Doctors' Corporations Given FTCA Coverage

Earlier this year, the federal government lost an attempt to deny insurance coverage to doctors who — in their capacity as sole owners of their own corporations — signed contracts with the United States to provide health care to patients at a non-profit clinic. When the government attempted to tell the doctors — after the doctors had been sued for malpractice — that they were not eligible for coverage, the doctors fought back in the U.S. District Court for the District of Columbia.

In their suit, El Rio Santa Cruz Neighborhood Health Center Inc. v. Department of Health and Human Services, Civil Action No. 03-1753 (ESH), 2004 U.S. Dist. LEXIS 465 (1/15/04), the plaintiff doctors sought review under the Administrative Procedure Act (APA), 5 U.S.C. ' 701, et seq., of a Department of Health and Human Services (HHS) determination that they were ineligible for medical malpractice liability coverage from the federal government under the Federally Supported Health Centers Assistant Act (FSHCAA) 42 U.S.C. ' 233(g).

The plaintiff physicians provided obstetric and gynecological services in Arizona for patients of El Rio Santa Cruz Neighborhood Health Center Inc. (El Rio) through contracts established between El Rio and each physician's individually owned, eponymous corporation. As a non-profit clinic that receives federal funds for the provision of medical care to low-income patients, El Rio receives professional liability coverage from the federal government pursuant to the FSHCAA. This act makes federally funded community health centers and their employees, officers, and individual contractors eligible for medical malpractice coverage under the Federal Tort Claims Act (FTCA), 28 U.S.C. '' 1346, 2671, to the same extent as federal employees of the Public Health Service.

Facts Behind the Case

In July 2002, the family of an El Rio patient sued plaintiffs, among others, in a survival action in Arizona state court for medical malpractice allegedly committed that month. See Puig v. Rios, No. 2002-3441 (Ariz. Sup. Ct.). Shortly thereafter, El Rio notified HHS of the suit and submitted information to the agency for a determination of the physicians' FTCA coverage, which, if granted, would prompt the substitution of the United States as defendant for the individual physicians in the malpractice suit. HHS, however, denied the physicians' FTCA coverage via a letter dated Jan. 23, 2003 to El Rio, from Elizabeth Jordan Gianturco, the Chief of the Claims and Employment Law Branch of HHS's General Counsel's Office (the Gianturco letter). The letter stated that plaintiffs were not “deemed employees of the Public Health Service because their contracts were between the health center and a professional corporation.” Thus, they did not meet the criteria under the FSHCAA for coverage under the FTCA and for representation by the U.S. government.

The physicians and El Rio filed their complaint against HHS and its Secretary on Aug. 18, 2003, requesting that the court invalidate HHS's refusal to grant FTCA coverage to the physicians and direct HHS to take appropriate action to notify the Department of Justice that plaintiffs are entitled to FTCA coverage. The controversy over plaintiffs' FSHCAA status stemmed from the fact that the plaintiffs contracted with El Rio through their individual professional corporations, instead of as individuals.

The Alexander Criteria

The court here noted that other courts faced with physicians claiming entitlement to FTCA coverage have refused to afford coverage when the doctor has no direct contract with the eligible health center but instead provides services through an agreement with a separate entity that has contracted with the center. However, in the one reported case in which the physician was the sole shareholder and employee of the corporation that entered into the contract with the eligible clinic, the court had held that FTCA coverage of the physician was proper under the act. Alexander v. Mount Sinai Hosp. Med. Ctr., 165 F. Supp. 2d 768 (N.D. Ill. 2001). As here, in Alexander, there was no direct employment agreement between the health care center and the doctor individually, but the Alexander court found that the contract between the doctor's eponymous corporation and the clinic was essentially an employment contract. The Alexander court therefore concluded that the physician in that case was covered under the FTCA, recognizing that to ignore the fact that the corporation was merely the doctor's alter ego would contravene the notion that the substance of the relationship overrides its form. As in Alexander, the court here found that plaintiffs physicians' contracts were essentially between El Rio and each of them individually, and FTCA coverage was therefore appropriate.

As an alternative ground for granting plaintiffs' motion, the court noted that each contract between El Rio and the physicians' corporations was executed with a guarantee, signed by the individual physicians. By executing a binding guarantee, each physician expressly assumed under Arizona law the separately enforceable obligation to personally perform services for El Rio. This guarantee functioned as direct contract between each physician and the health center, thus fully satisfying HHS's interpretation of ' 233(g) as requiring a contractual relationship between the individual health care provider and the clinic. The court found that under these circumstances, HHS's failure to examine the relevant facts, or to articulate a satisfactory explanation for its decision despite them, rendered the agency's decision to deny plaintiffs coverage based on the nature of their contractual relationship with El Rio arbitrary and capricious.

Finally, the court noted that in the earlier Alexander case — a case with an almost identical fact pattern — the government had taken exactly the opposite position it took in the present case (asserting that the doctor in question in that case was covered by the FTCA) in order to remove that action to federal court. Therefore, the court concluded, the government could not now claim, without explanation, that the doctors in the present case were not covered by the FTCA. For these reasons, plaintiffs were granted summary judgment.

Conclusion

The bottom line following the El Rio and Alexander cases is that doctors who are sole owners of their corporations and sign contracts on behalf of those corporations to provide health care services for the U.S. government are personally covered by the provisions of the Federal Tort Claims Act. If they are sued for malpractice, they are entitled to have the government substituted as defendant in the action.

Earlier this year, the federal government lost an attempt to deny insurance coverage to doctors who — in their capacity as sole owners of their own corporations — signed contracts with the United States to provide health care to patients at a non-profit clinic. When the government attempted to tell the doctors — after the doctors had been sued for malpractice — that they were not eligible for coverage, the doctors fought back in the U.S. District Court for the District of Columbia.

In their suit, El Rio Santa Cruz Neighborhood Health Center Inc. v. Department of Health and Human Services, Civil Action No. 03-1753 (ESH), 2004 U.S. Dist. LEXIS 465 (1/15/04), the plaintiff doctors sought review under the Administrative Procedure Act (APA), 5 U.S.C. ' 701, et seq., of a Department of Health and Human Services (HHS) determination that they were ineligible for medical malpractice liability coverage from the federal government under the Federally Supported Health Centers Assistant Act (FSHCAA) 42 U.S.C. ' 233(g).

The plaintiff physicians provided obstetric and gynecological services in Arizona for patients of El Rio Santa Cruz Neighborhood Health Center Inc. (El Rio) through contracts established between El Rio and each physician's individually owned, eponymous corporation. As a non-profit clinic that receives federal funds for the provision of medical care to low-income patients, El Rio receives professional liability coverage from the federal government pursuant to the FSHCAA. This act makes federally funded community health centers and their employees, officers, and individual contractors eligible for medical malpractice coverage under the Federal Tort Claims Act (FTCA), 28 U.S.C. '' 1346, 2671, to the same extent as federal employees of the Public Health Service.

Facts Behind the Case

In July 2002, the family of an El Rio patient sued plaintiffs, among others, in a survival action in Arizona state court for medical malpractice allegedly committed that month. See Puig v. Rios, No. 2002-3441 (Ariz. Sup. Ct.). Shortly thereafter, El Rio notified HHS of the suit and submitted information to the agency for a determination of the physicians' FTCA coverage, which, if granted, would prompt the substitution of the United States as defendant for the individual physicians in the malpractice suit. HHS, however, denied the physicians' FTCA coverage via a letter dated Jan. 23, 2003 to El Rio, from Elizabeth Jordan Gianturco, the Chief of the Claims and Employment Law Branch of HHS's General Counsel's Office (the Gianturco letter). The letter stated that plaintiffs were not “deemed employees of the Public Health Service because their contracts were between the health center and a professional corporation.” Thus, they did not meet the criteria under the FSHCAA for coverage under the FTCA and for representation by the U.S. government.

The physicians and El Rio filed their complaint against HHS and its Secretary on Aug. 18, 2003, requesting that the court invalidate HHS's refusal to grant FTCA coverage to the physicians and direct HHS to take appropriate action to notify the Department of Justice that plaintiffs are entitled to FTCA coverage. The controversy over plaintiffs' FSHCAA status stemmed from the fact that the plaintiffs contracted with El Rio through their individual professional corporations, instead of as individuals.

The Alexander Criteria

The court here noted that other courts faced with physicians claiming entitlement to FTCA coverage have refused to afford coverage when the doctor has no direct contract with the eligible health center but instead provides services through an agreement with a separate entity that has contracted with the center. However, in the one reported case in which the physician was the sole shareholder and employee of the corporation that entered into the contract with the eligible clinic, the court had held that FTCA coverage of the physician was proper under the act. Alexander v. Mount Sinai Hosp. Med. Ctr. , 165 F. Supp. 2d 768 (N.D. Ill. 2001). As here, in Alexander, there was no direct employment agreement between the health care center and the doctor individually, but the Alexander court found that the contract between the doctor's eponymous corporation and the clinic was essentially an employment contract. The Alexander court therefore concluded that the physician in that case was covered under the FTCA, recognizing that to ignore the fact that the corporation was merely the doctor's alter ego would contravene the notion that the substance of the relationship overrides its form. As in Alexander, the court here found that plaintiffs physicians' contracts were essentially between El Rio and each of them individually, and FTCA coverage was therefore appropriate.

As an alternative ground for granting plaintiffs' motion, the court noted that each contract between El Rio and the physicians' corporations was executed with a guarantee, signed by the individual physicians. By executing a binding guarantee, each physician expressly assumed under Arizona law the separately enforceable obligation to personally perform services for El Rio. This guarantee functioned as direct contract between each physician and the health center, thus fully satisfying HHS's interpretation of ' 233(g) as requiring a contractual relationship between the individual health care provider and the clinic. The court found that under these circumstances, HHS's failure to examine the relevant facts, or to articulate a satisfactory explanation for its decision despite them, rendered the agency's decision to deny plaintiffs coverage based on the nature of their contractual relationship with El Rio arbitrary and capricious.

Finally, the court noted that in the earlier Alexander case — a case with an almost identical fact pattern — the government had taken exactly the opposite position it took in the present case (asserting that the doctor in question in that case was covered by the FTCA) in order to remove that action to federal court. Therefore, the court concluded, the government could not now claim, without explanation, that the doctors in the present case were not covered by the FTCA. For these reasons, plaintiffs were granted summary judgment.

Conclusion

The bottom line following the El Rio and Alexander cases is that doctors who are sole owners of their corporations and sign contracts on behalf of those corporations to provide health care services for the U.S. government are personally covered by the provisions of the Federal Tort Claims Act. If they are sued for malpractice, they are entitled to have the government substituted as defendant in the action.