The Business of Healthcare

Wal-Mart and Why Hospitals May Be Liable for Medical Group Obligations


A recent settlement in a case involving Wal-Mart raises interesting issues for hospitals contracting with medical groups.

In rough terms, Wal-Mart contracted with a management company to manage a warehouse and distribution facility. In turn, the management company subcontracted with other companies to provide the actual labor.

A dispute arose over whether the subcontractor properly paid its employees and whether it violated a number of labor laws. Suit was filed against the management company and the subcontractors.

The plaintiffs alleged that the management company controlled many of the terms of performance and therefore should be liable for its subcontractor’s failure to comply with legal requirements, even though the contract shifts all responsibility for legal compliance to the subcontractor, declaring it to be “solely responsible” for and “the sole and exclusive employer” of the workers.

For example, the contract:

  1. Required the subcontractor to provide enough workers to satisfy the management company’s fluctuating needs.
  2. Dictated material terms of plaintiffs’ employment, such as requiring each new worker to undergo detailed pre-employment screening, subjecting them to ongoing supervision, and requiring strict adherence to the management company’s performance standards.
  3. Reserved the management company’s right to request that the subcontractor remove any worker from their assignment at the warehouse.

And then . . . over the objection of Wal-Mart, the court allowed the plaintiffs to add Wal-Mart as an additional defendant due to its control over the management company!

Shortly thereafter, the management company settled the case by paying $21 million in cash, thus avoiding a trial as to its, or Wal-Mart’s, actual liability as “joint employers” of the subcontractor’s labor force.

So what’s that have to do with hospitals? It’s simple.

Substitute “hospital” or “hospital department” for warehouse and you’ve got the relationship between most hospitals and physician services contract management companies. Look at the three, numbered control factors set out above and compare them with their hospital contact equivalents.

For example, the average exclusive anesthesia contract:

  1. Requires the contract holder to provide enough anesthesiologists/CRNAs to satisfy the hospital’s fluctuating needs.
  2. Dictates nearly every material term of the anesthesiologists’/CRNAs’ employment, such as requiring each new worker to undergo detailed pre-employment screening (that is, the hospital can reject potential hires), periodic performance evaluations (that is, the providers must meet certain satisfaction and performance indicator criteria), and strict adherence to the hospital’s performance standards (compliance with the hospital’s policies and procedures, etc.).
  3. Reserves the hospital’s right to request that the contract holder remove an anesthesiologist or CRNA from the roster.

Across the county in nearly every industry, large companies are laying off full time workers and are turning to staffing companies which, in turn hire what amount to temps, many on a part time basis.

The backlash demonstrated by the Wal-Mart situation is that those alleging damages at the hands of a downstream “labor supplier” will attempt to break through entity walls and construe the entire web of contracts as a single enterprise, attaching liability to each entity involved as if they jointly employed the laborers.

Will this result in liability for breach of contract claims, malpractice claims and fraud, or even for False Claims Act violations, at the hospital level as a result of the hospital’s contacts with a contract management company or even with a local medical group?

Only time will tell.

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