Twin legal developments in California, one involving the corporate practice of medicine, the other concerning exclusive contracting by hospitals with physician groups, have thrown new light on what hospital administrators can and cannot do when it comes to determining which doctors can work at their facilities.
In the first instance, the California Supreme Court on June 26 handed the University of California's five medical centers a victory by refusing to consider an earlier Court of Appeal ruling. The appeals court found the university did not violate corporate practice of medicine laws by restricting its anesthesiology practice to faculty physicians.
The case arose last year when the University of California at Los Angeles was sued by the California Medical Association and three Southern California anesthesiologists after UCLA insisted that the physicians could practice at a university hospital only if they accepted faculty positions, which they refused to do.
Corporate practice of medicine laws address the concern that corporate involvement, and the for-profit motives that often accompany it, threaten the patient-physician relationship. The theory is that, if a physician is employed by a "corporate" entity, the physician's judgment might be clouded or influenced by monetary considerations.
Congress has generally left it to the states to determine the extent to which they wish to pass laws discouraging the corporate practice of medicine; some, like California, have been aggressive in doing so. The relevant section of California's Business and Professions Code, 2400, states that "corporations and other artificial legal entities shall have no professional rights, privileges, or powers."
The phrase has been interpreted by some to encompass the healthcare profession.
The Medical Board of California, according to an advisory it issued in May concerning the UCLA case, reiterated its interpretation of 2400 as "intend(ing) to prevent unlicensed persons from interfering with or influencing the physician's professional judgment" and from "hiring (or) firing . . . professional, physician extender and allied health staff."
One of the lawyers for the anesthesiologists, Century City-based Anthony Schiff, holds that 2400 means "lay entities should not practice medicine for profit." But no test case had come along, until now.
In July 1995, UCLA purchased Santa Monica Hospital Medical Center (now called the Santa Monica-UCLA Medical Center) as part of its plan to increase the number and scope of patients that could be seen by its student physicians. Up to that time, the private Santa Monica Anesthesia Medical Group (SMAMG) had provided the hospital with anesthesia services, as independent members of its staff. But in 1998, UCLA decided to run Santa Monica's anesthesia service as a closed service, staffed only by members of the university's faculty. UCLA's reasons, says university counsel Jeff Blair, were "efficiency . . . to control the schedule (and to) guarantee trainees appropriate teaching cases."
UCLA offered full-time faculty positions, as assistant clinical professors of medicine, to all but one of the SMAMG anesthesiologists, but they all declined; Schiff says their concern "was that the appointments were not really teaching appointments (but merely) technical appointments that attempted to comply with a very limited exception to corporate practice of medicine statutes for teaching hospitals."
Instead, three of the anesthesiologists (who declined through Schiff to be interviewed for this article), joined by the CMA, sued the Regents of the University of California. They alleged that UCLA had "commenced an aggressive business plan designed to enable the unlicensed practice of medicine by UCLA . . . under the guise of teaching and research activities." This amounted to accusing the university of engaging in a disguised version of the corporate practice of medicine and, according to the CMA's legal counsel, Astrid Meghrigian, of "the use of medicine for financial gain." The lawsuit also charged UCLA with violating antitrust laws and sought a preliminary injunction to prevent UCLA from operating the anesthesia service at Santa Monica with employed physicians.
Schiff says the decision has "heavily stressed" the anesthesiologists he represents and will cause them to make less money, although he would not go into specifics because of pending civil litigation.
The Regents for their part contended that the ban on the corporate practice of medicine did not apply to the University of California medical schools and hospitals because they were, in effect, extensions of the state, which is a not-for-profit entity. A Superior Court judge agreed with the doctors and the
CMA, granted the preliminary injunction, and restrained UCLA from operating the anesthesia service with university-employed physicians. But the Regents appealed, and on March 29, the California Court of Appeal reversed the Superior Court and allowed UCLA to run Santa Monica's anesthesia service with its own faculty physicians.
The Court of Appeal reasoned that the application of 2400 to UCLA "would infringe upon (UCLA's) core governmental function, its raison d'etre," namely, operating as a teaching and research facility, as mandated by California's Education Code.
The court also took some pains to determine that UCLA was not in violation of antitrust laws. California's Unfair Practices Act defines unfair competition to include acts engaged in by "persons," but the Court said that "the University of California is a 'public entity' and, therefore, not a 'person."'
The CMA and the anesthesiologists appealed the Appeal Court decision to the California Supreme Court, which on June 26 declined to hear the case, handing the Regents a victory. A disappointed Schiff said there were genuine issues the court could have clarified by considering the case, such as what is a teaching patient, and does the fact that someone could potentially be one allow the university to be exempt from the state's police powers.
Schiff says the anesthesiologists will proceed with a civil suit against the University of California. But for the time being, California as a state seems to be exempt from corporate practice of medicine laws.
The second case, involving exclusive contracting, also had to do with the power of hospital administrators to decide which physicians can practice at their facilities. This year the California Department of Health Services has sent warning letters to at least seven California hospitals ordering them to void most of their exclusive physician contracts that had been common across the state for years.
The DHS said that hospitals that participate in the state Medicaid (Medi-Cal) program--about 270 out of 443--cannot deny practice privileges merely because a doctor is not part of a medical group with an exclusive contract, except in three areas carved out by the state's Welfare and Institutions Code.
The code permits an exclusive contract for the provision of pathology, radiology and anesthesiology services.
Despite the code, many hospitals routinely entered into exclusive contracts with medical groups specializing in cardiac care, neonatology, pediatrics, orthopedics and other specialties. But according to DHS spokesperson Ken August, dozens of complaint letters from physicians denied the right to treat their Medi-Cal patients at these hospitals have been pouring into DHS. For example, one by Nandumar Dandekar, M.D., dated Feb. 21, 2000, stated that Dandekar had "been restricted (from practicing) by the Board of Directors of Huntington Hospital, Pasadena, as of July 1, 1999, because of an exclusive contract with USC Cardiothoracic Surgeons."
In January, DHS ruled that such exclusions are illegal (except in the three specialties carved out). Following its ruling, DHS sent the warning letters to the hospitals, instructing them that they must be "open to any qualified and board certified" physician "that meets the qualifications for medical staff privileges or clinical privileges . . . regardless of membership with an exclusive professional service," as Virgil Toney, chief of DHS' Medi-Cal operations division, wrote in a letter to St. Luke's Hospital in San Francisco, which wanted to contract exclusively with a neonatology group.
The ruling means those hospitals that accept Medi-Cal contracts "will have to make a decision whether they want to maintain their contractual relationship with Medi-Cal or if they want to pursue an exclusive contract in those areas outside the three initial ones" allowed by the code, says Maureen Sullivan, vice president and general counsel of the California Healthcare Association, which represents many of the state's hospitals.
Sullivan expects that most of the hospitals "will tend to keep their Medi-Cal contracts and extinguish the exclusive contracts," not because Medi-Cal is so lucrative but because the hospitals don't wish to take on the DHS. Also, hospitals view treating Medi-Cal patients as part of their community service programs, which are mandated by law, Sullivan says.
Some of the affected hospitals, especially those that have achieved reputations in a specialty, are "quite concerned" about the ruling's impact on quality, Sullivan says, explaining, "There's a great deal of data indicating that the more a single group of physicians performs the same procedure, the better the outcome for morbidity and mortality."
The two rulings appear similar in that both seem to deal with "closed" hospital departments and whom hospital administrators allow to practice in their facilities. In some respects, they are.
"There is an underlying issue," says the CMA's Meghrigian, "and that is, under what circumstances should the quality of care be compromised (for efficiency, financial gain or other nonmedical considerations)?" And CHA's Sullivan says both rulings seem to address the ongoing debate of who's in charge of a hospital. Both "touch on that tension," she notes.
Yet from a legal point of view, the two issues can be distinguished pretty easily, Sullivan says. The DHS decision only relates to hospitals contracting with Medi-Cal, while the UCLA decision deals with the corporate practice of medicine at state-run medical centers.
Yet both decisions may have broad implications. The UCLA case, now that the Supreme Court has refused to hear it, has made a chink in the corporate practice of medicine laws, according to Kessenick.
"It creates an exception, which is the 'state of California exception,' that if you're an entity closely connected with the state, the courts will treat you like the state, and that permits them to employ physicians."
Meanwhile, the ruling on exclusive contracting "potentially has huge implications," says Bob David, regional vice president of the Hospital Council of Northern and Central California. "In a lot of hospital departments, especially in metropolitan areas, exclusive contracting has been going on for years and years." The hospitals are taking a wait and see stance for the time being, David says.
At least one group of players likes the DHS's decision: HMOs. Bobby Pena, a spokesperson for the California Association of Health Plans, says the UCLA ruling is good for patients. "Consumers want a broad physician directory to choose from, they want an open panel, and if a hospital has a contract with any one medical group, they're limiting choice."
Steven H. Heimoff is an Oakland, Calif.-based healthcare business writer.