California Appellate Decision Limits Hospital’s Options For Exclusive Contracts

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On February 4, 2019, the California Court of Appeal affirmed a judgment awarding plaintiff, Dr. Kenneth Economy, substantial damages for his suspension and subsequent termination of his staff privileges at defendant Sutter East Bay Hospitals. The Court of Appeal held that, because Dr. Economy’s termination, even though done under the provisions of an exclusive contract, was based on “medical disciplinary cause or reason,” he was entitled to prior notice and a hearing in accordance with Business and Professions Code section 809 et seq. This decision flies in the face of the underlying premise for exclusive contracts: the ability for a hospital to enter into a contractual arrangement that allows it to set superior metrics in exchange for exclusive rights to provide services. Clinical issues have long been mandated to be within the purview of the medical staff but exclusive contracting gives hospitals the ability to contract for higher standards of quality of care. The severity of the Economy decision calls into question the accepted approach to exclusive contracts.


Dr. Economy was an anesthesiologist who had practiced at Sutter East Bay Hospital for 20 years. The hospital operated a “closed” anesthesiology department pursuant to a contract with the East Bay Anesthesiology Medical Group (“East Bay Group”). Under the contract, East Bay Group exclusively provided administrative and coverage services to the hospital’s anesthesiology departments. Importantly, the parties’ contract authorized the hospital to require that East Bay Group immediately remove from the schedule any physician whose actions jeopardized the quality of care provided to the hospital’s patients. In July 2011, Dr. Economy was found responsible for numerous violations that jeopardized patient safety. Consequently, the hospital’s peer review committee recommended to East Bay Group that Dr. Economy complete a continuing education course through the Physician Assessment and Clinical Education (“PACE”) program. Dr. Economy completed the PACE program. Despite this additional training, he was once again found to have performance issues related to clinical care. The hospital then asked East Bay Group to remove Dr. Economy from its schedule pursuant to the parties’ contract. East Bay Group complied and later terminated his employment. Dr. Economy filed suit against the hospital alleging, among other things, a violation of his right to notice and a hearing under Business and California Professions Code section 8091 as well as his common law right to fair procedure.

Trial Court Finds in Favor of Dr. Economy

The trial court found that the hospital’s action of removing Dr. Economy from the anesthesia schedule was indisputably based on a medical disciplinary cause or reason, which ultimately constituted a summary suspension of his right to exercise his privileges and use the hospital’s facilities. The trial court found that the hospital’s failure to provide Dr. Economy with notice of the charges against him and an opportunity for hearing amounted to a violation of Section 809.5, as well as his common law right to fair procedure. Although the trial court awarded Dr. Economy approximately $4 million in damages, it denied his request for attorney’s fees and costs as a prevailing party under Section 809.9.

Court of Appeal Upholds Trial Court Decision

On appeal, the hospital argued that East Bay Group was not a “peer review body” within the meaning of Section 805 and therefore Dr. Economy’s suspension and termination did not trigger a duty to file a report with the state licensing board or to provide a hearing mandated by such reportable actions, which hearings are triggered by medical staff actions. The hospital also argued, to no avail, that Dr. Economy was not entitled to notice and hearing because he was terminated by his employer, East Bay Group, rather than the hospital. The Court of Appeal was not persuaded by the hospital’s arguments and held that the hospital’s request that Dr. Economy be removed from its anesthesiology schedules was tantamount to a decision to suspend and ultimately revoke his privileges. Because the hospital’s contractual terms with East Bay Group prohibited anesthesiologists from performing services at the hospital if not employed or scheduled by the group, the hospital’s decision effectively terminated his right to exercise clinical privileges at the hospital. Under the hospital’s medical staff bylaws, such a decision could be made only by its medical executive committee (“MEC”) after the provision of notice and an opportunity for hearing before the peer review committee. In Economy, it was undisputed that the hospital did not provide notice or a hearing, nor did the MEC review Dr. Economy’s disciplinary action. The Court also concluded the hospital did not delegate its peer review duties to East Bay Group under the terms of their contract. Indeed, the Court specifically noted that the hospital’s medical staff bylaws did not require or authorize a closed department to conduct peer review in lieu of the procedures set forth in its bylaws. The Court further noted that there was no evidence that East Bay Group had any policies or procedures for the conduct of peer reviews. The Court of Appeal reasoned that the hospital was therefore the entity solely responsible for reviewing physician performance pursuant to the contractual relationship. Accordingly, its failure to provide Dr. Economy with notice and an opportunity for hearing was a violation of his statutory and common law rights to due process. The Court of Appeal held that the hospital’s request to remove Dr. Economy from East Bay Group’s anesthesia schedule ultimately constituted a summary suspension of his right to exercise his privileges—a deprivation which could only lawfully be undertaken by way of formal peer review in accordance with Sections 805 and 809.

The Court of Appeal further reasoned that if the hospital were permitted to contract with third-party employers such as East Bay Group, who could suspend and terminate a physician without complying with statutory due process requirements, then a hospital could essentially avoid compliance with such statutes altogether, which would be contrary to public policy. Although it found that Dr. Economy was entitled to notice and a hearing, the Court of Appeal denied his request for attorney’s fees and costs, finding that the hospital’s defense was not frivolous, unreasonable, without foundation, or asserted in bad faith.

Exclusive Contracting in the Wake of Economy

As the Court of Appeal acknowledged in footnote 3, “[h]ospitals often enter into closed or ‘exclusive contracts . . . with healthcare entity-based physicians such as pathologists, radiologists, and anesthesiologists, . . . for a variety of reasons including (1) improving the efficiency of the healthcare entity; (2) standardization of procedures; (3) securing greater patient satisfaction; (4) assuring the availability of specific services; (5) cost containment; and (6) improving the quality of care.’ (citing to Health Law Practice Guide (2018) Exclusive Contracts, § 2:24.)” However, the Court of Appeal in Economy clearly took issue with the means by which the hospital enforced the provisions of its contract with East Bay Group. It is unknown at this point whether this case will be appealed to the California Supreme Court. Certainly, there are numerous factual distinctions to be made when considering the ramifications of Economy and every situation would require a careful case by case analysis. However, if Economy stands, it will require careful analysis and should encourage hospitals to consider the parameters of their exclusive contract relationships, the terms of those contracts, and even reweigh the benefits of closed departments in connection with their specific circumstances. At the very least, it is apparent that in the wake of Economy a more conservative approach will be to defer clinical issues to the medical staff for any necessary determinations and action.


Illinois hospital will have to meet constitutional charity standards, judge rules

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An Illinois judge has ruled that the operator of Carle Foundation Hospital in Urbana must meet constitutional standards for charitable organizations in order to receive tax exemptions, The News-Gazette reports.

The Carle Foundation is seeking retroactive property tax exemptions for 2004-2011 and a refund for taxes it paid to local authorities during that time. However, Champaign County Judge Randy Rosenbaum agreed with the recent Illinois Supreme Court ruling that hospitals seeking tax exemptions must not only offer as much charity care as they would have paid in taxes; they also must extend charity care to an indefinite number of people and not create any barriers to it.

Hospitals looking for a tax exemption  also must show they do not have any capital, stock or shareholders. Carle Foundation attorneys  have argued that they need only show that the hospital complies with the terms of the hospital tax-exemption law.

John Colombo, a retired law professor at the University of at Illinois Urbana-Champaign, said that the ruling is important for the Carle Foundation’s upcoming trial, but does not clearly define charitable use for the future of Illinois hospitals.

“The Illinois Supreme Court is going to have to say at some point, ‘Here’s what it takes for an Illinois hospital to be tax-exempt,'” said Mr. Colombo.



Patient’s $7,800 ED bill reaches California Supreme Court

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A case involving a hospital patient’s emergency department bill has been initiated at the California Supreme Court, a spokesperson for the Judicial Council of California confirmed to Becker’s.

He said the supreme court received a petition for review from the patient, and it has at least 60 days to decide whether it will grant, deny or take other action.

The petition centers on an unpublished opinion by the Fifth District Court of Appeal issued in July that would allow self-pay patients treated at Community Regional Medical Center in Fresno, Calif., and Clovis (Calif.) Community Medical Center to challenge their medical expenses as part of a class action, The Fresno Bee reported.

The appeals court decision reversed a trial court order denying class certification; directed certification of an “issue class”; and denied the the patient’s request to publish the opinion. But now the patient has petitioned the supreme court to get the opinion published. “Unpublished or ‘noncitable’ opinions are opinions that are not certified for publication in official reports and generally may not be cited or relied on by other courts or parties in other actions,” the spokesperson for the Judicial Council of California said. However, if the case were published, it would become case law, potentially affecting lawsuits against hospitals statewide.

Hospital officials have argued the case should not be published.

The case goes back to a dispute over interpretation of Community Regional Medical Center’s admissions contract and the rates charged to an uninsured emergency room patient, Cesar Solorio, according to the appeals court decision. Mr. Solorio reportedly received X-rays and a splint on his wrist at the hospital on Sept. 22, 2015. He later received a bill for $7,812.03 and filed a class-action complaint alleging rates billed to self-pay patients are “inflated and exorbitant,” the appeals court decision states.

Community Medical Centers, the operator of Community Regional Medical Center and Clovis Community Medical Center, disputes claims that the self-pay billing process is different from insured patients, according to The Fresno Bee.

Michelle Von Tersch, vice president of communications and public affairs, told the publication documents regarding a patient’s treatment are reviewed to determine applicable charges after discharge. She said that many uninsured patients are eligible for financial aid programs, such as charity care.

Read the full Fresno Bee report here.


Illinois Supreme Court: Hospitals’ property tax exemption is constitutional

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The Illinois Supreme Court ruled Sept. 21 that non-profit hospitals in the state do not have to pay property taxes as long as the value of the charitable services they provide is equal to or greater than the taxes they would have paid, according to The Chicago Tribune.

The ruling was an affirmation of a lower court decision that previously upheld the constitutionality of the property tax exemption, which was challenged in the lawsuit against the Illinois Department of Revenue by Cook County taxpayer Constance Oswald.

“When you give these hospitals a pass on paying real estate taxes, people within the counties where the hospitals are located have to make it up,” Edward Joyce, Ms. Oswald’s lawyer, told The Tribune.

But advocates for nonprofit hospitals argued the law allows them to fully dedicate themselves to delivering care to underserved patients.

“For nonprofit hospitals, property tax exemption fosters [transformation] by permitting them to focus their time, energy, and financial resources on new strategies to better serve all of the residents of our state.” said A.J. Wilhelmi, president and CEO of the Illinois Health and Hospital Association. “Taxing nonprofit hospitals would hurt the communities they serve by diverting dollars that are better used to care for patients and to upgrade equipment, modernize facilities and hire needed staff.”



Discipline based on arrest records upheld for health are professionals

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Doctors and other health professionals in California can be disciplined or lose their licenses for criminal conduct such as possession of illegal drugs even if they complete a pretrial treatment program and have the case erased from their record, under a ruling that has now become final.

The state Supreme Court unanimously refused Wednesday to take up a physician’s appeal of a ruling that said a licensing agency, such as the California Medical Board, can rely on arrest records as evidence that a license-holder committed professional misconduct, even if the underlying criminal case no longer exists.

That ruling, by a San Francisco appellate panel, is now a binding precedent for all trial courts in California. Besides doctors, it applies to other licensed medical professionals such as nurses and pharmacists.

The case involved a Southern California physician, Brandon Erdle, who was arrested in September 2013 on suspicion of possessing cocaine. His lawyer, Mitchell Green, said Erdle was actually arrested for an unrelated minor crime and was carrying bags with small amounts of the drug that he was about to drop into a medical disposal unit.

One DeLand police officer was fired and two others disciplined after losing meth during an arrest.

The case never went to trial, and the drug charge was dismissed in January 2016 after Erdle went through a treatment program known as pretrial diversion. In the meantime the Medical Board, citing his arrest report, accused Erdle of unprofessional conduct, then issued him a public reprimand in 2016 and placed him on probation.



Georgia Supreme Court rules Northside Hospital can’t shield all financial records in fight over state open-records law

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The Georgia Supreme Court ruled Thursday that Atlanta-based Northside Hospital can’t bar public access to all financial records, overturning a lower court’s decision, according to The Atlanta Journal Constitution.

The lawsuit was brought by plaintiff E. Kendrick Smith, who sought records from Northside’s $100 million acquisition of four physician practices. When the hospital rejected his request, Mr. Smith sued.  

The case concerns whether the nonprofit hospital should be subject to Georgia’s open-records law, Northside has argued is it not bound to the law because it’s a private nonprofit organization, not a public entity. The lower court rulings agreed with Northside’s stance arguing its financial records were not subject to disclosure.

Georgia Supreme Court justices opposed Nothside’s postion regarding the open record laws, but the court also rejected the plaintiff’s argument that all of the hospital’s financial records should be public. Instead, they remanded the dispute back to the lower court for further proceedings to determine which specific financial documents should be public record.

Attorney Peter Canfield, who represented Mr. Smith, argued Northside Hospital is subject to the open record laws because it was created by a public hospital authority, which is a public entity and the system operates on the authority’s behalf.

“The corporation’s operation of the hospital and other leased facilities is a service it performs on behalf of the [county’s] agency, and so records related to that operation are public records,” Georgia Supreme Court Justice Nels Peterson wrote in the ruling, according to the Atlanta Journal Constitution.


State’s doctors join suit over Dignity Health sterilization ban

California’s doctors are joining a legal challenge to the state’s largest owner of private hospitals over its refusal to allow women to have tubal ligations. Photo: Vladimir Vladimirov, Getty Images

California’s doctors are joining a legal challenge to the state’s largest owner of private hospitals over its refusal to allow women to have tubal ligations in its Catholic hospitals because of the church’s objections to sterilization. The 41,000-member California Medical Association said Wednesday that it wants to intervene in a lawsuit claiming Dignity Health’s policy violates state laws against sex discrimination and the corporate practice of medicine.