Examples of Liability Claims Against Healthcare Organizations
Article taken from the Group Dynamics: Piam Quarterly Newsletter for
Group Practices: Winter 1999
Termination of Staff Privileges
Allegations: The plaintiff, a doctor who was on the staff for
more than 25 years, was terminated after an evaluation of his deparment
was performed by a third party. He claimed that the third party reviewer's
recommendation of his termination was economically motivated by a desire
to secure future business from the hospital. he further claimed that
he was promised employment until retirement.
Results: The suit went to trial with the jury awarding $850,000
against the hospital and $450,000 against the president. The total defense
costs before appeal were $260,000. The verdict is on appeal.
Subsequent to defendants filing the appeal, the plaintiff instituted
a second suit against the hospital and his replacement. This suit alleged
slander and intentional interference with business relationships by failing
to grant the plaintifff staff privileges. It also alleged the denial
of his privileges was malicious and in retaliation of his first suit.
He seeks compensatory and punitive damages.
Joint Venture/Antitrust
Allegations: The plaintiff alleged it was wrongfully closed out
of the Durable Medical Equipment market by the use of monopoly power
by the hospital. The plaintiff claimed that representatives of the joint
venture DME supplier were given access to the hospital that was denied
to other DME suppliers. The hospital also attempted to "steer" patients
toward its joint venture by discouraging home health coordinators from
recommending other DME vendors, although testimony of all coordinators
indicated that the plaintiff was superior in terms of quality and service.
Results: The jury verdict, upheld on appeal, awarded the plalintiff
$760,983 in damages, which was trebled on the antitrust counts to $2,282,949.
While exact defense costs are unknown, antitrust issues are among the
most costly to litigate; therefore, it is safe to assume that the defendants
paid at least several hundred thousand dollars.
Denial of Staff Privileges
Allegations: A suit was filed in U.S. District Court where a physician
claimed that privelages were first promised, then denied. He claimed
that when first recruited by the hospital, he was advised that neither
board certification nor residency were prerequisites for the granting
of staff privileges. He further claimed that his experience met the qualifications
necessary for permanent appointment to the medical staff at the time.
He joined the medical staff and was granted temporary privileges. Before
he was granted permanent privileges, new guidelines were adopted, which
required board certification and residency. Based on these new guidelines,
approved by the Board of Directors after the physician's application
for privileges, he ws denied staff privileges. The denial was affirmed
through internal review procedures.
He alleged breach of contract against the hospital, staff, and CEO, federal
and state antitrust claims, and tortious interference with business relations.
He also alleged violation of the common law right to fair procedure,
promissory estoppel, and preliminary and permanent injunctons against
the hospital and staff.
While this was primarily a privilege case, the antitrust allegations
carried the threat of treble damages and had to be vigorously defended.
This case serves to both highlight and support the importance of seperately
identifying the various components of intangible value, rather than lumping
them together into a single category labeled "goodwill." No
physician is likely to pay another for the personal goodwill associated
with his or her reputation. However, the goodwill of the practice previously
acquired by a hospital or other buyer - or more accurately the value
associated with trained employees, going concern value, an established
location and fixed assets already in place and functioning - has value
worth paying for.
Conclusion
A substantial portion of re-valuations is conducted wtih the tax authorities
as one member of the likely audience. The health care industry has been
the source of a large number of recent transactions which are now the
subject of regulatory review, particularly in the Northeast where physicians
are the subject of an IRS Market Segment Specialization Program. The
Norwalk v. Commissioner case offers a timely review of the factors influencing
the value and transferability of goodwill and practice intangible value.