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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.