To Terminate or Not to Terminate: Provider Exclusion Laws and Why They Matter

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A robust, quality network of providers is essential to the operation of any managed care organization (MCO).  Credentialing, quality of care, or other legitimate business concerns frequently require an MCO to evaluate removal of a provider from its network or to reject a provider’s application to join the network.  Quality of care or credentialing issues present common scenarios where an MCO may have a legitimate concern regarding risk of harm to patients and good reason to terminate a provider’s contract or reject a provider’s application to join the network.  More complications arise in situations where the provider has only been accused of a crime or misconduct, but has not yet been convicted or disciplined by a licensing authority.  There may also just be purely administrative reasons why an MCO may not want a particular provider – such as a network that just doesn’t need more providers of a particular specialty.   Whatever the reason, MCOs need to be careful before terminating or rejecting a provider.  Depending on the jurisdiction, there may be legal limitations to the permissible reasons for the exclusion as well as a due process requirement that the MCOs must afford to the provider.  Often a careful and well-reasoned balancing act must occur between protecting patients from risk of harm while at the same time protecting a provider’s right to be treated fairly.

Many states mandate that a provider can only be terminated for cause, and must be given some kind of appeal procedure.  For instance, under New York Public Health Law section 4406-d, a provider cannot be terminated without a written explanation of the reasons for the proposed termination and an opportunity for review or hearing prior to the termination.   Similarly, California common law requires that any provider exclusion be substantively rational and procedurally fair.  See, e.g. Palm Medical Group v. SCIF, 161 Cal.App.4th 206 (2008).   In general, very few states (Colorado, Connecticut, South Dakota, Tennessee) allow for termination without cause and no kind of appeal rights.

Excluding a provider in violation of applicable rules can result in serious consequences.  Recently, a jury in California (Nordella v. Blue Cross, BC444364 (2013)) awarded a physician $4.49 million in economic damages (reduced to $3.8 million for the plaintiff’s partial fault) when it found that Blue Cross had violated his right to fair procedure by denying his application to join the network.

Litigation surrounding provider exclusion will continue to increase with the increasing number of MCO and ACO networks being created as part of the Affordable Care Act (aka “ObamaCare”).  To insulate against this risk, MCOs should ensure that their provider exclusion policies comply with applicable law (both statutory and common law), and then should apply those policies consistently.   This does not mean that a MCO should never terminate a provider – simply that it usually cannot do so without good reason and fair procedure.