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Jan 2015

Attorney’s Fees and Network Contracts

It is not uncommon for many everyday contracts to include attorney’s fees provisions. These provisions typically require that the losing party pay the attorney’s fees that the winning party incurred to pursue or defend a case. And over the course of a prolonged litigation, these fees can amount to tens of thousands of dollars!

Theoretically, in contracts between hospital providers and health plans, the attorney’s fees provision should be relatively straightforward. If the provider brings a lawsuit and prevails, the provider is awarded its attorney’s fees. Conversely, if the payor successfully defends a lawsuit against a hospital, it will be awarded its attorney’s fees.

But the scenario gets complicated when an attorney’s fees provision is included in hospital agreements that end up as network contracts. Traditional network contracts used to involve a negotiating entity, such as Multi-Plan or Interplan, bringing together providers with payors to form a network. However, “direct” hospital services contracts, (contracts which on their face appear to be directly with a single health plan), now act as network contracts as well. This is because most, if not all, such direct contracts provide the health plan with the ability to allow access to its negotiated rates to other payors, (“third party payors”), who may be unknown to the provider at the time the contract was signed. Complicating this is the fact that the direct hospital services contract may include a provision that the original health plan cannot be held  financially responsible if the third party payor fails to live up to the contractual terms. As a result, when a hospital provider pursues a third party payor by way of a network or a hospital services contract acting as a network contract,  (“network payor”), the network payor will protest that it is not bound by the terms of that network contract as it is not a signatory. And certain judges have agreed with the network payor and are reluctant to enforce these network agreements.

To add insult to injury, if the provider pursues the network payor under the terms of the contract, (such as by bringing a legal action or arbitration proceeding against them), the network payor  may deny that the contract applies but still enforce the attorney’s fees provision of the same network contract pursuant to California Civil Code Section 1717. This is a statute that is designed to impose a “mutuality of remedy.” In essence, Section 1717 holds that in any action on a contract which provides for recovery of attorney’s fees, the prevailing party in such an action is entitled to recover those fees, even if the party denies they are subject to the very contract which provides for such fees. In other words, network payors are able to use this statute to collect attorney fees even when they have denied that they should be bound under the very contract that allowed for the fees.  Given these issues, hospitals should seriously consider whether they should include attorney fees provisions in network contracts..

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