Q & A

February 2003

Q. The recent decision in the Scott-SSM Healthcare case in Missouri has highlighted the dangers involved in indemnification clauses that are often a part of pathology group contracts with hospitals. In this case, a radiologist who was a member of an independent group that had a contract to provide radiology services to an SSM hospital was ruled to be acting as an agent of the hospital, which resulted in the hospital being vicariously liable for his actions. This has sent a chill through the spines of hospital administrators, since every misread CT scan or surgical pathology slide can now result in damages being assessed against the hospital, even though the physicians involved are ostensibly independent contractors. Hospitals are reacting by putting the burden back on the physician groups through the use of indemnification ("hold harmless") clauses. However, most physicians’ professional liability carriers exclude coverage for this type of indemnification related to a physician’s negligence, since it is a liability assumed under contract. The net effect is that the corporation owned by the physicians is left without insurance to fight/fund an indemnification action by the hospital, exposing it to serious financial damage (over $2 million in the Scott case).

Q. Is there a way to address the hospital’s concerns about vicarious liability for the actions of independent physicians who provide specialty services under contract to the hospital without exposing those independent physician groups to legal actions for which they have no coverage? If not, how should pathology groups respond to hospital administrators who insist on indemnification clauses of this type?

A.  You are correct in cautioning pathologists to beware of indemnification provisions in their contracts with hospitals. In the typical indemnification clause, the pathology group indemnifies the hospital against claims based on the negligence of a pathologist in the group. The group is required to hold the hospital harmless from any liability attributable to the negligence of a pathologist. It may be required to bear the expenses the hospital incurs in defending a lawsuit that alleges negligence by the pathologist.

A hospital may invoke an indemnification clause when the pathologist and the hospital are sued based on injury to a patient arising, for example, from the reporting of a false-negative Pap test or from the misreporting of results of a clinical pathology procedure. In these situations, the hospital may be named as a defendant because the test was performed on its premises using laboratory personnel it employs and with equipment and reagents it supplies. However, the hospital will assert that the suit is based on the negligence of the responsible pathologist. Depending on the precise language of the indemnification clause, the hospital may require the pathology group to pay for the hospital’s defense or to provide an attorney to represent the hospital. It will also try to hold the pathology group liable for any damages assessed against the hospital or for the amount of any settlement.

The assertion that "most physicians’ professional liability carriers exclude coverage for this type of indemnification" is, in my view, an understatement. I am not aware of any malpractice carrier that covers liability incurred through an indemnification clause. The simple reason is that malpractice policies insure against the negligence of the insured-not against liabilities that, like a liability arising out of an indemnification provision, are assumed contractually. For this reason, I always urge pathologists to do their best to resist inclusion of indemnification provisions in their contracts with hospitals.

The question asks whether there is a way "to address the hospital’s concerns about vicarious liability for the actions of independent physicians who provide specialty services under contract to the hospital without exposing those independent physician groups to legal actions for which they have no coverage." I know of only one way: The pathology group can ask its insurer to make the hospital a named insured under the group’s malpractice policy. Adding the hospital as a named insured will provide insurance coverage if the hospital is sued based on the alleged negligence of a pathologist.

Professional liability carriers may be unwilling to provide this additional coverage-or may agree to do so only for a substantial increase in premium. Nevertheless, this is an issue well worth exploring when a pathology group purchases malpractice coverage-and when it is confronted by a hospital with a demand for an indemnification provision. Being included on the group’s policy as a named insured should be an acceptable substitute for an indemnification.

Assuming that the named insured approach won’t work, the question asks how pathology groups should respond to hospital administrators who insist on indemnification clauses. I have used three arguments:

• The appeal to fairness and decency. The pathology group can explain that it simply cannot afford to assume a potentially enormous uninsured liability. It can point out that the hospital doesn’t need the indemnification since the hospital has its own coverage.
• The appeal to notions of symmetry. If the pathology group is required to indemnify the hospital, then the group can say that the hospital should in fairness indemnify it against the negligence of the hospital. There is not much advantage in indemnification by the hospital, but the hope is that the prospect of giving an indemnification will dissuade the administrator from demanding indemnification.
• The appeal to practicality. The pathology group can point out a problem with the indemnification clause that is far from obvious. Specifically, if the group and the hospital are sued but the clause is triggered by the negligence of a pathologist, the two defendants will be pitted against each other. To avoid the indemnification, the group will have every incentive in the litigation to argue that it was the hospital-and not the pathologist-that was negligent. In contrast, to secure the indemnification, the hospital may have to take the position that the pathologist was negligent.

Generally, these arguments do not carry the day. Despite their force, the administrator usually insists on the indemnification. At that point, the pathology group has two choices (assuming that adding the hospital as a named insured under the group’s malpractice policy won’t work):

1. Refuse to sign the contract and seek a position elsewhere.
2. Sign the contract and hope that the clause is never invoked.

Jack R. Bierig
CAP General Counsel
Sidley Austin Brown & Wood
Chicago

Q.  The Health Insurance Portability and Accountability Act privacy regulations scheduled to take effect April 14 have implications for how we practice pathology. Fortunately, pathologists are considered indirect providers, which means that much of the confidential information we have access to is governed by patient consent forms that have already been obtained by other physicians. Therefore, pathologists can continue to review patients’ medical records without obtaining patient consent. But some questions remain:

• What restrictions are placed on our review of medical records? Must our review be focused on patients with whom we have established a pathologist-patient relationship, or can any pathologist within the group review any medical record of any patient at our hospital?
• For quality assurance and educational purposes, pathologists frequently want to know the results of a followup surgical procedure that took place at another institution. Will we need patient consent to obtain copies of the outside pathology report or slides, or both?
• When sending cases to consultants at other institutions, do we need to obtain prior patient consent?

A.  Pathologists review medical records under three legitimate circumstances: 1. when necessary to complete a report or answer a question about the care of a patient; 2. in the course of research; and 3. for QA purposes.

In the first circumstance, a pathologist-patient relationship exists because treatment by the attending physician includes consultation between health care providers [Health Insurance Portability and Accountability Act of 1996, section 164.506(c)]. In the second instance, the physician must seek specific permission from the patient for review of the record [164.508(f) and 164.512(i)] unless there is an exception granted by an institutional review board or a privacy board. Because quality improvement activities are included in the definition of health care operations, they are permitted under the basic consent for treatment [164.506].

A pathologist who is reviewing a record for purposes covered by the definition of health care operations can review the records of any patient. Because followup is between two covered entities and comes under the definition of health care operations, special consent is not required when asking to review followup surgical procedures and results from another institution. The same is true when seeking consults from other institutions.

Henry Travers, MD
Pathologist
Physicians Laboratory
Sioux Falls, SD Member, Council on Scientific Affairs