California Supreme Court Issues Key Decision on Peer Review Hearing Officer Bias in Natarajan V. Dignity Health

What to Know

• Dr. Natarajan argued that his hearing officer was impermissibly biased, due to the possibility that another medical staff in the same hospital system might hire him for future work.
• The Court disagreed, holding that the possibility of future work does not automatically disqualify a peer review hearing officer.
• Nevertheless, whether a hearing officer’s “financial interest in currying favor with the hiring entity may create an intolerable risk of bias requiring disqualification” will depend on the circumstances.
• Those circumstances include who controls the hiring process and how likely it is that the hearing officer may expect future compensation opportunities from that entity.
• The court expressly recognized that in this case, a contractual 3-year period, during which the hearing officer was ineligible to serve again for the same entity, eliminated any significant financial likelihood of bias. 
• Arent Fox LLP filed amicus curiae briefs on behalf of our client the California Hospital Association in this case, in both the California Court of Appeal and California Supreme Court.

Factual and Procedural Background

In Natarajan, the medical executive committee at St. Joseph’s Medical Center of Stockton (“St. Joseph’s”), owned by Dignity Health (“Dignity”), recommended termination of Dr. Natarajan’s medical staff membership and privileges. Dr. Natarajan requested a peer review hearing, and the hospital president exercised the authority delegated to him to select the hearing officer. 

Dr. Natarajan challenged the hearing officer’s appointment based on financial bias, arguing that the hearing officer had been hired at Dignity’s recommendation, Dignity was paying him for his services, and the hearing officer had served as a hearing officer for other Dignity hospitals. Dr. Natarajan argued that these connections, and the possibility that a different medical staff in the Dignity system might hire him in the future, would improperly influence the hearing officer to favor the medical staff.

The hearing officer’s contract contained a provision that would preclude St. Joseph from hiring him again as a hearing officer for three years. In part based on this contract, the hearing officer rejected Dr. Natarajan’s challenge, and a peer review panel upheld the medical executive committee’s recommendation to terminate Dr. Natarajan’s privileges. Dr. Natarajan appealed to the hospital’s governing board, which affirmed the panel’s decision. Dr. Natarajan filed a writ in the superior court, which was denied. Dr. Natarajan’s board appeal and writ petition both claimed he had not received a fair hearing because of the hearing officer’s alleged financial conflict. 

The Court of Appeal Decision

Dr. Natarajan appealed and the Court of Appeal issued a published decision that we reported on previously. The Court of Appeal soundly rejected Natarajan’s challenge to the hearing officer and affirmed the denial of the writ petition. In that opinion, the Court of Appeal disagreed with Yaqub v. Salinas Valley Memorial Healthcare System, which held that a hospital hearing officer should have been disqualified merely because he had been appointed on an ad hoc basis by the hospital, and could possibly be reappointed in the future.

The Supreme Court Decides that Bias Determinations Require Context

Dr. Natarajan petitioned for review to the California Supreme Court. In an opinion by Justice Kruger, the Court agreed with Dignity and the Court of Appeal, holding that the prospect of future employment does not automatically disqualify a hearing officer. The Supreme Court expressly disapproved of the Yaqub decision, and stated clearly that “disqualification is required only when there exists a direct pecuniary interest … that creates an intolerable risk of actual bias.” That risk does not arise simply because a hospital has hired a hearing officer in one case and may hire that same person again at some future time.

Nevertheless, the Supreme Court did not agree with the Court of Appeal’s holding that the prospect of future employment can never disqualify a hearing officer. In so doing, the Supreme Court left open the possibility that in certain circumstances, the possibility of future employment may give rise to a disqualifying conflict. The Court laid out two tests for deciding whether such a conflict exists: First, who controls the hearing officer selection process? Second, what is the extent and likelihood of future financial opportunities the hearing officer may receive from that same entity?

The Natarajan Record Revealed No Basis to Disqualify the Hearing Officer

The Supreme Court further found that based on the record before it, the circumstances surrounding the hearing officer’s appointment did not create an intolerable risk of bias that required disqualification. The Court noted that the bar in the hearing officer’s contract that prevented him from serving as a hearing officer at St. Joseph’s for three years (often called a “period of repose”) was sufficient to eliminate any significant financial temptation the hearing officer had to favor the hospital or its medical staff.

The Court also analyzed whether Dignity controlled the decision to hire the hearing officer, which the Court suggested could impact the bias analysis. The Court observed that in Natarajan, no such control existed. Instead, the medical staff had delegated through its bylaws the authority to appoint hearing officers to the hospital’s president. But in this case, the Court found no evidence to show that Dignity itself had decided which hearing officer to hire or otherwise controlled the selection process. The Court also concluded that the hearing officer’s contractual period of repose, which applied only to St. Joseph’s and not to every Dignity Health hospital, was sufficient to eliminate significant risk of bias.

The Court’s Advice for Future Cases 

At the conclusion of its opinion, the Court noted that hospitals and their medical staffs can choose “from a variety of tools” to ensure fair procedure, including contractual periods of repose like the one used in this case. Beyond that, however, the Court noted that hospitals and medical staffs are free to “take other measures … as appropriate given the circumstances of each particular case…, [b]ut what measures are necessary will depend on a careful, context-specific judgment about the risk of bias presented on the facts.” In other words, it will depend on many factors.

The good news for hospitals and peer reviewers is that with the vague Yaqub test retired, they now have additional guidance to apply in selecting hearing officers, who fill such a critical role in the peer review hearing process.