ADVISORY e-ALERT     October 27, 2009
Advisory Law Group, a Professional Corporation
Thought you were in the business of medicine?  Chances are, you're also in the insurance business.
We're all familiar with the concept of taking on risk in return for reward, but if so, why do so many physicians and medical groups become virtual insurers without properly calculating the risk or the "premium" to be received in exchange?

I'm talking about indemnification provisions, a common component of agreements between physicians and facilities, physicians and third party payors, and physicians and other physicians.
The theoretical concept of indemnification is simple, it's about allocation of risk:  One party agrees to be financially responsible for the loss suffered by the other, indemnified, party.
Of course, the shift from theory to practical application (especially to practical application to you) comes with a bit more complexity.  That's  because there are different types of indemnification - these provisions fall on a continuum, if you will, from the rather benign to the downright invidious.
Indemnification clauses can be highly beneficial when they run in your favor.  For example, if you were the hospital's Medical Director of Such-and-Such, it would be beneficial if there were a provision in your independent contractor agreement indemnifying you for damages resulting from your performance of the directorship's administrative duties.

In other cases, an indemnification provision might cut against you but still incorporate some degree of fairness.  Drawing on the example of the directorship, this second type of provision could be one requiring you to indemnify the hospital in the event that you don't pay taxes on the stipend money received and the taxing authorities seek to collect "withholding" from the hospital.
Inherent in both of the examples above is some notion of "you break it, you buy it."  In the first example, the hospital imposed an administrative role on you; you should be protected just as if you were a hospital administrator.  In the second example, you were liable for the taxes on the stipend and if you fail to meet that burden, the hospital shouldn't be responsible.
But there is another, egregious type of indemnification provision, at the far end of the continuum -- indemnification provisions that are used to impose financial liability on you or your group not for your own wrongs but for the indemnified party's wrongs. 
Here's an example of such an indemnification provision:

Physician shall indemnify Hospital for any costs, expenses, losses and attorneys fees arising out of or incident to any harassing, abusive or otherwise inappropriate behavior or conduct by Physician or any of Physician's employees, agents or subcontractors, that results in the assertion of claims against Hospital arising under Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act. the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act and any analogous local, state or federal law or regulation.

The danger in a provision like this one is that it goes well beyond the "you break it, you buy it" notion underlying the previous examples - in fact, it becomes "I break it, you buy it."  The claims that the hospital seeks protection against are all employment-related claims, claims that would most likely be brought against the hospital by its employees.  How much, if any, causative responsibility would you have for the events that you would, pursuant to such an indemnification provision, be held financially responsible for?

Even though you would have arguments over how to construe the meaning and scope of the indemnification provision and arguments concerning allocation of responsibility, do you want to be put in a position in which you are left holding the bag and grasping for defenses?

"But It's Low Risk"

As explained above, there's a significant difference between being called to indemnify based on something that you are in control of and something for which you have only tangential, or perhaps no, actual responsibility.  In the latter case, you are being put in the position of an insurer - only without the luxury of having collected a premium.

In addition to weighing the issue of the disconnect between causation and the obligation to indemnify, when evaluating a proposed indemnification provision you must understand that properly estimating the risk that you are assuming requires more than simply determining the probability of an occurrence - it also requires an understanding of the magnitude of the damages that might occur:  The risk of pulling the one "loser" out of 6 total choices (that is, 5 good results and 1 bad) is only 16.67%, seemingly low.  But the analysis changes as we apply that probability (a) to spinning the roulette wheel at a holiday celebration for your party favor - five great gifts and one whoopee cushion, or (b) to the chambers of a revolver in a game of Russian Roulette.  The downside of door prize roulette - a joke item; the downside of Russian Roulette - death.

The Key Points
Unlike a gift, it's truly better to receive indemnification than to give it.
On the other hand, if you are feeling generous, at least understand the extent of the disconnect between causation and the duty to indemnify, understand the probability of an occurrence, and understand the scope of the potential loss.  Lastly, remember to question what you are receiving in return.
Bear in mind that if you fail to take these elements into account, it will be as if you've made a potentially practice-destroying "gift" without ever having had the intent to do so - we usually call that being taken. 
Let us know if we can help you manage your risk. 


Opportunities Knocking In Market Flux, published in the September 2009 issue of Anesthesiology News.
Mark was also quoted as an expert in FTC Red Flags Issue Places New Burden on Oncology appearing in the August 24, 2009 edition of Oncology News International.  Click here to read (free registration required).


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The materials presented in this Advisory e-Alert are educational only and are neither legal advice nor a substitute for it. Advisory e-Alert presents a general discussion which may or may not apply to your particular legal or factual circumstances. The distribution of Advisory e-Alert is not intended to create, nor does it create, an attorney-client relationship. Please do not send us confidential information without receiving explicit authorization from Advisory Law Group to do so. Do not take or avoid taking any action as a result of the materials presented in this e-Alert without first obtaining legal counsel.   
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