Is it reasonable for a patient to believe that her health insurer is the employer of its in-network physicians? If so, can the insurer be held liable for the actions of in-network physicians? Just how much should an insurer assume that patients know about healthcare finance? A recent case in Maryland addressed these very questions. The answers may change the way healthcare providers do business.
Bradford v. Jai Medical Systems
In Maryland, a hospital may be liable for the negligence of a non-employee physician under the doctrine of apparent agency.[i] Only recently, though, has the state’s highest court held that this doctrine extends to managed care organizations (MCOs) as well.
In Bradford v. Jai Medical Systems, the Maryland Court of Appeals[ii] considered whether an MCO could be held liable for the negligence of an in-network provider.[iii] The plaintiff, a member of an MCO, sought a referral from her primary care physician for a specific podiatrist for treating her bunion. As a result of the podiatrist’s negligent care, the plaintiff underwent partial amputation of her foot.[iv] The plaintiff then sued, naming her MCO as one of the defendants. Though the negligent podiatrist was not an employee of the MCO, the plaintiff claimed that the MCO was liable under the doctrine of apparent agency.
At trial, a jury found for the plaintiff, and the MCO appealed. The Maryland Court of Special Appeals reversed, finding that the plaintiff did not fulfill the criteria of apparent agency and faulting the lower court for not applying the “common knowledge” test.[v] The Maryland Court of Appeals, the state’s highest court, affirmed, but disagreed, in part, with the intermediate court’s reasoning.
MCOs may be liable under apparent agency
MCOs encompass a variety of organizational structures formed to reduce healthcare costs. They include preferred provider organizations (PPOs), which generally cover both in-network and out-of-network physicians and charge more for the latter, and health maintenance organizations (HMOs), which generally restrict coverage to in-network physicians and require members to select a primary care physician. The defendant MCO in Bradford operated like an HMO and did not directly employ any healthcare providers.
Maryland has adopted the doctrine of apparent agency as set forth in the Restatement (Second) of Agency § 267.[vi] The doctrine, as applied by Maryland courts, holds a person or entity (“the principal”) liable for the actions of a non-employee (the apparent agent) when three criteria are met. First, the principal must have created, or allowed creation of, an appearance of agency, i.e., that the principal employed the apparent agent. Second, the plaintiff must have subjectively believed an agency relationship existed and relied on her belief. Finally, the plaintiff’s belief and reliance on that belief must be objectively reasonable.
In prior cases, Maryland courts have held that hospitals may be liable for the actions of independent-contractor physicians, in the capacity of apparent agents of the hospital.[vii] For example, if an emergency room is operated by a hospital’s independent contractors, but the emergency room is within the same physical structure as the hospital and there are no signs indicating that the hospital does not directly run the emergency room, the hospital is liable for the negligence of the emergency room physicians.[viii] The Court of Appeals in Bradford reasoned that an MCO, like a hospital, may lead members to believe that in-network physicians are employed by the MCO. Explaining that “there is no reason to preclude application of the theory of apparent agency in the context of an MCO and a network physician,” the court thus joined the courts of Illinois, Florida, and Pennsylvania in holding that MCOs may be liable under the doctrine of apparent agency.[ix]
The Bradford court ultimately found that the plaintiff had failed to establish apparent agency. Though the plaintiff claimed that the text of the MCO’s directory of in-network physicians suggested that the physicians were employees of the MCO, the court found no such suggestion, especially considering that the directory listed the names of 4,000 providers, including numerous hospitals and nationally known retailers and pharmacies like Wal-Mart and Rite Aid. The plaintiff showed that she subjectively believed the podiatrist was employed by the MCO, but the court held that her belief was not reasonable—the MCO did not hold out its providers as employees, and the plaintiff did not receive treatment on or near the MCO’s premises. Had the podiatrist been located in the same building as the MCO’s offices, there might have been a different result—or at least a question of fact created. Then, it would have been left to a jury to determine whether the MCO had implied that the physician was its employee.
The “common knowledge” test is inapplicable to MCOs
The Court of Appeals affirmed the intermediate court’s decision, but it disagreed in regard to the application of the “common knowledge” test. Under this test, a plaintiff cannot prevail on a claim of apparent agency if his belief contradicts matters of common knowledge. For example, it is common knowledge that an oil company’s signs and emblems at a gas station indicate only that the company’s products are sold at the station, not that the oil company owns and manages the station. Therefore, a plaintiff may not successfully claim that an oil company’s signs led him to believe that a gas station attendant was an employee of the oil company.[x]
The intermediate court in Bradford ruled in favor of the defendant MCO, based in part on the common knowledge test. Here, the plaintiff’s belief that the MCO employed the podiatrist was not objectively reasonable, because “it is common knowledge that MCOs are the equivalent of insurance providers and not the provider of actual medical services.”
The Court of Appeals pointedly disagreed and instead held that the common knowledge test is inapplicable to healthcare finance. First, the Court noted that MCOs, due to their diversity, may be very different from traditional insurers. MCOs may finance healthcare services directly and may even employ healthcare providers. Thus, an assertion that MCOs do not provide medical services is not necessarily accurate and therefore not common knowledge.
Second, when a court finds that a decisive fact is a matter of common knowledge, it is taking judicial notice that no person of ordinary intelligence could possibly have a belief contradicting that fact. Citing research showing that only a small percentage of Americans understand fundamental insurance terms like “deductible” and “copay,” the court explained that “it is not clear that details of health care finance are ‘common knowledge’ even to well educated members of our society.”
Apparent agency is not a new concept in the health sector. Hospitals in Maryland know, or should know, that an independent-contractor physician can create liability if the hospital does not clearly communicate to patients the actual status of the physician as an independent-contractor. But MCOs may be surprised to learn that they are subject to the same test in regard to professional liability.
Based upon the recent decision in Bradford, MCOs should clearly state in their directories that in-network physicians are not employees of the organization. Also, if the in-network physicians are located in the same building as an MCO, that MCO should require that the physicians post signs clearly stating that the physicians are not employed by the MCO.
Finally, MCOs should consider requiring that their members sign a form containing an express acknowledgement that healthcare providers in the MCO’s network are not the employees or agents of the MCO. Such documentation would establish unequivocally that the MCO is not representing the providers in its network as its agents, rather than leaving it up to the courts to decide that such a presumption could not be inferred from the actions they did take. An express acknowledgement, signed by an MCO’s members, would also serve to contradict a plaintiff’s claim that he subjectively believed that there was an agency relationship between the MCO and the provider, and that his belief was reasonable.
This case shows that MCOs cannot rely on claims of “common knowledge” in asserting that patients realize that in-network physicians are not agents of the MCO. When it comes to healthcare finance, MCOs, hospitals, and physicians should not assume that patients understand basic terms and concepts. Taking the time to explain, and then fully document, fundamental concepts upfront may reduce the likelihood of litigation later on.
- Mehlman v. Powell, 281 Md. 269, 378 A.2d 1121 (1977).
- The Court of Appeals is Maryland’s highest court. The Court of Special Appeals is the intermediate appellate court.
- Bradford v. Jai Med. Sys. Managed Care Orgs., Inc., 439 Md. 2, 93 A.3d 697 (2014).
- The podiatrist’s negligence was undisputed, as a default judgment had been entered.
- JAI Med. Sys. Managed Care Org., Inc. v. Bradford, 209 Md. App. 68, 57 A.3d 1068 (2012) cert. granted, 431 Md. 219, 64 A.3d 496 (2013) and aff’d sub nom. Bradford v. Jai Med. Sys. Managed Care Orgs., Inc., 439 Md. 2, 93 A.3d 697 (2014).
- See B. P. Oil Corp. v. Mabe, 279 Md. 632, 370 A.2d 554 (1977).
- Mehlman, 281 Md. 269; Debbas v. Nelson, 389 Md. 364, 885 A.2d 802 (2005); Hunt v. Mercy Med. Ctr., 121 Md. App. 516, 710 A.2d 362 (1998).
- Mehlman, 281 Md. 269.
- Petrovich v. Share Health Plan of Illinois, Inc., 188 Ill. 2d 17, 719 N.E.2d 756 (1999); Ramos v. Preferred Med. Plan, Inc., 842 So. 2d 1006 (Fla. Dist. Ct. App. 2003); Boyd v. Albert Einstein Med. Ctr., 377 Pa. Super. 609, 547 A.2d 1229 (1988).
- Chevron, U.S.A., Inc. v. Lesch, 319 Md. 25, 570 A.2d 840, 845 (1990).