Seventh Circuit Affirms Importance of Seeking Protection Under Medical Malpractice Act

By: Tyler S. Lemen

In 2014, a radiologist interpreting a patient’s CT scan allegedly failed to diagnose recurrent rectal cancer discernable from the scan.  The cancer went undetected for seventeen months and was untreatable upon discovery.  Following a jury trial, the patient was awarded $15 million.  After recent review, the Seventh Circuit Court of Appeals upheld the result.  This verdict was unusual since many providers of health care in Indiana seek protection under the Medical Malpractice Act (“MMA”), availing themselves of the current $1.65 million cap on damages and limiting their out-of-pocket exposure.

As a refresher on the MMA, in 1975 Indiana passed a landmark bill aimed at reducing malpractice insurance for health care providers by limiting the amount recoverable for their negligent acts. The MMA allows health care providers[1] the opportunity to qualify for protection by paying a statutorily computed surcharge to the Indiana Department of Insurance.  Payment of the surcharge provides the health care provider with statutory protections such as a cap on damages, a medical review panel proceeding prior to any civil suit, and the ability to apportion responsibility for compensating plaintiffs among the health care provider and Indiana’s Patient Compensation Fund, among other protections.  However, health care providers are not required to seek protection under the MMA. 

In a business landscape where complex corporate structures are utilized for various tax, employment, and liability reasons, it is usually safe to assume a corporation can rely upon its corporate structure as protection from any medical malpractice lawsuit since corporations do not practice medicine. Therefore, an entity not directly involved in providing health care may choose not to seek protection under the MMA.  However, in 1999 the Indiana Supreme Court in Sword v. NKC Hospitals undercut this idea by concluding a hospital could be liable for the alleged negligence of its independent contractor physician.  With this background, we consider the recent opinion.

The imaging center is part of a national provider network offering diagnostic imaging.  However, only its wholly owned Indiana entity was named as a defendant by the patient.  The Indiana entity (“Manager”) entered into a management agreement with a consulting group (“Provider”) under which Manager arranged for Provider to utilize Manager’s name and logo.  Both parties were independent contractors.  Provider owned and operated the radiology practice, employing physicians as independent contractors, and Manager owned the assets of the radiology practice and provided management, administrative and other non-medical services to support Provider.  Manager and Provider’s relationship was contractual.

The patient was not aware of the relationship between Manager and Provider.  The Indiana Supreme Court addressed this difference in understanding in Sword v. NKC Hospitals.  Again, Sword states a hospital may be liable to a patient for the acts of its independent contractor physician.  In reaching this conclusion, the court decided the determinative factor for liability was “the reasonableness of the patient’s belief that the hospital or its employees were rendering healthcare.”  Further, the court stated: “the relationship between the corporate entities is not ‘determinative’ of the patient’s belief ‘in any way.’” 

When the patient arrived at the imaging center for a CT scan, she thought Manager or its employees would provide her care.  But, Manager’s role was more analogous to that of a landlord.  Provider would offer health care services and find physicians to employ as independent contractors.  Manager would provide the imaging center at which Provider could offer health care.[2]

In short, Manager owned the building.  Provider and its independent contractor physician provided the imaging service.  To be sure, Manager, Provider, and the physician all acted prudently by defining their legal relationship pursuant to contract and through the use of various corporate forms.  However, these legal relationships did not determine whether Manager could be held liable to the patient.

Since multiple entities were involved in the patient’s care, both the Southern District of Indiana and Seventh Circuit Court of Appeals determined the holding of Sword was applicable to the facts of this case.  Meaning, Manager could be liable to the patient if her conclusion that Manager provided her care was reasonable.  The court further strengthened the impact of Sword by disregarding Manager’s argument that it did not employ the independent physician at issue so it could not be liable to the patient.  In essence, Manager was two legal steps removed from the patient since it contracted with Provider who then contracted with the physician providing care.  However, the key distinction is the patient’s understanding of who provided the care.  Regardless of Manager’s legal relationship with Provider, the physician, or the patient, it was held liable.


If Manager had availed itself of the MMA, the jury’s $15 million verdict would have been reduced to $1.25 million with Manager only responsible for paying $250,000.[3]  Regardless of how high the jury’s verdict went, Manager would have only paid $250,000.

While it may be easy to fault Manager for not seeking protection under the MMA, Manager’s decision was rational: corporations do not practice medicine and do not typically direct a physician in his or her practice of medicine.  At trial, Manager reasoned it was not a professional entity.  By law, it’s not permitted to practice medicine.  It does not practice medicine, does not employ physicians, does not provide medical services.  But, the patient did not know any of these facts.

The patient went to a building bearing Manager’s name. The patient’s imaging was supplied on a form bearing Manager’s logo and name.  The patient was provided no written notice advising her the CT scan would be interpreted by Provider or its employees, not Manager.  Given these facts, the jury found the patient reasonable in believing her care was provided by Manager or its employees, not by Provider–the entity legally responsible for providing the service.

Manager relied on the legal relationship it struck with Provider to protect it from any medical malpractice action brought by a patient of Provider.  That legal relationship was entirely proper, but not determinative.

The current case and Sword v. NKC Hospitals demonstrate health care providers have two ways of limiting medical malpractice exposure: 1) avail yourself of the protections afforded by the MMA by following the statutory guidelines to qualify for coverage; or 2) provide proper notice to patients clarifying by whom services are rendered. 

While these options seem simple, it is not always easy to discern how best to protect your practice.  Therefore, if you are a health care provider or an entity engaged in the delivery of health care and need assistance evaluating or protecting against medical malpractice liability, contact one of the health care attorneys at DSV for assistance. 

[1] “Health care means an act or treatment performed or furnished, or that should have been performed or furnished, by a health care provider for, to, or on behalf of a patient during the patient’s medical care, treatment, or confinement.” IC § 34-18-2-13.

“Health care provider” is defined very broadly by statute but generally means an individual, partnership, professional corporation, LLC, corporation or an institution licensed by the state offering health care. A full definition can be found at IC § 34-18-2-14.

[2] Testimony was also presented at trial indicating Manager may have offered some peripheral health care such as preparing patients for scans, etc. which seemed to influence the jury’s verdict.

[3] See this article by Jennifer L. Strange, partner at Drewry Simmons Vornehm, LLP, explaining how damages are capped depending upon the year in which the alleged negligent act occurred.