Ruling ends physician termination sans peer review process

For years, hospitals have requested that medical groups terminate problematic hospital-based physicians without any limitations. In Economy v. Sutter East Bay Hospitals, 2019 DJDAR 1049 (Feb. 4, 2019), the the 1st District Court of Appeal put an end to the practice of terminating a physician without utilizing the peer review process -- when it relates to clinical concerns. Upholding a trial court verdict of $3.8 million, the Economy court held that physicians are entitled to notice and a hearing in situations where a hospital requests a medical group to remove one of its physicians from the hospital's schedule for performance reasons.

Background

Dr. Kenneth Economy is an anesthesiologist who was employed by East Bay Anesthesiology Medical Group. The East Bay Group held an exclusive contract to provide anesthesia services at Sutter Hospital, and every anesthesiologist who provides services at the hospital was required to be employed by East Bay Group. In addition, the contract permitted the hospital to require East Bay Group to remove from the schedule any physician who "performs an act or omission that jeopardizes the quality of care provided to hospital's patients."

During an unannounced inspection, a state agency found that Dr. Economy was misusing the drug Droperidol. Dr. Economy's behavior was putting patients at risk, which placed the hospital in "immediate jeopardy." In response, the hospital asked East Bay Group to remove Dr. Economy from the anesthesia schedule pending further investigation. The hospital's anesthesia department peer review committee reviewed the issue and recommended that Dr. Economy complete a continuing education course prior to returning to clinical practice. Dr. Economy completed the course and returned to work.

Shortly thereafter, the hospital noticed further unacceptable errors and violations by Dr. Economy. The hospital asked East Bay Group to remove Dr. Economy from the anesthesia schedule permanently, explaining that it was not comfortable with the quality of care provided by Dr. Economy, and would not approve him on any schedules. East Bay Group asked Dr. Economy to resign. When he refused, East Bay Group terminated his employment.

The Lawsuit

Dr. Economy filed a complaint alleging the hospital violated his right to notice and a hearing under California Business and Professions Code Sections 805 and 809. After a bench trial, the court held that the hospital had violated Dr. Economy's due process rights and was required to provide him with a notice and peer review hearing before effectively terminating him. The court awarded Dr. Economy $3.8 million in damages, including $650,000 to offset the tax consequences of the lump-sum award. Of note, the trial court recognized there are no reported decisions in California on the concept of tax neutralization, but nonetheless held that compensating Dr. Economy for the additional tax liability is consistent with Civil Code Section 333 and is intended to make Dr. Economy whole.

The Appeal

The appellate court affirmed the judgment in its entirety. The court rejected the hospital's argument that Dr. Economy's rights were never triggered because he was terminated by East Bay Group, rather than by the hospital. The court reasoned that the hospital was essentially avoiding compliance with the notice and hearing requirements by relying on its contracts with medical groups as a way to terminate physicians. The court held that the hospital's decision not to approve schedules on which Dr. Economy was included was the functional equivalent of revoking Dr. Economy's clinical privileges.

The hospital further argued that East Bay Group was required to develop and maintain an independent peer review process for its physicians pursuant to the exclusive contract. The court, however, held that the hospital could not establish that it delegated its duties to East Bay Group.

Interestingly, the court also affirmed the award of an additional sum to offset the tax consequences of the lump-sum award, reasoning that the purpose of the award is to ensure that Dr. Economy is compensated fully for his losses.

Implications

Hospitals and medical groups should be cautious when terminating a hospital-based physician due to clinical reasons. Hospitals must provide a physician with prior notice and a hearing if they directly or indirectly terminate a physician for clinical-based reasons. Hospitals should not direct medical groups to remove or refuse to schedule a physician for competency reasons without due process.

It is important to note that the court focused on the removal of a physician for competency reasons. While not specifically addressed in Economy, it appears that hospitals may request medical groups to terminate a hospital-based physician for non-clinical reasons without providing notice and a hearing. Examples could be harassment, rudeness to staff, or other conduct that is contrary to the professional standards of the hospital but not subject to peer review. Each situation, however, needs to be evaluated on an individual basis.

Although the Economy court did not address whether physicians may voluntarily waive their due process rights and resign, this may be an acceptable alternative in certain situations. Hospitals and medical groups may want to inform problematic physicians of their options, such as voluntarily resigning or proceeding with peer review. Hospitals, however, may not contractually waive peer review in cases where a physician's medical competency is at issue. Instead, they may consider adding contractual language regarding the removal of a physician from the schedule due to non-clinical reasons.

While the medical group was initially a party in the lawsuit, it was not a party when the case was appealed. The court found the medical group having its own peer review committee to be relevant, but noted that the exclusive contract did not articulate that the group's peer review committee would protect all of the rights guaranteed under Sections 805 and 809. Given the hospital's non-delegable duties, medical groups may want to forego having their own peer review committees in favor of allowing the hospital committee to administer the function.