The recent decision by the California Supreme Court in Fahlen v. Sutter Central Valley Hospitals, No. S205568 , 2014 WL 655995 (Cal. 2014) may significantly weaken the efficacy of hospital peer review proceedings in California and may have implications for hospitals in other states. The court held that a physician is not required to exhaust peer review proceedings before bringing a statutory whistle-blower retaliation claim under California Health and Safety Code Section 1278.5 against a hospital that institutes what appeared to be a retaliatory peer review action against that physician.

Dr. Fahlen, a physician with staff privileges at a California hospital had, at various times over several years, heated exchanges with nurses and other hospital staff for allegedly failing to follow his patient treatment instructions. The hospital's Chief Operating Officer contacted the medical director of the physician's practice to complain. Eventually, Dr. Fahlen was terminated by his practice, lost his medical malpractice insurance, and was unable to treat patients at the hospital. The hospital initiated peer review proceedings against Dr. Fahlen and terminated his staff privileges. The physician filed a lawsuit against the hospital pursuant to California's whistle-blower statute without first filing an administrative mandamus proceeding, an appeal of the hospital’s decision that gives deference to the hospital’s decision. The hospital argued that Dr. Fahlen’s claim merited dismissal because California law required him to exhaust all judicial and administrative remedies before suing the hospital under the whistle-blower statute.

Before Fahlen, California law generally required a physician to exhaust all quasi-judicial proceedings afforded by a hospital and attack a hospital's decision through an administrative mandamus action before the physician could sue a hospital in common law tort on the basis that the doctor’s exclusion from staff privileges was retaliatory. In Fahlen, the California Supreme Court distinguished common law tort claims from statutory whistle-blower retaliation claims, which, it found, do not require exhaustion of all judicial and administrative remedies. The court determined that the "clear legislative intent" of the statute contemplated that a peer review proceeding could run contemporaneous with a Section 1278.5 whistle-blower action, particularly given the express legislative purpose behind the whistle-blower statute, which is to encourage and protect whistle-blowers who raise concerns about the quality of patient care.

For the first time on appeal to the California Supreme Court, the hospital advanced a federal preemption argument. The hospital argued that permitting simultaneous actions without exhaustion of all judicial and administrative remedies was at odds with the federal Health Care Quality Improvement Act ("HCQIA"), which establishes a broad immunity from lawsuits for individuals and healthcare organizations that participate in reasonably informed and reasonably justified disciplinary actions by medical peer review bodies. The hospital argued that the HCQIA and its underlying policy is to encourage hospitals and physicians to engage in peer review programs by relieving those parties from the threat of lawsuits. The Supreme Court declined to consider the argument as not properly before the Court, but did note that the HCQIA would not preclude relief such as reinstatement and other injunctive relief in any event.

While this decision only reflects the law in California, it has significant implications for hospitals throughout the United States. Many states have whistle-blower statutes that may be similar to California's whistle-blower statute. Although, as the Court discusses, members of a peer review committee engaged in a bona fide review process (and not one, as the Court noted here, that was initiated with retaliatory motivations) have qualified immunity, that immunity is merely a defense to a claim brought in a lawsuit. In other words, to raise it with any effect, one must actually be party to a lawsuit. Accordingly, one cannot ignore the further practical deterrence that a decision like this will have on the willingness of physicians to participate on a peer review committee. Ultimately, this decision has the potential to chill peer review systems in hospitals, which might also lessen the hospital’s ability to improve patient care.

Thus, more than ever, it is important for hospitals to consult legal counsel early on when considering whether to terminate a physician's privileges as the physician may use the hospital’s conduct before and during peer review as the basis for a whistle-blower action. However, while consulting counsel early in the process gives the hospital some "cover," relying on advice of counsel to justify the hospital's disciplinary decisions necessarily implicates a privilege waiver related to the discussions with counsel about those decisions. Hospitals should also bolster their complaint-filing policies so that they create an environment whereby physicians have clear and effective procedures to submit complaints about patient care and feel free from retaliation by the hospital.

As of now, the reach of the Fahlen decision is confined to California hospitals, but it should be viewed as an indication of things to come in other states, as courts throughout the United States continue to expand protections afforded to whistle-blowers.