American Journal of Law & Medicine

Implications of negligent selection and retention of physicians in the age of ERISA.


Enormous and fundamental changes are currently taking place in health care delivery. These changes include the consolidation of health care providers--from hospitals, physicians, and insurance companies, to medical supply businesses, managed care networks, and other health care providers--and numerous health care and insurance reform efforts by government at all levels.(1) These changes pose significant implications for the delivery of health care in the United States,(2) and will impact the manner, cost, and accessibility of health care delivery.(3) These changes will almost certainly affect the quality of health care services as well.(4) The quality of health care in the United States has for many years been a central concern of govemment, industry, health care providers, payors, and consumers.(5) Quality in health care is essential to overall national health, the guarantor of a productive and healthy populace, and an important indicator of United States social and technological preeminence.(6) It is, therefore, not surprising that Americans expect the highest quality of health care possible.(7)

The expectation of high quality health care is reflected in an immense body of law relating to health care and health care delivery.(8) One of the most controversial areas of health care law is state medical malpractice laws, as well as the state law of negligent selection and retention of physicians.(9) State-law claims for negligent selection and retention impose upon hospitals a duty to ensure that only competent physicians are permitted to practice medicine within the hospital.(10) A hospital's failure to execute this duty places the hospital at risk of liability in the event that a physician who practices medicine within the hospital commits medical malpractice.(11)

As one of the many changes taking place in health care delivery, managed care organizations (MCOs)(12) have rapidly begun to replace hospitals as the locus of medical decisionmaking and influence over medical practice.(13) The change in control and influence over medical decisiommaking and medical practice has placed on MCOs the same duty as hospitals under state and federal laws to ensure the competency of physicians who are employed or contracted to practice medicine.(14) However, concurrent with the shift in control and responsibility for medical decisionmaking to MCOs is the continuing development of case law surrendering state laws to preemption by the federal Employee Retirement and Income Security Act of 1974 ERISA).(15) Under ERISA, federal law regulates the management and administration of employee benefit plans.(16) With few exceptions, ERISA also specifically preempts any state laws that "relate to" employee benefit plans.(17) Guided by the recent Supreme Court decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co. (Travelers), ERISA may operate to preempt state-law claims for an MCO's negligent selection and retention of physicians where the MCO administers an employee benefit plan regulated by ERISA.(18) Therefore, state-law claims for negligent selection and retention against MCOs that manage or administer employee benefit plans may not have the same effect of promoting high quality care among MCOs that such laws have in promoting higg quality care among hospitals.(19) The tension between state negligent selection and retention laws and ERISA appears likely to hold hostage eforts to require that MCOs and employee benefit plans ensure the medical competence of their contracted or employed physicians.(20) It is not altogether clear that such a development will promote or hinder efforts to ensure the delivery of high quality care in the United States.(21)

In Part II of this Article, we will, review briefly the process of physician credentialing. We describe the standards imposed by licensihg and accrediting agencies.(22) Pan III analyzes and explores the legal theories under which hospitals and MCOs are liable when they negligently select or retain physicians.(23) In Part IV, the federal ERISA statute and its preemptive effect on state-law claims for negligent selection and retention laws, as well as the recent Travelers case, are analyzed.(24) This Article will propose alternative theories under which ERISA preemption might be avoided.(25) We will present public policy arguments that suggest that ERISA should not be applicable to state-law claims for negligent selection and retention. Finally, we will argue that the shift of control from hospitals to MCOs for ensuring quality care logically requires that MCOs be held responsible for the competency of physicians who provide managed care services.(26) We conclude that this responsibility is most effectively enforced by imposing a duty on MCOs to properly investigate and evaluate the competency of physicians who are granted privileges to practice medicine under the employee benefit plan. A breach of this duty in cases of medical malpractice should result in liability for negligent selection and retention.


The competency of physicians who are contracted or employed with MCOs is as important as it is obvious.(27) At the heart of managed care is cost efficiency.(28) To this end, MCOs have found that eliminating inappropriate medical services and clinical errors can reduce health care costs, including malpractice liability, and improve quality of life for patients.(29) Hence it has become a necessary and vital practice of MCOs to ensure that the care provided by their physicians meets the current standard of medical care.(30) In order to achieve this, MCOs, much like hospitals, have instituted credentialing procedures.(31)

Credentialing is a process in which the hospital or MCO obtains and reviews documentation attesting to the competence of current or prospective professional providers.(32) Generally the method by which credentialing takes place is virtually the same for both hospitals and open-panel MCOs.(33) Open-panel MCOs refer to those plans or organizations that contract either directly or indirectly with physicians, who are to provide the MCO's members with medical care within their, private offices.(34) Both direct contract health maintenance organizations (HMOs) and independent practitioner associations (IPAs) are common open-panel MCOs.(35) A direct contract HMO contracts directly with physicians for their services.(36) On the other hand, an IPA acts as an intermediary between an HMO and physicians. The IPA contracts with an MCO to deliver services in return for a single-capitation rate and then contracts with individual physicians to provide the medical care, paying physicians on either a fee-for-service or capitation basis.(37) Closed-panel MCOs--such as staff and group model HMOs where the HMO employs the physicians(38) or contracts with a medical group(39)--contract with physicians on an exclusive basis and prohibit physicians from contracting with other MCOs.(40)

Although the credentialing methods of open-panel MCOs are quite similar to those of hospitals, differences do exist.(41) And although credentialing for closed-panel MCOs varies substantially from that of open-panel MCOs in how it is achieved, the standards applicable to both are identical.(42) While the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) sets the standards for hospitals,(43) Standards for all MCOs are established by the National Committee for Quality Assurance (NCQA).(44) NCQA sets out specific requirements that must be satisfied in order for an MCO to receive accreditation.(45) Issues of quality management and improvement,(46) Utilization management,(47) members' rights and responsi- bilities,(48) preventive health services,(49) medical records,(50) and credentialing(51) are addressed in the standards for accreditation.

According to NCQA standards on credentialing and recredentialing, all MCOs must have in place: (1) written policies and procedures for the original credentialing, recredentialing, recertification, and/or reappointment of physicians; (2) a governing body or entity that reviews and approves such policies and procedures; and (3) a peer review body to make recommendations as to credentialing decisions.(52) While the NCQA imposes many requirements on MCOs seeking accreditation, the key factors of the initial credentialing or recredentialing process deal specifically with the physician applicant, including the physician's licensure, education, training, experience, competence, and history of liability.(53)

For the initial credentialing of a prospective physician, the MCO is minimally required to obtain and verify a number of items about the physician applicant before the physician applicant may be accepted as a participating provider.(54) Before an MCO can look into these factors, all physicians who wish to become a participating provider with an MCO must first complete an application.(55) Information about the physician applicant must be requested by the MCO from recognized monitoring organizations or services such as the National Practitioner Data Bank (NPDB) and the State Board of Medical Examiners (SBME).(56) MCOs are also required to check for any Medicare or Medicaid sanctions that have been placed upon the physician.(57)

The standards set by NCQA for the recredentialing process are much the same as the original/initial credentialing process.(58) Recredentialing must take place at least once every two years.(59) At the time of recredentialing, the physician's license and staff privilege status, Drug Enforcement Agency (DEA) or Controlled Dangerous Substance (CDS) number, board certification, malpractice insurance, and liability history will be verified.(60) Member complaints about the physician, results of quality reviews concerning the physician, utilization management history, and members' satisfaction surveys are also considered to determine whether the physician may remain a plan provider.(61)

The standards which JCAHO promulgates for granting or denying staff privileges and appointment or reappointment(62) are very similar to those of the NCQA, but tend to be much broader as well as more vague.(63) Credentialing is not limited to the requirements set out by JCAHO or NCQA, but now includes what was once never considered: credentialing based on the physician's utilization of hospital resources.(64) More and more institutions are utilizing what is referred to as "enhanced medical staff credentialing."(65) Enhanced medical staff credentialing emphasizes outcomes and economics in order to make up for some of the inadequacies of the traditional health care system.(79) The foundation of the health care system has shifted from hospitals to MCOs, where cost efficiency is the controlling factor.(80) The legal system faces new questions that arise out of the change in the structure of the health care system. These new questions, however, deal with an old problem: liability for medical malpractice. Who should be held liable for medical malpractice? Should the MCOs be liable as well as the physicians and hospitals? Even if courts were to permit claims against MCOs for physician negligence, would federal law(81) preempt such causes of action? Not until recently have courts imposed liability on MCOs for the negligence of the physicians whom they employed or with whom they contracted.(82) MCOs--much like the hospitals before them--may fall and often have fallen prey to the legal theories of vicarious liability--respondeat superior, ostensible agency, nondelegable duty--and corporate liability.(83)

A. Vicarious LIABILITY

The doctrine of vicarious liability places a legal duty or responsibility on a person or an entity for the negligent acts or omissions of another because of the existence of some special relationship between the two.(84) Plaintiffs are often successful when claims are brought under the theory of vicarious liability.(85) Courts have separated vicarious liability into respondeat superior, apparent or ostensible agency, and nondelegable duty or enterprise liability.(86)

1. Respondeat Superior

Respondeat superior is a theory based on actual agency.(87) It is applied most often in employee negligence situations.(88) When an employee acts negligently, causing harm to another, the employer may be held liable if the employee was acting within the scope of employment and was acting in furtherance of the employer's purposes.(89) Courts have long held that the respondeat superior doctrine is applicable to and enforceable on hospitals.(90) In the managed care world, the respondeat superior the--credentialing processes.(66) In enhanced medical staff credentialing, defined quality of care ("outcomes") parameters and financial ("economic credentialing") parameters are established to guide the reappointment--and to a lesser extent, the appointment--process.(67) The financial implications of physician admission and treatment decisions are interwoven into the credentialing process.(68) Monitoring both clinical outcome and financial parameters allows both hospitals and MCOs to regulate and guard against physicians' overutilization of resources.(69) These economic credentialing features, together with traditional credentialing procedures, demonstrate the enormous influence over the manner in which physicians may enter the market and deliver care under MCOs. Therefore, consistent with case law imposing a duty on hospitals to properly select and credential their physicians, as well as liability for breaching such duty, holding MCOs liable for negligently selecting and retaining physicians because of MCOs' control over physician practices seems appropriate.


Health care has experienced what is commonly referred to as a paradigm shift.(70) The health care system went through a change in which the essential underlying nature of the health care system was altered in such a way that the system no longer functioned the way it had before the shift.(71) Health care found itself changed from a system where physicians contracted directly with patients and were paid by the patients for their services--a system where the hospital was simply a place for the poor to go to die--to one in which the hospital was the central aspect or focal point.(72) Here, the hospital itself was viewed as a provider, physicians independently contracted with hospitals, and private and government health insurance predominated.(73) Health law quickly caught up with this shift to a hospital-based health care system and soon courts had several theories under which hospitals could be held liable for the negligence of the physicians who practiced within their walls.(74)

Today, hospitals remain an essential part of our health care system, but indeed the system has changed once again.(75) Much of the decisionmaking in health care has fallen into the hands of managers or businessmen.(76) Economics, more than ever before, now drives the health care system.(77) With soaring and ever-increasing health care costs, managed care seems to some an appropriate solution with its increased focus on cost efficiency.(78) As such, managed care has become firmly rooted in our ory may be even more applicable than the theory has been with hospitals. Whether respondeat superior will be applicable to an MCO facing an action as a result of malpractice will be based on the determination of the physician's status as an employee.(91) Staff model HMOs will almost certainly be subject to respondeat superior,(92) as evidenced in the cases of Sloan v. Metropolitan Health Council(93) and Schleier v. Kaiser Foundation Health Care Plan.(94) staff model HMOs are subject to respondeat superior, but also that a case-by-case analysis is the only way to determine whether respondeat superior is applicable to hold liable such MCOs as IPA-model HMOs, or preferred provider organizations (PPOs).(95)

2. Ostensible Agency

Ostensible (or apparent) agency and agency by estoppel are probably the most widely used theories of vicarious liability.(96) Under ostensible agency, a hospital or MCO is liable for the negligent acts of one of "its" physicians where the patient views the institution as the provider, the physician performs an inherent function of the institution, and the hospital or MCO holds the doctor out as one of its employees-i.e., the patient reasonably believes that the physician was an employee of the hospital or MCO.(97) A similar but more stringent theory is agency by estoppel, which requires proof of actual reliance to the detriment of the patient/plaintiff for a finding of vicarious liability.(98) The issue of physician selection--that is, the patients' ability to choose their own doctor--often determines whether the patient has looked to the institution for medical treatment.(99) As for whether the institution is to be deemed as holding out the physician as an employee, courts look to whether hospital or MCO documentation-such as letterhead, advertisements, and brochures--would lead a reasonable patient to believe that the physician was an employee of the hospital or MCO.(100)

Courts have set a strong precedent for using ostensible or apparent agency vicarious liability to hold hospitals liable for the negligent acts of their independent contracting physicians.(101) Ostensible agency's reach has also been extended into the realm of managed care.(102) The case of Boyd v. Albert Einstein Medical Center is widely cited for the application of apparent/ostensible agency to MCOs, though the issue of whether HMOs could be held liable under such a theory was left open.(103) Reversing the trial court's grant of summary judgment for the defendant HMO, the court in Boyd remanded the case for trial basing its decision on hospital law precedent.(104) The court rejected the HMO's argument that ostensible agency should be applied only to the relationship between hospitals and their independently contracted physicians.(105) The court left open the possibility that the ostensible agency theory of liability could apply to HMOs.(106) The Boyd case-in setting out a broad range of factors that courts may consider in determining whether an agency relationship existed(107)--shows likely willingness of courts to extend ostensible agency to managed care.(108)

3 . Enterprise Liability and Nondelegable Duty

Under the theory of enterprise liability, courts apply liability on a "whole hospital or enterprise" basis, while the theory behind nondelegable duty is that there are certain core duties of a hospital or other health care entity which simply may not be delegated to an independent contractor.(109) The institution for, at, or in which the negligent physician practices--or the health plan which pays for the services provided--becomes responsible for the physician's liability.(110) Under enterprise liability, hospitals, instead of physicians, are the defendants.(111)

The theory of nondelegable duty, with respect to hospitals, is well founded and has had strong support from the courts.(112) As to whether such a duty may be applied to MCOs, it is likely that--due to the increasing role which managed care plays in our health care system and the rapid expansion in regulatory schemes and processes governing MCOs--courts may extend the nondelegable duty theory into managed care.(113)


With the increase in the importance of physician credentialing sprang a legal theory by which courts began to consistently hold hospitals liable for the negligent acts of their physicians.(114) This legal theory forced hospitals to impose stricter credentialing procedures.(115) Hospitals have long been required to credential physicians to whom they gave staff privileges.(116) That is, though hospitals had to credelitial their physicians in order to receive accreditation, the hospitals nevertheless had no legal duty to do so.(117) It was not until the Supreme Court of Illinois decided Darling v. Charleston Community Memorial Hospital in 1965 that hospitals had a legal duty to credential physicians imposed on them. (118) Darling sent shock waves through the hospital community because the court held for the first time that hospitals may be held liable for negligently selecting and monitoring physicians who commit malpractice, regardless of the physicians' status as independent contractors.(119) Subsequent cases further developed and clarified those duties which--if not satisfied could be the basis for holding a hospital liable under Darling's "hospital corporate negligence."(120)

The case of Joiner v. Mitchell County Hospital Authority established the standard that hospitals had a duty to exercise reasonable care in their decisions to grant staff privileges. …

Log in to your account to read this article – and millions more.