When does a hearing officer in a physician peer review hearing have a disqualifying financial bias?

For 15 years, Yaqub v. Salinas Valley Memorial Healthcare System, 122 Cal. App. 4th 474 (2004), had stood as the sole published decision to squarely address whether a hearing officer appointed to preside over a medical staff physician peer review hearing has a disqualifying financial bias. Yaqub, which disqualified a hearing officer for mere risk of bias based on his past work at a hospital, rests on a shaky foundation. It failed even to mention the statute governing hearing officer financial bias in physician peer review matters. No court has endorsed Yaqub, but no published decision had rejected it either. Yaqub's nebulous, incorrect standard persisted in the only citable case on point.

Yaqub now has some disagreeable company. In a recent decision, the 3rd District Court of Appeal "express[ly] repudiat[ed]" Yaqub, declaring it "a deviation from the strong current of precedent and therefore 'a derelict on the waters of the law.'" Natarajan v. Dignity Health, 2019 WL 5387284 (Oct. 22, 2019, modified and certified for publication on Nov. 20, 2019) (citation omitted). Natarajan is the first decision to interpret California's peer review hearing officer bias statute, Business and Professions Code Section 809.2(b), which states that a hearing officer "shall gain no direct financial benefit from the outcome" of the peer review proceeding. Natarajan holds that mere potential bias based on past or possible future hearing officer work at a private hospital does not deprive a physician of fair procedure when challenging adverse action on his/her hospital practice privileges.

Yaqub's primary weakness is that it did not follow the governing statutory standard. Natarajan, 2019 WL 5387284, at *5 (noting Yaqub's "failure even to consider ... the statutory restatement of the principles of fair procedure limited to a direct financial interest in the outcome under section 809.2") (emphasis in original). Yaqub disqualified a hearing officer for mere potential financial bias, based on evidence of his "'long-standing and continuous' relationship" with the hospital. Yaqub, 122 Cal. App. 4th at 483. The hearing officer there had previously served as hearing officer for prior hearings at the same hospital, including one relating to a summary suspension of the same physician's privileges. He also had served as mediator and arbitrator in cases involving the hospital. And he had been selected by the hospital's board of directors to serve on the board of a hospital foundation that raised money for the hospital. The court held that these facts together created a "possible temptation" to favor the hospital.

But "possible temptation" is irreconcilable with the statutory requirement of "direct financial benefit"; in fact, Yaqub itself expressly stated that the financial bias it identified was not direct. Yaqub, 122 Cal. App. 4th at 485 ("no evidence ... of a direct financial interest in the outcome of the case"). Natarajan explains that Yaqub wrongly perpetuated an "appearance of bias" or "potential bias" standard contrary to the "direct" standard the Legislature chose to impose in the controlling statute.

Yaqub also ignored the distinction between constitutional due process principles applicable to public entities, and the more flexible fair procedure requirements applicable to private hospitals, where "the controlling concept ... is fair procedure and not due process .... [In a] private institution[], whatever fair procedure rights [a physician] has arise from [the peer review statutes] and not from the due process clauses of the state and federal Constitutions." Kaiser Found. Hospitals v. Superior Court, 128 Cal. App. 4th 85, 102 (2005).

Natarajan explains in practical terms why that distinction is significant for claims that peer review hearing officers have a disqualifying pecuniary bias. In hearings at private hospitals that are controlled by fair procedure, "a court does not presume bias based on a mere appearance absent a factual showing." Natarajan, 2019 WL 5387284, at *4 n.11 (emphasis in original). In reaching the opposite conclusion, Yaqub erroneously relied on Haas v. County of San Bernardino, 27 Cal. 4th 1017 (2002) to state a standard for medical staff proceedings that would apply to private hospitals. But Haas involved a hearing officer who adjudicated disputes for a public entity, so the Supreme Court applied constitutional due process analysis, holding that potential bias, including a "temptation" to favor the hiring entity, was disqualifying. In private hospital peer review, hearing officers are not adjudicators and are statutorily prohibited from voting or deciding matters. They merely preside over hearings, ruling on evidence and maintaining orderly proceedings. Mileikowsky v. West Hills Hosp. & Med. Ctr., 45 Cal. 4th 1259, 1271 (2009) (interpreting Section 809.2(b), holding peer review hearing officers are not adjudicators and have "no part in the decisionmaking process").

The Natarajan decision recognizes that the Legislature could "frame the criteria for impartiality of an adjudicator as it wishes for purposes of the fair procedure that a private entity must provide, without being required to meet the constitutional threshold for public entities." Natarajan, 2019 WL 5387284, at *5 (emphasis in original). The statutory requirement of disqualification for "direct financial benefit in the outcome" is consistent with long-standing law in the physician peer review setting that only actual bias or a "'practical probability' of unfairness" requires reversal of the outcome of a medical staff hearing. Rhee v. El Camino Hosp. Dist., 201 Cal. App. 3d 477, 492 (1988); Hongsathavij v. Queen of Angels/Hollywood Presbyterian Medical Center, 62 Cal. App. 4th 1123, 1142 (1998) ("bias in an administrative context can never be implied, and the mere suggestion or appearance of bias is not sufficient").

As noted, no court has applied Yaqub. Its holding is flawed, as demonstrated by its outright rejection in Natarajan. Trial courts, the bar, and peer review hearing officers can now benefit from Natarajan's clear-eyed analysis of the bias statute, which has been absent from the case law since its 1990 enactment.

While a court might still choose to follow Yaqub instead of Natarajan, Natarajan nonetheless provides a roadmap for creating a record that might avoid or minimize Yaqub's application. For example, a process making clear that the medical staff selects the hearing officer may eliminate claims that the hospital itself makes that decision. Similarly, even if a court follows Haas, the Supreme Court there explained that a provision in a hearing officer's engagement agreement prohibiting him/her from presiding at another proceeding at that hospital for several years should suffice to defeat asserted financial bias. Haas, 27 Cal. 4th at 1037 n.22. For precisely this reason, the hearing officer in Natarajan agreed not to serve again as a hearing officer at the hospital for three years. Such steps may protect hospitals and medical staffs against overzealous application of the questionable Yaqub decision. 

Mr. Landsberg and Ms. McCallum represent Dignity Health in Natarajan v. Dignity Health.