For California Hospitals and Medical Staffs, Exclusive Contracts Are No Substitute For Fair Hearing Obligations

On Monday, February 4, the California Court of Appeal, First Appellate District issued this decision in Economy v. Sutter East Bay Hospitals. In the case, a hospital informed the anesthesiology group with which it had an exclusive contract that it would not accept any future schedules that included a specific physician due to concerns about his clinical competence. The Court of Appeal held that by doing so, the hospital effectively summarily suspended and terminated that physician’s privileges for a medical disciplinary cause or reason. The hospital therefore was statutorily obligated to provide the physician with a fair hearing prior to the action, which it did not do. The Court concluded that the hospital’s failure to provide the physician with his statutorily-guaranteed hearing rights led to the physician’s financial losses after he was terminated from his medical group. The result: $3,867,122 in damages awarded to the physician. 

Exclusive Contract Includes Common Provision Permitting Removal from Schedule

The circumstances underlying this case are not unique to Sutter East Bay Hospitals (Sutter East Bay). As reported by the Court, Sutter East Bay operated a “closed” anesthesia department pursuant to an exclusive contract with East Bay Anesthesiology Medical Group (East Bay Group). Under the terms of the contract, only anesthesiologists employed by East Bay Group could provide anesthesiology services at Sutter East Bay. The contract also provided that East Bay Group must immediately remove any physician from the schedule who “performs an act or omission that jeopardizes the quality of care provided to hospital’s patients.” 

Dr. Economy was a physician employed by East Bay Group. After quality concerns regarding his care were raised during a California Department of Public Health survey, contributing to a finding of immediate jeopardy, the hospital asked East Bay Group to remove Dr. Economy from the anesthesia schedule. The Group did so. Dr. Economy was placed back on the schedule after he completed a continuing education course mandated by the Sutter East Bay anesthesiology department peer review committee. 

According to the opinion, within a week after being back on the schedule, the hospital discovered deficiencies in two out of four of Dr. Economy’s cases. Sutter East Bay informed East Bay Group that it was not comfortable with Dr. Economy’s quality of care and would not approve any anesthesia schedules that included Dr. Economy. The hospital confirmed that it was asking East Bay Group to remove Dr. Economy from providing care at the hospital, pursuant to the contract term allowing the hospital to require the Group to remove any physician who “jeopardizes the quality of care provided to Hospital patients.” East Bay Group asked Dr. Economy to resign; when he refused, the Group terminated his employment. 

Dr. Economy sued the hospital alleging, among other things, that it violated his common law right to fair procedure and his rights under Business and Professions Code Section 809 by failing to provide him with a notice and hearing before his removal. The trial court ruled in his favor, finding that when Sutter East Bay effectively removed Dr. Economy from the anesthesia schedule, it was for a medical disciplinary cause or reason and constituted a summary suspension of his privileges. Therefore, Dr. Economy was entitled to notice of the charges against him and the opportunity to challenge the action in a hearing. Sutter East Bay appealed. 

The Court’s Decision: An Instruction to Keep a Physician Off the Schedule Is Functionally a Summary Suspension and Termination

The Court of Appeal upheld the trial court’s decision. The Court described California Business and Professions Code Section 805’s requirement that peer review bodies file a report to the Medical Board whenever they take certain actions limiting or terminating a physician’s membership or privileges for a medical disciplinary cause or reason. The Court then explained that if such actions are recommended, the physician is entitled to certain notice and hearing procedures pursuant to Business and Profession Code Section 809 et seq. and pursuant to the physician’s common-law rights before the actions become final. (Though not mentioned in the opinion, California law also allows certain reportable actions to be taken summarily prior to a hearing when there is imminent danger to any person.) The Court noted that Business and Professions Code Section 809.6 specifically provides that notice and hearing rights cannot be waived in any contract or other agreement.

Sutter East Bay agreed that if its medical staff had directly terminated Dr. Economy’s privileges, he would have been statutorily entitled to a hearing. But, the hospital argued, it did not take any action against Dr. Economy’s privileges – Dr. Economy was terminated by East Bay Group, not by Sutter East Bay. 

The Court of Appeal rejected this argument and placed responsibility on Sutter East Bay for “its own actions and failures to act.” The Court concluded that by informing East Bay Group (which held an exclusive contract to provide services) that it would not accept any schedules that included Dr. Economy, the hospital effectively directed the Group to remove Dr. Economy from the schedule. This was, according to the Court, “the functional equivalent of a decision to suspend and later revoke [Dr. Economy’s] clinical privileges” and that this decision could be made only after the hospital provided Dr. Economy with notice and a hearing. The Court also suggested that the hospital’s position undermined public policy, as the Medical Board of California would never be notified of the hospital’s concern that Dr. Economy was endangering patient safety.

The Court also rejected Sutter East Bay’s argument that Dr. Economy was not entitled to damages because there was no evidence that he would have been exonerated if a hearing had been held. The Court explained that whether Dr. Economy would have prevailed was irrelevant: the action Sutter East Bay took was invalid due to the hospital’s failure to provide Dr. Economy with his statutory rights prior to termination, and Dr. Economy was entitled to damages for the period of time in which the discipline was invalid. The Court also determined that Dr. Economy was entitled to an additional amount of damages to offset the tax consequences to him of a lump sum award.

Some Good News: The Court Denied Plaintiff’s Request for Attorney’s Fees

Despite this, there was some good news for Sutter East Bay. Business and Professions Code Section 809.9 requires courts to award attorney’s fees and other costs to the substantially prevailing party in a suit brought to challenge an action or restriction that was required to be reported under Section 805. This requirement, however, applies only if “the other party’s conduct in bringing, defending, or litigating the suit was frivolous, unreasonable, without foundation, or in bad faith.” The trial court had denied Dr. Economy’s request for an award of attorney fees, finding that although Dr. Economy was the prevailing party, the central legal issue was “difficult,” and the question of whether Sutter East Bay’s action was lawful was “arguable.” Therefore, the trial court concluded, “the hospital’s conduct in defending the action was not frivolous, unreasonable, without foundation, or in bad faith.” The Court of Appeal upheld this ruling.    

The Lesson of the Decision: Hospitals and Groups Should Evaluate Their Professional Services Agreements Closely 

Many hospitals and groups throughout California have exclusive professional services agreements with provisions allowing the hospital to direct the group to exclude a practitioner from providing services under the agreement. After this decision, hospitals and groups should carefully evaluate whether and how these provisions are implemented. Of course, nothing in the Court’s decision prevents the hospital and group from working together to address competency concerns, as long as the hospital is fulfilling its own statutory obligations. 

Questions, however, remain. What if a hospital expresses concerns regarding a physician to the group, and the group decides on its own to remove the physician without any directive from the hospital? If the group removes the physician out of concern that its contract with the hospital will be jeopardized otherwise – even without any express instruction from the hospital – will a court find the hospital to be in some way responsible? If there is evidence that the hospital’s expression of concern was an unspoken-yet-understood instruction to keep the practitioner out, this could be a risk. 

And what if the contract with the group is not exclusive and the provider remains free to exercise his or her privileges without being employed by the group? If the practitioner is removed from the group’s schedule per the hospital’s instruction and his or her economic opportunities are reduced as a result, will the same notice and hearing rights come into play? There are plenty of reasons why this should not be the case – but the Court’s broad interpretation of what actions constitute the termination of privileges should cause hospitals to consider carefully the impact of requests it makes to any group regarding a practitioner with quality issues. And, of course, hospitals should also carefully evaluate their interactions to limit the risk of being accused of interfering with a practitioner’s employment with a group.

Hospitals and groups must be able to freely discuss their concerns about practitioners who provide services under their contracts – this is vital to patient health and safety, as well as to fulfilling the hospital’s regulatory responsibilities for oversight of contracted services. This Court of Appeals decision should not prevent these discussions, but hospitals and groups should be clear with each other about their intent and impact.