Key Takeaways From the Natarajan v. Dignity Health Decision

Health Highlights

On August 12, 2021, the California Supreme Court issued its opinion in Natarajan v. Dignity Health, No. S259364. The case addresses the potential bias of hearing officers appointed to preside over hospital administrative proceedings that are held when a medical staff committee recommends that a physician with privileges at the hospital be subject to disciplinary action. The Supreme Court, in a unanimous decision, held that the fact that a hospital might hire a hearing officer again for future work does not create a presumption that the hearing officer has a financial incentive to favor the hospital and does not, without more, require disqualification for bias. The Natarajan decision clarifies the statutory scheme governing selection of hearing officers for peer review hearings and provides important guidance for hospitals and their medical staffs in making such selections.

The Natarajan Decision

The decision grew out of a dispute between Dignity Health and Sundar Natarajan, M.D., a hospitalist who formerly was a member of the medical staff of St. Joseph Medical Center, a Dignity Health-owned hospital in Stockton, California. The medical staff in 2014 recommended termination of Dr. Natarajan’s medical staff membership and privileges due to his pervasive substandard patient care management and documentation. Dr. Natarajan requested an administrative hearing before a panel of peer physicians on the hospital’s medical staff, which was presided over by a non-decision-making hearing officer appointed to make procedural and evidentiary rulings. The hearing officer’s contract with St. Joseph for Dr. Natarajan’s hearing contained a restriction preventing him from serving at that particular hospital for three years. However, from the outset, Dr. Natarajan complained that the hearing officer must be disqualified for bias, as he had previously served as a hearing officer at other Dignity Hospitals and might be hired to do so again in the future. Dr. Natarajan’s argument was rejected by the hospital board of directors, by the superior court, and by the Court of Appeal.

In the August 12 decision, the Supreme Court also rejected Dr. Natarajan’s argument that tried to establish a presumption that the hearing officer’s repeated engagements at other Dignity Health hospitals, and his hope for more such engagements, created a probability that the hearing officer was biased towards the hospital and against Dr. Natarajan. The court found no evidence that the hearing officer was biased in this case.

Important Takeaways From the Decision

There are several important takeaways from the decision:

  • The mere potential for future hearing officer work at the same hospital or at an affiliated hospital within a hospital system does not alone create an unacceptable risk that the hearing officer will be biased in favor of the hospital and against the physician and thus does not, without more, create an appearance of financial bias requiring disqualification of a hearing officer. The court explained that while “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.”
  • Whether impermissible financial bias exists depends on the context and facts of the particular case (which, in Dr. Natarajan’s case, did not support a finding of bias). Relevant facts can include what entity selects the hearing officer and whether, and to what extent, the hearing officer has a likelihood of future work for that same entity. The court found it significant that the hearing officer in Dr. Natarajan’s case had contractually agreed not to serve as a hearing officer at the same hospital for a three-year period.
  • A rule of automatic disqualification arising from potential future work would hamstring the peer review process, as hospitals would have to find and train a new hearing officer for each proceeding, “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 court disapproved Yaqub v. Salinas Valley Memorial Healthcare System (2004) 122 Cal.App.4th 474, which held—directly contrary to the Natarajan Court of Appeal—that a hearing officer is impermissibly biased if there is a prospect of obtaining future work from the hospital. This, the court explained, cannot be the “direct financial benefit from the outcome” that the statute prohibits. The elimination of Yaqub as precedent in California is itself tremendously significant for hospitals and medical staffs that had been confronting hearing officer “bias” arguments for 17 years after Yaqub had been decided.
  • To the extent a hearing officer might have future employment prospects at the same hospital involved in the proceeding, any “meaningful risk” of financial bias can be negated by a contractual restriction preventing the hearing officer from serving again as a hearing officer at that hospital for three years. Such a restriction is not “invariably required” in order to negate bias, but its suitability depends on the facts of the case.
  • A hearing officer in a peer review hearing is not the decision maker—that role belongs to a panel of the physician’s professional peers. In contrast, “[a] hearing officer—if one is selected at all—plays a comparatively limited role in peer review proceedings.” A hearing officer nonetheless can make procedural and evidentiary rulings that could impact the proceedings and thus is required to be impartial, but the hearing officer cannot vote and is not an adjudicator of whether peer review corrective action is proper or not.
  • A medical staff vested with the authority to conduct peer review hearings may permissibly delegate to the hospital’s president the power to select a hearing officer. Absent specific evidence, there is no basis to assume that the hospital’s president is controlled by the corporate parent entity so as to make the parent the de facto selector of hearing officers. And without such evidence, there is no reason to assume that a hearing officer has a financial incentive to please the parent so that he/she may get the hearing officer work at other, affiliated hospitals.

Significance of Natarajan for Hospitals and Medical Staffs

Natarajan clarifies that hospitals and medical staffs may use hearing officers that they have used before and might use again, without automatically—or even “nearly always”—running afoul of the prohibition on hearing officer financial bias. The Yaqub decision, which had fueled contrary arguments by physicians subject to peer review, is no longer precedent for such an argument. Instead, hospitals and medical staffs must pay close attention to the circumstances of the selection of the particular hearing officer in the particular proceeding. A hospital and its medical staff may “choose from a variety of tools” to make sure that a hearing officer obtains no direct financial benefit from the outcome, and what tools are necessary will depend on the circumstances of the particular case.

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