Revolution in Disputes Between Hospitals and Their Physicians?

Daily Journal

A new decision of the state Court of Appeal last week may change the way disputes between hospitals and their privileged physicians will play out. In Fahlen v. Sutter Central Valley Hospitals, 2012 DJDAR 11289 (Cal. App. 5th Dist. Aug. 14, 2012), the court upheld the right of a physician to sue for damages a hospital that had refused to reappoint the physician to its medical staff through peer review proceedings. The physician alleged that the discipline was retaliation for his whistleblowing about staff work he thought threatened public health. He was allowed to bring the suit although he had not challenged the hospital's adverse peer review decision through a writ of mandate under Code of Civil Procedure Section 1094.5. Hitherto, under the state Supreme Court's 36-year-old decision in Westlake Community Hosp. v. Superior Court, 17 Cal. 3d 465 (1976), any hospital decision about staff privileges was entitled to collateral estoppel effect if it had not been challenged and reversed in such writ proceedings.

Dr. Mark Fahlen was a nephrologist who had enjoyed staff privileges at Memorial Medical Center since 2002. Fahlen, employed by Gould Medical Group, had repeated arguments with nurses about "negative interactions" regarding care for his patients, to the point where eventually the hospital's chief operating officer contacted Gould's director in a strange way. The COO testified at a peer review hearing that he made this contact in the hope that the Gould director would confront Fahlen, Fahlen would get angry, Gould would fire him, and Fahlen would then leave town. That is certainly an unusual plan, but Gould did fire Fahlen resulting in the loss of his medical malpractice insurance and his ability to treat patients. Fahlen consulted the hospital's COO, who told him to leave town or he would be subject to peer review hearings; Fahlen replied that he intended to stay and open an independent practice. Shortly thereafter, the medical staff commenced peer review proceedings against Fahlen. Apparently the COO testified to much of this unusual history.

The Medical Executive Committee decided not to renew Fahlen's staff privileges. Fahlen contested that decision and the matter was heard according to standard practice under the Medical Staff bylaws by a Judicial Review Committee (JRC), a committee of other physicians with staff privileges. The JRC found that the Medical Staff had not sustained its burden of proving that its recommendation not to renew Fahlen's privileges at the hospital was "reasonable and warranted" although it observed that his interactions with the nursing staff had been "inappropriate and not acceptable."

Eventually the hospital's board of directors overruled the JRC, ordering that Fahlen not be reappointed upon the expiration of his privileges. Up to this point, the events are not unusual. If Fahlen wanted to challenge them, his path would be by writ review in the Superior Court. Should he fail to seek such review, the decision would be final. If he did seek review and the nonrenewal was affirmed, Westlake would collaterally estop any further challenges.

Fahlen chose a different path. Since 1999, California has had a statute encouraging health care workers to notify authorities of "suspected unsafe patient care and conditions." Health & Safety Code Section 1278.5. The statute prohibits retaliation against health care workers for making such complaints. In 2007, it was amended "to include among those protected from retaliation or discrimination any ‘member of the medical staff ... or any other health care worker of the health facility.'" Section 1278.5(b)(1). The statute also creates a presumption that "discriminatory action" was retaliatory if it was taken by the health facility or its owner within 120 days of the whistleblower's complaints. Section 1278.5(d).

Fahlen brought suit against the hospital and its COO under this section. Apparently he is the first litigant to present the apparent conflict between the peer review statutes and Westlake on the one hand, and Section 1278.5 on the other hand, to a court of appeal.

The defendants brought a SLAPP motion and appealed when it was denied. The Court of Appeal decided that the peer review procedures were "protected activity" for SLAPP purposes: official proceedings authorized by law. See Kibler v. Northern Inyo County Local Hospital Dist., 39 Cal. 4th 192 (2006). However, in the face of a statutory presumption in Fahlen's favor, the defendants could not defeat Fahlen's showing of a "probability that [he] will prevail on the claim." Code of Civil Procedure Section 425.16(b)(1)). The defendants argued that Westlake required Fahlen to seek writ review or be collaterally estopped from challenging the hospital board's decision not to renew his privileges; the court disagreed.

In 2007, the Legislature considered proposed amendments to Section 1278.5 which would "simply add[ ] nonemployee doctors who had staff privileges at a health facility to those persons who were protected from discrimination and retaliation as a result of whistleblowing." Opponents argued that peer review proceedings, whose confidentiality was protected by other statutes, were put at risk by the bill. In response, the bill was amended to provide that "the medical staff of the health facility may petition the court for an injunction to protect a peer review committee from being required to comply with the evidentiary demands ... if the evidentiary demands would impede the peer review process or endanger the health and safety of patients," and that "prior to granting an injunction, the court shall conduct an in camera review of the evidence to determine" whether production would "impede[ ]" the peer review process, in which case the court may grant an injunction against such production, but only "until the peer review hearing is completed." The court concluded that these additions meant that the Legislature intended that whistleblower actions could proceed even while peer review proceedings were in progress.

But how could that right be reconciled with Westlake's requirement that the physician or other healthcare worker must exhaust the administrative process, including a Section 1094.5 mandate proceeding? The Supreme Court had ruled in two related situations that a whistleblower need not exhaust administrative procedures before exercising her rights under Section 1278.5. In State Bd. of Chiropractic Examiners v. Superior Court (Arbuckle), 45 Cal. 4th 963 (2009), the plaintiff had exhausted her administrative remedies before the State Personnel Board, which had ruled that the administrative actions against her were not based on her protected disclosures, and the question before the court was whether Arbuckle's whistleblower action was barred by the Westlake doctrine. The Supreme Court rejected that argument, noting that the statute "expressly acknowledged the existence of the parallel administrative remedy [but] did not require that the [administrative findings] be set aside by way of a mandate action" and that the statute was written in a manner suggesting that the Legislature had not wanted to confine her remedies to be "narrowly circumscribed" by administrative findings.

Runyon v. Board of Trustees of California State University, 48 Cal. 4th 760 (2010), involved a different whistleblower statute that protected employees of the California State University system. The court ruled that even a "thorough and procedurally fair administrative decision" did not resolve the whistleblower's claims, which could therefore be presented in a civil action for damages.

Combining the reasoning of Arbuckle and Runyon with the specific but limited provisions enacted to protect patient concerns in ongoing peer review proceedings, the court determined that in enacting the 2007 amendments to Section 1278.5, the Legislature intended to allow physician retaliation claims to proceed in parallel with peer review proceedings, and that the Westlake rule could not be asserted in defense against such a suit.

Fahlen's case is unusual in that the hospital's COO apparently admitted to taking exceptional steps to make Fahlen's life in Modesto untenable; but its ruling will apply throughout California. By no means do all peer review proceedings against physicians involve management and relationship disputes. Some contend that hospitals and medical staffs have been aggressive in protecting themselves and their staffs against physicians who challenge the status quo. At the same time, more than a few physicians have asserted that disciplinary proceedings against them were retaliatory even where the targeted physician had clearly been disruptive to patient care.

If the Fahlen decision stands, we can expect that in many situations there will be parallel suits under Section 1278.5 during the peer review process. The case will likely have no effect where the charges against a physician are purely medical, but we can expect that even in such cases some physicians will argue that the claims of inadequate professional performance are pretextual and that the true reason for them is retaliatory. Now they can make that argument in damage suits under Section 1278.5, before juries and without the collateral limitations of the peer review process's outcome.

Any time a disruptive physician is being disciplined through peer review, the other parties can expect a claim of retaliation. Whether that is a positive or a negative development depends on your point of view.

Kurt W. Melchior is a partner with Nossaman LLP.  He is a member of the California Trial Lawyers Hall of Fame, an award given to professionals who have excelled as trial lawyers and whose careers exemplify the highest of values and professional attainment.  He has over 30 years' experience in complex litigation, including insurance coverage litigation.  He has tried many non-jury and jury cases to judgment and has been counsel of record in more than 70 published cases.

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