Avoid liability with your contracts

Horror story points to need to investigate

[Editor's note: This is the first part of a two-part series on avoiding liability in contracting. In this month's issue, we tell you about how you can end up contracting with the wrong company and what your liability can be. In next month's issue, we give you specific steps to investigate vendors, and we suggest items to watch for in the contract.]

A hospital has a disagreement with its anesthesia group and decides not to renew its contract, which is set to expire.1 Negotiations are undertaken with a new group. At the last minute, the group requests that a different name be used on the contract, which the negotiators claim is a new affiliate of their group.

After the contract is signed, the president of the former anesthesia group posts a video on YouTube that says the newly signed company has a business address in a strip mall. He questions the hasty credentialing of the new anesthesiologists. "We are very, very concerned about the safety of our patients," the president says.

Representatives of the company that hospital officials thought they had negotiated with says they have no affiliation with the group named in the contract. Although the "affiliate" claimed to have had more than 25 years of experience managing anesthesiology services, the company didn't officially exist until February 2010. The hospital was its first contract. The lead negotiator for the contract is determined to be the son of the founder and head of the company that the hospital thought it was negotiating with.

Articles in the local newspaper and letters to the editor accuse the hospital administrator of putting patients' safety and health in jeopardy. Open-heart surgeries are on hold while a cardiac anesthesiologist is sought.

Just nine days after the contract is signed, the hospital drops the new group and replaces it with an in-house medical group as manager. The hospital said its reason was that it "refused to go from one unacceptable management situation ... to the potential for another ...."

Situations in which a facility ends up signing a contract with a company different from the one with which it intended are not unheard of, says Richard Bays, RN, MBA, CPHQ, CLNC, health care consultant with R Bays Consulting, Houston, TX. "I've seen some things, such as a company domino onto the reputation of another company," Bays says. "Or they'll use another, similar name, so it looked like a subsidiary." The end result? "I've seen people get burned," Bays says.

Be forewarned: You can be held liable for the services of your contractor, depending on the contract you signed, say sources interviewed by Same-Day Surgery. John Schario, MBA, CEO of Nueterra Healthcare, part of a U.S. holding company in Leawood, KS, says, "In the end, if you are the party that is being paid for the service or your place of business provided a component of the service, you can be held responsible for anything that is provided. It can be very difficult to place blame, especially if the vendor claims your staff used a product wrong or played some role in the claim."

Your contract might not be covered by your insurance, Bays says. Notify your insurance company that you are entering into an agreement, he advises. Determine if your contractor will be covered as an "insured contract," Bays says. If it is, then ask the vendor you are contracting with to also cover you with their insurance, he says.

To avoid liability, thoroughly investigate the company, experts advise. Start with the people doing the negotiating, advises Stephen Trosty, JD, MHA, CPHRM, ARM, president of Risk Management Consulting Corp. in Haslett, MI. Verify their positions, Trosty says. Confirm that these persons have the right to negotiate contracts on behalf of the company and to hold the company responsible and liable for the contacts, he says. Document the negotiations, sources say.

In the case with the newly introduced "affiliate" company, "that should have been a red flag, when at least minute you suddenly have a new corporation that is signing the contract, and not the corporation you've been dealing with," Trosty says. In such a situation, don't sign the contract until you've thoroughly checked out the newly named entity, he says.

Contracting decisions should be based on more information than answers to a request for proposal (RFP), Schario says. "Providers should conduct due diligence on anyone they plan to subcontract with, especially those who will come in contact with patients whose care is entrusted to you," he says.


  1. Dietrich T. Riverside hospital debacle shows the dirty business of surgery. Daily Press. April 25, 2010. Accessed at www.dailypress.com/news/columnists.