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Legal aspects of economic credentialing.

The term "economic credentialing" does not have a universally accepted meaning. Commentary on the topic seems to imply that the term has two meanings.

In one meaning, economic credentialing is the process in which hospital privileges are granted or renewed based on the economic impact of a provider's prior utilization experience, taking into account patient health needs and ultimate outcomes. This definition has a quality assurance aspect. It implies that a hospital will monitor costly practice patterns from both an economic and a quality perspective and make credentialing decisions on the basis of whether a physician is depleting limited resources without enhancing the quality of care rendered. [1]

The other definition of the term focuses solely on the physician's economic experience. Pure economic credentialing does not take into account the quality of care rendered or the particular physician's patient mix. The sole issue is whether or not the procedure was economically appropriate, rather than whether it was medically justified and economically appropriate. [2] To date, such a pure "bottom line" oriented approach has not received much acceptance in the hospital community. However, from the physician perspective, this is a logical extension of quality-based economic credentialing. The concern physicians have with pure economic credentialing is that hospitals will base credentialing decisions solely on physician profitability as opposed to patient care.

Potential Legal Issues

Who decides? Physicians who oppose economic credentialing may attempt to challenge that hospital's authority under the theory that the medical staff, and not the hospital's governing body, is responsible for making credentialing decisions. At least one court has held that the sole function of a hospital's board of directors, with respect to credentialing, is to uphold the medical staff's recommendations, assuming they are rationally based and supported by substantial evidence. [3] Further, state statutes have been interpreted to place a substantial amount of decision-making authority as to credentialing and peer review in the hands of the medical staff. [4]

Moreover, the Joint Commission on Accreditation of Healthcare Organizations' (JCAHO) accreditation standards have been construed by opponents of economic credentialing as placing all decision-making authority with respect to medical staff appointments, reappointments, terminations, or reductions in clinical privileges in the hands of the medical staff. [5]

Nevertheless, the view espoused by some commentators is that physicians are not qualified to accurately assess economic and financial needs of the institution and therefore should limit their recommendations to issues relative to clinical competence and quality of patient care. Support for this position is construed from the JCAHO standards and from case law that places institutional management and planning in the hands of the governing body. [6] Therefore, hospitals argue that, with respect to economic criteria, the governing body is solely responsible for proposing, adopting, and applying such criteria. [7]

Proper adoption of economic criteria. Medical staff credentialing criteria must be properly documented, supported by some business or patient care justification, and set forth in the medical staff bylaws. Absent such justification and documentation, economic credentialing criteria may be challenged upon the theory that the physician was not properly notified of the applicable requirements. This requirement has its foundation in principles of due process, which requires adequate notice of the standards being applied. The due process clause of the Fourteenth Amendment to the U.S. Constitution provides a constitutional basis for this contention in cases where a public or quasi-public hospital fails to properly notify a physician of the criteria. The hospital's public nature provides the necessary state action element required of a Fourteenth Amendment claim. [8]

Additionally, if the basis for the adoption of such criteria is not adequately documented in writing and is not founded on financial or patient care grounds, an aggrieved physician may claim that the hospital's credentialing decision was arbitrary and capricious and not justified by any business or patient care concerns.

Furthermore, an aggrieved physician may allege a breach of contract in those jurisdictions that recognize the medical staff bylaws as a contract. The argument being that by imposing credentialing standards that are not properly included in the medical staff bylaws, the hospital breached its contract with the physician by imposing terms that were not contemplated by the parties.

Therefore, hospitals must document, in writing, the concerns leading up to the bylaws revision or adoption. Further, the hospital's governing body will likely elect to adopt pure economic criteria that do not evaluate patient care concerns as part of its own bylaws. [9] Conversely, quality-based economic criteria should be placed in the medical staff bylaws and will therefore require adoption by the medical staff and approval by the governing body in accordance with JCAHO standards. [10]

Quality versus profit. Another potential legal argument against the proliferation of pure economic credentialing is that the resulting exclusion from the medical staff is not reasonably related to the maintenance of quality care or patient welfare. [11] This argument is further supported by the paucity of judicial precedents upholding adverse credentialing decisions based solely on financial concerns. The cases most closely on point rely to some extent on the effects a particular physician's costly practice patterns have on patient care, patient welfare, or the hospital's objectives. [12]

It is unclear how courts are likely to decide when faced with a pure economic credentialing case (i.e., the physician does not admit or refer enough patients to the particular hospital). However, one would assume that hospitals will make efforts to base all credentialing decisions on quality of care, patient welfare, or institutional objectives. Even in cases where such a rationale is not in fact the basis for an adverse credentialing decision, the standards are broad enough for a hospital to posit the argument that its decision was grounded in good faith on one of these standards.

Breach of fiduciary duty. Pure economic credentialing may be attacked on a theory of breach of the public trust. An aggrieved physician may contend that by excluding him or her from membership on the medical staff, the hospital breached its fiduciary duty to the public by limiting the public's ability to select a physician of choice and have adequate access to hospital facilities. [13]

This argument may be frustrated with evidence that the costs, in terms of depletion of resources resulting from a particular physician's practice patterns, outweighed the benefits of allowing such a physician to retain staff privileges. In fact, the hospital may argue in the alternative that by revoking or denying such privileges, patient care was arguably enhanced because the patient may, in some cases, switch to a physician with admitting privileges who better utilizes resources without sacrificing quality.


Economic credentialing is likely to face a multitude of legal challenges over the upcoming years. The courts are likely to be forced to take a position as to pure economic credentialing. The broad standard currently being applied by the courts is easily satisfied because arguably all economically based decisions have at least a marginal effect on quality of care or patient welfare. Therefore, it will be interesting to see whether the courts distinguish between pure economic credentialing and quality-based economic credentialing and whether they fashion a more stringent standard upon which such credentialing decisions are to be made. [14]


[1] Typically, this type of credentialing involves a comparative review of lengths of stay and physician charges by DRG; utilization review data, such as denials of admissions, number of days, and services; the amounts in medical malpractice settlements; and the income to accounts receivable ratio.

[2] It is argued that the application of such a form of economic credentialing could, if taken to the extreme, result in a physician's losing or being denied staff privileges because he or she serves a high percentage of Medicare or charity patients.

[3] Weiss v. York Hospital, 745 F.2d 786, 796 n.14 (3d Cir. 1984), cert. denied, 410 U.S. 1060 (1985).

[4] Cal. Bus. & Prof. Code *** 809.05(a) (West 1990).

[5] JCAHO Accreditation Manual for Hospitals G.B. 1.13 at 49 (1991).

[6] JCAHO Accreditation Manual for Hospitals G.B. 1 at 47 (1991). See Maltz v. New York Univ. Medical Center, 503 N.Y.S.2d 570, 571 (N.Y. App. Div. 1986).

[7] As is discussed in note 9, infra, there are antitrust concerns incidental to having a medical staff establish and apply pure economic credentialing criteria. See generally Peters, B., and Maneval, W., "Medical Staff Membership Criteria: A Credentialing Minefield," Medical Staff Counselor 5(3):2,5, Summer 1991.

[8] Miller v. Indiana Hosp., 419 A.2d 1191, 1194-95 (Pa. Super. 1980).

[9] Courts have reasoned that a hospital's governing body is best suited from both a practical and an antitrust perspective to decide economic issues relating to the granting of priveleges. See Maltz supra n.3, 745 F.2d at 814-15. A medical staff that develops, adopts, and applies economic criteria unrelated to patient care for use in evaluating whether to extend staff privileges to other physician/competitors is likely to face challenges for anticompetitive motives and behavior. Therefore, hospital governing boards are often advised to unilaterally develop such economic criteria for inclusion in its bylaws as standards to apply in the governing body's evaluation of medical staff credentialing recommendations.

[10] JCAHO Accreditation Manual for Hospitals M.S.2.1. at 98 (1991).

[11] Belmar v. Cipolla, 475 A.2d 533, 538 (N.J. 1984).

[12] See, for example, Edelman v. John F. Kennedy Memorial Hospital, No. C-2104-80 (N.J. Sup. Ct. June 25, 1982): cert. denied 475 A.2d 585 (N.J. 1984). In a case interpreting a New York statute that codifies this standard, a hospital, relying on its institutional objectives, denied staff privileges to a gastroenterologist because of bed limitations and adequate staffing in the department. The court held that, absent evidence of bad faith on the part of the hospital, it would not intervene in the hospital's decision because it was afforded broad discretion in meeting its objectives. Maltz, supra, note 9, 503 N.Y.S.2d at 571.

[13] This argument, albeit tenuous, was advanced in Desai v. St. Barnabas Medical Center, 510 A.2d 662, 670 (N.J. 1986). There, the court held that policies that systematically exclude the patients of a doctor or a class of doctors must be found to reasonably advance the public welfare in order to survive judicial review.

[14] Some commentators have argued that at least one court has attempted to do this in holding that a physician's property interest in staff membership outweighs the hospital's business interests. Lewisburg Community Hosp. v. Alfredson, 805 S.W.2d 756 (Tenn. 1991). However, another view of the case is that it is not a true economic credentialing decision because it involved the termination of an exclusive provider agreement, albeit allegedly for business reasons. Rather, the case represents a constructive reduction in staff privileges resulting from the hospital's refusal to give the provider assess to equipment and staff. Therefore, Lewisburg appears to stand for the proposition that physicians are to be afforded due process in cases in which their privileges are limited or revoked on the basis of a hospital's decision to terminate an exclusive contract.

Neil Olderman is an attorney with Epstein Becker & Green, P.C. and in located units Washington D.C. offices.
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Title Annotation:managing medical care costs
Author:Olderman, Neil
Publication:Physician Executive
Date:Nov 1, 1991
Previous Article:Defining quality physicians.
Next Article:The use of billing data in quality improvement.

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