Ch.7LegalAspects.docx | Essay Stewards

7.1 WHAT IS A CONTRACT?

A contract is a special kind of voluntary agreement, either written or oral, that involves legally binding obligations between two or more parties. A contract serves to provide one or more of the parties with a legal remedy if another of the parties does not perform his or her obligations pursuant to the terms of the contract. The major purpose of a contract is to specify, limit, and define the agreements that are legally enforceable. A contract forces the participants to be specific in their understandings and expectations of each other. Contracts, particularly those in writing, serve to minimize misunderstandings and offer a means for the parties of a contract to resolve any disputes that may arise.

7.2 TYPES OF CONTRACTS

The following is a general description of the various types of contracts and a brief definition of each. Healthcare professionals should be knowledgeable with each type of contract because they are commonly used in the healthcare setting.

Express Contracts

An express contract is one in which the parties have an oral or written agreement. Both written and oral contracts are generally recognized and are equally legal and binding.

Oral Contract. A court will not consider oral negotiations and agreements made before or at the same time a written contract is signed if the parties intended the document to be their complete and final agreement. Both written and oral contracts are generally recognized and are equally legal and binding.

Written Contract. It is preferable to reduce important and complex contracts to writing. In certain instances, the courts will enforce only written contracts.

Implied Contract

An implied contract is one that is inferred by law. It is based on the conduct of the parties, such as a handshake or similar conduct. Much of the litigation concerning excesses of corporate authority involves questions of whether a corporation has the implied authority—incidental to its express authority—to perform a questioned act. In Hungerford Hosp. v. Mulvey, for example, even though its certificate of incorporation did not authorize such an act specifically, a hospital was permitted to construct a medical office building on land that had been donated for maintaining and operating the hospital. The court, in recognizing a trend to encourage charitable hospitals to provide private offices for rental to staff members, held that such an act was within the implied powers of the hospital and that such offices aid in the work of a general hospital even though it went beyond the hospital corporation’s express powers.

Voidable Contract

A voidable contract is one in which one party, but not the other, has the right to escape from its legal obligations under the contract. It is considered to be a voidable contract at the option of that party. For example, a minor, not having the capacity to enter into a contract, can void the contract. However, the competent party to the contract may not void the contract.

Executed Contract

An executed contract is one in which all of the obligations of the parties have been fully performed.

Enforceable Contract

An enforceable contract is one that is a valid, legally binding agreement. If one party breaches it, the other will have an appropriate legal remedy.

Unenforceable Contract

An unenforceable contract is one in which, because of some defect, no legal remedy is available if breached by one of the parties to the contract.

Contracts for Realty, Goods, or Services

There are also contracts for realty (real estate or interests in real estate), goods (movable objects, with the exception of money and securities), and services (human energy).

Offer/Communication

An offer is a promise by one party to do (or not to do) something if the other party agrees to do (or not do) something. Preliminary negotiations are not offers. An offer must be communicated to the other party so that it can be accepted or rejected.

Consideration

Consideration requires that each party to a contract give up something of value in exchange for something of value. No side can have a free way out or the ability to obtain something of value without providing something in exchange. Only when legal consideration has been given will a court treat the agreement as a contract. The adequacy or inadequacy of consideration, or the price paid, will not normally affect the formation of a contract.

7.3 ELEMENTS OF A CONTRACT

Whether contracts are executed in writing or agreed to orally, they must contain the following elements to be enforceable: (1) offer/communication, (2) consideration, and (3) acceptance.

The law will enforce contracts only when they are executed between persons who are competent—that is, those with the legal and mental capacity to contract. Certain classes of persons, such as minors, people with mental illness, and prisoners, traditionally have been considered unable to understand the consequences of their actions and have been deemed incompetent, or lacking in legal capacity, to make a binding contract.

Offer/Communication

Consideration

Acceptance

Upon proper acceptance of an offer, a contract is formed. A valid acceptance requires the following:

1. Meeting of the Minds. Acceptance requires a meeting of the minds (mutual assent); in other words, the parties must understand and agree on the terms of the contract. This means that each side must be clear as to the details, rights, and obligations of the contract.

2. Definite and Complete. Acceptance requires mutual assent to be found between the parties. The terms must be so complete that both parties understand and agree to what has been proposed.

3. Duration. Generally, the offeror (the one who makes the offer) may revoke an offer at any time prior to a valid acceptance. When the offeror does revoke the proposal, the revocation is not effective until the offeree (the person to whom the offer is made) receives it. Once the offeree has accepted the offer, any attempt to revoke the agreement is too late and is invalid.

4. Complete and Conforming. The acceptance must be a mirror image of the offer. In other words, the acceptance must comply with all the terms of the offer and not change or add any terms.

7.4 BREACH OF CONTRACT

A breach of contract occurs when there is a violation of one or more of the terms of the contract. The basic elements that a plaintiff must establish in order to be successful in a breach of contract lawsuit include the following: (1) A valid contract was executed; (2) The plaintiff performed as specified in the contract; (3) The defendant failed to perform as specified in the contract; and (4) The plaintiff suffered an economic loss as a result of the defendant’s breach of contract.

7.5 CORPORATE CONTRACTS

The ability of a corporation to enter into a contract is limited by its powers as contained in or inferred from its articles of incorporation (sometimes called a charter) or conferred upon it by general corporation law. Whenever a contract of any consequence is made with a corporation, appropriate corporate approval and authorization must be obtained. In the event that a contract is entered into with a corporation without the appropriate authority, the contract nevertheless may be ratified and made binding on the corporation by subsequent conduct or statements made on its behalf by its representatives.

When the chief executive officer (CEO) of an organization exceeds the limits of his or her authority, the question of whether the organization will be responsible for the CEO’s acts may arise. If the actions of the governing body give rise to a third party’s reasonable belief that the CEO acts with the authority of the organization, and such belief causes the third party to enter into an agreement with the CEO, expecting that the organization will be obligated under the contract, then the organization generally is responsible under the concept of apparent authority (the appearance of being the agent of another [employer or principal] with the power to act for the principal). However, if a third party deals with the CEO in the absence of indications of the CEO’s authority created by the governing body and thereby unreasonably assumes that the CEO possesses the authority to bind the organization to a contract, then such third party deals with the CEO in an individual capacity and not as an agent of the organization.

Although there can be times when a CEO makes a decision that exceeds his or her authority, the governing body may subsequently approve such actions through ratification by accepting any resulting responsibility as though it had been authorized previously. Conversely, if the governing body, for example, has set a limitation on the amount of money a CEO is authorized to expend on a capital budget item and the CEO exceeds that authorization, he could be held liable to the supplier for that purchase, if so made without prior approval of the governing body.

7.6 PARTNERSHIPS

A partnership comprises two or more persons who agree to carry on a business for profit and to share profits and losses in some proportions. A partnership, unlike a corporation, can be created by the parties’ actions without a written or oral agreement.

Agent

An agent is one who has the power to contract for and bind another person, the principal, to a contract. Corporations can act only through agents (e.g., their officers).

Apparent Agent or Ostensible Agent

An apparent or ostensible agent is one who a third person believes is acting on behalf of the principal. If a hospital undertakes to provide physician services to a community, and the community reasonably believes that a physician is employed by the hospital to deliver services, then the hospital would generally be liable for the physician’s negligent acts. For example, in Jennison v. Providence St. Vincent Med. Ctr., Jennison, having severe abdominal pain, was taken to the hospital emergency department. Unsure of the cause of Jennison’s medical problems, Cook, Jennison’s assigned physician, recommended surgery. Prior to surgery Cook asked Nunez, a member of an independent anesthesiology group at the hospital, to place a central venous catheter in Jennison.

An X-ray had been taken to confirm the correct placement of the central line. The X-ray showed that the tip of the central line had gone into the pericardial sac of Jennison’s heart. A procedure had not been established to notify the treating physicians in a timely manner that the central line had been dangerously misplaced.

Upon the eventual discovery that the central line had been misplaced, it was pulled back to its proper position. Unfortunately, fluids had already infused through the central line and into the space between Jennison’s heart and pericardial sac. The pressure of the fluid against her heart kept it from filling adequately. Jennison’s blood pressure dropped, and she went into cardiac arrest. The doctors attempted to remove the excess fluid. During the procedure, Jennison suffered a second cardiac arrest. The doctors were again able to resuscitate her. However, due to the lack of oxygen to her brain, Jennison suffered a severe brain injury.

The jury returned a verdict in favor of the plaintiffs, finding the hospital 100% negligent, and the hospital appealed. The Court of Appeals of Oregon affirmed the findings of the trial court. The hospital presented itself as providing radiology services to the public. The public, looking to the hospital to provide such care, is unaware of and unconcerned with the technical complexities and nuances surrounding the contractual and employment arrangements between the hospital and the various medical personnel operating therein. Public policy dictates that the public has every right to assume and expect that the hospital is the medical provider it purports to be.

7.7 INDEPENDENT CONTRACTOR

An independent contractor is an individual who agrees to undertake work without being under the direct control or direction of another. Independent contractors are personally liable for their own negligent acts. Whether a physician is an employee or an independent contractor is of primary importance in determining liability for damages. Generally, a healthcare organization is not liable for injuries resulting from negligent acts or omissions of independent physicians. There is no liability on the theory of respondeat superior, whereby a physician is an independent contractor as long as the physician is not an employee of the organization, is not compensated by the organization, maintains a private practice, and is chosen directly by his or her patients. The mere existence of an independent contractual relationship, however, is not sufficient to remove an organization from liability for the acts of certain of its professional personnel if the independent contractor status is not readily known to the injured party.

Hospital Liable for Physician’s Negligence

A hospital can be liable for a physician’s negligence, even if the physician is under contract to provide services to the hospital. The appellate division of the New York State Supreme Court in Mduba v. Benedictine Hospital held that the hospital was liable for the emergency department physician’s negligence whether the physician was an independent contractor or, even if under contract, the physician was considered to be an independent contractor. The court held that the patient had no way of knowing of the existence of a contract and relied on the relationship between the hospital and the physician in seeking treatment in the emergency department.

Agency Liable for Negligent Hiring

The employer, Patient Support Services, Inc. (PSS), in Maristany v. Patient Support Services, Inc., was found not liable for negligent hiring for injuries received by a patient under the care of one of its independent contractors. By contract dated January 29, 1994, the plaintiff retained the services of PSS to furnish an independent nurse, Terry, to care for her husband, Santiago, a postoperative brain surgery patient at defendant Presbyterian Hospital.

At approximately 10:00 PM, Terry assisted a hospital nurse in placing Santiago into a Posey-restraining vest. At approximately 3:30 AM, Terry returned from a break to find Santiago extremely agitated. Terry sought assistance and tried to restrain the patient physically, but the patient escaped from the vest, climbed over the rails, and fell to the floor, sustaining serious injury.

The plaintiffs did not contest that Terry’s status was that of an independent contractor, not an employee. Although an employer is generally not liable for the torts or negligent acts of an independent contractor under the doctrine of respondeat superior, the employer had a right to rely on the supposed qualifications and good character of the contractor and is not bound to anticipate misconduct on the contractor’s part. The employer is not liable on the ground of its having employed an incompetent or otherwise unsuitable contractor unless it also appears that the employer either knew or, in the exercise of reasonable care, should have ascertained that the contractor was not properly qualified to undertake the work.

There was no competent proof that PSS had any reason to question Terry’s qualifications. At the time of the incident, Terry had had her qualifying certificate for more than 10 years. She had received training in the use of Posey restraints and had previously cared for patients whose condition required these restraints. Because Terry had previously worked for PSS and had not given any indication of incompetence, there was no viability to the claim that PSS was negligent in assigning her to the care of Santiago.

7.8 LEGALITY OF OBJECT

To be a valid contract, the purpose or object of the contract must not violate state or federal policy and must not violate any statute, rule, or regulation. If the subject or purpose of the contract becomes illegal by some statute, rule, or regulation before actual formation of the contract, the parties no longer can form the contract.

7.9 CONDITIONS

A condition precedent is an act or event that must happen or be performed by one party before the other party has any responsibility to perform under the contract. An express condition is formally written into the contract in specific terms. An implied condition is one in which, although the parties may not have specifically mentioned the condition, it can reasonably be assumed that the parties intended the condition to be enforced.

7.10 PERFORMANCE

Performance is the act of doing what is required by a contract. Each party to a contract is bound to perform the promises according to the stipulated terms contained in the contract. The effect of successful performance by each party to a contract is to discharge the parties bound to the contract from any future contractual liability.

7.11 NONPERFORMANCE DEFENSES

Under some circumstances, the law gives a person a right not to perform under a contract. Defenses permitting nonperformance of a contract include fraud, mistakes, duress, illegal contract, impossibility, and statute of limitations.

Fraud

A victim of fraud is not generally required to perform the agreed upon terms of a contract. Contract fraud occurs when at least one party under a contract knowingly misrepresents a material fact under the contract and intends that the other party rely on that misrepresentation. The second party must rely on the misrepresentation and suffer some damage before it will be excused from performing under the terms of the contract.

Mistakes of Fact and Law

Mistakes occur in contracts just as they do in everything else. A party to a contract will be allowed to claim mistake as a defense under certain instances. There are two types of mistakes: mistake of fact and mistake of law. A mistake of fact is an incorrect belief regarding a fact. Both parties must have made the mistake. If only one is in error (and it is not known to the other), mistake of fact is not a defense. Mistake of law, on the other hand, is an incorrect judgment of the legal consequences of known facts. If the parties to a suit make a mistake as to the law involved, they usually must accept their plight without any remedy.

Duress

Duress is the use of unlawful threats or pressure to force an individual to act against his or her will. An act performed under duress is not legally binding.

Illegal Contract

An illegal contract is a contract whose formation, object, or performance is against the law or contrary to public policy that no court would uphold or enforce. No individual can recover damages when a contract is formed for illegal purposes.

Impossibility

Contracts can become impossible to perform because (1) certain facts might have existed at the time the contract was executed or (2) they might have arisen subsequent to the formation of the contract. Contracts that are impossible to perform do not have to be carried out by the parties to a contract.

Statute of Limitations

A party who does not, within a period known as the statute of limitations, take action to enforce contract rights by suing for damages caused by a breach of contract or taking other action can be barred from doing so.

7.12 REMEDIES

What can a party do when another has breached the contract and refuses to or cannot perform? The general rule is that legal redress will attempt to make the injured party whole again.

Specified Performance

When an aggrieved party has subsequently complied with his or her obligations pursuant to the agreed upon terms of a contract, that party might seek specific performance as a remedy rather than monetary remuneration. The most satisfactory remedy available to an injured party may be to require specific performance by the other party to the contract.

Monetary Damages

Monetary damages, sometimes called compensatory damages, are awarded in an attempt to restore to the aggrieved party the money that it would have had if the other party had not breached the contract. This can include the cost of making a substitute contract with another party and the expense of delays caused by the breach.

General and Consequential Damages

General damages are those that can be expected to arise from a breach of a contract. They are foreseeable and common in the circumstances. Consequential damages are those that occur because of some unexpected, unusual, or strange development involved in the particular contract in dispute. The distinction between the two types is one of foreseeability. If it is found that the party who breached the contract could have foreseen the damages that followed, that person could be liable for consequential as well as general damages.

Duty to Mitigate Damages

When a party to a contract has breached the terms of a contract, the other party cannot stand idly by and let damages build indefinitely. Every injured party has a duty to mitigate (lessen) damages caused by the breach of another person or entity. Failure to do so will prevent the aggrieved party’s full recovery of damages that could have been mitigated.

Arbitration

Under the modern view of contract law, agreements in contracts to arbitrate subsequent disputes are valid.

7.13 EMPLOYMENT CONTRACTS

An employment contract is a written document that sets forth the terms of the employment relationship. Such contracts are binding on both the employer and employee so long as the contract has been executed in a legal manner. The conditions of employment, including wages, hours, and type of work, are generally described in an employment contract. Depending on the level of employment and the responsibility of the new employee, the conditions of employment should include the terms of employment, the duties and responsibilities of the employee, compensation, confidentiality requirements (e.g., trade secrets and proprietary information), a non-compete clause, and provisions for termination of the agreement (e.g., an inability to perform one’s duties and responsibilities).

A contract can be express or implied. Most employees work under employment contracts. For example, if an employee signs a document promising to abide by company policy and procedures, it likely constitutes an employment contract. Certain categories of employees (e.g., radiologists) often have the ability to negotiate their employment contracts. An employer’s right to terminate an employee can be limited by express agreement with the employee or through a collective bargaining agreement to which the employee is a beneficiary.

The rights of employees have been expanding through judicial decisions in the different states. Court decisions have been based on verbal promises, historical practices of the employer, and documents such as employee handbooks and administrative policy and procedure manuals that describe employee rights.

A job description is not intended to be an employment contract, nor does it dissolve the at-will employment relationship. It is a record of the basic purpose, typical level of authority, typical source of action, and representative function or duties of the job. It is designed to provide management and others with a clear understanding of the level of the job and its working relationships, skills, and requirements in relation to other jobs.

Employee Breaches Contract: Repayment of Tuition Required

The registered nurse in Sweetwater Hosp. Ass’n v. Carpenter was found to have breached her contract with the hospital under which the hospital agreed to pay for her schooling as a nurse anesthetist in exchange for her agreeing to work for the hospital for 5 years following completion of her studies. The nurse agreed that if she failed to work at the hospital following completion of her studies, she would be responsible for cash advances by the hospital plus interest. Upon completion of her studies, the nurse sought employment elsewhere because it appeared to her that there were no nurse anesthetist positions available at the hospital.

As consideration for the loan, the contract provided that the defendant agreed to become or remain an employee of the hospital. The contract did not state in what capacity the defendant would become or remain an employee. There was nothing in the language of the contract stating that the hospital had an obligation to offer the defendant a nurse anesthetist position.

In this case, there was no proof by the defendant that the hospital breached the contract. The defendant breached her own contract by taking a job elsewhere without specifically getting proof that she was not going to be offered a job by the hospital. The defendant did not present herself for employment at the hospital after graduation. She accepted a position elsewhere. Because she did not become employed at the hospital, she was not entitled to rely upon the forgiveness provisions contained in the contract. She was, therefore, obligated to repay the hospital.

Geographic Limitations on Practice Reasonable

The provisions of a covenant prohibiting the plaintiff in Thompson v. Nason Hosp., a pediatrician, from practicing pediatric medicine for a period of 2 years within a 10-mile radius of the defendant’s office, and prohibiting her for a period of 1 year from soliciting patients of the defendant, were found to be reasonable as to both duration and geographic area. When the plaintiff entered into the employment contract, she agreed to be bound by the restrictive covenants in the event that her employment should end. The defendant had the right to terminate the plaintiff’s employment for any reason whatsoever or for no reason upon 60 days’ written notice to the plaintiff.

No Express Agreement: Right to Terminate

No express agreement was found to exist in O’Connor v. Eastman Kodak Co., in which the court held that an employer had a right to terminate an employee at will at any time and for any reason or no reason. The plaintiff did not rely on any specific representation made to him during the course of his employment interviews nor did he rely on any documentation in the employee handbook, which would have limited the defendant’s common law right to discharge at will. The employee had relied on a popular perception of Kodak as a “womb-to-tomb” employer.

Restrictive Covenant Enforceable

The plaintiff-hospital, in Sarah Bush Lincoln Health Ctr. v. Perket, sued its former director of physical medicine and rehabilitation to enforce a restrictive covenant in the employment contract precluding the director from accepting similar employment in the same county within 1 year of termination of employment. The parties to the complaint entered into a contract whereby the defendant was employed as the plaintiff’s director of physical medicine. The contract provided that during the director’s employment and for a period of 1 year thereafter, the director would not, directly or indirectly, invest in, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control of any person, firm, or corporation engaged in competition with the hospital in providing health services or facilities within Coles County, including the provision of services in a private office, without prior written consent of the hospital. Following the termination, the defendant engaged in the business of providing physical medicine and rehabilitation services in Coles County. The plaintiff argued that unless the defendant was enjoined, the hospital would suffer irreparable injury. The circuit court granted the hospital’s motion for preliminary injunction.

BREACH OF EMPLOYMENT CONTRACT

Citation: Dutta v. St. Francis Reg’l Med. Ctr., 850 P.2d 928 (Kan. Ct. App. 1993)

Facts

On July 1, 1987, Dr. Dutta, a radiologist, began working in the radiology department of the hospital as an employee of Dr. Krause, the medical director of the hospital’s radiology department. On August 5, 1988, the hospital terminated Krause’s employment as medical director. On August 8, 1988, Dutta and the hospital entered into a written employment contract with a primary term of 90 days. The contract provided that if a new medical director had not been hired by the hospital within the 90-day period, the agreement was to be automatically extended for a second 90-day period.

Following a period of recruitment and interviews, the hospital offered Dr. Tan the position. Tan and the hospital executed a contract making him the medical director of the radiology department. The contract granted Tan the right “to provide radiation oncology services on an exclusive basis subject to the exception of allowing Dutta to continue her practice of radiation oncology at the hospital.” On April 24, 1989, the hospital notified Dutta that the 90-day contract had expired and that Tan was appointed as the new medical director. The letter provided in part:

It is our intent at this time to establish an exclusive contract with Dr. Donald Tan for medical direction and radiation therapy at SFRMC. Your medical staff privileges to practice radiation therapy at SFRMC will not be affected by this action. You will be allowed to maintain your current office space for radiation oncology activities; however, you should make alternative arrangements for your billing and collection activities. [Id. at 931]

Dutta and Tan then practiced independently of each other in the same facility. On October 13, 1989, Tan became unhappy with this arrangement and requested exclusive privileges, stating he could not continue as medical director without exclusivity. On February 2, 1990, an exclusive contract was authorized by the hospital. Dutta was notified that she would no longer be permitted to provide radiation therapy services at the hospital after May 1, 1990. By letter, Dutta twice requested a hearing on the hospital’s decision to revoke her right to use hospital facilities. Both requests were denied.

Dutta sued the hospital for breach of employment contract after the hospital entered into an exclusive agreement with Tan, thereby denying Dutta the use of the hospital’s radiology department and equipment. Dutta presented evidence about the purpose of the requirement in her contract with the hospital that provided that the new medical director be mutually acceptable to both parties. A hospital administrator testified that the hospital and Dutta included the phrase “mutually acceptable” in the contract because “[w]e both agreed that we wanted the person being recruited to be compatible with Dutta” [Id. at 932].

Issue

Was the language, “mutually acceptable,” ambiguous in the employment contract between the hospital and Dutta?

Holding

The Kansas Court of Appeals held that substantial evidence supported the jury’s verdict that the hospital breached its written employment contract with Dutta by hiring a medical director who was not mutually acceptable to both the hospital and Dutta.

Reason

The language in the contract is ambiguous if the words in the contract are subject to two or more possible meanings. The determination of whether a contract is ambiguous is a question of law. Paragraphs 4 and 5 of the hospital’s employment agreement with Dutta, dated August 8, 1988, read as follows:

4. During the term of this Agreement the Medical Center shall be actively recruiting for a full-time Medical Director for the Radiation Therapy department…. Dr. Dutta shall be involved in the interviewing process. The person selected [the] above positions shall be mutually acceptable to the Medical Center and Dr. Dutta. Dr. Dutta may discuss potential business arrangements with each individual interviewed.

5. Once the full-time Medical Director or part-time radiation therapist is selected, Dr. Dutta will, in good faith, attempt to reach a satisfactory business arrangement with the selected individual. [Id. at 936]

The testimony of Dutta, the hospital administrator, and the attorney who represented Dutta in contract negotiations provides a factual basis for the jury to find that the phrase, “mutually acceptable,” in the contract was intended by Dutta to ensure that the hospital would select a medical director who indicated a willingness to form a partnership or otherwise acceptable business relationship.

Discussion

1. Describe the protective elements each party to an employment contract should negotiate.

2. Describe the elements necessary to make a contract valid.

On appeal, the Illinois Appellate Court held that the grant of the preliminary injunction was proper and that the defendant was engaging in the business of providing physical medicine and rehabilitation services in Coles County. By hiring the defendant, the hospital was thereby bringing him in contact with a clientele that the hospital had established over a period of years. The hospital was naturally interested in protecting its clients from being taken over by the defendant as a result of these contacts.

Restrictive Covenant Not Enforceable

Not every restrictive covenant is enforceable; for example, a restrictive covenant in an employment contract between a hospital and neurosurgeon was found to be geographically too restrictive whereby the neurosurgeon was not to practice within a 30-mile radius of the hospital. This restriction was determined to be excessive. Such a restriction was considered to be detrimental to public interest in that the restricted area was plagued with a shortage of neurosurgeons.

The reader should understand that employment contracts that contain a restrictive covenant between a physician and a hospital, although not favored, are not per se unreasonable and unenforceable. The trial court must determine whether the restrictive covenant protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not adverse to the public interest.

In another case, the restrictive covenant in Comprehensive Psychology System P.C. v. Prince limiting the ability of a psychologist from practicing his profession within 10 miles of his former employer’s facility and from soliciting any of his patients was determined not to be enforceable. The nature of the practice of psychology and the uniquely personal patient–psychologist relationship forbid restrictions that might interfere with an ongoing course of treatment. A psychologist who changes his office location, voluntarily or involuntarily, has a duty to inform patients of the change and the new location and phone number. To do otherwise may be akin to abandonment. Before unilaterally withdrawing from treating a patient, a doctor must provide reasonable notice of withdrawal to enable the patient to obtain substitute care. The limitations the plaintiff seeks to enforce against the defendant interfere with a critical patient–psychologist relationship and with the right of the patient to continued treatment from that psychologist.

Employee Handbook: A Contract

In order for an employee handbook to constitute a contract, thereby giving enforceable rights to the employee, the following elements must be present:

1. A policy statement that clearly sets forth a promise that the employee can construe to be an offer.

2. The policy statement must be distributed to the employee, making him or her aware of the offer.

3. After learning about the offer and policy statement, the employee must “begin” or “continue” to work.

The plaintiff-employee in Weiner v. McGraw-Hill brought suit against his employer for wrongful termination. The plaintiff allegedly was discharged without just and sufficient cause or the rehabilitative efforts specified in the defendant’s handbook and allegedly promised at the time the plaintiff accepted employment. Furthermore, on several occasions when the plaintiff recommended that certain of his subordinates be dismissed, he allegedly was instructed to proceed in strict compliance with the handbook and policy manuals. The court held that although the defendant did not engage the plaintiff for a fixed term of employment, the plaintiff pleaded a good cause of action for breach of contract. Even the employment application that the plaintiff signed at the time of employment stated that he would be subject to the provisions of McGraw-Hill’s Handbook on Personnel Policies and Procedures.

In Watson v. Idaho Falls Consolidated Hospitals, Inc., a nurse’s aide was awarded $20,000 for damages when the hospital, as employer, violated the provisions of its employee handbook in the manner in which it terminated the plaintiff’s employment. Although the nurse’s aide had no formal written contract, the employee handbook and the hospital policies and procedures manual constituted a contract in view of evidence to the effect that these documents had been intended to be enforced and complied with by both employees and management. Employees read and relied on the handbook as creating terms of an employment contract. They were required to sign for the handbook to establish receipt of a revised handbook that explained hospital policy, discipline, counseling, and termination. A policy and procedure manual placed on each floor of the hospital also outlined termination procedures.

Employee Handbook: Not a Contract

An employee handbook is not always considered a contract, as noted in the following cases.

Not a Contract Because of Disclaimer

The employee handbook in Churchill v. Waters was not a contract because of a disclaimer in the handbook. A nurse brought a civil rights action against the hospital and hospital officials after her discharge. The federal district court held for the defendants, finding that the hospital employee handbook did not give the nurse a protected property interest in continued employment: “Absent proof that the handbook contained clear promises which indicated the intent to bind the parties, no contract was created.” The “handbook contained a disclaimer” expressly disavowing any attempt to be bound by it and stated that its contents were not to be considered conditions of employment. The handbook was presented as a matter of information only, and the language contained therein was not intended to constitute a contract between McDonough District Hospital and the employee. Although an employee handbook may delineate specific disciplinary procedures, that fact does not, in and of itself, constitute an enforceable contract.

Termination of Contract: Insubordination

The physician in Trieger v. Montefiore Med. Ctr. circulated a memorandum to department chairs at the hospital strongly criticizing management and urging his co-chairs “to set things right and reclaim their prerogatives and responsibilities.” The appellate court found that the trial court correctly determined that the memorandum was insubordinate and that it gave just cause for termination of the physician’s employment contract. In addition, the physician’s age discrimination claim was dismissed for lack of evidence sufficient to raise an issue of fact as to whether the hospital’s reason for the doctor’s dismissal, circulation of the insubordinate memorandum, was a pretext for discrimination. The doctor was terminated immediately after circulating the insubordinate memorandum, and there was no other evidence in the record to support the claim that the hospital’s actions were pretextual.

7.14 MEDICAL STAFF BYLAWS: A CONTRACT

Medical staff bylaws can be considered a contract. The plaintiff, Dr. Bass, in Bass v. Ambrosius, alleged that the hospital’s termination of his staff privileges violated its own bylaws. The hospital contended that its bylaws did not constitute a contract between itself and Bass, and, therefore, any violation of those bylaws would not support a breach of contract claim. The general rule that hospital bylaws can constitute a contract between the hospital and its staff is consistent with Wisconsin law that an employee handbook written and disseminated by the employer, and whose terms the employee has accepted, constitutes a contract between the employer and the employee. For instance, in Ferraro v. Koelsch, an employee handbook was management’s statement of what the company offered its employees and what it expected from its employees in return. It thus contained the essential elements of a binding contract: the promise of employment on stated terms and conditions by the employer and the promise by the employee to continue employment under those conditions. The court noted that a promise for a promise, or the exchange of promises, constitutes consideration to support any contract of this bilateral nature.

The bylaws at issue in Bass v. Ambrosius, required by Wis. Admin. Code § HSS 124.12(5) and approved by the hospital’s board of directors, have the same contractual elements as did the handbook in Ferraro. First, the bylaws state that they provide the rules that govern the physicians and dentists practicing at the hospital. Second, members of the hospital’s medical–dental staff must continuously meet the qualifications, standards, and requirements set forth in the bylaws. Third, an appointment to the medical–dental staff confers only those privileges provided by the letter of appointment and the bylaws. Fourth, all applicants for appointment to the medical–dental staff must submit a signed application acknowledging the requirement to familiarize themselves with the bylaws. Thus, Bass’s application to the medical–dental staff acknowledged by his signature that he would conduct his professional activities according to the bylaws and rules and regulations of both the hospital and the medical–dental staff of the hospital. In a separate letter, as part of the application process, Bass agreed to conduct his activities according to the bylaws of the hospital, as well as the bylaws and rules and regulations of the hospital’s medical–dental staff. For its part, the hospital promised that the medical–dental staff would be guided and governed by rules and regulations consistent with the bylaws, and it promised that any adverse action against a member of the medical–dental staff would comply with various procedural safeguards. The bylaws constituted a contract between Bass and the hospital. Accordingly, Bass was entitled to an order holding that the hospital had to comply with its bylaws before it could terminate his staff privileges.

In Sadler v. Dimensions Health Corporation, Sadler, an obstetrician and gynecologist (OB/GYN), applied for medical staff privileges in the hospital’s OB/GYN department. She was granted temporary privileges pending receipt of further information on her application. While practicing at the hospital, three incident reports concerning Sadler were filed. They involved her failure to respond to calls and initiate timely treatment, a broken humerus and permanent nerve injury following a birth, and a retained surgical sponge. The patient care committee (PCC) of the OB/GYN department reviewed the reports and concluded that continued observation of Sadler was warranted. The PCC met with Sadler to review five cases. Three involved nonindicated or precipitous cesarean sections, and two involved delayed responses to calls from the hospital staff. Following review, the PCC recommended that Sadler consult with more senior practitioners for second opinions before performing cesarean sections.

Two physician consultants were eventually retained by the OB/GYN department of the hospital to review charts of a variety of Sadler’s cases. Random charts of other members of the OB/GYN department of the hospital were also reviewed. Following review, the consultants recommended in their report that Sadler be subjected to case-by-case pre-monitoring for surgical indications. The hospital’s medical executive committee (MEC) reviewed the documentation regarding Sadler’s performance. Based on that review, the MEC voted not to extend provisional privileges and to impose monitoring of Sadler until her provisional privileges expired. Sadler was notified by letter of the MEC decision not to extend her provisional privileges. She was advised that she had a right to request a hearing pursuant to the provisions of the bylaws. Sadler exercised that right, and an ad hoc committee (a hearing committee) was formed pursuant to the bylaws. The committee concluded that there was compelling evidence that the physician consistently disregarded hospital policies, was unprofessional in her dealings with staff, and deviated from acceptable standards in her hospital record keeping and clinical practice. In addition, she ignored efforts by the hospital to bring her into compliance.

The parties agreed that the bylaws of the medical staff of the hospital to which Sadler subscribed when she applied for privileges at the hospital constituted an enforceable contract between her and the hospital. Those bylaws provided a process by which Sadler could challenge her termination of clinical privileges. Sadler fully pursued the prescribed process.

Represented by counsel, she appeared before a panel of members of the medical staff who had no involvement with her case. She cross-examined witnesses under oath, called her own witnesses, offered evidence, and presented oral argument and posthearing written memoranda to the hearing committee. When the hearing committee agreed with the recommendation of the MEC that her privileges at the hospital should be terminated, she exercised her right under the bylaws to have that decision reviewed by the appellate review committee of the board of directors.

The court of appeals held that there was substantial evidence to support the conclusions of the hearing committee and the board of directors that the imposition of proctoring and monitoring upon Sadler and the termination of her hospital privileges were reasonable and proper.

Right to Hearing

A physician whose privileges are either suspended or terminated must exhaust all remedies provided in a facility’s bylaws, rules, and regulations before commencing a court action. The U.S. Court of Appeals in Northeast Georgia Radiological Associates v. Tidwell held that a contract with the hospital’s radiologists, which incorporated the medical staff bylaws, sustained the plaintiffs’ claim to a protected property interest entitling them to a hearing before the medical staff and the hospital authority.

7.15 EXCLUSIVE CONTRACTS

An organization often enters into an exclusive contract with physicians or medical groups for the purpose of providing a specific service to the organization. Exclusive contracts generally occur within the organization’s ancillary service departments (e.g., radiology, anesthesiology, pathology). Physicians who seek to practice at organizations in these ancillary areas but who are not part of the exclusive group have attempted to invoke the federal antitrust laws to challenge these exclusive contracts. These challenges generally have been unsuccessful.

In Jefferson Parish Hospital v. Hyde, the defendant hospital had a contract with a firm of anesthesiologists that required all anesthesia services for the hospital’s patients be performed by that firm. Because of this contract, the plaintiff anesthesiologist’s application for admission to the hospital’s medical staff was denied. Dr. Hyde commenced an action in the federal district court, claiming the exclusive contract violated Section 1 of the Sherman Antitrust Act. The district court rejected the plaintiff’s complaint, but the U.S. Court of Appeals for the Fifth Circuit reversed the decision, finding the contract illegal per se. The Supreme Court reversed the Fifth Circuit, holding that the exclusive contract in question does not violate Section 1 of the Sherman Antitrust Act. The Supreme Court’s holding was based on the fact that the defendant hospital did not possess “market power,” and, therefore, patients were free to enter a competing hospital and to use another anesthesiologist instead of the firm. Thus, the court concluded that the evidence was insufficient to provide a basis for finding that the contract, as it actually operates in the market, had unreasonably restrained competition.

Similarly, the anesthesiologists in Belmar v. Cipolla brought an action challenging a hospital’s exclusive contract with a different group of anesthesiologists. The New Jersey Supreme Court held that under state law, the hospital’s exclusive contract was reasonable and did not violate public policy.

COMPETITION CLAUSE NOT OVERLY RESTRICTIVE

Citation: Dominy v. National Emergency Servs., 451 S.E.2d 472 (Ga. App. 1994)

Facts

The appellee, National Emergency Services (NES), assigned appellant, Dr. Dominy, to the emergency department at Memorial Hospital and Manor (MHM) in Bainbridge, Georgia, where he was working in 1987 when that hospital terminated its contract with NES and contracted with another provider, Coastal Emergency Services, for emergency department physicians. Dominy continued to perform emergency medical services at MHM under contract with Coastal until 1989.

The contract provided: “The period of this Agreement shall be for one (1) year from the date hereof, automatically renewable for a like period upon each expiration thereof….” The only reasonable construction of this provision was that the parties intended to contract for Dominy’s employment for automatically renewable 1-year terms upon the mutual assent of the parties. The fact that the agreement did not set out the mechanics by which mutual assent may be communicated did not invalidate the contract.

Dominy challenged the contract’s noncompetition clause as overly restrictive. The covenant in this case provides, in pertinent part: “for a period of two (2) years after the termination of this agreement … Physician shall not directly or indirectly solicit a contract to perform nor have any ownership or financial interest in any corporation, partnership, or other entity soliciting or contracting to perform emergency medical service for any medical institution at which Physician has performed the same or similar services under this Agreement or any prior Agreement between Physician and Corporation” [Id. at 474].

Issue

Was the contract’s noncompetition clause overly restrictive?

Holding

The court of appeals held that the noncompetition clause was not overly restrictive.

Reason

The record reveals no attempt by either party to terminate the contract, and it is undisputed that Dominy received payment for his services at MHM and other benefits from NES consistent with the agreement until the hospital terminated its contract with NES. By their conduct, the parties assented to each of the contract’s yearly renewals. Accordingly, the trial court properly granted summary judgment to NES.

As to the contract’s noncompetition clause, this restriction prohibits Dominy from performing emergency medical services in only MHM in Bainbridge, Georgia, where he worked pursuant to a contract with NES, and from having an ownership or financial interest in an entity contracting to provide emergency medical services to that one hospital. He is not precluded from all practice of medicine, with staff privileges at MHM, nor is he prohibited from providing emergency medical services, directly or under contract to a provider of such services, to other hospitals in the immediate vicinity. The court found that such a restriction is reasonably limited in duration and territorial effect while it protects NES’s interest in preventing Dominy from becoming its competitor immediately after termination of its contract with MHM.

Discussion

1. Discuss why hospitals place noncompetitive clauses in their contracts.

2. Discuss why the contract’s noncompetitive clause was not overly restrictive.

Nurse Practitioner: Noncompetitive Clause

The respondent-hospital in Washington County Memorial Hospital v. Sidebottom employed the appellant-nurse practitioner from October 1993 through April 1998. Prior to beginning her employment, the nurse entered into an employment agreement with the hospital. The agreement included a noncompetition clause providing, in part that the nurse, during the term of the agreement and for a period of 1 year after the termination of her employment, would not within a 50-mile radius directly or indirectly engage in the practice of nursing without the express direction or consent of the hospital. In February 1994, the nurse requested the hospital’s permission to work for the Washington County Health Department doing prenatal nursing care. Because the hospital was not then involved in providing prenatal care, the hospital gave her permission to accept that employment but reserved the ability to withdraw the permission if the services the nurse was providing later came to be provided by the hospital. In January 1996, the nurse and the hospital entered into a second employment agreement that continued the parties’ employment relationship through January 9, 1998. This agreement included a noncompetition clause identical to the 1993 employment agreement. It also provided for automatic renewal for an additional 2 years unless either party gave written termination notice no less than 90 days prior to the expiration of the agreement. On March 11, 1998, the nurse gave the hospital written notice of her resignation effective April 15. On April 16, the nurse began working as a nurse practitioner with Dr. Mullen, whose office is located within 50 miles of the hospital.

The Circuit Court prohibited the nurse from practicing nursing within a 50-mile radius of the hospital for a period of 1 year from April 15. The noncompetition clause in the nurse’s employment agreement was found to be clear and unambiguous. The nurse had been notified by the hospital that the noncompetition clause in her contract would be enforced. On appeal, the judgment of the circuit court was affirmed.

7.16 RESTRAINT OF TRADE

The increasing number of alternative delivery systems and resultant competition has created the potential for illegal activities to restrain trade. The emphasis on free enterprise and a competitive marketplace has resulted in careful scrutiny by the Federal Trade Commission (FTC), the federal agency responsible for monitoring the marketplace and enforcing federal antitrust laws.

The Antitrust Division of the U.S. Department of Justice has primary responsibility for enforcing federal antitrust laws, which includes investigation of possible violations of both the criminal and the civil provisions of the Sherman, Clayton, and Robinson–Patman Acts.

Federal Trade Commission

The FTC is authorized to enforce Section 5 of the FTC Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices. Together with the Department of Justice, the FTC also enforces the Clayton Act sections that prohibit discrimination (e.g., in price), exclusive dealings and similar arrangements, certain corporate acquisitions of stock or assets, and interlocking directorates.

Sherman Antitrust Act

The Sherman Antitrust Act, named for its author Senator John Sherman of Ohio, proscribes that every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several states is declared to be illegal. Those who attempt to monopolize or combine or conspire with any other person or persons to monopolize any part of the trade or commerce can be deemed guilty of a felony. Areas of concern for healthcare organizations include reduced market competition, price fixing, actions that bar or limit new entrants to the field, preferred provider arrangements, and exclusive contracts.

A healthcare organization must be cognizant of the potential problems that may exist when limiting the number of physicians that it will admit to its medical staff. Because closed staff determinations can effectively limit competition from other physicians, the governing body must ensure that the decision-making process in granting privileges is based on legislative, objective criteria and is not dominated by those who have the most to gain competitively by denying privileges. Physicians have attempted to use state and federal antitrust laws to challenge determinations denying or limiting medical staff privileges. Generally, these actions claim that the organization conspired with other physicians to ensure that the complaining physician would not obtain privileges so that competition among physicians would be reduced.

Conspiracy to Terminate Physician’s Privileges

In Patrick v. Burget, the U.S. Supreme Court upheld a $2 million jury verdict in favor of a surgeon practicing in Oregon who claimed that other physicians conspired to terminate his staff privileges at the only hospital in town and thus drove him out of practice. The defendant physicians argued that their conduct should be immune from liability under the state action doctrine because Oregon, like many states, has state agencies that regulate the procedures that hospitals may use to grant or deny staff privileges. The Supreme Court rejected this state action defense in the light of the egregious facts of the case (the defendant physicians were also participants in the state processes) and the fact that Oregon’s statutory scheme did not actively supervise medical staff determinations.

Claim of Boycott Denied

On February 29, 1984, the defendant hospital in Cogan v. Harford Memorial Hospital, owned by Upper Chesapeake Health Systems, Inc. (UCHS), contracted with Dr. Cogan to act as the chief of radiology for 5 years. In 1988, the hospital and Cogan renegotiated the contract. Cogan’s compensation was increased, and the contract was extended until May 25, 1993, subject to termination by either party, providing a 120-day written notice. During the renegotiation, Cogan sought compensation on a fee-for-service basis, but the hospital was uncomfortable with such an arrangement.

In December 1990, Cogan began discussing with NMR of America, Inc. the possibility of opening a radiology clinic to provide testing with magnetic resonance imaging (MRI) separate from the hospital. The hospital expressed opposition to such an arrangement. In response, Cogan tied discussions of a new MRI clinic to renegotiation of his contract on a fee-for-service arrangement. The hospital agreed to discuss a fee-for-service contract. Under the proposed contract, Cogan’s radiology group would not maintain any financial or professional interest with any competing medical facility within 20 miles of a hospital owned by UCHS. The parties failed to reach an agreement.

On March 1, 1991, the hospital informed Cogan of its intention to terminate his employment contract as of June 28, 1991. In October 1991, Cogan formed Cogan & Smith, a partnership with Dr. Smith, his former associate at the hospital.

In November 1991, Cogan & Smith signed a contract in which it agreed to act as the managing director of a radiology clinic. The clinic had a lower volume of business than anticipated, and Cogan filed suit against UCHS. He contended that the hospital’s policy against sending patients to facilities not accredited by The Joint Commission impeded the clinic’s business. The hospital claimed that the policy affected no more than seven patients. Cogan contended it affected 15,000 patients. He characterized this policy as a group boycott against the clinic. Under the Sherman Antitrust Act, group boycotts may be considered anticompetitive.

Cogan contended that the defendants violated the Sherman Act, breached the contract between himself and UCHS, interfered with his contractual relations, wrongfully discharged him, and deprived him of his constitutional rights in violation of 42 U.S.C. § 1983, as amended, 15 U.S.C.A. §§ 1, 2.

The U.S. District Court held that the harm suffered by Cogan because he was unable to continue working at the hospital was not compensable under the Sherman Act. The court found no evidence showing that competition in any relevant market had been harmed, reduced, or impacted by the termination of Cogan’s contract or the alleged group boycott of the MRI clinic by the implementation of the hospital’s policy. The only harm asserted was Cogan’s inability to continue working at the hospital. The injury he incurred as a competitor of the hospital was not the “type the antitrust laws were intended to prevent.”

Agreement for Professional Services Too Restrictive

In Emergicare Systems Corporation v. Bourdon, Emergicare Systems Corporation (ESC) contracted to provide emergency department physicians to the Longview Regional Hospital for several years; Dr. Bourdon was one of those physicians. On October 23, 1991, ESC sent a letter to Bourdon confirming that its contract with Longview Regional Hospital would terminate on November 8, 1991, and that pursuant to his agreement for professional services with ESC, his agreement with ESC would also terminate. Bourdon talked to the hospital administrator and to Metroplex Emergency Physicians, PA. Arrangements were made for him to continue his work at the emergency department as an employee of Metroplex.

ESC sued Bourdon and Metroplex. ESC alleged that Bourdon breached a covenant not to compete and that Metroplex interfered with its contractual agreement with Bourdon. Following a nonjury trial, judgment was rendered on February 15, 1996, that ESC take nothing from the defendants. ESC appealed. The covenant purports to restrict the physician from working within 5 miles of any clinic operated by ESC, whether the physician ever worked in that clinic or not. Also, the covenant purports to restrict the physician from working in any emergency department where ESC provides emergency department physicians for 1 year following termination of such contract. This could be at some indefinite future date, more than 1 year following the physician’s termination of employment by ESC.

The trial court was correct in rendering the take-nothing judgment on the appellant’s claims against Metroplex. The appeals court held that covenants not to compete that are unreasonable restraints of trade and that are unenforceable on grounds of public policy cannot form the basis of an action for tortious interference.

7.17 HOSPITAL STAFF PRIVILEGES

Staff privileges are both professionally and economically important to healthcare professionals in the practice of their chosen professions. Healthcare organizations must be selective in the granting of staff privileges to maintain quality standards, but every effort must be made to prevent anticompetitive abuses. As competition increases between podiatrists and orthopedic surgeons, psychologists and psychiatrists, nurse midwives and obstetricians, nurse anesthetists and anesthesiologists, and so on, it must be understood that there is a clear difference in denying staff privileges to an individual on a quality basis and denying such privileges to an entire group of professionals; the latter will serve only to raise a red flag and increase the chances of scrutiny by the courts. Competition for patients increases the potential for denial of privileges to prevent competitors from effectively entering the marketplace and practicing their respective professions.

CONTRACT VIOLATES ANTITRUST LAWS

Citation: Oltz v. St. Peter’s Community Hosp., 19 F.3d 1312 (9th Cir. 1994)

Facts

Oltz, a nurse anesthetist, brought an antitrust action against physician anesthesiologists and St. Peter’s Community Hospital after he was terminated. Oltz had a billing agreement with the hospital, which provided 84% of the surgical services in the rural community that it served. The anesthesiologists did not like competing with the nurse anesthetist’s lower fees and, as a result, entered into an exclusive contract with the hospital on April 29, 1980, in order to squeeze the nurse anesthetist out of the market. This resulted in cancellation of the nurse anesthetist’s contract with the hospital. Oltz filed a suit against the anesthesiologists and hospital for violation of the Sherman Antitrust Act, 15 U.S.C. § 1. The anesthesiologists settled for $462,500 before trial.

The case against the hospital proceeded to trial. The jury found that the hospital conspired with the anesthesiologists and awarded the plaintiff $212,182 in lost income and $209,649 in future damages. The trial judge considered the damage award to be excessive and ordered a new trial.

The hospital motioned the court to exclude all damages after June 26, 1982, which was the date that the hospital renegotiated its exclusive contract with the anesthesiology group. The court decided that Oltz failed to prove that the renegotiated contract also violated antitrust laws, thus ruling that Oltz was not entitled to damages after June 26, 1982. Because Oltz conceded that he could not prove damages greater than those offset by his settlement with the physicians, his claim for damages against the hospital was disposed of by summary judgment.

The judge who presided over Oltz’s request for attorneys’ fees restricted the amount that he could claim. Because Oltz had been denied damages from the hospital, the judge refused to award attorneys’ fees or costs for work performed after the 1986 liability trial.

Issue

Was Oltz entitled to seek recovery for all damages resulting from destruction of his business after June 26, 1982?

Holding

The U.S. Court of Appeals for the Ninth Circuit held that Oltz was entitled to seek recovery for all damages.

Reason

Oltz introduced evidence that the initial exclusive contract violated antitrust laws and that such violation destroyed his practice. “Because the initial conspiracy destroyed his practice, Oltz is entitled to seek recovery for all damages resulting from the destruction of his business…. The legality of any subsequent agreements between the conspirators is irrelevant, because the April 29, 1980, contract severed the lifeline to Oltz’s thriving practice…” [Id. at 1314].

Discussion

1. What should parties to a contract be aware of when negotiating exclusive contracts?

2. What remedies are available when one party breaches a contract by refusing to perform an agreed-upon service?

Restricting Privileges

Moratoriums and closed medical staffs, as used in the healthcare field, describe an organization’s policy of prohibiting further appointments to its medical staff. Generally, a moratorium is for a specified period. It is lifted at such time as the purpose for which it was instituted no longer exists. A closed staff is of a more permanent nature and relates to the mission of the institution, such as a commitment to teaching and research. Such institutions are very selective in their medical staff appointments. Generally, physicians who are appointed have both high academic interests and abilities as well as national recognition for expertise in their specialties.

Organizations have adopted a moratorium policy in certain instances because of a high inpatient census and the difficulties that would be encountered in accommodating new physicians. If left unchecked, the closing of an organization’s medical staff eventually could have the effect of discouraging a competitive environment in the physician marketplace.

Governing bodies that adopt a closed-staff policy must do so on a rational basis and take the following into consideration before closing the medical staff to new applicants:

• Effect on the organization’s census

• Organization and community needs for additional physicians in certain medical and surgical specialties and subspecialties

• Strain that additional staff will place on the organization’s supporting departments (e.g., radiology and laboratory services)

• Effect of denying medical staff privileges to applicants who presently are located within the geographic area of the organization and serving community residents

• Effect on any contracts the organization may have with other healthcare delivery systems, such as health maintenance organizations

• Effect a moratorium will have on physician groups that may desire to add a partner

• Effect additional staff may have on the quality of care rendered in the organization

• Whether closing the staff will confine control of the organization’s beds to the existing medical staff, allowing them to enhance their economic interests at the expense of their patients and other qualified physicians

• Effect of a limited moratorium by specialty as opposed to a comprehensive one involving all specialties (indiscriminately closing a staff in all departments and sections without a review could be considered an action in restraint of trade)

• Existence of a mechanism for periodic review of the need to continue a moratorium

• Effect that medical staff resignations during the moratorium may have on the organization’s census

• Existence of a mechanism for notifying potential medical staff candidates at such time that the organization determines that there is a need for an expanded medical staff

• Characteristics of the medical staff (is the staff aging and in need of new membership?)

• Potential for restraint of trade legal action under antitrust laws

• Effect on physicians without staff privileges whose patients are admitted to the hospital

• Formation of a committee composed of representatives from the governing body, medical staff, administration, and legal counsel to develop an appropriate moratorium policy

• Selection of a consultant to study the demographic marketplace, physician referral patterns, literature, and organization use; conduct a medical staff opinion poll; develop patient–physician population ratios; determine population shifts; develop a formula to determine optimal staffing levels by department and section; and provide this information to the governing body for use in determining the appropriateness of closing the staff in selected medical departments and/or sections

The continuing pressures of new technology, third-party payers, a growing body of regulations, malpractice insurance rates, and a shortage of physicians in a variety of specialties emphasize the need for organizations to consider how they can effectively compete in the marketplace. The imposition of a moratorium could prove to be counterproductive to the long-term survival of an organization.

The governing body must ensure that any proposed action to close an organization’s medical staff is based on objective criteria. Unless an organization can show closing its medical staff is based on legitimate patient care concerns and/or relates to the objectives of the organization, physicians could successfully challenge an organization’s actions to impose a moratorium.

7.18 TRANSFER AGREEMENTS

Healthcare organizations should have a written transfer agreement in effect with other organizations to help ensure the smooth transfer of patients from one facility to another when such is determined appropriate. A transfer agreement is a written document that sets forth the terms and conditions under which a patient may be transferred to a facility that more appropriately provides the kind of care required by the patient. It also establishes procedures to admit patients of one facility to another when their condition warrants a transfer.

Transfer agreements should be written in compliance with and reflect the provisions of the many federal and state laws, regulations, and standards affecting healthcare organizations. The parties to a transfer agreement should be particularly aware of applicable federal and state regulations.

Agreements that will aid in bringing about the maximum use of the services of each organization and in ensuring the best possible care for patients should be established. The basic elements of a transfer agreement include the following:

1. Identification of each party to the agreement, including the name and location of each organization to the agreement.

2. Purpose of the agreement.

3. Policies and procedures for transfer of patients. (Language in this section of the agreement should make it clear that the patient’s physician makes the determination as to the patient’s need for the facilities and services of the receiving organization. The receiving organization should agree that, subject to its admission requirements and availability of space, it will admit the patient from the transferring organization as promptly as possible.)

4. Organizational responsibilities for arranging and making the transfer. (Generally, the transferring organization is responsible for making transfer arrangements. The agreement should specify who will bear the costs involved in the transfer.)

5. Exchange of information. (The agreement must provide a mechanism for the interchange of medical and other information relevant to the patient.)

6. Retention of autonomy. (The agreement should make clear that each organization retains its autonomy and that the governing bodies of each facility will continue to exercise exclusive legal responsibility and control over the management, assets, and affairs of the respective facilities. It also should be stipulated that neither organization assumes any liability by virtue of the agreement for any debts or obligations of a financial or legal nature incurred by the other.)

7. Procedure for settling disputes. (The agreement should include a method of settling disputes that might arise over some aspect of the patient transfer relationship.)

8. Procedure for modification or termination of the agreement. (The agreement should provide that it can be modified or amended by mutual consent of the parties. It also should provide for termination by either organization on notice within a specified period.)

9. Sharing of services. (Depending on the situation, cooperative use of facilities and services on an outpatient basis [e.g., laboratory and X-ray testing] may be an important element of the relationship between organizations. The method of payment for services rendered should be carefully described in the agreement.)

10. Publicity. (The agreement should provide that neither organization will use the name of the other in any promotional or advertising material without prior approval of the other.)

11. Exclusive versus nonexclusive agreement. (It is advisable for organizations—when and where possible—to have transfer agreements with more than one organization. The agreement may include language to the effect that either party has the right to enter into transfer agreements with other organizations.)

7.19 INSURANCE CONTRACT

Insurance is a form of risk management used primarily to hedge against the risk of potential loss. In an insurance contract, the insurer has an obligation to indemnify the insured for losses caused by specified events. In return, the insured must pay a fixed premium during the policy period. As noted, the interpretation of an insurance contract can give rise to a legal action when the insurer refuses to indemnify the insured.

Coverage Denied

The plaintiffs in Truett v. Community Mut. Ins. Co., brought an action against the insurer to recover medical expenses. In June 1991, Truett was treated for migraine headaches. As of August 1, 1991, Truett was covered under an employee benefit plan through a group health insurance contract with Community Mutual Insurance Co. On August 29, 1991, Truett was hospitalized for dizziness, vomiting, and weakness on his left side. After extensive testing, Dr. Moorthy diagnosed Truett as suffering from a complicated migraine. Truett sought reimbursement for medical expenses he incurred during the course of his illness.

Community Mutual concluded on January 20, 1992, that Truett’s medical expenses were not covered because the expenses were for the care of a preexisting condition. Under the insurance policy, conditions that existed prior to the effective date of the policy were not covered if health problems related to the conditions were manifested after the effective date. Truett challenged this assessment to a Community Mutual appeals board. Dr. Morrow was recruited by Community Mutual to provide an expert assessment of Truett’s case. The Community Mutual appeals board found that Truett’s condition was preexisting because he had been treated in June 1991 for migraine headaches. Therefore, Community Mutual denied his coverage for his expenses. On September 1, 1992, the Truetts filed a complaint against Community Mutual to recover Truett’s medical expenses. The court of common pleas entered summary judgment for Community Mutual, and Truett appealed.

INAPPROPRIATE TRANSFER OF A PATIENT

Citation: J.B. v. Sacred Heart Hosp. of Pensacola, 635 So. 2d 945 (Fla. 1994)

Facts

The facts of this case reveal that the hospital on or about April 17, 1989, was requested by its medical staff to arrange transportation for the patient, diagnosed with acquired immunodeficiency syndrome (AIDS), to another treatment facility in Alabama. The social services department, unable to arrange ambulance transport, asked the patient’s brother to provide the transportation. J.B., having visited his brother at the hospital when he was first admitted, was under the impression that his brother’s diagnosis was Lyme disease. He had not been notified that there was a change in diagnosis. The patient was released to his brother from the hospital with excessive fever and a heparin lock in his arm. During the trip, J.B.’s brother began to thrash about and accidentally dislodged the dressing to his heparin lock, causing J.B. to reach over while driving in an attempt to prevent the lock from coming out of his brother’s arm. In doing so, J.B. came in contact with fluid around the lock site. J.B.’s hand had multiple nicks and cuts as a result of a recent fishing trip. [Id. at 947]

The complaint, which was filed after the 2-year statute of limitation had tolled, alleged that the hospital was negligent in arranging for J.B. to transport his brother in that it knew of the patient’s condition, the level of care that would be required in transporting him, and the risk involved. J.B. alleged that because he contracted the AIDS virus, his wife was exposed to it through him and his children have suffered a loss of relationship with him.

The Florida District Court ruled that J.B.’s complaint stated a claim for medical malpractice and was thus subject to the presuit notice and screening procedures set out in Florida statutes. Because J.B. did not follow those procedures, the court dismissed the complaint. On appeal, the Florida Circuit Court declined to rule on J.B.’s claim, concluding that the issues were appropriate for resolution by the Florida Supreme Court.

Issue

Was the claim of the patient’s brother a claim for medical malpractice and therefore subject to a 2-year statute of limitations?

Holding

The Florida Supreme Court answered that the claim was not a claim for medical malpractice for purposes of the 2-year statute of limitations or presuit notice and screening requirements.

Reason

Florida Statutes set a 2-year limitation period for medical malpractice actions. J.B.’s injury arose solely through the hospital’s use of him as a transporter. Accordingly, this suit is not a medical malpractice action, and the 2-year statute of limitations is inapplicable. According to the allegations in J.B.’s complaint, the hospital was negligent in using J.B. as a transporter. The complaint does not allege that the hospital was negligent in any way in the rendering of, or the failure to render, medical care or services to J.B.

Discussion

1. Why was the plaintiff’s suit not an action in malpractice?

2. Were the transfer arrangements for the patient appropriate?

The Ohio Court of Appeals held that the insurer’s denial of coverage was not arbitrary or capricious. The appeals board had all of Truett’s medical records from before and after the incident in question. It obtained Morrow’s expert opinion that the complicated migraine was a continuation from Truett’s previous bouts with normal migraines. The appeals board and Morrow relied on medical evidence in making their decisions and neither overlooked nor ignored relevant information. Thus, the decision was not arbitrary or capricious.

The Court’s Decision

The trial court was found to have erred in granting a directed verdict to Strickland on Harvey’s breach of contract claim. Harvey relied on the documents he signed expressing his desire not to be administered blood. It was for the jury to determine whether an express contract was created. The trial court’s grant of a directed verdict was reversed, and the matter was remanded for a new trial.