SUNDAR NATARAJAN, Plaintiff and Appellant, v. DIGNITY HEALTH, Defendant and Respondent.
S259364
IN THE SUPREME COURT OF CALIFORNIA
August 12, 2021
Third Appellate District C085906; San Joaquin County Superior Court STK-CV-UWM-2016-4821
Justice Kruger authored the opinion of the Court, in which Chief Justice Cantil-Sakauye and Justices Corrigan, Liu, Cuéllar, Groban, and Jenkins concurred.
Under California‘s peer review statute, a hospital must afford a physician a fair hearing before revoking the physician‘s staff privileges. (
The question in this case is whether a person hired by a hospital to serve as a hearing officer may be disqualified for financial bias under
I.
A.
In California, hospitals are composed of an administrative governing body that oversees hospital operations and a medical staff that provides medical services and ensures its members provide adequate medical care to patients. A physician who wishes to practice at a hospital must maintain staff privileges. The termination of staff privileges can significantly limit the physician‘s ability to practice medicine. For that reason, before staff privileges can be terminated, the physician must be afforded certain procedural protections, including the opportunity for review of the termination decision. (El-Attar v. Hollywood Presbyterian Medical Center (2013) 56 Cal.4th 976 (El-Attar);
Hospital peer review originated as a purely voluntary process for handling recommendations to suspend or terminate physician staff privileges, but by now has become firmly embedded in California law. For decades before the peer review statute was enacted in 1989, California courts had held that hospitals must provide certain protections to physicians facing the denial of staff privileges. For private hospitals like St. Joseph‘s Medical Center of Stockton, the obligation was rooted in the common law doctrine of fair procedure, which applies to the membership decisions of certain private organizations affecting the public interest. (El-Attar, supra, 56 Cal.4th at pp. 986-987, citing, inter alia, Anton v. San Antonio Community Hosp. (1977) 19 Cal.3d 802; see, e.g., Kaiser Foundation Hospitals v. Superior Court (2005) 128 Cal.App.4th 85, 102; Applebaum v. Board of Directors (1980) 104 Cal.App.3d 648, 657 (Applebaum).) Fair procedure required hospitals to afford physicians certain fundamental procedural protections, including adequate notice and an opportunity to be heard before an impartial decision maker. (El-Attar, at pp. 986-987; Applebaum, at p. 657.)
The bulk of the peer review statute‘s requirements are aimed at private hospitals, like the hospital at issue in this case. (See
When the hearing is held before a peer review panel, a hearing officer may be appointed to preside. (
The statute provides that hearing officers and panel members alike “shall gain no direct financial benefit from the outcome.” (§ 809.2(a) & (b).)
B.
St. Joseph‘s Medical Center of Stockton is a private, self-governing hospital owned by Dignity Health, a California-based health care organization. In 2007, St. Joseph‘s hired Sundar Natarajan, M.D., as director of its hospitalist program. About two years later, Natarajan left this position and started his own hospitalist group that also operated out of St. Joseph‘s. Beginning in 2011, the St. Joseph‘s medical staff raised concerns about Natarajan‘s hospitalist practice, including deficient recordkeeping, excessive length of patient stay, and misuse of consultants. The medical staff repeatedly reprimanded and issued fines to Natarajan because of his recordkeeping deficiencies. Although Natarajan acknowledged the problem, the recordkeeping issues persisted. By August 2013, the chair of the medical department notified Natarajan that a committee of physicians would launch an investigation into these alleged administrative deficiencies. After the investigation, the committee recommended revoking Natarajan‘s privileges. The medical executive committee then reviewed the recommendation, considered Natarajan‘s responsive presentation, and adopted the recommendation to terminate his medical staff membership and hospital privileges.
Natarajan requested a peer review hearing to review the recommendation. In accordance with St. Joseph‘s bylaws, the chief of the medical staff selected physicians to serve on the hearing panel, and the hospital president exercised authority delegated by the medical staff to select A. Robert Singer, a semiretired attorney, to serve as the hearing officer.
Invoking his statutory right to “challenge the impartiality of any member or hearing officer” under
Singer, exercising his section 809.2(c) authority to rule on disqualification motions, denied Natarajan‘s challenge. Later, after several evidentiary hearings spanning nearly a year, the peer review panel upheld the medical executive committee‘s recommendation to revoke Natarajan‘s staff membership and privileges.
Natarajan filed an administrative appeal. He did not challenge the sufficiency of the evidence supporting the panel‘s decision; his primary argument was instead that he had not received a fair hearing because of Singer‘s purported financial conflict. Rejecting the argument, the governing board‘s subcommittee affirmed the panel‘s decision. Natarajan then filed a petition for writ of administrative mandate in the superior court. The superior court denied the petition, concluding, as relevant here, that Natarajan had not established that Singer stood to gain a “direct financial benefit from the outcome” of the proceeding. (§ 809.2(b).)
Natarajan appealed. In a published decision, the Court of Appeal rejected Natarajan‘s challenge to Singer‘s ruling on his disqualification motion. The court reasoned that in the context of private hospital peer review, disqualification standards are not governed by constitutional due process, as in Haas, but by statute; section 809.2(b) specifies that the hearing officer “shall gain no direct financial benefit from the outcome.” (
In so holding, the Court of Appeal disagreed with Yaqub v. Salinas Valley Memorial Healthcare System (2004) 122 Cal.App.4th 474 (Yaqub), which, relying on Haas, held that a hospital peer review hearing officer should have been disqualified because, among other things, the hearing officer had been appointed on an ad hoc basis and there was a possibility he would be reappointed in the future.
II.
The “peer review statute, like the common law fair procedure doctrine that preceded it, establishes minimum protections for physicians subject to adverse action in the peer review system.‘” (El-Attar, supra, 56 Cal.4th at p. 988, quoting Mileikowsky, supra, 45 Cal.4th at p. 1268; see
The parties agree that section 809.2(b)‘s “direct financial benefit” standard governs this case but disagree about how it applies. Natarajan contends that the prospect of future work for the same hospital or an affiliated hospital network is a direct financial benefit that requires disqualification. Dignity Health, for its part, maintains that an interest in possible future employment is an insufficient ground for disqualifying a nonvoting hearing officer from service.
A.
Before assessing the parties’ competing positions, we begin by surveying the common ground between them. The term “direct financial benefit” is undefined in the peer review statute, but it is not an unfamiliar standard. As both sides agree, the term parallels — and by all appearances, derives from — the disqualification standard that courts had developed as a matter of common law fair procedure before the peer review statute was enacted. Drawing in turn on due process case law, courts explained that fair procedure includes the right to an impartial decision maker. (Applebaum, supra, 104 Cal.App.3d at p. 657, citing, inter alia, Withrow v. Larkin (1975) 421 U.S. 35, 47; American Motors Sales Corp. v. New Motor Vehicle Bd. (1977) 69 Cal.App.3d 983, 991 (American Motors Sales Corp.); accord, Lasko v. Valley Presbyterian Hospital (1986) 180 Cal.App.3d 519, 529.) They explained that disqualification of the
The parties agree that when the Legislature used the nearly identical phrase “direct financial benefit from the outcome” in setting out a financial conflicts standard in section 809.2(b), it meant to codify the common law rule. This stands to reason, since, as we explained in El-Attar, the peer review statute was, in general, designed to codify common law fair procedure. (See El-Attar, supra, 56 Cal.4th at p. 988.) Considering section 809.2(b) from that vantage point makes certain points clear. First, as both sides agree, section 809.2(b) — like the parallel provision governing panel members in section 809.2(a), and like the common law rule that preceded them both — requires disqualification when financial conflicts create an unacceptable risk of bias.3 (See Hackethal, supra, 138 Cal.App.3d at p. 443.) Most obviously, this means neither the panel members nor the hearing officer may stand to realize financial gain as a direct result of the outcome of the proceeding. For example, a hospital cannot pay the hearing officer more depending on whether the peer review proceeding resulted in the termination of staff privileges. (Cf. Tumey v. Ohio (1927) 273 U.S. 510, 535 [criminal defendant denied due process because adjudicator had a “direct pecuniary interest in the outcome” in the form of costs and fees awarded only if defendant was convicted]; see id. at pp. 531-532.) Further, to take an example that arises more commonly in the peer review setting, section 809.2(a) and (b) also mean that neither a panel member nor a hearing officer may serve if that person is a direct business competitor and thus stands to profit if the physician were ultimately to lose staff privileges. (Hackethal, at p. 443 [if shown to be a business competitor of the petitioner, tribunal member could be subject to disqualification for having “a direct pecuniary interest in the outcome“]; cf. Gibson v. Berryhill (1973) 411 U.S. 564, 579 [state board composed of optometrists disqualified from adjudicating revocation of licenses of competing optometrists on grounds of “substantial pecuniary interest[s]“]; see id. at p. 578.) Courts had so held as a matter of common law fair procedure (see Hackethal, at p. 443), and it is undisputed that the same prohibition applies by virtue of section 809.2‘s codification of the common law standard.4
There is, however, no similarly clear answer to the question whether section 809.2(b) reaches financial conflicts based on the hearing officer‘s possibility of future employment. No prestatutory fair procedure case ever addressed the question. The Court of Appeal, in its opinion, suggested the answer was clear from the Legislature‘s choice of the term “‘direct financial benefit,‘” reasoning that if the Legislature had intended to disqualify a hearing officer who has a “mere possible interest in future employment,” it would have described the disqualifying benefit as ‘potential’ or ‘possible,’ rather than ‘direct.‘” (Natarajan, supra, 42 Cal.App.5th at pp. 391-392.) We are, however, unpersuaded that the plain language of the statute categorically exempts financial conflicts based on the possibility of future financial gain. In ordinary parlance, the word “direct” connotes immediacy: the “absence of an intervening agency . . . or influence” or “stemming immediately from a source.” (Webster‘s 9th New Collegiate Dict. (1988) p. 358.) But much like the word “immediate” itself, “direct” is a relative term. The competitor cases illustrate the point. An adjudicator does not gain an immediate financial benefit from disciplining a competitor in the sense that money automatically lands in the adjudicator‘s hands upon ruling, as would a bribe or a kickback. Still, no one disputes that business competitors can have a disqualifying direct financial interest in a disciplinary proceeding. The common law fair procedure cases explain why: Even though the prospect of gaining a competitive advantage is not as direct a benefit as money in hand, it is sufficiently direct to create a “distinct possibility” the controversy “will not be decided on its merits but on the potential pecuniary interest” of the adjudicator. (American Motors Sales Corp., supra, 69 Cal.App.3d at p. 988; see id. at p. 987; see also Gibson v. Berryhill, supra, 411 U.S. at p. 579 [adjudicator‘s “financial stake need not be as direct or positive as it appeared to be in Tumey [v. Ohio, supra, 273 U.S. 510]” for it to be disqualifying (italics added)].)
Reading section 809.2(b) against this backdrop, we agree with both sides that the question before us is not simply whether the hearing officer will receive a guaranteed payout depending on the results of the peer review hearing. It is, rather, whether the hearing officer stands to gain a financial benefit that creates an unacceptable risk that the officer will make his decisions with his mind on money, not on the merits.
We now move from common ground to contested terrain. Our jumping-off point is Haas, supra, 27 Cal.4th 1017. As noted above, Haas was a due process challenge to a county business licensing appeal based on the financial conflicts associated with the way the county had appointed the administrative hearing officer. The administrative hearing officer was not a county official but was a practicing lawyer who had been hired by the county on an ad hoc basis to adjudicate the proceedings. She had not been hired by the county previously, but the county‘s counsel indicated that the county intended to use the officer again “‘as the occasion suggests, in the future if she‘s interested in doing it and if the case should arise‘” and that the county‘s contract with the officer was “‘open-ended.‘” (Id. at p. 1022.) This court held that, as a matter of due process, the officer should have been disqualified.
We explained that due process requires quasi-judicial decision makers, like judicial officers, to be fair and impartial. And while adjudicators are ordinarily afforded a presumption of impartiality, no such presumption applies where financial interests are concerned; rather, due process requires the disqualification of an adjudicator who has a financial interest that “would offer a possible temptation to the average person as judge not to hold the balance nice, clear and true.” (Haas, supra, 27 Cal.4th at p. 1026.) It was this basic principle, we explained, that led courts to condemn so-called fee systems, in which prosecutors and plaintiffs chose a judge who was paid a flat fee for each case adjudicated. Although the judge was paid regardless of outcome, more cases meant more compensation, and so the selection process gave the judge “a pecuniary incentive to favor frequent litigants.” (Id. at p. 1028, citing, inter alia, Brown v. Vance (5th Cir. 1981) 637 F.2d 272, 274.) From the fee system cases we derived this general lesson: “A procedure holding out to the adjudicator, even implicitly, the possibility of future employment in exchange for favorable decisions creates such a temptation and, thus, an objective, constitutionally impermissible appearance and risk of bias.” (Haas, at p. 1034.)
Natarajan contends that Haas applies here and requires the disqualification of hearing officers who are appointed on an ad hoc basis, because the possibility of future hearing officer employment creates an unacceptable risk of bias. Dignity Health disagrees. It contends Haas is distinguishable, and that the practical consequences of importing its due process standard to the peer review context would be to require the disqualification of virtually all experienced hearing officers, the vast majority of whom are lawyers appointed by hospitals on an ad hoc basis.
As an initial matter, we agree with Dignity Health that Haas does not directly control this case. The question before us concerns the meaning of the
Nonetheless, we consider Haas helpful to our analysis inasmuch as it explains why a decision maker‘s interest in future employment can sometimes affect the decision maker‘s impartiality, though it may not operate as directly as an outright bribe or kickback. As Haas explains, when an adjudicator‘s prospect for similar work in the future is entirely dependent on the goodwill of the hiring entity that is free to select its adjudicators, adjudicators may face financial temptations not to hold the balance “nice, clear and true.” (Haas, supra, 27 Cal.4th at p. 1029.) For hospital peer review hearing officers, the financial benefits at stake may be sufficiently “direct” to require disqualification under section 809.2(b).
But while we conclude that the possibility of future employment may give rise to a disqualifying conflict, we do not hold that the possibility of future employment always (or nearly always) gives rise to a disqualifying conflict when a hearing officer has been appointed on an ad hoc basis. Potential future employment, on its own, is not automatically disqualifying. If it were, then every hospital would presumably be required to locate and train a new hearing officer for every peer review hearing it holds. This rule would come at considerable cost to the efficiency and the integrity of the peer review process, and with minimal benefit in terms of assurance of hearing officer impartiality. The law imposes no such requirement.
Nor do we hold that disqualification is required whenever a hospital expresses interest in employing a hearing officer again in the future if the circumstances arise, regardless of the extent of the hearing officer‘s financial interest in future employment with that particular hospital. When we found a disqualifying bias in Haas, we explained that the county‘s ad hoc appointment of the hearing officer deviated from the recognized norm in quasi-judicial governmental adjudications, which is to use hearing officers who are full- or part-time employees of the local or state government. Where the county had expressed interest in employing that particular individual on future occasions, the ad hoc hiring process created a risk that she would be rewarded with future remunerative employment should she render decisions favorable to the county. We considered that risk unacceptable under the circumstances. (See Haas, supra, 27 Cal.4th at p. 1037, citing
Significant differences between the relevant settings counsel against a presumption that the circumstances that created an intolerable risk of bias
We do not suggest, of course, that the comparatively limited role of hearing officers makes their impartiality irrelevant. Peer review hearing officers are not entirely walled off from the decisional process and can make procedural and evidentiary rulings that can affect what evidence the triers of fact can use as a basis for making their decision.5 It is presumably for these reasons that the statute secures the right to an impartial hearing officer, as well as impartial panel members. (§ 809.2(c).) But Haas did not consider the different circumstances that might be present in the context of peer review proceedings, where, among other things, hearing officers preside over and make significant rulings that affect the proceedings but ultimately have no vote on the ultimate issue, which is reserved for the judgment of an expert panel of the physician‘s peers.
Natarajan suggests that the difference in contexts in some ways might require more demanding disqualification standards than ordinary judicial or quasi-judicial adjudication, as substantive errors by biased individuals might go unremedied because of the deferential standard of review applicable to peer review proceedings. (
Ultimately the question concerns when the risk of financial bias becomes intolerable under the circumstances. This is an inherently context-sensitive inquiry, and it should be undertaken with appropriate regard for the unique features of the hospital peer review context.
C.
Our conclusions about the governing law mean we must part company with the Court of Appeal in this case, which considered the prospect of future employment to be categorically beyond the reach of section 809.2(b). But we also part ways with Yaqub, supra, 122 Cal.App.4th 474, whose analysis diverges from ours in several respects. The court in that case considered, solely as a matter of general principles of fair procedure, whether a peer review hearing officer should be disqualified for bias for several reasons: that he had presided over the same physician‘s prior hearing; that he had once served on the board of governors for the hospital‘s foundation, which raised funds for the hospital; and that he had been hired on an ad hoc basis to preside over a number of peer review hearings for the same hospital in the past and “there was the potential for further appointments in the future.” (Id. at p. 485; see id. at p. 481.) The Court of Appeal in Yaqub concluded that, although there was “no evidence of actual prejudice or of a direct financial interest in the outcome of the case,” the circumstances surrounding the ad hoc hiring of the hearing officer were sufficient to create a “‘possible temptation‘” to favor the hospital that led to a disqualifying “appearance of bias” under Haas. (Id. at pp. 485, 484.)
As the Court of Appeal in this case explained, Yaqub never considered the import of section 809.2(b), the provision that governs in this case. But this was not Yaqub‘s most significant error.6 As we have explained above, the parties agree that section 809.2(b) was designed to embody principles of
D.
We now consider whether, on the facts of this case, Natarajan showed that the prospect of future employment created an intolerable risk of bias that should have disqualified Singer from serving as a hearing officer. Two central factors guide our inquiry in this case: whether a particular entity exercises control over the hearing officer selection process, and the extent and likelihood of future financial opportunities that the hearing officer may receive from the same entity.7
Here, Singer was formally appointed by St. Joseph‘s. Since retiring from his law firm, Singer received most of his income from hearing officer work at various health facilities, often earning substantial sums from these appointments.8 We can therefore assume that Singer had more than a trivial incentive to do what he could to put himself in a good position for future hearing officer appointments at St. Joseph‘s. But Singer‘s contract prohibited further appointments at St. Joseph‘s for a period of three years, meaning that Singer‘s only immediate employment prospects lay with facilities not involved in the particular proceeding at issue. Whatever financial interest Singer may have had in the outcome of the proceedings at St. Joseph‘s, it was not sufficient to raise a meaningful risk of bias.
Natarajan argues the bar was insufficient because it did not extend to other hospitals across the Dignity Health network. This argument depends on the factual premise that Dignity Health, rather than the hospital medical staff, controlled the selection process of hearing officers at least at St. Joseph‘s, if not also at other affiliate hospitals. If Dignity Health did not have control over the process at St. Joseph‘s, let alone at its other affiliate hospitals, Singer would have no reason to believe that the outcome of this proceeding would affect his prospect of future employment at another Dignity Health facility.
To evaluate this argument requires us to take a closer look at what the relevant statutes and record show about Dignity Health‘s role in Singer‘s selection to conduct the hearing at St. Joseph‘s. By law, the choice was not Dignity Health‘s to make. The peer review statute authorizes an individual hospital‘s medical staff to grant or revoke hospital privileges, and to decide how peer review should be structured within the bounds prescribed by statute, including whether and how the peer review panel and hearing officer are selected. (
Here, St. Joseph‘s medical staff, through its bylaws, delegated the authority to appoint hearing officers to the St. Joseph‘s president. This
When Natarajan raised a similar argument in the trial court, that court found no evidence that Dignity Health was responsible for Singer‘s appointment. Natarajan contests some of the trial court‘s underlying findings, but our review of the record accords with the trial court‘s conclusion on this overarching point. Although a Dignity Health attorney initially contacted Singer to inquire about his availability to serve as a peer review hearing officer at St. Joseph‘s, the decision ultimately resided with St. Joseph‘s officials: The St. Joseph‘s medical staff delegated the authority to choose a hearing officer to the president of St. Joseph‘s, and it was the president who contacted and formally appointed Singer a few weeks later. Nothing in the record shows that the Dignity Health attorney directed or pressured the St. Joseph‘s president to select Singer.
In the absence of evidence to show that Dignity Health actually controlled the decision to hire Singer, Natarajan argues that, by virtue of corporate structure, Dignity Health effectively controls the president of St. Joseph‘s and any decision he makes. Under Dignity Health‘s bylaws, the hospital president is appointed by the hospital‘s community board (the governing body of the hospital), which is, in turn, established by Dignity Health. But the record contains no information about how the members of the community board are appointed (or removed) or how that board appoints (or removes) the hospital president. And standing alone, the manner in which the president is appointed is insufficient to establish that the hearing officer appointment here was made by Dignity Health, rather than by the president, acting independently on behalf of the medical staff.
It is true, of course, that Singer and hearing officers may, in general, face some incentive to court future work at other hospitals by developing a prohospital reputation. An employer-specific temporary bar will not completely eliminate that sort of incentive. But to eliminate such incentives entirely would require ad hoc hearing officers to forswear future employment at any hospital. The ban on receiving a “direct financial benefit from the outcome” (§ 809.2(b)) does not reach so far. The point of this type of precaution is not to bar a hearing officer from any future work, nor is it to eliminate ad hoc engagements altogether. It is, rather, to secure the basic preconditions for a fair hearing on a physician‘s qualifications.
As this case demonstrates, hospitals and their medical staffs can choose from a variety of tools to ensure the basic statutory preconditions are satisfied, including the use of temporary bars on reappointment. They are also free to take other measures not inconsistent with the statute, as appropriate given the circumstances of each particular case. (See Mileikowsky, supra, 45 Cal.4th at p. 1274 [medical staff bylaws can provide additional peer review protections beyond statutory requirements].)9 Once again, what measures are necessary will depend on a careful, context-specific judgment about the risk of bias presented on the facts. Here, based on the record before us in this particular case, we conclude the circumstances surrounding Singer‘s appointment did not create an intolerable risk of bias that would require disqualification under section 809.2(b).
We affirm the judgment of the Court of Appeal.
KRUGER, J.
We Concur:
CANTIL-SAKAUYE, C. J.
CORRIGAN, J.
LIU, J.
CUÉLLAR, J.
GROBAN, J.
JENKINS, J.
Name of Opinion Natarajan v. Dignity Health
Procedural Posture: Review Granted (published) XX 42 Cal.App.5th 383
Opinion No. S259364
Date Filed: August 12, 2021
Court: Superior
County: San Joaquin
Judge: Barbara A. Kronlund
Counsel:
Law Offices of Stephen D. Schear, Stephen D. Schear; Justice First, Jenny Chi-Chin Huang; and Tara Natarajan for Plaintiff and Appellant.
Manatt, Phelps & Phillips, Barry S. Landsberg, Doreen Wener Shenfeld, Joanna S. McCallum and Craig S. Rutenberg for Defendant and Respondent.
Davis Wright Tremaine and Terri D. Keville for John Muir Health, Adventist Health, Kaiser Foundation Hospitals, MemorialCare Health System, Providence St. Joseph Health, Sharp Healthcare and Sutter Health as Amici Curiae on behalf of Defendant and Respondent.
Arent Fox, Lowell C. Brown, Sarah Benator and Diane Roldán for California Hospital Association as Amicus Curiae on behalf of Defendant and Respondent.
Nossaman, Rosenberg, Shpall & Zeigen, Carlo Coppo; Patrick K. Moore Law Corporation, Patrick K. Moore; Hanson Bridgett, Glenda M. Zarbock; James R. Lahana; and John D. Harwell as Amici Curiae on behalf of Defendant and Respondent.
Horvitz & Levy, H. Thomas Watson, Peder K. Batalden and Joshua C. McDaniel for Scripps Health and Regents of the University of California as Amici Curiae on behalf of Defendant and Respondent.
Francisco J. Silva, Long X. Do and Joseph M. Cachuela for California Medical Association as Amicus Curiae.
Freeman Mathis & Gary, Marc J. Shrake; and Joseph P. Wood for American Academy of Emergency Medicine as Amicus Curiae.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Stephen D. Schear
Law Offices of Stephen D. Schear
2831 Telegraph Avenue
Oakland, CA 94609
(510) 708-9636
Barry S. Landsberg
Manatt, Phelps & Phillips, LLP
2049 Century Park East, Suite 1700
Los Angeles, CA 90067
(310) 312-4259