Secured Transactions



Contract Clause of the Month: Managed care contracts and regulations can be a jungle of legal language, and physicians who do not carefully pick their way through the various clauses can be in for a nasty surprise. In this monthly feature of Texas Medicine , the TMA Office of General Counsel identifies some of the contract clauses or regulations of which physicians should be aware.

NOTICE: Please check the Texas Medical Board Web site for  current updates on its rules and policies  ( PDF ) with respect to this issue.

Secured Transactions

By Lee Spangler, JD, TMA Office of General Counsel

Physicians must make sure they are always able to access their patients' medical records. The most obvious reason is to protect their ability to deliver care to patients. Also, access to medical records may be advantageous when dealing with administrative actions or investigations by regulatory agencies. Although physicians may not realize it, loans procured for a practice probably have contract clauses that affect medical records.

Consider the following provision:

SECURITY INTEREST . Debtor [physician] grants to Secured Party a security interest in any and all inventory, equipment, appliances, furnishings, fixtures, and any other assets now or hereafter placed upon the premises known as [Physician Practice] located at [123 Main Street] (the "Premises") or used in connection therewith and in which Debtor now has or hereafter acquires any right and the proceeds therefrom. As additional collateral, Debtor assigns to Secured Party, a security interest in all of its right, title, and interest to any trademarks, trade names, contract rights, and leasehold interests in which Debtor now has or hereafter acquires. The Security Interest shall secure the payment and performance of Debtor's promissory note in the principal amount of _________________ ($___________) Dollars and the payment and performance of all other liabilities and obligations of Debtor to Secured Party of every kind and description, direct or indirect, absolute or contingent, due or to become due now existing or hereafter arising. Upon default of the Debtor the Secured Party may take immediate possession of the collateral, and for this purpose the Secured Party and his agents may enter upon the premises of the debtor, in accordance with applicable law. The debtor is liable for the expenses of taking possession, holding, preparing for sale, selling and the like, including attorney's fees. These costs and expenses are secured by the security interest in the collateral.

This is a typical, though onerous, example of a clause that appears in many loan agreements. Usually it is added to reduce the lender's risk of default. If the debtor refuses or is unable to pay, the lender will at least obtain the value of the debtor's business assets.

Medical records are generally considered the property of the physician (although patients always have a right to access the information they contain). In other words, medical records are assets of the physician's practice. Furthermore, Texas law says records of the identity, diagnosis, evaluation, or treatment of a patient created or maintained by a physician are confidential and privileged and may not be disclosed except as provided by law. There are a number of exceptions to this general prohibition, such as the ability to share medical information with another physician or other personnel acting under the direction of the physician who participate in the diagnosis, evaluation, or treatment of the patient. However, there is no exception in the law to permit disclosure to secured parties.

Should a physician default on a loan secured in the property of the practice, the secured party (bank) can then enter the practice and seize all of the assets of the practice, including the medical records . That is what the physician agreed to permit. This places the physician in a particularly precarious legal position. The physician is under an obligation to provide medical services to patients, which can be impossible without medical records, and to see that the records are kept confidential. Should a patient be harmed from the secured party's seizure of the medical records, the physician may be held liable. Also, because the medical records are now in the possession of a nonphysician party without the patient's consent, a physician may be liable for the unauthorized disclosure of medical records. Although unlikely, the Texas State Board of Medical Examiners (TSBME) could discipline a physician for a breach of the duty to maintain the confidentiality of medical records.

This conundrum can arise in other situations. For instance, physician practices have only limited space at the primary practice site for storing records. To satisfy TSBME rules that medical records be kept for seven years from the last date of treatment (or, for minors, seven years from the last date of treatment or until the patient reaches age 21), physicians often keep a large number of medical records in storage facilities. Storage facilities have the right to seize and sell the contents of storage lockers if the "renter" defaults on the storage fees. Here, again, the records can end up in the hands of a nonphysician, leading to possible civil liability and administrative action.

When obtaining business loans, physicians may wish to consider ensuring that the definition of "assets" expressly excludes medical records and guarantees access to them. Further, if medical records are in storage facilities, great care should be taken to ensure the storage fees are kept current.

A physician should hire an attorney if a lender or storage facility seizes medical records. The lender's position on seizing medical records may change when the physician's legal counsel explains that the lender may be named in any lawsuit for damages if a patient is harmed because the physician is prevented from accessing the patient's medical information.

As always, it is advisable to seek legal advice from an attorney before signing any contract.

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