Take Note: An Indemnification Clause Can Have A Significant Impact On Your Payer Contract

When negotiating contracts with payers, one of the most critical yet often overlooked provisions is the indemnification clause. This clause can have far-reaching implications for your financial and legal responsibilities, making it essential to understand and negotiate carefully.

Indemnification clauses in healthcare contracts determine who bears responsibility for potential losses or damages. Learn how these provisions can safeguard your personal and professional assets.

If you have ever looked at a contract, you may have noticed a section entitled “indemnification.” But what does this word mean? Who uses it, and why? Does it mean that no one can bring a lawsuit? Take note: an indemnification clause can have a significant impact on your contract. That is, understanding who benefits (and how) can change the course of contract negotiations.

An indemnification clause is a part of a contract where one party agrees to cover certain losses or damages experienced by another party. In other words, these clauses define who is responsible for specific risks and liabilities.

The main goal of an indemnification clause is to assign risk between parties in a contract. By stating in advance who is financially responsible for particular issues or outcomes, these clauses help prevent costly legal disputes. Understanding these provisions is essential for protecting both personal and professional assets.

Bilateral vs. Unilateral Indemnification Clauses

Indemnification clauses can go in one direction or be reciprocal. In a unilateral indemnification arrangement, only one party agrees to indemnify the other, with no reciprocation.

When a contract contains a bilateral (mutual) indemnification clause, both parties agree to indemnify each other for specific activities. For example, a medical practice and a management services organization (MSO) could enter into a bilateral indemnification arrangement. If the MSO’s administrative error led to a compliance issue, the MSO would cover the resulting liabilities. If a practitioner’s clinical mistake resulted in a malpractice claim, the practice would assume the responsibility.

Common Uses of Indemnification Clauses in Healthcare Contracts

As a healthcare professional or private practice owner, you will encounter indemnification clauses in various types of contracts.

Partnerships: Healthcare practitioners often form partnerships to operate group practices. Partnership agreements may include indemnification clauses designed to protect individual partners from personal liability for actions taken by other partners or the partnership as a whole.

Management Services: Healthcare practice owners often enter into management services agreements (MSAs) with management companies that provide services such as billing, staffing, or administrative support. In this scenario, an indemnification clause can protect healthcare practice owners from the consequences of management companies’ actions.

Indemnification of Officers: In business entities such as corporations and LLCs, indemnification clauses can help protect officers from personal liability arising from their official duties. These provisions ensure leaders can make decisions without undue fear of personal financial loss.

Why It Matters

The risk of lawsuits poses a serious and ever-present threat to healthcare professionals. Therefore, the ability to shift liability away from oneself is usually desirable. Indemnification clauses can protect you and your business from lawsuits and serve as a deterrent, even against strong cases. Note, though, that physicians and other healthcare providers cannot waive their responsibilities to their patients.

Financial Risk: Indemnification clauses can expose your organization to significant financial liability. For example, if a payer is sued due to actions or omissions related to your services, you could be required to cover their legal fees, settlements, or damages.

Scope of Liability: Broadly worded indemnification clauses may require you to assume responsibility for issues beyond your control, such as third-party actions or payer errors. This can create an unfair burden on your organization.

Insurance Implications: Your professional liability or general liability insurance may not cover indemnification obligations, leaving your organization to bear the full cost of any claims.

Negotiation Leverage: Payers often include one-sided indemnification clauses favoring their interests. Failing to negotiate these terms can result in an unbalanced agreement that disproportionately shifts risk to your organization.

Key Considerations When Reviewing Indemnification Clauses

Mutuality: Ensure the clause is mutual, meaning both parties agree to indemnify each other. This creates a fairer distribution of risk.

Scope of Coverage: Limit the scope of indemnification to matters within your control. Exclude liability for payer negligence, third-party actions, or issues arising from payer systems.

Cap on Liability: Negotiate a cap on your indemnification obligations to limit potential financial exposure.

Insurance Alignment: Verify that your insurance policies align with the indemnification obligations in the contract. Consider adding endorsements to your policies if necessary.

Legal Review: Have the clause reviewed by legal counsel to ensure it is reasonable and does not expose your organization to undue risk.

Practical Steps to Protect Your Medical Practice

Push Back on Unfair Terms: If the payer insists on a one-sided indemnification clause, advocate for more balanced language.

Define Triggering Events: Clearly outline the specific scenarios that would trigger indemnification, such as breaches of contract or negligence.

Include Exclusions: Explicitly exclude liability for issues outside your control, such as payer system failures or third-party actions.

Document Everything: Ensure all negotiated terms are clearly documented in the final contract to avoid disputes later.

Summary

Indemnification clauses are not just boilerplate language, they can significantly impact your organization’s financial and legal well-being. By carefully reviewing and negotiating, physicians can protect their medical practice from undue risk and ensure a fair and equitable managed care contract. Always approach these clauses with caution and a clear understanding of their potential consequences.

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