Cases and Comments on Contracts

Part 9: Employee vs. Independent Contractor: Exceptions to the Rule ($)

by Robert V. West, MD JD FAAEM

For months now, we have seen many "non-democratic groups" restructuring their contractual relations with their emergency physicians so as to create a group of employees, rather than independent contractors. This rather "blue collar" label has an inherent distaste for most of us who consider ourselves professionals, rather than mere contract labor. More importantly, it effectively keeps emergency physicians out of the stream of revenues they generate. Ironically, it has even been suggested by some critics that the leadership at AAEM may in some way be the driving force behind this conversion. If you look at the legal theory and federal law behind these alternative practice arrangements, the rational behind this conversion process should be as clear as a stream of greenbacks.

First some legal theory regarding vicarious liability. The general rule is that a principal is not legally responsible for the negligent acts of an independent contractor (agent). Physicians are generally considered to be independent contractors. Thus, it would follow that a hospital or contract management company is not liable for the negligent acts of its independent contractor physicians. Stated differently, under the general rule, the acts or omissions of an emergency physician should not bind or create tort liability for his or her principal if that physician is an independent contractor. In other words, they don't have to pay if you screw up.

This is not generally the case between a principal and his or her employee (servant). In this situation, the general rule is that acts of the employee/servant binds the employer/principal. With that in mind, why would a principal create an exception to a general rule that tends to inculpate him or herself? In this context, why would a hospital or contract management company convert their staff of emergency physicians to employees, if it only adds to their insurance costs and opens their pockets in a malpractice suit? In this author's opinion, the answer is found in the unabridged pursuit of profits created by a legal loophole.

To understand this logic, let's focus on some specifics and put these theories into context in the Fall of 1996. In October of that year, the Health Care Financing Administration (HCFA) sent a letter to several contract management companies stating that HCFA was going to strictly enforce the prohibition against reassignment of our fees. That is, the fees we generated were no longer permitted to flow directly to the management companies for which we worked. The money was supposed to flow to the treating physician. That regulatory policy decision by HCFA was based on a federal statute, not an interest in our economic well being. Under 42 USC 1395(u)(b)(6), federal law requires that the monies paid by HCFA for health care services shall go directly to health care provider (who is presumed to be an independent contractor), unless the health care provider is an employee. Under an employer/employee arrangement, there is no prohibition against reassignment of your fees to your employer.

AAEM applauded and supported HCFA's decision to enforce this law, seeing it as a means to level the playing field and give the independent contractor physicians direct control over their fees and improve our bargaining position with management. The opposition and schemes to skirt this assignment issue ensued over the following year, until it was clear that HCFA was not going to back down. Therefore, many of the big groups and hospitals decided they would simply reshuffle the deck and create an exception to the presumed independent contractor relationship, so as to keep the physicians out of the flow of revenue they create. Accordingly, the conversion to employees was a simple maneuver to create an exception to the effect of this law and thus obviate the legal requirement that federal funds were to be paid directly to the health care provider.

The bottom line is that in order to protect and conceal the "management fees" that are being deducted from your collections, exceptions to the general rule were created and risks were assumed. AAEM estimates that between $30,000 and $50,000 per year per full-time emergency physician is being harvested from this stream of revenue, all under the guise of management services. As the contract holder, the benefits derived from your services as an employee outweigh those risks associated with tort liability. Furthermore, they do not want to be confronted about or obligated to disclose your revenues. The flow of monies we generate has again been diverted by a series of contractual and legal exceptions to "the rules."

Editor's Note: Dr. West accurately describes a current trend in EM today by citing that many contract management companies are choosing to convert independent contractor physicians to employees in order to accept reassignment directly on their behalf. Although technically legal according to federal statutes, AAEM has sought and received clarification from HCFA that even though such reassignment is allowable, employed physicians still have the right to review what is being billed and paid on their behalf (see sidebar at right).