Due Process - States
ACR Bulletin
January 1998
Legal
Managed Care: Physician Due Process
A hospital's duty to investigate and review the competence of the physicians using its facilities is well founded in case law and statutory authority in all 50 states. The hospital, through the medical staff, is responsible for creating standards, rules, regulations, and bylaws that govern physician activities. Using reasonable care, this duty extends to granting, terminating, or limiting staff privileges. However, when a hospital terminates or limits privileges, the hospital is also responsible for providing physicians with due process and fair hearing. Until recently it was unclear whether these protections applied to physicians in their practice arrangements with managed care organizations (MCO).
Unlike early case law, several recent cases have worked their way through the courts with favorable results. In the New Hampshire Supreme Court in 1996, a physician challenged a termination-without-cause clause in a provider agreement with an MCO based on lack of due process. The physician was successful. In New Jersey a federal district court in September 1997 determined that the termination without cause of a group of psychologists employed by a large MCO was analogous to granting or denying hospital staff privileges to physicians. An MCO in Washington, DC, agreed to settle a dispute with the Medical Society of the District of Columbia by creating a credentialing committee and appellate process to review nonselection or deselection actions of the MCO. In California, the Second Appellate District Court of Los Angeles held in 1997 that in spite of a "without cause" termination provision in his provider services agreement with an MCO, a physician was entitled to a "fair procedure" before termination from the managed care network. Except for the settlement in the District of Columbia and the New Hampshire decision, the remaining cases are undergoing further review. The initial decisions, however, are discussed in detail below.
New Hampshire
From 1985 to 1989, Paul Harper, a surgeon, contracted with Healthsource New Hampshire, Inc., to provide both surgical and primary care services to Healthsource's enrollees. In 1989 Healthsource changed this arrangement, contracting with Harper only for services as a primary care provider. His contract remained the same until 1994 when Healthsource informed Harper that his contract was being terminated because he failed to meet certain credentialing criteria. This notification came after Harper questioned Healthsource about entries made in the treatment records of a number of his patients.
Harper appealed the decision to terminate his contract and requested from Healthsource the documentation on which his termination was based. His request was denied, but he was given an opportunity to present his own evidence before a clinical quality assurance committee hearing. On the basis of Healthsource's refusal to provide him with the requested documentation, he declined to appear before the committee. The decision to terminate his contract for cause was affirmed with a recommendation that he should be terminated without cause as well. Harper appealed this decision and appeared before an executive level committee at Healthsource. No evidence was presented against him at the hearing, and Healthsource still refused to provide him with the documentation that supported the termination decision. The final decision was made to terminate his contract "without cause." Harper filed suit.
In the initial stages of litigation, Harper met only rejection. Healthsource successfully moved in superior court to dismiss all of Harper's claims. He appealed and presented his case before the New Hampshire Supreme Court. The court dismissed all of his claims, except one: whether his termination without cause was a violation of public policy or constituted bad faith. In a case of first impression for the State of New Hampshire, the court held that when a physician is terminated without cause, and such termination is "made in bad faith or based upon some factor that would render the decision contrary to public policy, then the physician is entitled to review of the decision" [Harper v. Healthsource NH, Inc., 674 A.2d 962 (NH 1996].
The Harper decision is significant for several reasons. First, the court held that Harper was not an employee of Healthsource or an independent contractor. This finding was contrary to all previous similar decisions. Second, the court seemed to go out of its way to fashion a common law solution to protect Harper's "right" of access to his patients. The court used its power to effectuate social change; ordinarily, changes in social policy are instituted through legislative pronouncements. Furthermore, the court recognized that in the traditional physician-patient relationship under managed care, neither the physician nor the patient was empowered to override the interests of the MCO. Thus the court fashioned a decision that recognized a legitimate public policy in protecting the physician-patient relationship. The court also noted that such interests could be financially motivated, resulting in harm to patients.
New Jersey
MCC Behavioral Care, Inc., is one of the largest MCOs providing services for mental health and substance abuse through contracts with health maintenance organizations (HMOs). Its delivery of services is provided by a number of psychologist networks through provider service agreements with MCC. One of the provisions in the standard agreement allows either party to terminate the agreement "without cause" upon 30 days' written notice. Relying on this provision, MCC terminated the agreements of a number of psychologists, including many who were members of the New Jersey Psychological Association. The association and its affected members brought suit against MCC in the Superior Court of New Jersey, alleging eight causes of action [New Jersey Psychological Association v. MCC Behavioral Care, Inc., No. 96-3080 (D.N.J. Sept. 15, 1997].
The case was removed to federal district court where MCC argued that all claims were subject to arbitration. The provider agreements executed by the psychologists required arbitration to settle any contract disputes. The district court agreed with MCC that the breach-of-contract claim and several of the other claims were subject to arbitration. Three causes of action, however, were based on New Jersey statutory and common law and not subject to arbitration. The district court allowed the psychologists to proceed on these claims: (1) MCC's termination of the agreements violated public policy; (2) the termination violated the doctrine of fundamental fairness; and (3) the termination was a tortious interference with the psychologists' right to pursue an economic advantage.
In resolving these three surviving issues, the district court looked to New Jersey case law. The court noted that the New Jersey Supreme Court had not addressed the public policy issue in the context of managed care. Case law did recognize, however, a strong public policy preventing hospitals from "arbitrarily" excluding "otherwise qualified doctors from their staffs." The New Jersey courts also recognize that physicians have a right to "fundamental fairness" in decisions regarding their hospital staff privileges.
The district court examined the relationship between the psychologists and MCC. It was decided that the relationship between physicians and HMOs or MCOs was analogous to the relationship between physicians and hospitals. Thus the public policy and fundamental fairness protections given to hospital staff physicians would apply to arrangements between physicians and MCOs. The court also noted that New Jersey Department of Health regulations could serve as the source of the public policy claim and that MCC's actions were similar to wrongful discharge.
In resolving the third claim in favor of the psychologists, the court found that MCC "intentionally and maliciously interfered" with the plaintiffs' ability to practice their profession. Because of MCC's dominance in the marketplace, the privilege to participate in the network could be critical to both the psychologists and their patients. Even as a general rule, physicians and patients have much at stake in any decision that terminates a physician's privileges. The terminations by MCC disrupted the psychologist-patient relationship, which may have resulted in financial loss for the providers.
At present, final action on these claims is stayed, pending the results of the claims submitted to arbitration.
California
In early 1997 the Second Appellate District Court of Los Angeles considered similar issues in Potvin v. Metropolitan Life Insurance Corporation, 54 Cal. App. 4th 936; 63 Cal. Rptr. 2d 202 (1997). Ruling in favor of the physician-plaintiff, Potvin, the appellate court held that a physician was entitled to a "fair procedure" before termination of his participation agreement in an insurer's managed care network. The court further held that such a fair procedure was required in spite of Metropolitan's reliance on the "without cause" termination provision in Potvin's provider agreement. This decision is on appeal to the Supreme Court of California.
In 1990, Potvin, a specialist in obstetrics and gynecology, executed an agreement with Metropolitan to participate in a preferred provider organization (PPO) and an HMO network. The agreement provided for automatic termination "for cause" or termination by either party "without cause" upon 30 days' written notice. Approximately two years later, Metropolitan provided Potvin with written notice of his termination "without cause" in accordance with the agreement. He responded, requesting an explanation, and after the passage of several months was advised that his termination was a business decision and not a reflection of his performance.
Not satisfied with Metropolitan's answer, Potvin requested a further explanation for his termination. Initially he was advised that his termination was in accordance with the provisions of his provider agreement and that Metropolitan had no contractual obligation to provide further explanation. Subsequently, he was told that one reason for termination was his failure to meet Metropolitan's selection and retention requirements for malpractice history. He wrote back to Metropolitan, explaining his malpractice history and describing the negative impact the termination had on his practice and his relationship with his patients. He also requested a hearing to resolve the issue. After his second request to Metropolitan went unanswered, he filed suit.
At the trial court, summary judgment was entered in favor of Metropolitan. The court found that Potvin was not entitled to any procedural rights. He appealed, and the appellate court reversed the decision.
As in the New Jersey case, the California appellate court looked to the state's common law and case law. The court noted that California recognized a right-to-fair-procedure for persons arbitrarily excluded from private organizations that control important economic interests. The size of Metropolitan's patient population could have a significant effect on the financial interests of the physicians providing services under agreements with Metropolitan. Additionally, this duty only applied to private organizations who were "tinged with public stature or purpose" and not private organizations such as clubs. The court considered the purpose of MCOs-the delivery of healthcare services-to fall within this duty.
The appellate court noted that California case law required a fundamental right-to-fair-procedure when substantial economic interests were affected in the context of medical staff matters. California also previously determined that a deselected physician was entitled to hearing rights because managed care providers "control substantial economic interests" and expulsion from membership in such an organization could not be "arbitrary, capricious, or contrary to public policy." In this second case, also involving Metropolitan as a defendant, a podiatrist successfully contested his termination resulting from a "without cause" provision in his provider agreement [Ambrosino v. Metropolitan Life Insurance Corporation, 899 F. Supp. 438 (N.D. Cal. 1995)]. The California appellate court found Ambrosino persuasive in ruling favorably for Potvin.
Other strategies to encourage due process
Developing case law is an effective means for providing physician due process under managed care. Courts are well equipped to handle the issues, but the drawback is that litigation takes time, and no decision is final until all appeals are exhausted. Both Potvin and New Jersey Psychological Association are still awaiting a final outcome. Even when the decisions do become final, they may not provide all the answers. If the Supreme Court of California affirms Potvin, the issue of due process will be decided, but the degree of required due process will remain unclear. Potvin also failed to define the standard of review in evaluating what constitutes "fair procedure." These issues likely will appear in future cases, but the results could take years.
The decision in Potvin is consistent with standards under development by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and the National Committee on Quality Assurance (NCQA). Although JCAHO historically was primarily concerned with the accreditation of hospitals, both it and NCQA are devoting considerable resources to accrediting MCOs. It is possible that JCAHO and NCQA standards will bring to MCOs the same due process and peer review standards required in traditional medical facilities with medical staff bylaws.
Clearly the decision in Harper was an attempt to correct what the court perceived as a serious interference with the physician-patient relationship. Although the result in Harper is meritorious, the legal analysis used to reach the conclusion could suffer under a critical review and may not prove useful in future decisions. Therefore, the decision appears to have limited precedential value. The decision is important, however, because it serves to demonstrate that some issues may find a better resolution through legislative change as opposed to the courts. Issues involving social change are better suited to the legislative arena, where a solution may be fashioned that is not fact-specific to a particular case. This approach appears to be gaining momentum. A number of states in the last several years have enacted or are in the process of enacting managed care legislation. States such as Texas and New Jersey have recently enacted laws that require managed care plans to provide physicians with certain due process rights before termination. The New Jersey Health Care Quality Act was signed into law Aug. 7, 1997. The law requires managed care plans to provide a physician with a list of reasons for his or her termination before the expiration of the provider contract. Affected physicians are also informed of their right to a hearing to resolve termination issues.
Conclusion
In the states mentioned above where either legislation or a court decision resulted in favorable action for the affected physician, one more factor is worthy of comment. In each situation the public policy arguments were first identified, debated, and brought to the attention of the general public by physician organizations. In particular, the California Medical Association deserves a great deal of credit for helping foster an environment in California that contributed to the successful decision in Potvin. The Texas Medical Association was instrumental in the passage of managed care legislation in Texas. Specialty societies, such as the ACR, play an equally important role in the dissemination of information to its members, in its legislative advocacy, and in the courts through participation as an amicus in cases of precedential importance.