California Supreme Court issues ruling in important peer review case

August 17, 2021

The California Supreme Court recently issued an important decision that clarifies a physician's ability to challenge peer review hearing officers for impermissible bias.

The California Medical Association (CMA) filed an amicus brief in the case, in support of neither party, that sought to provide the court with the appropriate background, procedural understanding, and evidentiary foundation to fashion a robust, clear, and contextualized hearing officer impartiality standard.

The plaintiff in this case — Natarajan v. Dignity Health — is a hospitalist who lost his privileges after a peer review hearing. In his appeal, he did not dispute the factual findings and conclusions of the peer review panel, but rather claims that the hearing officer in his peer review proceeding was biased and should have been disqualified.

The parties in this case adopted vastly different interpretations of the extent to which the "direct financial benefit" standard in the peer review statute precluded a hearing officer from participating in a peer review proceeding. The individual physician contended that the prospect of future work for the same hospital or an affiliated hospital within the same system constituted an impermissible financial interest that required disqualification of the hearing officer. The hospital asserted that an interest in possible future employment was insufficient to disqualify a hearing officer from service. The appellate court ruled against the physician, holding that the “fair procedure” standard forbids only a "direct financial interest" in the outcome of the proceeding; the appearance of bias was not sufficient to disqualify a peer review hearing officer.

The California Supreme Court disagreed with the reasoning of the appellate court, although it did not overturn the court's ruling on factual grounds.

The court adopted the heart of CMA's suggested approach, holding that a hearing officer's interest in future employment may create an intolerable risk of bias requiring disqualification, but that such an assessment heavily depends on the circumstances of each case. The court established a two-factor test to determine whether a hearing officer's prospect of future employment creates a disqualifying risk of bias: whether a particular entity exercises control over the hearing officer selection process, and the extent and likelihood of future financial opportunities that the hearing officer may receive from the same entity.

While CMA believes the court could have gone further to ensure that hearing officers with a possible temptation of bias are disqualified from service, the court agreed with CMA's argument that the appellate court’s “actual bias” standard was too narrow. The court agreed with CMA that a broader, fact-based inquiry into the possibility of impermissible bias by a hearing officer is necessary ensure competent practitioners are shielded from arbitrary and discriminatory review while also upholding the protection of the public.

The Natarajan case also highlights the importance of strong medical staff bylaws. The court examined and gave great deference to the medical staff's bylaws in this case, which delegated the authority to appoint the hearing officer to the hospital president. Going forward, medical staffs should ensure that their medical staff bylaws specify that only the medical staff or medical executive committee can appoint hearing officers. Model language can be found in the 2021 CMA Model Medical Staff Bylaws, which were reviewed by the court and specifically referenced in the decision.


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