American Journal of Law & Medicine

Vicarious Liability: Relocating Responsibility For The Quality Of Medical Care.


Managed health care has recently generated a great deal of distrust, even anger, in the public mind. To be sure, much of this public reaction is based on anecdotal evidence and one-dimensional thinking.(1) But many unbiased experts observing managed care today are themselves unhappy with the health care industry's performance. While these observers find little justification for the current political backlash against managed care, they are also disappointed that today's health plans have not made a more positive difference.(2) Indeed, informed observers commonly regret that the new arrangements for the financing and delivery of care have done so little to get physicians to adopt truly efficient practices, achieving not only cost reductions but also substantial improvements in health status and patient outcomes--that is, in the quality of care. Although managed care has not demonstrably harmed the overall quality of health care in the United States, it has done little to improve it.(3)

In the view of many, therefore, the managed care revolution that began in earnest in the early 1980s remains a half-baked affair today. Simply giving managed care more "baking time" does not seem to be the answer, however, because something about the recipe itself is apparently leaving many consumers and most knowledgeable critics unsatisfied. Moreover, the health care industry may be unable to produce more savory versions of managed care at reasonable cost if the recipe continues to be dictated by law and regulation(4) or if government imposes new liability risks on plans that take aggressive measures to control costs.(5) There are, of course, other things that policymakers might do to inspire health plans to create more appetizing products. For example, many experts hope that new methods of measuring quality and reporting provider performance will soon make quality differences more salient and enable consumers and their agents to demand improvements. It is not clear, however, that information alone, or any other strategy under active consideration, can create enough new pressures on health plans or providers to trigger radical managerial reforms of the kind that may be necessary to raise the quality of care appreciably. Public policy has not yet hit upon an approach that will cause health plans and their subcontractors to concern themselves with quality in health care as much as they do currently, and controversially, concerned about its cost.

This Article suggests a legal reform that would more clearly establish the ultimate responsibility of health plans for the quality of the health services their enrollees receive. Specifically, it recommends legislation establishing as a so-called "default rule" (that is, a legal rule that operates in the absence of a different contractual arrangement) the principle that a health plan is vicariously, and exclusively, liable for medical malpractice and other torts committed by health care providers whom it procures to treat its enrollees. Put simply, the argument is that health plans, and not individual doctors, should be legally accountable in the first instance for the quality of care delivered to patients just as they are currently accountable to employers and consumers for the cost of care. Not only is it logical to have responsibility for cost and quality initially assigned to the same entity, but factual circumstances relevant under the common law of agency also point in this direction. Thus, today's health plans routinely select providers or provider organizations to treat their enrollees with low cost as the dominant criterion. Even more ominously, they compensate these subcontractors in ways that may induce them to neglect or undertreat individual patients. For these reasons and also because health plans are in an excellent position to control provider performance directly (as necessary) or to induce downstream actors with whom they do business to make quality improvements, a common law court or a legislature could easily conclude that health plans should bear presumptive responsibility whenever their providers breach a legal duty to an enrollee.

The recommended "default rule" would leave health plans free, however, to shift the new liability risk to downstream subcontractors. As a result, the liability burden in most cases would finally come to rest on a provider entity to which the health plan has also shifted substantial financial risk for the provision of health services.(6) Thus, the proposed legal reform would not be inconsistent with current trends under which health plans are offering consumers a wider choice of providers and increasingly distancing themselves from the actual provision of care, confining themselves to such functions as negotiating and administering contracts with employers, building and maintaining provider networks, and bearing whatever financial risks they do not download to subcontractors.(7) Even though health plans may be finding it unpopular to limit consumer choices, or inefficient to integrate vertically and involve themselves directly in the delivery of care, quality should be on the table in negotiations between plans and providers. Such negotiations currently proceed on the traditional assumption that tort liability concerns only individual providers and their individual patients. The legal change envisioned in this Article would make the extent and allocation of liability risks a concern of health plans and thus a new subject for bargaining between plans and potential subcontractors. As a result, whatever incentives tort law provides to deter bad practice and to maintain and improve the quality of health care would operate universally on entities that are well positioned and well equipped to take action to enhance quality. Quality considerations would thus be incorporated in many decisions that are currently driven by cost concerns alone. One cannot be certain exactly how health plans or provider organizations on which liability risks devolve by contract would respond to such a change in their legal environment. There are reasons to believe, however, that tort law's deterrence signals are more likely to induce quality improvements when they are directed at health care organizations rather than individual practitioners.

Although "vicarious liability" has been advocated from time to time, usually under the label "enterprise liability,"(8) it is not currently on any prominent reform agenda. Instead, the debate over the liability of managed care plans has centered only on whether to authorize lawsuits against plans for their own alleged negligence or breaches of contract, not on making plans or their subcontractors liable when physicians fail to meet their professional obligations to patients.(9) Many health care experts are concerned, however, that the political movement to intensify legal controls over managed care is distracting attention from a more general quality problem in American health care and that the health care industry is neglecting large opportunities to improve the quality of care through better management.(10) In combination with efforts to provide more quality information to the public, legislation that places the legal onus for medical accidents initially on health plans could prove to be an important step in harnessing the plans' bargaining power in the effort to improve quality and to achieve overall efficiency in health care spending. These considerations all strongly point toward making vicarious liability a central feature of public policy toward managed care.

Part II of this Article briefly discusses the state of U.S. health care today, first emphasizing how thoroughly managed care has disappointed expectations and then noting an important separate development, the raising of new concerns about the entire health care system's shortcomings with respect to the quality of care. Part III stresses the need both for radical organizational reform to improve quality and for a new paradigm of responsibility for clinical care, suggesting that vicarious liability, implemented as proposed, might provide the needed impetus for change. Part IV then explains the proposal to make exclusive vicarious liability the default rule for organized health plans and argues the policy case for adopting it. Part V attempts to put to rest important and legitimate concerns about the effects of the proposed strategy on the professionalism of physicians. Part VI briefly examines the current law on vicarious liability, noting why legislation is necessary even though courts are increasingly exposing health plans to such liability. Finally, Part VII argues for adopting the proposal despite the serious objection that malpractice law has not proved to be a very reliable source of incentives to improve the quality of medical care.


Although today's health plans and their subcontractors have begun an important revolution, their actual accomplishments to date fall short of the goals envisioned for managed care when it first came on the scene in the 1970s and early 1980s. At that time, policy experts expected competing health plans to organize providers into discrete, competing groups, each undertaking distinctive collaborative efforts to improve the quality of care while also controlling costs. However, the vision of health plans actually organizing and directly overseeing providers has not been realized.(11) The reasons for this outcome are several. A health plan that is large enough to realize economies of scale in performing its core functions would face serious diseconomies of scale if it attempted to manage health care itself.(12) In addition, there are questions about the propriety of entrusting managerial authority to corporate entities that lack legal responsibility for the quality of care. In any event, today's health plans act almost exclusively as general contractors at least once removed from providers and the actual delivery of care.

In addition to distancing themselves from the provision of health services, today's health plans have rarely made substantial efforts to induce their subcontractors to improve providers' overall performance by coordinating their efforts and rationalizing their clinical methods. Some plans have responded to demands by sophisticated purchasers by steering patients to so-called "centers of excellence" for certain highly specialized services and imposing some reporting and quality-related requirements on their subcontractors.(13) However, these measures are only a nod in the direction of quality improvement. In reality, most plans are not rigorously selective in their choice of subcontractors. Rather than screening for demonstrated competencies and demanding the organizational changes necessary for superior performance, most plans offer eligibility to provide covered services to virtually any provider-subcontractor willing to accept the plan's financial terms.(14) At the health plan level, therefore, managed care today means little more than subcontracting and capitation, techniques that allow health plans to exercise their purchasing power over providers and to transfer to them much of the financial risk in meeting enrollees' health care needs.(15) Although they actively negotiate the prices they will pay, health plans delegate responsibility for most other matters to a wide variety of subcontractors and exercise very little influence over those subcontractors' performance.(16)

Most of today's health plans do, however, engage in some explicit rationing of health care financing. So-called "predetermination of benefits," undertaken by designated utilization managers who determine whether certain services that physicians propose to prescribe fall within the plan's coverage,(17) allows plans to husband the funds contributed by their subscribers without directly interfering in doctor-patient relationships. However, because this practice is cumbersome, controversial and legally risky, it is giving way to more extensive capitation arrangements. As subcontractors assume more responsibility for delivering promised services, cost control is often achieved through sub rosa, or secret, rationing by clinicians whose choices are influenced by financial incentives to economize.(18) Given both the relative transparency of predetermination of benefits and the distinction between rationing financing and rationing actual care, one would think that predetermination is preferable as a cost-control strategy over undisclosed rationing at the bedside.(19) Even so, health plans are entrusting greater responsibility for the quantity as well as the quality of care to a variety of independent contractors and the physicians they engage.(20)

To be sure, even though health plans are not actively managing care themselves, their subcontractors may be appropriately managing it in consumers' interest. Yet these subcontractors are generally selected because of their low costs, not because of their demonstrated skill in managing care and improving its quality. They are, in any event, a very mixed bag, including such entities as unorganized "preferred providers" and more or less organized independent practice associations (IPAs), physician networks, management services organizations, provider-sponsored organizations, physician-hospital organizations, and other so-called integrated delivery systems.(21) Judging from recent bankruptcies and other signs of financial distress, many of these entities are incapable of managing costs effectively. It is even more doubtful that many of them are committed to, or effectively engaged in, raising quality standards and improving patient outcomes.

Many of the subcontracting entities to which health plans are delegating responsibility for providing appropriate care to their enrollees were created by providers primarily to bargain with health plans on their behalf, not to facilitate the efficient management of care. …

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