Conrad v. Medical Bd. of California
48 Cal. App. 4th 1038, 55 Cal. Rptr. 2d 901, 96 Cal. Daily Op. Serv. 6215 (1996)
Rule of Law:
California Health and Safety Code section 32129 does not provide an exception to the corporate practice of medicine doctrine; therefore, hospital districts are prohibited from directly employing physicians and must instead retain them as independent contractors.
Facts:
- Palomar Pomerado Health System (the District) entered into employment agreements with nine physicians, including Dr. Alan J. Conrad.
- These contracts required the physicians to meet specific performance targets, such as 4,600 patient encounters per year.
- The agreements included financial incentives drawn from surplus funds but stipulated that contracts would not be extended if a physician's generated fees fell below their base salary.
- In 1991, the Department of Consumer Affairs initially issued a written opinion stating that Section 32129 allowed hospital districts to employ physicians.
- In 1994, the Department reversed its position, notifying the District that employing physicians was illegal under the Medical Practice Act.
- The Medical Board of California threatened enforcement, asserting the contracts violated the ban on the corporate practice of medicine.
Procedural Posture:
- The District and the physicians filed a lawsuit in the state trial court seeking declaratory relief to validate their employment contracts.
- The parties filed cross-motions for summary judgment, agreeing on the facts and presenting only a question of law.
- The trial court granted summary judgment in favor of the Medical Board, ruling that the districts could not legally employ physicians.
- The District and physicians appealed this ruling to the California Court of Appeal.
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Issue:
Does Health and Safety Code section 32129, which authorizes hospital district boards to contract with physicians, create a statutory exception to the corporate practice of medicine doctrine that allows districts to hire physicians as direct employees?
Opinions:
Majority - Huffman
No, the court held that the statutory language authorizing a district to 'contract with' physicians does not authorize direct employment. The court reasoned that the Legislature uses the specific term 'employ' in other sections of the code (such as for hiring legal counsel or architects) but notably omitted it regarding physicians. Furthermore, the 'Corporate Practice of Medicine' doctrine is a longstanding public policy designed to prevent divided loyalties between a doctor's patient and a corporation's profits. The court found that the District did not fit into existing narrow exceptions for charitable or educational institutions because it serves the general public. Consequently, the phrase 'contract with' must be interpreted as referring to the historic practice of engaging doctors as independent contractors.
Analysis:
This decision reinforces the strength of the 'Corporate Practice of Medicine' doctrine in California, strictly limiting the ability of non-professional entities to exercise control over physicians. By distinguishing between 'contracting with' (independent contractor relationship) and 'employing' (master-servant relationship), the court ensured that medical decisions remain autonomous from corporate profit motives. This ruling forces hospital districts to structure relationships with medical staff as independent contractor agreements rather than direct employment, which impacts tax status, benefits, and the degree of control administrators can exert over clinical productivity.
