” Adamski v. Tacoma Gen. Hosp., 20 Wash. App. 98, 115, 579 P.2d 970, 979 (1978).


Howard v. Park, 195 N.W.2d 39, 40 (Mich. Ct. App. 1972); Capan, 430 A.2d at 649; Adamski, 20 Wash. App. at 115, 579 P.2d at 978-79; see also Brown v. Moore, 247 F.2d 711, 719-20 (3d Cir. 1957) (applying liability under respondeat superior when a holding out occurs).


See generally Joanne Stern et al., Health Maintenance Organizations: Development, Growth and Expansion, 8 Whittier L. Rev. 377 (1986) (presenting a panel discussion of the reasons behind the surge of HMOs in California).


Ossario, supra note 3, at 198.


Id. (“Just the fact that there are so many new HMOs and the fact that they are expanding so rapidly creates tremendous problems.”).


See, e.g., McClellan v. Health Maintenance Org., 604 A.2d 1053, 1058 (Pa. Super. Ct. 1992) (holding that an HMO's advertisements that it carefully screened its primary care physicians subjected the HMO to the ostensible agency doctrine).


547 A.2d 1229 (Pa. Super. Ct. 1988).


743 S.W.2d 373 (Tex. Ct. App. 1987).


Boyd, 547 A.2d at 1230. At the time of Mrs. Boyd's death, she and her husband were participants in the Health Maintenance Organization of Pennsylvania (HMO of PA), a managed care product. The third-party payer limited Mrs. Boyd's choice of physician to the names provided in a directory. In June 1982, Mrs. Boyd saw Dr. Rosenthal, whom she selected from the directory. Dr. Rosenthal referred Mrs. Boyd to Dr. Erwin Cohen, a participating HMO of PA surgeon as required by the subscription agreement. Dr. Cohen performed a biopsy of Mrs. Boyd's breast tissue on July 6, 1982. During the surgery, he perforated Mrs. Boyd's chest wall with the biopsy needle. Mrs. Boyd was discharged, but continued to have complaints for weeks afterward. On August 19, Mrs. Boyd awoke with chest pain. Dr. Rosenthal examined Mrs. Boyd and diagnosed Tietz's Syndrome. Tietz's Syndrome is an inflammatory condition affecting the costochondral cartilage in women between 30 and 50 years old. He set up a subsequent appointment for tests to be done at his office. Following a series of tests in his office, Dr. Rosenthal sent Mrs. Boyd home. Her symptoms persisted and worsened. That same afternoon, Mr. Boyd discovered Mrs. Boyd dead in their bathroom from a heart attack. Id. at 1229-30.

In his lawsuit, Mr. Boyd contended that Mrs. Boyd exhibited symptoms of cardiac distress and that Dr. Rosenthal should have sent her to the hospital rather than negligently ordering the tests on Mrs. Boyd at his office. Id. at 1230 n.5. The reasons the test occurred at Dr. Rosenthal's office were disputed. The HMO maintained that the tests were done at Dr. Rosenthal's office because Mrs. Boyd would have been more comfortable. Mr. Boyd maintained that they were done at the office because the HMO required them to be done there to keep medical fees within the HMO. Id. at 1230 n.4. Mr. Boyd contended that the safer practice would have been to perform the tests at the hospital where the results would have been more quickly available and that this negligent treatment caused Mrs. Boyd's death. Mr. Boyd maintained that HMO of PA should be liable for the negligence of its participating physicians because those physicians acted as ostensible agents for the HMO. Id. at 1231.








Id. at 1234.


Id. at 1231.


Id. at 1232.




Id. at 1234-35.


Id. at 1235.




Id. at 1232 n.6 (noting that in a document entitled “Why Offer HMO-PA?,” HMO of PA represented to employers that it “[a]ssumes responsibility for quality and accessibility” of health care).


Id. at 1235.


Id. at 1233; see supra notes 64-67 and accompanying text.


Boyd, 547 A.2d at 1235.






743 S.W.2d 373 (Tex. Ct. App. 1987).


Id. at 374. The Williamses provided the following statement of each act or failure to act:

Failure to listen to patient complaints and failure to diagnose and properly treat nail staph infections and systemic [l]upus [erythematosus], refusal of treatment. Failure to order the usual and customary lab work for a person taking the medications prescribed to monitor well[-]being of patient and to decrease chance of side effects. Mismanagement of ca[r]e of the nail to the point that correct management of systemic lupus was impossible due to the fact steroids could not be given appropriately.

Id. at 374-75. HealthAmerica Corporation (HealthAmerica) was the legal successor to Good Health Plus, Inc. Southwest Medical Group (Southwest) was the physician group that gave medical services to Mrs. Williams. The medical services agreement between HealthAmerica and Southwest stated that “under this agreement, physicians ‘shall be totally responsible for all medical advice to and medical treatment of members and for performance of medical services within the service area.”’ Id. at 376. HealthAmerica did not select the physicians who treated Mrs. Williams, and HealthAmerica did not have the right to direct or control “the work or practice of medicine” of the physicians who treated Mrs. Williams. Id. at 377. Neither HealthAmerica nor Good Health Plus employed, paid, or supervised any physicians. In Mrs. Williams's medical records, many progress notes were written on forms provided by Southwest and bore the professional association mark, “Southwest Medical Group, P.A.” Id. at 378. Finally, when Mrs. Williams sought care from the “Southwest Medical Group, P.A.,” she signed a Consent to Procedure form that contained the following language: “I hereby authorize [the Southwest Group physician] and whomever he may designate as his assistants, to perform upon myself the following procedure ....” Id.


Tex. Rev. Civ. Stat. Ann. art. 4495b, §§ 1.01-5.10 (West Supp. 1994).


Williams, 743 S.W.2d at 375. The provision provided as follows:

[I]t shall be unlawful for any individual, partnership, trust, association, or corporation by the use of any letters, words, or terms as an affix on stationery or on advertisements, or in any other manner, to indicate that the individual, partnership, trust, association, or corporation is entitled to practice medicine if the individual or entity is not licensed to do so.

Id. (quoting Tex. Rev. Civ. Stat. Ann. art. 4495b, § 3.07(e) (West Supp. 1987)).

Under the corporate practice of medicine doctrine, a lay corporation cannot “employ a doctor, charge for the doctor's services, pay the doctor a salary, and then keep the profit that is left over.” Anthony Hunter Schiff, Provider Discounts, 9 Whittier L. Rev. 249, 250 (1987). A professional corporation owned by a physician is the only type of corporate entity that can practice medicine and retain profits. Id. However, a corporation can provide health services to employees if it does not charge for the services. Id. The corporate practice of medicine rule generally prohibits corporate entities from employing physicians. The most significant exception to the rule is health maintenance organizations. See Cynthia M. Combe & Neil Krugman, Design and Pricing of the PPO and EPO Products, in Managed Health Care: Legal and Operational Issues Facing Providers, Insurers, and Employers, at 114-16 (PLI Commercial Law and Practice Course Handbook Series No. 393, 1986), available in Westlaw, TP-All File (discussing the prohibitions against the corporate practice of medicine). This prohibition is based on legal and policy considerations. Legally, statutory licensure requirements for physicians include certain age, educational, and moral character requirements that are “incapable of being met by an artificial [entity] such as a corporation.” Id. at 114. Policy considerations include a concern that corporations may control medical decision making to “an unacceptable degree and interfere with the quality of patient care,” and that treatment decisions may be “based upon economic considerations, such as shareholder interests, rather than upon patient need.” Id. at 114-15; see also Cal. Bus. & Prof. Code § 2400 (West 1990) (stating that “[c]orporations and other artificial legal entities shall have no professional rights, privileges or powers”).


See infra notes 295-298 and accompanying text.


Tex. Ins. Code Ann. §§ 20A.02-20A.36 (West 1990).


Williams, 743 S.W.2d at 375 (quoting Tex. Ins. Code Ann. § 20A.29 (West 1981)).


Id. (quoting Tex. Ins. Code Ann. § 20A.06(a)(3) (West 1981) (alteration in original)).




Id. at 379.


Id. at 378.




It is unclear, however, from the facts of Williams whether Mrs. Williams selected Southwest's doctors or was required to use them. Part of the problem with Williams may be in how the plaintiff's attorney formed the case.


Id. at 375-76.


Id. at 378.


Id. at 379.


See Gnessin, supra note 132, at 410 (advising managed care organizations to inform and to disclose to the patient the exact relationship between the health care provider and the HMO as an effective defense against ostensible agency).


Boyd v. Albert Einstein Medical Ctr., 547 A.2d 1229, 1235 (Pa. Super. Ct. 1988).


See id. (indicating that Mrs. Boyd had no choice as to which specialist to use).


“A hospital would not be held liable for the negligence of a doctor (whether on staff or not) if the patient was aware of the actual relationship between the doctor and the hospital.” Stewart v. Midani, 525 F. Supp. 843, 853 (N.D. Ga. 1981); see also Hannola v. City of Lakewood, 426 N.E.2d 1187, 1190 (Ohio Ct. App. 1980) (holding that public advertisements disclaiming agency may serve to insulate the unwilling principals).


A court could find that even where an individual knew that the managed care organization (MCO) physicians were independent contractors, and not MCO employees, an individual requiring care lacks a meaningful choice because of the financial restraints placed on individuals who opt out of the MCO plan. Under those restraints the court might find ostensible agency despite the knowledge of the individual. See Martell v. St. Charles Hosp., 523 N.Y.S.2d 342, 351 (Sup. Ct. 1987) (holding that even where a patient has the knowledge of emergency room physicians' status as independent contractors, the hospital can be held liable under ostensible agency theory).


See Pamela S. Bouey & Maureen E. Corcoran, Managed Care Diversification and New Products, in Managed Health Care 1988: Legal and Operational Issues, at 9, 13 (PLI Commercial Law and Practice Course Handbook Series No. 471, 1988), available in Westlaw, TP-All File (stating that most states exempt HMOs from prohibitions regarding the practice of medicine by lay corporations). But see Ill. Rev. Stat. ch. 215, para. 165/26 (1993) (HMOs cannot be found liable for the malpractice of member physicians); Brown v. Michael Reese Health Plan, Inc., 502 N.E.2d 433 (Ill. App. Ct. 1986) (holding that a statute exempting voluntary health service plans from liability was a reasonable exercise of state power and a justifiable method of pursuing cost control).


Cf. Schleier v. Kaiser Found. Health Plan, 876 F.2d 174, 177 (D.C. Cir. 1989) (holding an HMO liable for the negligence of an independent contractor where sufficient evidence of a master-servant relationship existed).


The diverse organizational structures make the application of traditional malpractice theories more difficult. See generally Gregory G. Binford, Malpractice and the Prepaid Health Care Organization, 3 Whittier L. Rev. 337 (1981); Monahan & Willis, supra note 79, at 353; Oakley & Kelley, supra note 228, at 624.


See Ossario, supra note 3, at 197-98 (distinguishing IPA for-profit HMOs from nonprofit group staff models of the past decade by noting the difference in management controls and financial incentive arrangements). In Boyd, the defendant HMO was an independent practice association model HMO. Boyd v. Albert Einstein Medical Ctr., 547 A.2d 1229, 1232-33 (Pa. Super. Ct. 1988).


29 U.S.C. §§ 1001-1461 (1988).


Senate Comm. on Labor and Pub. Welfare, Retirement Income Security for Employees Act of 1973, S. Rep. No. 127, 83d Cong., 1st Sess. 29 (1973).


29 U.S.C. §§ 1001-1145 (1988).




Id. § 1132.


Id. § 1132(e)(1).


Id. § 1001(b). Before 1974, there was no comprehensive body of law governing the administration and regulation of employee benefit plans. At the federal level, employee benefit plans were regulated through the Internal Revenue Code and § 302 of the Taft-Hartley Act, 29 U.S.C. § 186 (1988). In 1958, the Welfare and Pension Plan Disclosure Act, Pub. L. No. 85-836, 72 Stat. 997 (1958) (repealed 1976), required certain reports and disclosure. However, the states exercised their authority through inconsistent doctrines of state trust, insurance, and contract law. Daniel W. Sherrick, ERISA Preemption: An Introduction, 64 Mich. B.J. 1074, 1074 (1985), available in Westlaw, TP-All File.


29 U.S.C. § 1144(a) (1988). State law includes “all laws, decisions, rules, regulations, or other State action having the effect of law.” Id. § 1144(c)(1). A state includes “political subdivisions ..., or any agency or instrumentality ... which purports to regulate directly or indirectly the terms and conditions of employee benefit plans.” Id. § 1144(c)(2). Furthermore, ERISA exempts certain state laws from preemption (i.e., acts or omissions occurring after January 1, 1975): (1) laws that regulate insurance, banking, or securities; (2) criminal laws of general applicability; (3) any law of the United States; and (4) public employer plans, church plans, and workers compensation plans. Id. § 1144(a)-(d). Thus, without an explicit exemption, ERISA applies to any state law that regulates medical benefit plans.


FMC Corp. v. Holliday, 498 U.S. 52, 58 (1990) (noting that “[t]he preemption clause is conspicuous for its breadth”); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46 (1987) (“deliberately expansive”).


See generally Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 133 (1990) (cause of action allowing recovery from employer when discharge is premised on an attempt to avoid contributing to pension plan is preempted); Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 829-30 (1988) (statute explicitly barring garnishment of ERISA plan funds is preempted); Dedeaux, 481 U.S. at 47-48 (common law tort and contract causes of action seeking damages for improper processing of a claim for benefits under a disability plan are preempted); Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983) (statute interpreted by state court as prohibiting plans from discriminating on the basis of pregnancy is preempted); Christopher v. Mobil Oil Corp., 950 F.2d 1209, 1218 (5th Cir.) (common law fraud and negligent misrepresentation claims that allege reliance on agreements or representations about the coverage of a plan are preempted), cert. denied, 113 S. Ct. 68 (1992).


29 U.S.C. § 1132(a)(1)(B) (1988); see, e.g., Cathey v. Dow Chemical Co. Medical Care Program, 907 F.2d 554, 555 (5th Cir. 1990), cert. denied, 498 U.S. 1087 (1991).


29 U.S.C. § 1132(a)(3) (1988).


Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985). A number of circuits have adopted the view that no money damages would be awardable. See Harsch v. Eisenberg, 956 F.2d 651 (7th Cir.), cert. denied, 113 S. Ct. 61 (1992); Novak v. Andersen Corp., 962 F.2d 757 (8th Cir. 1992); Drinkwater v. Metropolitan Life Ins. Co., 846 F.2d 821 (1st Cir.), cert. denied, 488 U.S. 909 (1988); Bishop v. Osborn Transp., Inc., 838 F.2d 1173 (11th Cir.), cert. denied, 488 U.S. 832 (1988); Sokol v. Bernstein, 803 F.2d 532 (9th Cir. 1986).


See supra part IV.


965 F.2d 1321 (5th Cir.), cert. denied, 113 S. Ct. 812 (1992).


Id. at 1322, 1323. MAP was a self-funded medical benefits plan. The plan was administered by Blue Cross and Blue Shield of Alabama (Blue Cross) pursuant to an Administrative Services Agreement between Bell and Blue Cross. Id.


Id. at 1322.


In the first pregnancy, the fetus went into distress at the 36th week. The obstetrician had to perform a Cesarean section to successfully deliver the baby. Id. at 1323.


Id. at 1322-23.


Under the portion of MAP known as the “Quality Care Program” (QCP), participants were required to obtain precertification for overnight hospital admissions, and concurrent review or approval once they were admitted to a hospital. Failure of the plan's participants to obtain approval would affect the benefits to which they were otherwise entitled. Id. at 1323.


Id. at 1322.






Id. at 1324.


Id. at 1325; see also Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 66 (1987) (holding that ERISA preemption is so exhaustive that a preemption defense provides an adequate basis for removal to federal court).


All parties agreed that the plan was governed by ERISA. Corcoran, 965 F.2d at 1325.










Id. at 1325-26.


E.g., Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985); Lorenzen v. Employees Retirement Plan of Sperry & Hutchinson Co., 896 F.2d 228, 230 (7th Cir. 1990); Warren v. Society Nat'l Bank, 905 F.2d 975 (6th Cir. 1990), cert. denied, 111 S. Ct. 2256 (1991).


Corcoran, 965 F.2d at 1326 (quoting Corcoran v. United HealthCare, Inc., Civ. A. No. 90-4303, 1991 WL 353841, at *1 (E.D. La. Apr. 3, 1991)); see also Settles v. Golden Rule Ins. Co., 927 F.2d 505, 570 (10th Cir. 1991); McRae v. Seafarers' Welfare Plan, 920 F.2d 819, 821-22 n.8 (11th Cir. 1991); Cefalu v. B.F. Goodrich Co., 871 F.2d 1290, 1297 (5th Cir. 1989); Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enters., Inc., 793 F.2d 1456, 1462-64 (5th Cir. 1986), cert. denied, 479 U.S. 1034, and cert. denied, 479 U.S. 1089 (1987).


Corcoran, 965 F.2d at 1329.


Id. at 1330. See generally Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47-48 (1987). See also William A. Chittenden III, Malpractice Liability and Managed Health Care: History and Prognosis, 26 Tort & Ins. L.J. 451, 489 (1991) (stating that claims of negligence for injuries caused by utilization review denial of medical services “can ... be characterized as claims founded upon a constructive denial of plan benefits”).


Corcoran, 965 F.2d at 1330.


Id. See generally Sommers Drug Stores, 793 F.2d at 1456.


Corcoran, 965 F.2d at 1331.




Id. at 1337.


Id. at 1335.


See supra notes 177-183 and accompanying text.


The court relied on the QCP booklet for “substantial support” for its view that the refusal was a medical decision. United's booklet says that it “assess[es] the need for surgery or hospitalization and determine[s] the appropriate length of stay for a hospitalization, based on nationally accepted medical guidelines.” Corcoran, 965 F.2d at 1331. The booklet goes on to say that United “will discuss with your doctor the appropriateness of the treatments recommended and the availability of alternative types of treatments.”Id. The booklet emphasizes that “United's staff includes doctors, nurses, and other medical professionals knowledgeable about the health care delivery system. Together with your doctor, they work to assure that you and your covered family members receive the most appropriate medical care.” Id.


Id. According to the court, the disclaimer only supports the conclusion that no physician-patient relationship existed between United and Corcoran. Id; see also Wickline v. California, 239 Cal. Rptr. 810, 819 (Ct. App. 1986) (declining to hold MediCal liable but recognizing that it made a medical judgment).


Corcoran, 965 F.2d at 1332.








Id. at 1333.






Id. at 1332-33.


See Leslie C. Giordani, Comment, A Cost Containment Malpractice Defense: Implications for the Standard of Care and for Indigent Patients, 26 Hous. L. Rev. 1007, 1021 (1989).


Corcoran, 965 F.2d at 1333; see also Memorial Hosp. Systems v. Northbrook Life Ins. Co., 904 F.2d 236, 248 n.16 (5th Cir. 1990); Lee v. E.I. Dupont de Nemours, 894 F.2d 755, 757 (5th Cir. 1990).


Corcoran, 965 F.2d at 1334.


Id.; see Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990) (wrongful discharge action preempted); Christopher v. Mobil Oil Corp., 950 F.2d 1208, 1218 (5th Cir.) (fraud action preempted), cert. denied, 113 S. Ct. 68 (1992); Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enters., Inc., 793 F.2d 1456, 1467 (5th Cir. 1986), cert. denied, 479 U.S. 1034, and cert. denied, 479 U.S. 1089 (1987).


Corcoran, 965 F.2d at 1338-39.




Id. at 1338.




David S. Starr, The No-Fault Alternative to Medical Malpractice Litigation: Compensation, Deterrence, and Viability Aspects of a Patient Compensation Scheme, 20 Tex. Tech L. Rev. 803, 806 (1989).










Tan, supra note 186, at 243 n.13.


Starr, supra note 375, at 806-07 n.23.


Murray L. Schwartz & Daniel J.B. Mitchell, An Economic Analysis of the Contingent Fee in Personal Litigation, 22 Stan. L. Rev. 1125 (1970) (noting that the greatest expense for the plaintiff is the contingent fee).


Starr, supra note 375, at 806-07 n.23.




Stephen D. Sugarman, Doctor No, 58 U. Chi. L. Rev. 1499 (1991) (reviewing Paul C. Weiler, Medical Malpractice on Trial (1991)).




1 American Law Institute, Reporter's Study, Enterprise Responsibility for Personal Injury 3 (1991).


Sugarman, supra note 385, at 1499.


Starr, supra note 375, at 807-08.


92 Wash. 2d 246, 595 P.2d 919 (1979).


See Starr, supra note 375, at 808.


The suggestion of a no-fault compensation plan is not new; it has been proposed by a number of scholars. See, e.g., David G. Duff, Compensation For Neurologically Impaired Infants: Medical No-Fault in Virginia, 27 Harv. J. on Legis. 391, 391 (1990); Jeffrey O'Connell, A ‘Neo No-Fault’ Contract in Lieu of Tort: Preaccident Guarantees of Postaccident Settlement Offers, 73 Cal. L. Rev. 898 (1985); Stephen D. Sugarman, Alternative Compensation Schemes and Tort Theory Doing Away With Tort Law, 73 Cal. L. Rev. 558 (1985).


1 Arthur Larson, The Law of Workmen's Compensation § 1.1 (1992).


1 id. § 1.10.


1 id. § 2.50.


2 id. § 61.00.


2 id. § 61.21.


2 id. § 60.00.


1 id. § 2.50.


A patient may typically say, “You may have told me but I obviously did not understand because I consented to the treatment, so my consent was not informed.”


A provider and a patient may agree, however, that the injuring provider may provide continued medical care at no cost and, if so, such medical care will not constitute part of recovery.


Lost wages, loss of earning capacity, etc.


Clinical proof of pain would activate a recovery schedule, with the amount of recovery based on the duration of disability and not on the intensity.


Starr, supra note 375, at 825.


Id. at 829 n.184.


H. Michael Bagley et al., Workers' Compensation, 44 Mercer L. Rev. 457 (1992).


See generally 2 Larson, supra note 393, § 10-57.


For example, estimates by the General Accounting Office put the amount of welfare fraud and abuse at $1 billion per year. Fraud in Welfare Put at $1 Billion, N.Y. Times, Dec. 7, 1987, at A25.


One study estimates that one percent of hospital patients receive an injury caused by physician negligence. Of those that are injured, only 2 out of every 15 file a claim. Of those who file a claim, only 50% are ever compensated. So only 1 in 15 injured patients ever receive compensation. Paul C. Weiler et al., Proposal for Medical Liability Reform, 267 JAMA 2355, 2355 (1992) (reporting the results of a medical practice study performed at Harvard).


243 U.S. 188 (1917).


Id. at 200.


Id. at 201.


See, e.g., Lucas v. South Carolina Coastal Comm'n, 112 S. Ct. 2886 (1992).


Starr, supra note 375, at 835.


Id. at 835-36.


In the last year over 3,000 articles have been written on health care cost containment. In the 102nd Congress, over twenty bills were introduced that addressed the issue of health care reform and cost containment.


Starr, supra note 375, at 817.






Weiler et al., supra note 409, at 2355.


Starr, supra note 375, at 810.


Id. at 806 (citing California Medical Ass'n and California Hosp. Ass'n, Report on the Medical Insurance Feasibility Study 65 (D. Mills ed., 1977)).




Id. at 810 n.43.




Curley Bonds, The Hippocratic Oath: A Basis for Modern Ethical Standards, 264 JAMA 2311 (1990); see also Donald Konold, Codes of Medical Ethics: History, in Encyclopedia of Bioethics 162 (Warren T. Reich ed., 1978).


See supra notes 168-171 and accompanying text.

17 UPSLR 1