General Practice, Solo & Small Firm DivisionMagazine

Health Law

Physician Deselection Under Attack:

Will Without Cause Termination Soon Be A Thing Of The Past?

By Stephen E. Roth

This article presents an overview of the deselection process and the arguments being made against it, an analysis of the leading cases, and a discussion of some suggested unique approaches to this issue.

The Debate. The process of deselection addresses the termination of physician contracts without cause in an effort by MCOs to winnow higher cost providers from the MCO panel through utilization review, in which resources utilized by providers are compared against an average or some other predetermined standard. Critics argue that such terminations are "de facto gag clauses" because physicians take a risk if they do anything which could be adverse to the economic interest of the MCO, even if their obligations to the patient dictate otherwise. As a result, without cause termination clauses threaten basic patient care.

Cases and Commentary. The case drawing the most recent attention, Potvin v. Metropolitan Life Insurance Company, involved a physician who signed an independent contractor agreement with Metropolitan which was terminable upon 30 days notice. Two years later, Metropolitan exercised the without cause provision and terminated the contract without a hearing. When Metropolitan refused to reinstate the doctor, he sued. Metropolitan moved for summary judgment, alleging that the without cause termination did not breach the contract or Dr. Potvin’s other rights. The trial court granted the motion. The California Court of Appeals reversed, relying on the California common law right to a fair procedure, which is intended to prevent arbitrary exclusion from quasi-public organizations. The court found that because Metropolitan controlled substantial economic interests and Dr. Potvin possessed the requisite economic interest since Metropolitan’s decision impacted his right to fully practice his profession, adequate notice and an opportunity to respond were required.

In the northeast, two courts declined to automatically enforce such provisions, finding they could violate public policy. In Harper v. Healthsource New Hampshire, Inc., a doctor enrolled with an HMO. The contract allowed termination without cause on six months notice. A few years later, the HMO terminated the doctor’s contract allegedly because the physician had not satisfied its recredentialing criteria. After two unsuccessful administrative appeals, the doctor sued. The trial court granted the HMO’s motion to dismiss. The New Hampshire Supreme Court reversed, finding the termination without cause provision was limited by the implied covenant of good faith and by public policy. The court examined the provision under traditional contract principles, weighing whether the without cause provision violated public policy and the covenant of good faith and fair dealing. It concluded that a physician is entitled to review of a deselection decision to determine whether the decision comported with the covenant of good faith and fair dealing and whether it was made for a reason contrary to public policy.

In Psychological Association v. MCC Behavioral Care, Inc., plaintiffs were psychiatrists provided by MCC to MCOs for delivery of mental health benefits. After being terminated from the provider panel without cause they sued, alleging that the termination violated public policy because it was really based on MCC’s dissatisfaction with their treatment plans and its conclusion that they were not "managed care compatible." The New Jersey court denied MCC’s motion to dismiss the allegations concerning violations of public policy, analogizing the plaintiffs’ cause of action to the public policy exception to the at-will employment rule. The court found two pronouncements of public policy which supported plaintiffs’ claim: analogous cases holding that the state had a significant interest in qualified doctors serving on hospital medical staffs; and state regulations which required that utilization management protocols be based on "written clinical criteria . . . developed with the involvement from practicing physicians . . . in the network," that limitations on treatment be decided by physicians only, and that doctors must be permitted to advocate for their patients in utilization management decisions. The New Jersey district judge refused to dismiss the lawsuit since termination without cause could violate public policy.

Alternative Approaches. One commentator has advocated that courts should refuse to enforce at-will termination clauses since the provider agreements are contracts of adhesion. Under this approach, cases involving physicians and MCOs are analogized to cases finding franchise agreements to be contracts of adhesion when they are terminable without cause. The primary case utilized in this analysis is Shell Oil Co. v. Marinello, where the court refused to enforce an at-will termination clause in a franchise contract, finding that the agreement resulted from the oil company’s significantly greater bargaining power. According to this approach, the tactics used by MCOs to terminate physicians are closely analogous to those used in Shell. MCOs enter markets by enrolling as many providers as possible to maximize choice and their competitiveness. Many doctors depend on participation in the MCO to maintain their practices. Therefore, it is unrealistic to consider the right to terminate to be truly bilateral, particularly since many MCOs drop those doctors whose treatment decisions are costing the MCO the greatest amounts.

Professor Bryan Liang advocates recognition of a new legal doctrine to limit termination of doctors without cause to insure continuity of care for patients within a defined sensitive disease category. According to Liang, changes resulting from managed care support the recognition of this new doctrine. The first set of changes has affected physicians. Prior to the onset of managed care, the insurance company did not control the physician’s actions; the relationship was one of fee-for-service. However, with managed care doctors no longer have unchecked discretion in treatment of patients; MCOs have the power to affect a physician’s treatment decisions and his or her financial well-being. Liang contends that a new classification of worker must be created by the common law to address the state of doctors in an era of managed care.

Managed care has also changed the options of patients, who can no longer choose their doctors with no limitations. Patients face the loss of long-standing relationships if their MCO deselects their personal physician. This situation imposes risks and burdens on patients with chronic illnesses or those who are terminally ill where the need to find a new physician can result in significant burdens. In an age of capitation, these patients are the least desirable because they are the most expensive to treat, and may have difficulty finding a new doctor.

Liang maintains the solution is a new doctrine. The power of an MCO to terminate a physician without cause would be limited if "the physician has patients who wish to continue the relationship and the patients are within a defined sensitive disease state category." This approach considers the effects of managed care on both patients and physicians.

Conclusion. The relevant question is not whether deselection clauses will be enforced but what basis courts will use to place them under greater scrutiny. If the cases and the commentary included in this article are any indication, courts will look hard to find a public policy basis or a question of fact about good faith to prevent quick dismissal of claims concerning provider deselection.

Stephen E. Roth is a partner in the firm of Baker, Donelson, Bearman & Caldwell, and practices in the firm’s Knoxville office. Mr. Roth serves as an Officer of the ABA Health Law Section.

- This article is an abridged and edited version of one that originally appeared on page 1 in The Health Lawyer, April 1999 (11:3).

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