California is one of only a handful of states that prohibit hospitals from directly employing physicians, with limited exceptions, such as for non-profit teaching hospitals. This prohibition is slowly eroding, however.  On June 28, 2010, the California Assembly passed SB 726 (pdf), which would amend California Business and Professions Code §2401 to expand a pilot program authorizing the direct employment of physicians and surgeons by public or private rural hospitals, and hospitals in public health care districts located in areas designated by federal law as a “Health Professional Shortage Area” or “medically underserved.”  The bill would extend the pilot program until January 1, 2018, and allow covered hospitals to employ up to five physicians and surgeons at a time, under certain conditions.  Following are some of the key restrictions that would apply:

• The CEO of the hospital or healthcare district would be required to certify that the hospital had been unsuccessful in recruiting a physician and surgeon for at least 12 continuous months beginning on or after July 1, 2008, the recruitment efforts made, and the reasons for the lack of success, if known.
•  Contracts with physicians or surgeons would be limited to a period not exceeding 10 years.  
• The hospital or healthcare district would not be permitted to actively recruit or employ a physician or surgeon employed by a federally qualified health center, a rural health center, or other community clinic not affiliated with the district or hospital.  
• The total number of physicians and surgeons employed by the district or hospital would be limited to two at any time unless the district or hospital board authorized hiring of no more than three additional physicians and surgeons based on “a showing of clear need in the community following a public hearing duly noticed to all interested parties, including, but not limited to, those involved in the delivery of medical care.” 

The policy reasons for SB 726, as stated in the bill, are:

• Concern that the large number of uninsured and underinsured Californians are causing a number of California communities great difficulty in recruiting and retaining physicians and surgeons.  
• The lack of a viable alternative to the economic security of direct employment when recruiting physicians and surgeons to relocate to many rural and medically underserved communities.  

The bill expressly reaffirms “protection for patients and physicians and surgeons from inappropriate intrusions into the practice of medicine, and further intends that a qualified health care district or qualified rural hospital not interfere with, control, or otherwise direct a physician and surgeon's professional judgment.”  Nevertheless, the California Medical Association (CMA) has opposed the legislation because of concerns about interference by hospitals, as an employer, with the practice of medicine. As an alternative remedy to the physician shortage problem in certain areas, the CMA has proposed loan repayment programs for physicians who relocate to rural and underserved areas. 

SB 726 has been supported by hospital associations and rural hospital and community groups, including the California Hospital Association, Medical Group Management Association, and Association of California Health Care Districts, concerned about the shortage of doctors in rural and low-income areas.

The passage of SB 726 may be the beginning of wider cracks in California’s prohibition of  hospital employment of physicians. If so, it would be part of a national trend toward increased employment of physicians by hospitals, recently noted in a number of medical publications, such as Medscape and Hospital & Health Networks. Hospitals considering direct employment of physicians should carefully consider all of the pros and cons, and the legal issues involved. For example, direct employment of physicians by hospitals may create the potential for unionization of physicians who are employees and therefore arguably covered by the National Labor Relations Act. Hospitals are well-advised to consider these and other aspects of direct physician employment when deciding whether to hire physicians and if so, how to structure the employment  relationship to provide protections to the hospital and avoid unintended consequences.

This entry was written by Greg Keating and George O’Brien.