In the recently
published case, Lifespan Corporation v. New England Med. Ctr., Inc., et al.,
plaintiff Lifespan, a Rhode Island-based network of hospitals, brought suit
against subsidiary New England Medical Center (NEMC) for failure to make two
payments required by a 1997 disaffiliation agreement.
NEMC admitted to failing
to make the payments. However, the nonprofit hospital also filed a counterclaim
for indemnification based on Lifespan's alleged misconduct during the course of
their affiliation -- namely, failing to include basic inflationary adjustments
in its health insurance payor contracts and directing NEMC to enter into a
questionable interest rate swap. Citing these same examples of misconduct,
Attorney General Martha Coakley intervened and filed a counterclaim against
Lifespan for breach of its fiduciary duty to its public charity subsidiary.
Sounding a wake-up
call for healthcare networks and hospitals alike, the U.S. District Court judge
in Rhode Island found -- for the first time -- that a healthcare network owes a
fiduciary duty to its nonprofit hospital subsidiaries under Massachusetts law.
The court held that Lifespan had breached this duty to NEMC and was therefore
liable for gross negligence, willful misconduct, and intentional
misrepresentation. The net result? The court ordered Lifespan to pay damages of
$9,297,778 (including pre-judgment interest) to NEMC and, in the process,
forced attorneys in the industry to examine carefully their contract
negotiation and drafting practices.
What does the Lifespan
decision mean for the relationship between parent healthcare networks and their
subsidiary hospitals? When can a conflict of interest arise? How closely will
courts applying Massachusetts law examine contracts between these entities?
What are some specific ways that you can improve your contract negotiations and
drafting to protect your health care network or hospital client?
For a lively and
practical discussion of these and many other issues and concerns, please join
us on November 16 for Prince Lobel's upcoming seminar, "Responding to
Challenges and Changes in the Healthcare Industry." Please click here for
more information and RSVP instructions.
If you have any
questions about the information presented here, please contact firm partner Jeffrey A. Dretler at
617 456 8130 or jdretler@PrinceLobel.com, or firm associate Patricia A. O'Connell at
617 456 8047 or poconnell@PrinceLobel.com.