The axiom "hard facts make bad law" never held so true than in the case of the Minnesota Supreme Court's decision in Medical Staff of Avera Marshall Regional Medical Center vs. Avera Marshall, issued on December 31, 2014. On its surface, the court's opinion rather tidily resolved two previously unanswered questions in Minnesota — first, can a medical staff sue and be sued (the court answered "yes"); and second, are medical staff bylaws a contract (again "yes"). But the events leading up to the decision were about as tidy as a cafeteria food fight, and the cleanup after the brawl may occupy lawyers, hospital administrators and medical staff leaders for years to come.
The Trays Were Flying
It's hard to know who threw the first bun, but something hit the wall shortly after Avera Health's purchase of Weiner Memorial Medical Center in 2009. Weiner Memorial had previously been owned by the City of Marshall, and by some accounts health care reform was more a headline than a reality at the hospital. Affiliated Community Medical Center (ACMC), one of the largest physician groups in western and southern Minnesota, comprised both a majority of Weiner Memorial's medical staff as well as its Medical Executive Committee (MEC).
Following its acquisition of the hospital, Avera Marshall sought to credential several of its employed physicians on the hospital's medical staff. This allegedly raised competitive concerns with ACMC. When the MEC failed to act on the Avera physicians' applications, the hospital board unilaterally appointed them. Hospital administration then attempted a shake-up of the medical staff quality committee, appointing a non-physician administrator and some Avera-employed physicians to the body.
By this point the food was flying. The MEC began excluding hospital representatives from its meetings, claiming the ability to meet in "executive session" outside the presence of any non-voting members (especially the hospital administrator). The hospital refused to acknowledge the legitimacy of these meetings, and in turn demanded a say in setting the MEC's agenda. The MEC retained its own lawyer and claimed the right to share legally privileged, confidential peer review information with its lawyer. The hospital board claimed the ability to commence peer review proceedings with or without the MEC.
Finally, in January 2012, the hospital sent a letter to medical staff leadership stating that the hospital board had "approved the repeal and termination" of the medical staff bylaws and their replacement with new bylaws unilaterally approved by the board. The former medical staff bylaws had clearly acknowledged "the ultimate authority of the [hospital's] Board of Directors" over the medical staff. However, the bylaws were less clear about how they were to be amended. Amendments proposed by the medical staff, its MEC or a special committee required approval by 2/3 of the medical staff members, and subsequent approval by the hospital board. But the bylaws were silent with respect to amendments proposed by the hospital board — except for a general savings clause stating that the amendment process as a whole "did not supersede the general authority of the [hospital board] as set forth in its corporate bylaws or applicable common law or statute."
The MEC filed suit challenging the board's unilateral repeal and amendment of the bylaws, later obtaining ratification of its filing by a majority vote of the medical staff.
Initially the case went well for Avera Marshall. Avera obtained summary judgment in the district court. The judge applied long-standing Minnesota case law holding that unincorporated associations lacked the ability to sue or be sued, and that even if they had such ability, medical staff bylaws did not constitute a "contract" that could be breached. The court of appeals affirmed. Nevertheless, in a 5-2 decision by the Minnesota Supreme Court, Justice Page, writing for the majority, reversed on both grounds.
Yes Virginia, Medical Staffs Can Sue
The court based its first ruling — that hospital medical staffs have the independent standing to sue — on a 1946 Minnesota statute originally enacted to empower labor unions. The statue (Minn. Stat. § 540.151) states that "when two or more persons associate and act … under a common name … they may sue and be sued[.]" Minnesota courts had previously shown restraint in invoking this provision. After all, read literally, your book club, Facebook group or doubles tennis team could each sue or be sued. But the majority in Avera felt no such restraint: "Here, the Medical Staff is composed of two or more physicians," it reasoned, "who associate and act together for the purpose of ensuring proper patient care … under the common name ‘Medical Staff.'" Thus, the court concluded, a medical staff has the authority to sue and be sued under Minnesota law.
The implications of this first ruling will probably have greater impact than the court's second ruling on the contract issue. Prior to Avera, hospital boards in Minnesota could rest assured that all strategic decisions, and all internal appeals, ended at the board. The board was the final forum to resolve virtually all intra-hospital disputes, whether between different departments of the hospital, peer review bodies and physicians, different viewpoints within management, or the medical staff and hospital administration. Indeed, this was the basis for the same court's 2007 ruling in Larson v. Wasemiller, which established a new tort of negligent credentialing in Minnesota. The court in Larson held that hospitals (read: hospital boards) should be held liable for bad credentialing outcomes even though they lack clinical expertise, because the buck stops at the board when it comes to patient safety.
Well, apparently not so much. When it comes to interpreting the authority boards delegate to their medical staffs, now the buck stops with a judge. The Avera decision provides a second forum — courts of law — where hospital factions may air any kind of dispute that arguably can be tied to a "breach" of the medical staff bylaws. At the same time, the Avera decision creates a new breed of litigant that had not previously existed: the medical staff as a body. As a result, rather than a community board fashioning a compromise or nuanced solution to resolve a complicated, oftentimes personality-laden internal dispute, now either side — the medical staff or board — can apply to a court for a "yes or no" declaratory judgment, injunction or conceivably even monetary damages.
… And They Can Be Sued
Which raises the next issue. The ability to sue comes with the ability to be sued. While Avera is a clear victory for those championing greater power and independence of hospital medical staffs, this new vulnerability to suit should be cause for concern. Will plaintiffs lawyers seek to extend the Larson tort of negligent credentialing to medical staffs, especially where (for example) government hospitals can invoke statutory tort claims immunity or damages caps? Antitrust allegations have never gained much traction in peer review suits filed in Minnesota courts — unlike in several other jurisdictions. However, now that the medical staff is recognized as an independent actor capable of suit, is it also a potential "co-conspirator" under Section 1 of the Sherman Act (and its state antitrust equivalents)? If so, both hospitals and their medical staffs may be exposed to new antitrust claims brought by aggrieved physicians whose hospital privileges have been denied, restricted or revoked for allegedly "anticompetitive" purposes.
And the rabbit hole gets deeper. If medical staffs lose their lawsuits, what assets can the prevailing party reach? The statute upon which the court based its ruling provides that any adverse judgment "bind[s] the joint or common property of the associates, the same as though all had been named as parties to the action." Does this mean that only the kitty of medical staff dues is exposed (the "joint or common property"), or could a prevailing plaintiff attach the personal assets of medical staff members ("the same as though all had been named")? Who chooses the lawyer for the medical staff, when do they get to choose, and who pays for this lawyer? Should medical staffs demand indemnity from their hospitals against liabilities, or vis a versa? Will insurers step in to this previously unidentified market for insurance by offering newly crafted policy riders — or even separate policies — to hospital medical staffs?
Scary Two-Headed Clients
Hospital legal counsel face their own set of dilemmas as a result of the Avera decision. Notwithstanding the American Medical Association's long-standing position that medical staffs should, a priori, be entitled to independent legal counsel, most hospital lawyers have been comfortable representing their hospital and health system clients as totalities, simultaneously advising their boards, management teams and medical staffs without much concern. After Avera, hospital lawyers will need to be more vigilant for intra-hospital conflicts that potentially create a "dual representation" situation — i.e., the requirement under the lawyers' rules of professional ethics to view the factions as separate parties in adversity who cannot be represented by the same lawyer unless the lawyer obtains both parties' consent.
Like cell division, it now appears that one hospital client can quickly morph into two potential clients. Does such cell division occur after a single argument between the hospital administrator and a medical staff functionary in the hospital lunchroom, or does it require a formal vote of the MEC, or medical staff in its entirety? Whichever the case, when true adversity between the hospital and its medical staff arises, the hospital's lawyer may need to step out — even if the hospital wants to keep "its" lawyer — unless the lawyer was prescient enough to obtain advance consent from the medical staff. Look for more law firm engagement letters addressing precisely this scenario.
Medical Staff Bylaws as Contract
Much of the attention given the Avera decision has focused on its now-familiar construction of medical staff bylaws as contracts. State courts elsewhere have split on this construction, with possibly the majority holding in favor of the contract theory (e.g., AZ, CA, DC, FL, IN, MD, NJ, NY, PA, TN and UT), a minority holding against it (e.g., CT, GA, MS, MO, OH and TX), and still others expressing their doubts or as yet undecided (e.g., CO, IA, MA, OK and VA). Minnesota courts had not held conclusively that medical staff bylaws constituted a contract until now. In Campbell, the only Minnesota case cited by the plaintiffs in support of their suit, the Minnesota Supreme Court only obliquely referenced the contract theory in holding that the aggrieved physician had been afforded "a full measure of his contractual due process rights," dismissing his contract claims without further discussion.
Notwithstanding the seeming novelty of the Avera court's ruling, contract claims have long been asserted by physician-plaintiffs in credentialing lawsuits. Plaintiff's contract pleadings in these suits generally overlap their due process claims. Even after Avera, bylaw-based contract claims are unlikely to yield any more or different remedies by way of monetary damages or injunctive relief. The true novelty of the decision lies in its sweeping application of the contract theory to an entire medical staff, rather than to a single aggrieved physician. In effect, the court construed a hospital board's own governing documents to overturn the actions of the board in the absence of any adverse action against any individual physician's privileges.
But What Do the Bylaws Actually Say?
Observers on both sides of the Avera decision need to remember that what the medical staff bylaws say is still more important than what they are (i.e. potentially contractual). In many ways, hospital lawyers can take a cue from their labor law colleagues, who got pretty good at disclaiming the contractual status of employee handbooks when courts in the 1970s began seeing contracts in those documents also. Notably, the majority in Avera found one of the critical elements necessary for contracting — mutual assent — in the Avera bylaws' repeated references to the physician "agreeing" to this or that requirement. While securing a credentialing applicant's agreement to abide by the bylaws has been the tradition, it is not at all clear that such agreement is any more necessary to the credentialing process or to effective peer review than is securing a motorist's "agreement" to abide by the speed limit.
Finally, and somewhat ironically, parties can always agree that a contract is not really a contract. As a result of the Avera ruling, hospitals and medical staffs that seek to avoid potential judicial interference can — and probably will — grow more adept at disclaiming contract status in their medical staff governance documents, thereby depriving future courts of the assent element so easily discerned by the Avera court in Avera Marshall's bylaws. Moreover, even if bylaws must be construed as contract, commercial attorneys are quite adept at fashioning binding dispute resolution clauses that retain control of the dispute resolution process, for example by requiring formal negotiations, mediation, private arbitration or other brokered solutions, without permitting access to courts.
Most importantly, all constituencies within the hospital will need to work together to craft clearer provisions governing how they resolve deadlocks. Now that the Avera Marshall food fight is over, it's time for the rest of us to clean up the mess and get back to the business of serving our communities.