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California Hospitals Cannot Use an Exclusive Contract to do an End-Run around a Medical Staff Member’s Right to Notice and a Fair Hearing When Competence or Professional Conduct Is at Issue

The Exclusive Contract & Quality of Care

Dr. Kenneth Economy was employed by East Bay Anesthesiology Medical Group (“Anesthesia Group”), which held an exclusive contract to provide anesthesia services at The East Bay Hospital (“Hospital”).1 During a surprise inspection, the California Department of Public Heath (“CDPH”) found that Dr. Economy was responsible for numerous deficiencies in the use of the drug Droperidol. According to CDPH, these deficiencies “placed patients at risk for undue adverse medical consequences,” and CDPH declared that the Hospital was in immediate jeopardy until a written action plan was prepared and accepted.2 The Hospital immediately formed a response team and the vice president of medical affairs requested that the president of the Anesthesia Group remove Dr. Economy from the hospital’s anesthesia schedule pending further investigation.3 Dr. Economy was told that he was being taken off the schedule due to his use of Droperidol.4 The Hospital submitted a written action plan to CDPH stating in part, that the physician responsible for the Droperidol use had not followed hospital policy, was referred to peer review and immediately suspended by his Anesthesia Group. The state surveyor approved the plan and lifted the immediate jeopardy.5

Peer Review and the Anesthesia Group

Peer review concluded that further education was needed and recommended that Dr. Economy attend the Physician Assessment and Clinical Education (“PACE”) course at the University of California San Diego.6 Dr. Economy’s return to practice at the Hospital was dependent upon successful completion of the course.7 The Anesthesia Group informed Dr. Economy that he needed to attend PACE before he could return to the Hospital.8 He then requested an opportunity to appear before the peer review committee to discuss the decision.9 His request was denied on the basis that the Medical Executive Committee was aware of his situation and his only option was to complete the PACE program.10 Dr. Economy’s Reinstatement and Termination Dr. Economy completed the PACE program and returned to work at the Hospital.11 Following his reinstatement, a pharmacy manager found that Dr. Economy continued to violate the Hospital’s policy for administering Droperidol.12 As a result, the Hospital’s vice president of medical affairs told the Anesthesia Group that, due to ongoing quality of care concerns, the anesthesia schedules with Dr. Economy would not be approved.13 Once again, the Anesthesia Group removed Dr. Economy from the anesthesia schedule.14 The Anesthesia Group informed Dr. Economy he would not be allowed to return to the Hospital and asked for his resignation. Dr. Economy refused and the Anesthesia Group terminated him.15

The Lawsuit

Dr. Economy sued the Hospital, alleging it violated his right to both notice of charges and a peer review hearing under California Business and Professions Code section 809 et seq. He also alleged that his common law due process rights were violated, relying upon Anton v. San Antonio Community Hospital (1977) 19 Cal.3d 802.16 Dr. Economy prevailed and the trial court found the Hospital had violated Dr. Economy’s due process rights under both California Business and Professions Code section 809 et seq. and Anton v. San Antonio Community Hospital (1977) 19 Cal.3d 802. The trial court concluded the Hospital was required to provide Dr. Economy with a formal notice of charges and peer review hearing before removing him from the schedule which effectively terminated his privileges.17 The court awarded Dr. Economy nearly $4 million in damages for lost and future income.18 The Hospital appealed the judgment.19

The Appeal

The Court of Appeal affirmed the judgment and award of lost income for Dr. Economy, holding the Hospital violated his rights to notice and a fair hearing by directing his employer to remove him from the schedule.20 The appellate court rejected the Hospital’s argument that no fair hearing was required because it never formally rescinded Dr. Economy’s privileges; it was the Anesthesia Group that removed him.21 The court explained, if it were to accept the Hospital’s argument, Dr. Economy’s “right to practice medicine would be substantially restricted without due process” and “the Hospital’s decision not to accept any schedule on which [Dr. Economy] was included effectively prevented [Dr. Economy] from exercising clinical privileges at the Hospital and engaging in the practice of medicine.”22 Therefore, the decision not to approve the anesthesia schedules that included Dr. Economy was “the functional equivalent of a decision to suspend and later revoke [Dr. Economy’s] clinical privileges.”23​

The Lesson

This case serves as a compelling reminder that a hospital’s use of an exclusive contract to exclude a physician from practicing for a quality of care or professional conduct reason must be scrutinized under applicable state law to determine if notice and fair hearing is required. Here, the court clearly held that California common law and statutes provide physicians with due process rights before a hospital may exclude their ability to practice under the terms of an exclusive contract due to their competence or conduct.

1 Economy v. The Hospital East Bay Hospitals, (Feb. 4, 2019, A150211, A150738, A15096) 31 Cal.App.5th 1147, 1152.

2 Id. at 1153.

3 Id.

4 Id. at 1154.

5 Id.

6 Id.

7 Id.

8 Id.

9 Id.

10 Id.

11 Id.

12 Id.

13 Id. at 1155.

14 Id.

15 Id.

16 Id.

17 Id. at 1158.

18 Id. at 1160-61.

19 Id. at 1147

20 Id. at 1160

21 Id. at 1158

22 Id. at 1158-59

23 Id. at 1158

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume IX, Number 262


About this Author

Erin Muellenberg Medical Staff Law Attorney

Erin Muellenberg brings a strong skillset to her exclusive practice of medical staff law. As a former Director of Medical Staff Services in a large community-based hospital, she is intimately familiar with the daily operations of the Medical Staff Organization and its governance process. Erin’s practice focuses on advising hospitals, health systems, critical access hospitals, ambulatory surgery centers, and medical groups on the regulatory, compliance, and practical requirements for interfacing the medical staff and allied health professional staff with hospital operations.


Lauryn A Sanders Houston Behavioral Health Health Care Services Health Care Industry Medical Staff

Lauryn Sanders is committed to working with health care clients to achieve efficient and innovative outcomes for their immediate and long-term goals. She focuses her practice on transactional and regulatory matters affecting a wide range of clients in the health care industry, including health systems, hospitals, physician groups, pharmacies, and clinical laboratories. 

Lauryn advises clients on a broad array of regulatory aspects in the health care industry, including licensure and accreditation, reimbursement issues, corporate practice of medicine and compliance programs. Her experience includes drafting and negotiating of transactional agreements, including, affiliation agreements, professional service agreements, management agreements and medical director agreements. 

Prior to joining Polsinelli, Lauryn worked as a legal fellow with the Office of General Counsel at the University of Southern California.