State Supreme Court Decision Bars Hospitals from Considering Economic Factors in Deciding Physician Staff Privileges

HospitalIn a significant victory for physicians in the battle against “economic credentialing,” the Arkansas Supreme Court recently held that a hospital that denies or refuses to renew staff privileges to physicians because they have an interest in a competing hospital unlawfully interferes with the doctor-patient relationship. The American Medical Association (AMA), which opposes such hospital policies and filed an amicus curiae brief in the Arkansas case, defines economic credentialing as “the use of economic criteria unrelated to quality of care or professional competence in determining a physician’s qualifications for initial or continuing hospital medical staff membership or privileges.”

The Akansas Supreme court’s decision in Baptist Health v. Murphy ended seven years of litigation that began when several cardiologists who had interests in another hospital challenged a new policy at Baptist Health that prohibited the granting or renewal of professional staff appointments or clinical privileges to “any practitioner who, directly or indirectly, acquires or holds an ownership interest in a competing hospital.” The doctors’ claimed that the policy was a violation of  the Arkansas Deceptive Trade Practices Act (ADTPA) and wrongfully interfered with the doctor-patient relationship in violation of public policy. The hospital contended that the relationships between patients and physicians were not contractual relationships giving rise to business expectations protected by law, and that even if they were, the hospital policy did not interfere with those relationships. The hospital also defended the policy as a legitimate means of  protecting the hospital’s economic viability by discouraging competition by physicians who considered investing in specialty hospitals.

The court dismissed the physicians’ ADTPA claim on the ground that there was no private right of action under that statute, but affirmed the lower court’s ruling that the hospital policy wrongfully interfered with the doctor-patient relationship. Agreeing with the lower court, the Arkansas Supreme Court found that the physicians’ interests in their relationships with patients and providing continuity of care outweighed the hospital’s economic interest because there was no evidence that the hospital’s finances were ever at risk or that it needed the policy to protect its economic viability. The court concluded that by excluding otherwise qualified physicians from treating their patients at Baptist Health, the policy interfered with a physician’s relationship with his or her patient and resulted in a loss of professional fees from that treatment. The court found, moreover, that physicians without privileges at Baptist would lose referrals from other physicians. Consequently the Arkansas Supreme Court held that the lower court correctly concluded that Baptist’s policy was intended to wrongfully suppress competition from specialty hospitals and make patients choose between their doctors and Baptist.

Not surprisingly, the AMA, which submitted an amicus brief in support of the physicians in the case, has staunchly opposed the use of economic criteria unrelated to patient care to grant hospital privileges. This type of economic credentialing, the AMA has stated, can take many forms, including consideration of the level of a physician’s referrals, conflict of interest policies such as that used by Baptist Health, or “loyalty oaths,” through which hospitals deny or rescind staff privileges to physicians who own, have financial interests or leadership positions in, or refer patients to competing hospitals.

Some states, including California, Illinois, and Texas, have statues that prohibit economic credentialing. For example, Texas law  specifically provides that a hospital may not “refuse or fail to grant or renew staff privileges, or condition staff privileges, based in whole or in part on the fact that the physician or a partner, associate, or employee of the physician is providing medical or health care services at a different hospital or hospital system.” Similarly, California law prohibits hospitals that contract with Medi-Cal from denying medical staff membership or clinical privileges “for reasons other than a physician's individual qualifications as determined by professional and ethical criteria, uniformly applied to all medical staff applicants and members.”  More specifically, the statute expressly prohibits staffing or clinical privilege decisions made on the basis of  the “existence of a contract with the hospital or with others.”

In contrast to the Arkansas Supreme Court’s decision in Baptist Health, courts in some states without statutory prohibitions on economic credentialing have found it permissible for hospitals to consider economic criteria in making staff privilege decisions. Most notably, in Mahan v. Avera St. Luke’s, the South Dakota Supreme Court approved a hospital’s decision to “close” medical staff positions to applicants for orthopedic surgery privileges or privileges to perform certain spinal procedures. The hospital board reached its decision after a group of orthopedic surgeons in the area built a day surgery center that competed with the hospital.  In assessing the hospital’s decision, the court emphasized that South Dakota law places responsibility for managing the affairs of non-profit corporations and hospitals on the institution’s board of directors, and that “courts should not interfere in the internal politics and decision making of a private nonprofit hospital corporation when those decisions are made pursuant to its Corporate Bylaws.”

Equally important was the South Dakota court’s focus on the economic needs and community interests asserted by the hospital. Because it served a small community, the hospital had difficulty recruiting a neurosurgeon unless he or she could also perform back and spine surgery there. The hospital claimed that providing staff privileges to additional orthopedic surgeons would undermine its ability to retain the neurosurgeon it had recently hired. The court agreed that the hospital’s restrictions of staff privileges were in the community’s “best interests, and were necessary to insure 24-hour neurosurgical coverage” for the area. The court specifically found that the hospital:

cannot continue to offer unprofitable, yet essential services including maternity ward, emergency room, pediatrics and critical care units, without the offsetting financial benefit of more profitable areas such as neurosurgery.  The Board responded to the effect the [competing] hospital would have on the economic viability of [the] hospital and the health care needs of the

The South Dakota Supreme Court concluded that neither the hospital’s corporate bylaws nor the laws of South Dakota precluded the hospital from making the economically reasonable decision not to grant staff privileges to any additional physicians who would perform particular types of spinal or orthopedic surgery.

Hospitals considering whether to adopt or continue use of economic criteria in making staff privilege decisions should look carefully at state statutes covering hospital privileges, but should also examine pertinent case law. In most states that, like Arkansas and South Dakota, do not have statutes or regulations governing staff privileges, one of the most important factors in determining whether economic criteria may be used in making staff privilege decisions may well be whether these restrictions on privileges are necessary to insure the economic viability of the hospital.

This entry was written by George O’Brien.

Photo credit: MSRPhoto

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.