Health Law Perspectives

April 2008

In this issue:

Court of Appeal Expands Reach of Fair Procedure Doctrine

HLB Attorneys Honored

Healthcare Transparency Measure Advances

HLB Calendar

Court of Appeal Expands Reach of Fair Procedure Doctrine

By John Mills

The common law fair procedure doctrine continues to serve health care providers well. As confirmed by the recent ruling in Palm Medical Group, Inc. v. State Compensation Insurance Fund (Ct.App. 1 Dist., March 25, 2008, #A114651), providers who are denied admission to the preferred provider networks of certain insurers without fair procedure can sue the insurers for money damages. This significantly levels the playing field for providers who seek admission to preferred provider networks.

The issue in Palm was the preferred provider network (PPN) of the State Compensation Insurance Fund’s (SCIF), California’s largest workers’ compensation carrier. Providers were selected for inclusion in SCIF’s PPN by applying to a “Medical Community Liaison” (MCL), which had the power to recommend whether or not the provider should be included in the PPN. Palm Medical Group, an occupational medical clinic serving the Fresno community, applied for admission to SCIF’s PPN. Despite Palm’s repeated efforts, the MCL for the Fresno district refused to recommend that Palm be admitted. Palm filed suit against SCIF alleging a violation of the common law fair procedure doctrine, and a jury ultimately found that SCIF owed Palm a duty of fair procedure with respect to its application to the PPN, because SCIF “possessed power so substantial over the market for the treatment of occupational injuries in the Fresno area in 2001-2002 that the failure to admit an ordinary, competent medical provider to its [PPN] would significantly impair that provider’s ability to practice occupational medicine in the Fresno area.” The jury also found that SCIF’s reasons for rejecting Palm’s application for admission to its PPN were arbitrary and unreasonable and that Palm should have been admitted into the PPN had fair procedures been provided. The jury awarded Palm $1,131,000 in damages. Although the trial court set aside this judgment, the appellate court reversed the trial court and concluded that the jury’s verdict and award must stand because Palm’s right to fair procedure had been violated.

Health care providers have frequently invoked the common law fair procedure doctrine to prevent or redress injury to the practice of their profession. For example, individual providers have long relied on the doctrine to ensure that hospitals afford them basic fair procedure when rendering decisions concerning staff membership and privileges. And in the seminal case, Potvin v. Metropolitan Life Ins. Co. (2000) 22 Cal.4th 1060, the California Supreme Court held that before terminating a physician’s preferred provider contract, an insurer wielding substantial market power will have to provide the physician with “fair procedure.” The decision in Palm extends the Potvin ruling in three important respects.

First, the court in Palm held that the common law doctrine of fair procedure not only applies to decisions to terminate a provider’s status or contract as a preferred provider, but also applies to decisions to exclude a provider who has never gained admission in the first place. According to the court, “the doctrine applies where exclusion, in the case of the medical profession, significantly impairs the ability of an ordinary, competent physician to practice medicine or a medical specialty in a particular geographic area, thereby affecting an important, substantial economic interest.” Second, the court held that the common law doctrine of fair procedure protects not only individual health care providers, but also medical corporations or other business entity providers like Palm. Recognizing that corporations, like individuals, have a fundamental right to procedural due process, the court stated that there was “no valid reason to deny corporations similar protection under the doctrine of fair procedure.” Finally, the court rejected SCIF’s argument that it should be afforded the opportunity to re-review Palm’s application using fair procedures, rather than pay damages. According to the court, damages are a sufficient remedy where the provider can show that its exclusion from the PPN results in lost profits.

In addition to these three key legal holdings, the court rejected SCIF’s arguments that the evidence presented to the jury did not establish that SCIF possessed so much market power in the Fresno area that excluding Palm would significantly impair its ability to practice or affect a substantial economic interest, a prerequisite to application of the doctrine of fair procedure. The evidence established that Palm could not obtain business from any SCIF-insured business because Palm was not included in the PPN and SCIF steered its non-PPN policyholders to PPN providers; Palm’s exclusion from the PPN interfered with its ability to attract new non-SCIF business; and Palm’s revenues decreased as a result of not being a PPN provider, thereby threatening its ability to practice occupational medicine in Fresno.

The court also held that the jury correctly found that SCIF’s purported reasons for excluding Palm from the PPN were arbitrary and unreasonable, such as SCIF’s reliance on the fact that Palm did not use a particular form for narrative reports, where the form could only be generated by typewriter and Palm used a substantially similar computer-generated form.

This case illustrates the flexibility and broad reach of the common law doctrine of fair procedure, especially as used by health care providers. Palm is an important victory for California providers who are applying for admission to preferred provider networks, because by confirming the damages award to Palm for its arbitrary exclusion from the PPN, the court is sending a message to large insurers that they had better carefully, and fairly, consider each provider’s application.

For more information, please contact Mr. Mills or Daron Tooch in Los Angeles at 310.551.8111, Mark Reagan in San Francisco at 415.875.8500 or Cary Miller in San Diego at 619.744.7300.

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HLB Attorneys Honored

Partner David Henninger has been named one of nation’s outstanding physician practice lawyers by Nightingale’s Health Law News.

Partner Cary Miller has once again been named one of San Diego’s Best Lawyers in the areas of health law, commercial litigation and medical malpractice.

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Healthcare Transparency Measure Advances

Legislation that would establish a regulatory committee to develop a healthcare cost and transparency plan for California has passed a key policy committee.

AB 2967 by Assemblymember Sally Lieber (D-Mountainview) is one of several bills to be introduced in the wake of health care reform earlier this year. The bill is nearly identical to the healthcare cost and quality transparency provisions of reform bill AB1 X1 by Assembly Speaker Fabien Nunez (D-Los Angeles). The bill is sponsored by the Service Employees International Union and opposed by providers.

Specifically, the bill would:

Establish a 16-member committee to develop and recommend to the Secretary a transparency plan designed to provide public reporting of health care safety, quality, and cost information, and to monitor the implementation of the transparency plan. Specifies the type of entity each member of the committee represents.
Require the committee to meet at least once every two months, to make its recommendations within one year of its first meeting, and to fully review the transparency plan at least once every three years. It would also require the committee to appoint at least one technical committee and one clinical advisory panel, which must include a majority of clinicians.
Would require the transparency plan to provide for collection of data from health plans and insurers, medical groups, health facilities, licensed physicians, and other health care professionals, and to include a process for assessment of compliance with data collection requirements and a recommended fee schedule to fund its implementation.
Would require the Secretary of Health and Human services, within 60 days of receipt of the transparency plan, to either accept it and develop regulations to implement it, or refer the transparency plan back to the committee for further modifications.
Would require the Secretary to assure timely implementation of the transparency plan, including determining the specific data to be collected, collecting the data, and providing an opportunity for providers who report data to review, comment on, and appeal any outcome report before it is released.
Would require the Office of Statewide Health Planning and Development (OSHPD) to provide the Secretary, after receiving input from interested stakeholders, with a proposed fee schedule to be paid by providers to establish and support implementation of the transparency plan. The bill would also make proposed fees subject to approval by the Legislature and Governor in the annual budget.
Would cap fees imposed on a hospital to fund this bill, and to fund OSHPD under existing law, at 0.06% of the hospital’s operating costs, as specified. Establishes the Health Care Cost and Quality Transparency Fund to receive fees and other contributions to support the implementation of this bill.
Would require the Secretary to report to the Legislature every six years after implementation of the transparency plan, and to include recommendations concerning continuation of the committee.

Providers - including hospitals and physicians - oppose the bill on a number of levels. Providers object to the creation of a new bureaucracy and administrative burden the bill proposes, which they argue will increase system costs and inefficiencies - especially for the smaller providers. In addition, providers fear that incentives for not caring for the most needy populations may be an unintended outcome of the bill. Providers further argue that a new committee of political appointees will provide the administration with expansive new powers with no legislative oversight.

The bill recently passed the Assembly Health Committee on a party-line vote and will next be heard by the Assembly Appropriations Committee. Fiscal implications of the bill had not been analyzed at press time, though, as mentioned, the bill does call for a provider fee schedule to be developed by OSHPD to pay for the actual plan.

For more information, please contact Daron Tooch at 310.551.8111.

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HLB Calendar

April 9-11	AHLA Institute on Medicare and Medicaid Payment Issues, Baltimore. John Hellow presents Medicare Litigation Update, and Byron Gross presents Medicaid Litigation Update.
April 11	California Society for Healthcare Attorneys Annual Meeting, Napa. California Society for Healthcare Attorneys Annual Meeting, Napa.
April 18	Healthcare Association of Southern California Annual Conference, Dana Point. Daron Tooch speaks on Recent Developments in Managed Care Payor/Provider Disputes.
June 3, 17, 18	CHA Annual Reimbursement Seminar, Oakland, Newport Beach, Pasadena. HLB Attorneys Lloyd Bookman, Patric Hooper, John Hellow, Byron Gross, Hope Levy-Biehl and Mark Hardiman are lead faculty, covering Medi-Cal, Medi-Care, False Claims Act, RACs and more.
June 12	*ABA 7th Annual National Institute on the Civil False Claims Act and Qui Tam* Enforcement, Washington, D.C*. Patric Hooper is a panelist for Recent Developments on Damages and Penalties*.

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Health Law Perspectives is produced monthly, 10 times per year and is provided as an educational service only to assist readers in recognizing potential problems in their health care matters. It does not attempt to offer solutions to individual problems but rather to provide information about current developments in California and federal health care law. Readers in need of legal assistance should retain the services of competent counsel. Occasionally articles produced in Health Law Perspectives will reference California Health Law Monitor, a biweekly publication covering legislation, litigation, and regulation. For more information on California Health Law Monitor, contact M. Lee Smith Publishers at (800) 274-6774.