IV. Traditional Theories of Liability

Third-party payers using managed care products induce, through utilization review and financial risk shifting, health care providers to make health care decisions based on economic pressures. If those decisions result in injury to the patient, under what theory, if any, can a third-party payer be held liable? If theories producing liability exist, a more important issue is whether they will have the effect of promoting safety and spreading the cost of injuries. There are several theories of liability for injury that might be adaptable to cover the problems created by the peculiar relationships among providers, patients, and third-party payers.

Both insurance and managed care products are in perverse relationships with providers in that they can cause providers to act in unacceptable ways. With insurance, the problem of moral hazard exists. Insurance causes the physician to provide services without regard to cost. Managed care, on the other hand, may cause providers to deny services without regard to need because they act in the best interest of the third-party payer. In a health care system that emphasizes acting in the patient's best interest, current legal theories are adequate. But these theories are inadequate when applied to the perverse relationship between providers and third-party payers. Current legal theories fail to cause third-party payers to act with care when designing utilization review programs or when giving financial incentives to providers to act in the third-party payers' best interest. Furthermore, because patients infrequently recover *42 from third-party payers under current theories, the theories fail to meet the goal of spreading the risk to those who create it.

This Part discusses the inadequacy of four traditional theories as they might be applied to cost containment efforts. Section A discusses negligence or direct liability for utilization review and financial risk shifting activities. Section B considers the effectiveness of the corporate negligence doctrine in compensating for cost containment injuries. Section C contemplates the use of the doctrine of respondeat superior. Section D describes the use of the ostensible agency doctrine to compensate for cost containment effects. These traditional theories of liability are inadequate when applied to cost containment efforts because they fail to adequately promote safety, spread the risk, and compensate patients.

A. Negligence (or Direct Liability) for Injuries Caused by Cost Containment Measures

A party can be held liable for injuries caused by its failure to conform to a standard of care, that is, when the party has been negligent. Negligence, as a theory, has proved inadequate as a risk spreader in health care primarily because medical practice is as much an art as a science. FN186 Consequently, the current tort system has difficulty distinguishing between medical judgment and negligent conduct.

Should a CAT scan be performed to detect the unlikely tumor, even though such a test is expensive and carries with it a small risk of complications including death? ... Should the physician forego the test if the best clinical judgment so dictates, or is the doctor better off ordering the test anyway to protect against a malpractice suit in the event a tumor actually is present? FN187

By deferring to professional practice, negligence theories allow the profession to define the standard of care. Thus, the negligence approach places the patient at a theoretical disadvantage because distinguishing between a judgment call and negligence depends in large part on for whose benefit an expert witness is testifying. Consequently, many injured patients do not file negligence claims, in part because of the problem of *43 proving negligence. FN188 Of those who actually file suit, many patients are not able to establish fault. FN189 Finally, even if the injured patient wins at trial, it usually takes many years of litigation before she is compensated. FN190 Thus, under the present negligence scheme, compensation resembles a tort lottery. FN191 As such, negligence theory is an unreliable source of compensation for patients, including those injured by third-party cost containment efforts.

Third-party cost containment efforts further complicate this situation because they push more of the provider's practice from clearly negligent behavior to judgment calls. As cost containment measures become more and more prevalent, a component of the standard of reasonable care will necessarily be whether the physician acted in reliance on reasonable cost containment efforts. The leading case as to third-party payer liability for cost containment through utilization review and financial risk shifting activity is Wilson v. Blue Cross. FN192

In Wilson v. Blue Cross, Mr. Wilson, the decedent, had an insurance contract with Alabama Blue Cross, which was administered by Inter-plan Service Benefit Bank. FN193 California Blue Cross provided the benefits of the insurance contract between Alabama Blue Cross and Mr. Wilson. FN194 The contract provided inpatient hospital benefits as follows:


While a Member is covered under this Contract and is a registered bed patient in a Hospital, and during such time (subject to the limitations, exclusions, and conditions prescribed elsewhere herein) as the Member's attending physician determines that hospitalization is necessary, such *44 Member shall be entitled to the following benefits, herein referred to as Hospital Service.... FN195

Benefits for mental and nervous disorders were provided as follows:


Benefits hereunder for mental and nervous disorders or for pulmonary tuberculosis shall be limited to an aggregate of thirty (30) days during any period of twelve (12) consecutive months. FN196

Nothing in the insurance contract permitted review by an outside entity of an attending physician's conclusion that hospitalization was necessary. FN197 In 1983, Western Medical, a utilization review consulting firm, contracted with California Blue Cross to perform “utilization review of the ‘medical necessity”’ of hospitalization. FN198 Western Medical did not have a contract with Alabama Blue Cross. FN199

Mr. Wilson suffered from major depression, drug dependency, and excessive weight loss. He was admitted to College Hospital on March 1, 1983. FN200 His treating physician, Dr. Taff, decided that Mr. Wilson needed three to four weeks of inpatient care at the hospital. FN201 Western Medical performed a “concurrent review” using federal Medicare regulations and decided that the hospitalization was not medically necessary. FN202 Ten days later, Mr. Wilson's insurance company refused to pay for any further hospital care. FN203 Because neither Mr. Wilson nor his family could afford to pay for any further inpatient hospital care, FN204 Dr. Taff discharged him without appealing Western *45 Medical's utilization review. FN205 On March 31, 1983, Mr. Wilson committed suicide. FN206

In a suit brought by Mr. Wilson's father, the trial court issued summary judgment for Blue Cross on the ground that Wickline v. State FN207 controlled. The Appellate court reversed and remanded, holding that a triable issue existed as to whether the conduct of Blue Cross was a substantial factor in causing the decedent's death. FN208 Wickline, the appellate court reasoned, erred in relieving the third-party payer from liability. FN209 The Wilson court reasoned correctly. The purpose of utilization review is to affect providers' decisions regarding medical services. When the system works appropriately, third-party payers reap the cost containment benefits. Having initially injected cost containment into medical decision making, third-party payers should not be allowed to cloak themselves with immunity merely because the providers acceded to the cost containment decision of the third-party payer.

Wickline involved three key components, legal and factual, that the Wilson opinion specifically distinguished. First, Wickline held that as a matter of law, the discharge decision by the attending physician met the medical standard of care for physicians. FN210 The Wilson court distinguished Wickline on this point *46 by noting that no evidence indicated that the discharge decision was within the medical standard of care. FN211 To the contrary, Dr. Taff testified that reasonable treatment required inpatient treatment on March 11, 1983, and that had Mr. Wilson completed his planned hospitalization, there was a reasonable medical probability that he would not have committed suicide. FN212

Second, in Wickline, the funding process was based on the state's statutory rather than contractual duty to provide funds. FN213 Wilson is distinguishable because, in Wilson, neither a statute nor a regulation affected the duty owed by Blue Cross. Blue Cross's duty to Wilson was based on contract, while in Wickline, a specific statute allowed the denial of benefits to a person seeking acute hospital care when the denial was “in accordance with the usual standards of medical practice in the community.” FN214

Finally, in Wickline, the court held that the Medi-Cal review process did not “corrupt medical judgment.” FN215 In Wilson, Blue Cross argued that, as in Wickline, the physician had sole responsibility for medical treatment decisions. FN216 The Wilson court rejected that argument, stating in dicta as follows:

[T]he argument is likewise invalid because it misconstrues the test for joint liability for tortious conduct. The test for joint tort liability is set forth in section 431 of the Restatement (Second) of Torts, which provides, “The actors' negligent conduct is a legal cause of harm to another if (a) his [or her] conduct is a substantial factor in bringing about the harm, and, (b) there is no rule of law relieving the actor from liability because of the manner in which his [or her] negligence has *47 resulted in the harm.” Section 431 correctly states California law about the issue of causation in tort cases. FN217

Thus, the court held that a third-party payer is responsible when that third-party payer's actions are a substantial factor in bringing about the injury. FN218

The Wilson appellants argued that “public policy considerations which favor the use of the concurrent utilization process should alter the normal rules of tort liability.” FN219 The court rejected the argument, noting that in Wickline the California Administrative Code and the Welfare and Institutions Code mandated the use of utilization review processes. FN220 A specific statute provided for denial of benefits “‘in accordance with the usual standards of medical practice in the community.”’ FN221 The court found no “similar clearly expressed public policy that applies to Mr. Wilson's contract with Alabama Blue Cross.” FN222

Finally, Western Medical argued that Dr. Taff had the responsibility to pursue avenues of appeal when insurance benefits were denied because of the utilization review process. FN223 The Wilson court again rejected the Wickline dicta stating that the doctor who “complies without protest with the limitations imposed by a third-party payer, when her or his medical judgment dictates otherwise, cannot avoid his or her ultimate responsibility for her or his patient's care.” FN224 The court distinguished Wilson as involving a claim by a decedent's estate and relatives directly against insurance companies and their agents, not against a physician, and stated that the informal policy allowing for reconsideration by Western Medical did not warrant granting summary judgment. FN225 Thus, summary judgment should not have been granted for Western Medical because there were “triable issues of material fact as to Western Medical's liability for tortious interference with the contract of insurance between Mr. Wilson and Alabama Blue Cross and its role in causing the wrongful death of Mr. Wilson .” FN226

  • 48 By rejecting Wickline, the court brought the issue of third-party payer liability into focus: Did the third-party payer substantially cause the injuries to the plaintiff, either negligently or intentionally (tortiuously)? This is the issue that all courts should address because, if courts adopt the Wilson reasoning, a significant step in the right direction would be made. Nevertheless, because most courts continue to focus on the character of the decision-making conduct rather than the inevitability of effects on the individual patients, the problems of burden of proof continue to prevent liability from attaching.

The problems surrounding the burden of proof are particularly severe when third-party payers can make the tort system ineffective by redefining the reasonableness of their behavior in their favor. This problem is evidenced by the retrial of Wilson, when the jury found that Blue Cross had not been negligent. FN227 Thus, even direct liability does not adequately address the goals of risk spreading and compensation. Such goals can be met only through an alternative theory of third-party payer liability.

B. Corporate Negligence Doctrine

A health care organization can be held liable not only for its own negligence causing harm to a patient, but also as a corporate entity when it fails to adequately protect a patient from harm by others. FN228 In the last hundred years, the primary organizational structure for the delivery of health care has been the hospital. A hospital's legal duty to patients was based on the view that a hospital was analogous to an innkeeper in providing facilities for physicians to practice medicine. FN229 While the hospital might be liable for harm caused by its physical facilities or 49 its employees, it was deemed powerless to prevent harm at the hands of the physician. FN230 Corporate negligence theory replaced that traditional view with the view that a hospital owes the patient a separate and independent duty to protect her from harm. FN231 The hospital's responsibility to the patient extends beyond merely refraining from causing harm. The duty includes a number of responsibilities: to provide proper overall surveillance of the quality of patient care services; FN232 to properly review and investigate the credentials and expertise of medical staff applicants before granting privileges; FN233 to protect patients from malpractice by members of its medical staff when, through reasonable care, it should have known that malpractice was likely; FN234 to use reasonable care in maintaining the facility 50 and providing medical instruments and equipment; FN235 and to use care in selecting and supervising medical personnel. FN236

In Darling v. Charleston Community Memorial Hospital, FN237 the first and most widely followed corporate negligence case, the court recognized the hospital's obligation to oversee the quality of patient care services.

Present-day hospitals, as their manner of operation plainly demonstrates, do far more than furnish facilities for treatment. They regularly employ on a salary basis a large staff of physicians, nurses and [interns], as well as administrative and manual workers, and they charge patients for medical care and treatment, collecting for such services, if necessary, by legal action. Certainly, the person who avails himself of “hospital facilities” expects that the hospital will attempt to cure him, not that its nurses or other employees will act on their own responsibility. FN238

While hospitals are not guarantors of adequate health care, establishing hospital corporate negligence does not turn on the relationship between the physician and the hospital. FN239 A primary justification for the corporate negligence doctrine is the *51 hospital's custody of the patient. FN240 Although a managed care product does not have custody, the duty to protect from harm may nevertheless arise from the process of selecting physicians or other medical personnel for the managed care product. This is particularly true when the managed care product restricts a patient's choice of provider. FN241 Thus, as with hospital liability, a managed care product should be liable for failing to properly review and investigate the credentials and expertise of provider panel applicants, FN242 and for failing to protect its subscribers from malpractice by provider panel members when it knew or should have known, through reasonable care, that such malpractice was likely. FN243

The court in Harrell v. Total Health Care, Inc. FN244 discussed the extension of the corporate negligence doctrine to independent practice association model managed care products.

A subscriber to Total Health Care, or to any other prepaid medical services plan, expects and assumes that the plan will cover the expenses of medical care. To realize the benefit of the Total Health Care plan, the subscriber must, under the plan terms, accept treatment by physicians that Total Health Care has approved. Although Total Health Care argued otherwise, the evidence shows that a subscriber does not have unlimited choice of a specialist physician. To be assured that payment of the charges will be made by Total Health Care, the subscriber must go to the physician referred by his primary care physician and the specialist must have contracted with Total Health Care. Because the subscriber *52 may select another doctor and pay for the services outside the Total Health Care coverage is irrelevant. FN245

Although the court dismissed the case by using a technical aspect of Missouri law, FN246 the court's conclusion in Harrell is an appropriate extension of the corporate negligence doctrine to HMOs. The court concluded that the plaintiff made a case of liability for corporate negligence based on proof that (1) Total Health Care conducted no investigation of the physician's competence, (2) the physician's record of malpractice claims was such that a prudent person would recognize the physician's lack of competence, and (3) Total Health Care did not discharge its duty to the plaintiff as a subscriber to its services to prevent a foreseeable risk of harm. FN247

Because many third-party payers market their managed care products with claims that they determine provider panel competency, continuously evaluate the physician panel, monitor provider performance, and take corrective action, courts may readily extend the corporate negligence doctrine to them.

Even if extended, however, the doctrine suffers from several problems. For instance, besides establishing organizational negligence, the plaintiff must also prove that the physician was negligent and that the physician's negligence was the proximate cause of the plaintiff's injuries. FN248 Thus, the plaintiff faces the difficulty of proving two concurrent negligent acts to establish liability. The focus, therefore, is on the negligent conduct of the physician and not on the utilization review process or financial risk shifting.

Thus, even if applied, the corporate negligence doctrine would do little to promote safe utilization review processes and limit financial incentives. If the utilization review process is not negligently designed or conducted, but merely defective, there will probably be no liability under this doctrine. Under traditional theories of tort liability, managed care products tend to decrease physician liability because economic considerations and the deference given to professional judgment make physicians' actions seem more reasonable. In addition, because *53 third-party tortfeasors have always been more difficult to hold liable, managed care products are rarely viable alternative sources of recovery. The results are more injuries to patients and fewer successful lawsuits. As a practical matter, only twenty jurisdictions have adopted the corporate negligence doctrine. FN249 Consequently, even if a managed care product is defective, the doctrine would have limited effect.

C. Respondeat Superior Doctrine

Another possible theory of liability is the doctrine of respondeat superior, which holds an entity liable for the negligent acts of an employee arising in the course of his or her employment. Historically, hospitals, as the primary organizations for health care delivery, were immune from liability for the negligent acts of physicians. Even after the demise of the doctrine of professional skills FN250 and the doctrine of charitable immunity, FN251 hospitals continued to enjoy immunity from liability *54 for the negligent acts of physicians. FN252 It was not until 1965 that courts began to extend liability to hospitals on some theory other than the doctrine of respondeat superior. FN253

Up until that time, liability turned on the character of the physician-hospital relationship, that is, whether the physician was an independent contractor or an employee. Hospitals were not liable for the conduct of physicians who were independent contractors or who lacked an apparent employment relationship with the hospital. FN254 More recently, courts have held a hospital liable, under certain conditions, for the negligence of a physician who was an independent contractor. FN255 The line of respondeat superior cases begun in 1965 holds, for example, that a hospital that negligently selects or retains an independent contractor may be directly liable for injuries resulting from the negligence of that independent contractor. FN256 Further, a hospital may be vicariously liable for the negligence of an independent contractor performing nondelegable duties. FN257 In recent years, such vicarious liability has also been found under the doctrine of ostensible agency. FN258

  • 55 As a theory of liability for cost containment conduct, the doctrine of respondeat superior might subject a third-party payer to liability if a physician were employed by the managed care product and the physician made negligent decisions based on utilization review or financial risk shifting. Increasingly, courts are applying theories of vicarious liability to third-party payers. This is true where the managed care product limits a patient's choice of providers to those who have contracted to provide care to its beneficiaries. FN259

The doctrine presents several problems, however. First, many managed care products, such as preferred provider organizations, do not directly employ physicians. FN260 Second, even for employed physicians, many injury-producing decisions fall within a gray area in which the decision, though motivated by considerations other than the patient's best interests, is arguably within the appropriate standard of care. Under such circumstances, third-party payers would escape liability for resulting injuries. Furthermore, cost containment measures move more physician conduct from the clearly negligent arena into the nonnegligent (or judgment) arena, resulting in compensation for fewer injured patients. Consequently, the doctrine of respondeat superior would not be effective in spreading the cost of cost containment injuries to all responsible parties.

D. Ostensible Agency Doctrine

Ostensible agency liability is a type of vicarious liability under which a health care organization can be held liable for a health care provider's negligence. FN261 The liability of the organization *56 is based on appearances that have “led a patient to reasonably believe that the health care provider was in the health care organization's employ and under its control.” FN262 Thus, reasonable reliance of the patient may determine liability, even though no employment relationship exists.

In order to find a hospital liable for the negligent acts of an independent physician with staff privileges, courts have generally required the following:

(1) The plaintiff must show that the hospital or its agent acted in a way that would lead a reasonable person to conclude that the negligent physician was operating as an agent under the hospital's authority;

(2) Where the acts of the agent create the appearance of authority, the plaintiff must prove that the hospital had knowledge of an acquiesced in them; and

(3) The plaintiff must have acted in reliance on the ostensible agency relationship. FN263

  • 57 Thus, ostensible agency turns not on the issue of control, as in the respondeat superior doctrine, but on the appearance of the relationship between the physician and health care institution.

Courts that have looked at this issue generally have accepted the ostensible agency doctrine on two grounds. First, the courts recognize that the changing role of the hospital in society creates a likelihood that patients will look to the institution and not to the individual physician for care. FN264 Second, the courts say that ostensible agency liability should attach when the hospital holds out FN265 the physician as its employee. FN266

Will the ostensible agency doctrine be extended to third-party payers? If applicable, will the doctrine be an effective tool to promote safety, to protect the physician-patient relationship, and to minimize access problems? The managed care product market is changing radically and expanding rapidly. FN267 This rapid change and expansion, coupled with an increase in the number of inexperienced people who develop and manage managed care products, FN268 would seem to create fertile ground for litigation. FN269 The courts have heard several cases under the doctrine of ostensible agency. FN270 The leading cases are Boyd v. Albert Einstein Medical Center FN271 and Williams v. Good Health Plus, Inc. FN272

  • 58 1. Boyd v. Albert Einstein Medical Center

Mrs. Boyd died after being treated by physicians who were participants in the “HMO of PA.” FN273 In his lawsuit, Mr. Boyd contended that the HMO advertised that its physicians and medical care providers were competent and had been evaluated for up to six months before being selected as HMO providers. FN274 He further contended that he and Mrs. Boyd relied on the HMO's representation of quality care in choosing Drs. Rosenthal and Dorstein as their primary care physicians, and that HMO of PA's documents showed both that those doctors were designated care providers and that HMO of PA guaranteed the quality of care. FN275

The trial court granted HMO of PA's motion for summary judgment on the ground that Mr. Boyd failed to establish that the theory of ostensible agency, based on the facts applied to hospitals, applied to the HMO. FN276 On appeal, the Pennsylvania Superior Court considered whether the theory of ostensible *59 agency should be applied to an independent association practice model HMO operating with independent contractor physicians. FN277

The Boyd court acknowledged that Pennsylvania recognized the theory of ostensible agency and had applied it to hospitals. FN278 It then outlined factors that other courts had considered in determining that an independent contractor could be an agent of a hospital. FN279 Among those factors were the likelihood that “patients will look to the institution rather than the individual physician for care” and whether the HMO held out the physician as an employee. FN280

Considering these factors, the Boyd court concluded that ostensible agency should apply if Mrs. Boyd had submitted herself to the care or protection of the primary care physicians in response to an invitation from the HMO. FN281 The court decided that there were grounds for an inference that the HMO extended such an invitation to Mrs. Boyd. FN282 Furthermore, several facts demonstrated that Mrs. Boyd reasonably could have looked to the HMO for her medical care and that she reasonably could have believed that the physician treating her was an HMO of PA employee. FN283 HMO of PA's marketing materials represented to enrollees that its program guaranteed the quality of care. FN284 It required enrollees to select a primary care physician from a limited list of physicians approved by the HMO. FN285 Finally, HMO of PA employed a gatekeeper system. FN286 The court reasoned that “because Mrs. Boyd was required to follow the mandates of HMO of PA and did not directly seek the attention of the specialist, there is an inference that she looked to the institution for care and not solely to the physicians.” FN287

  • 60 The Boyd court concluded that “an issue of material fact [existed] as to whether the participating physicians were the ostensible agents of HMO [of PA].” FN288 Thus, the court reversed the trial court's grant of summary judgment to HMO of PA and remanded the ostensible agency question to the trial court. FN289 The court, however, did not decide whether Drs. Rosenthal and Dornstein acted negligently nor whether HMO of PA would be liable if they did.
  1. Williams v. Good Health Plus

In Williams v. Good Health Plus, Inc., FN290 Ruth Williams maintained that her right thumbnail had to be surgically removed after it became infected because of Good Health Plus's and HealthAmerica's negligence. She claimed that the defendants permitted unsanitary conditions to exist in the treatment areas where the nail was treated, and that the defendants placed her on a drug without previously performing necessary tests. FN291

The Williams analysis (unlike Boyd) was based on state laws governing the practice of medicine and governing HMOs. *61 The Texas Medical Practice Act FN292 prohibited the corporate practice of medicine and required individuals to satisfy specific licensure requirements to practice medicine. FN293 The Act did not provide any means for a corporation such as HealthAmerica to be licensed to practice medicine. FN294

The Texas Health Maintenance Organization Act FN295 stated that the Act shall not be construed to

(a) authorize any person, other than a duly licensed physician or practitioner of the healing arts, acting within the scope of his or her license, to engage, directly or indirectly, in the practice of medicine or any healing art, or

(b) authorize any person to regulate, interfere, or intervene in any manner in the practice of medicine or any healing art. FN296

  • 62 The Texas Health Maintenance Organization Act provided that “[n]othing in this Act shall be construed as permitting the practice of medicine as defined by the laws of this state.” FN297 Perhaps most important was the provision of the Health Maintenance Organization Act that limited the powers of HMOs to the following:

the furnishing of or arranging for medical care services only through physicians or groups of physicians who have independent contracts with the health maintenance organizations; the furnishing of or arranging for the delivery of health care services only through providers or groups of providers who are under contract with or employed by the health maintenance organization. FN298

Based on the court's interpretation of the relevant Texas statutes and the facts, HealthAmerica established that, as a matter of law, it was entitled to summary judgment. FN299 The court reasoned that HealthAmerica could not be subjected to liability for any of the alleged negligent treatment because HealthAmerica could not practice medicine. FN300 The court gave no credence to the argument that HealthAmerica represented or held out the physicians as its agents. FN301 The court did not examine previous cases construing the ostensible agency theory of liability.

  1. Analysis of Boyd and Williams

While a third-party payer was liable in Boyd, but not in Williams, Boyd and Williams are not inharmonious. Taken together, the cases demonstrate why ostensible agency, though theoretically applicable to third parties, is a weak doctrine. First, the applicability of the doctrine relies on facts within the third-party payer's control that can be easily manipulated. Boyd and Williams were decided under very different factual circumstances. For instance, in Boyd, HMO of PA was more involved in medical decision making, while the third-party payer in Williams exercised very little specific direction and *63 control over the physicians who treated the plaintiff. FN302 Furthermore, the Williams court did not rule out the possibility that under the right fact pattern, it might apply the ostensible agency analysis. If true, the alleged acts and omissions of misdiagnosis and medical mistreatment would mean that HealthAmerica engaged in the practice of medicine. FN303 HealthAmerica submitted a motion for summary judgment and affidavits establishing that, as a matter of law, HealthAmerica could not practice medicine. When Williams did not respond with additional facts that would establish ostensible agency, FN304 the court held that she was “not entitled to claim, in the absence of a response to the motion for summary judgment or any other evidence in the record, that HealthAmerica may be liable on some theory of holding-out or ostensible agency.” FN305 Thus, it is likely that given the right facts (and possibly better lawyering), Texas, like Pennsylvania, will apply the ostensible agency doctrine.

Even if applied, however, the doctrine is flawed in its capacity to promote safety, to spread risk, and to minimize the negative effects of cost containment efforts. Because of the holding out requirement, third-party payers can easily restructure their programs to avoid the appearance of agency. FN306 The key factor underlying Boyd was that Mrs. Boyd looked to the HMO corporate institution, not to the individual physicians. FN307 A well-developed managed care product and a skilled attorney could remove such appearances. For example, how would the Boyd case have turned out if HMO of PA had not promised any quality of care, had given Mrs. Boyd the option of seeking care outside the plan, FN308 and had required a disclosure consent acknowledging that the physicians were independent contractors FN309 and not agents of the plan? FN310

  • 64 Second, the effectiveness of the ostensible agency doctrine can be statutorily negated, as it was in Texas. The court in Williams relied on Texas law that provided that HMOs are not exempt from the corporate practice of medicine rule. That law is unique among laws governing HMOs. Most other states offer HMOs an exemption from the prohibition against the corporate practice of medicine. FN311 Thus, courts in most other jurisdictions will make a common law negligence analysis or an ostensible agency analysis and not a statutory analysis. FN312 Still, the issue of HMO liability is new, so future decisions are not clearly predictable.

Finally, the ostensible agency doctrine is applicable only to some forms of managed care products. FN313 It is, for example, inapplicable to managed care products that hire staff physicians. FN314 More importantly, the doctrine of ostensible agency is *65 applicable only when physician negligence exists. Because cost containment activities are not considered when determining liability, there is little incentive for third-party payers to change cost containment activities that result in injuries. Under the ostensible agency doctrine, a court will view physician malpractice as an aberration, not as a symptom indicating a need for systemic change. Furthermore, because not all persons injured by defective cost containment measures can establish ostensible agency, the doctrine is ineffective as a risk spreader.

E. Summary

The tort system has developed several theories to facilitate compensation for injuries caused by another. Negligence will compensate for behavior that falls below a standard of reasonable care. Corporate negligence will hold an organization liable for the negligent conduct of a provider when the organization was negligent in hiring or supervising the provider. Respondeat superior will hold an employer liable for the negligent acts of an employee provider even though the employer itself has not acted negligently. Ostensible agency will hold an organization liable for the negligent act of a provider who, even though not an employee, has been held out as an agent of the organization.

As discussed, negligence, corporate negligence, respondeat superior, and ostensible agency are all inadequate to meet the goals of compensating victims, promoting safety, and spreading the risk. These theories fail to include injuries created by managed care organizations in their cost containment efforts of utilization review and financial risk shifting. To meet these goals, an alternative compensation system must be developed. This is particularly crucial because even if a patient proves a tort claim for injuries, ERISA would raise an additional barrier to recovery.