Centinela Freeman v. Health Net

Filed 4/2/14 Opinion on rehearing

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

CENTINELA FREEMAN EMERGENCY B238867a

MEDICAL ASSOCIATES et al.,

(Los Angeles County

Plaintiffs and Appellants, Super. Ct. No. BC449056)

v.

HEALTH NET OF CALIFORNIA, INC.,

et al.,

Defendants and Respondents.

APPEAL from a judgment of the Superior Court of Los Angeles County,

John Shepard Wiley, Judge. Reversed and remanded.

Michelman & Robinson, Andrew H. Selesnick and Jason O. Cheuk for Plaintiffs

and Appellants.

California Medical Association, Center for Legal Affairs, Francisco J. Silva,

Long X. Do and Michelle Rubalcava as Amicus Curiae on behalf of Plaintiffs and

Appellants, California Medical Association, California Hospital Association, California

Orthopaedic Association, California Radiological Society and California Society of

Pathologists.

Astrid G. Meghrigian as Amicus Curiae on behalf of Plaintiffs and Appellants

for California Chapter of the American College of Emergency Physicians.

Reed Smith, Margaret M. Grignon, Kurt C. Petersen, Kenneth N. Smersfelt and

Zareh A. Jaltorossian; Crowell & Moring, William A. Helvestine, Ethan P. Schulman

and Damian D. Capozzola; Attorneys for Blue Cross of California dba Anthem Blue

Cross; Jennifer S. Romano, Attorney for Pacificare of California dba Secure Horizons

Health Plan of America; Manatt, Phelps & Phillips, Gregory N. Pimstone,

Joanna S. McCallum and Jeffrey J. Maurer, Attorneys for California Physicians’ Service

dba Blue Shield of California; Gonzalez Saggio & Harlan LLP, Don A. Hernandez and

Jamie L. Lopez, Attorneys for SCAN Health Plan; Gibson, Dunn & Crutcher,

Kirk A. Patrick and Heather L. Richardson, Attorneys for Aetna Health of California;

DLA Piper, William P. Donovan, Jr. and Matthew D. Caplan, Attorneys for Cigna

HealthCare of California, Inc., Defendants and Respondents.

Barger & Wolen, John M. LeBlanc and Sandra I. Weishart as Amicus Curiae on

behalf of Defendants and Respondents, California Association of Health Plans.

_______________________________________

2

The law imposes a duty on emergency room physicians to treat patients

regardless of their ability to pay. When those patients are enrollees in health care

service plans (HMO’s),1 the law imposes an obligation on the HMO’s to reimburse the

physicians for emergency treatment provided to the enrollees, even when the physicians

were not under contract to the HMO’s. HMO’s sometimes delegate their health care

obligations to independent practice associations (IPA’s); HMO’s are statutorily

permitted to delegate to IPA’s their obligation to reimburse emergency physicians. In

this case, the HMO’s delegated responsibility for some of their enrollees to an IPA;2 the

delegation included the duty to reimburse emergency physicians. At some point, the

IPA began experiencing financial problems and, after a number of years, ultimately

ceased operating as a going concern. As the IPA’s financial problems increased, it

failed to reimburse physicians who had provided emergency services to its enrollees.

The unpaid emergency physicians sought payment from the HMO’s, which simply

instructed the physicians to continue presenting their bills to the IPA, even though it

was clear that the IPA would not be able to pay those bills. As they were required to do

by law, the physicians continued to render emergency services to enrollees in the IPA;

and, unfortunately, the IPA continued to fail to provide payment for those services.

1

“Health care service plans are often called HMO’s (health maintenance

organizations).” (Watanabe v. California Physicians’ Service (2008) 169 Cal.App.4th

56, 59, fn. 3.)

2

It is not clear from the limited factual record before us whether, when an HMO

delegates the obligations associated with an enrollee to an IPA, the enrollee is

considered to be an enrollee in the IPA itself. We will, however, refer to such a patient

as an enrollee in both the HMO and the IPA.

3

The physicians brought suit against the HMO’s, alleging a cause of action for,

among other things, negligent delegation. The HMO’s successfully demurred to the

complaint, and the physicians appeal. We hold that where: (1) a physician is obligated

by statute to provide emergency care to a patient who is enrolled in both an HMO and

an IPA with whom the physician has no contractual relationship; (2) the physician

provides emergency care to the patient; (3) the HMO, which has a statutory duty to

reimburse the physician, chose to delegate that duty to an IPA it knew, or had reason to

know, would be unable to fulfill the delegated obligation; and (4) the IPA fails to make

the necessary reimbursement, the resulting loss should be borne by the HMO and not

the physician. In short, we hold that the HMO has a duty not to delegate its obligation

to reimburse emergency physicians to an IPA it knows or has reason to know will be

unable to pay. This duty is a continuing one, and thus will also be breached by an

HMO’s failure to act when it learns, after an initial delegation, that its delegatee is no

longer able to fulfill its obligations. As the physicians have alleged sufficient facts to

reflect the existence of a claim for a negligent delegation by the HMO’s in this case,

and/or a negligent failure to timely reassume a delegated obligation, we will reverse the

judgment and remand the matter for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Parties

As this case was resolved on demurrer, we consider the facts as pleaded by the

emergency physicians and all reasonable inferences arising therefrom. This appellate

matter arises out of two separate, but related, cases. Both cases arose out of the failure

4

of three related IPA’s, known collectively by the parties as “La Vida.”3 La Vida was

alleged to have contracted with a number of HMO’s, known, collectively, as “the

HMO’s” or “the plans.”4

The plaintiffs are two different groups of physicians. In one case, the plaintiffs

are several partnerships of emergency room physicians working at several hospitals.5 In

the other case, the plaintiff is a medical group of radiologists,6 who also allegedly

perform medical services on an emergency basis. None of the plaintiff physician groups

are alleged to have contracted with La Vida or any of the HMO’s.7 As a result, our

reference in this opinion to “plaintiffs” is limited to the physicians who have performed

emergency room medical services and emergency radiological services for enrollees of

the defendant HMO’s and who do not have any contractual relationship with such

3

The precise names of the three La Vida entities are unclear. They were named

as: (1) La Vida Medical Group & IPA, dba La Vida Prairie Medical Group; (2) La Vida

Multispecialty Medical Centers, Inc.; and (3) Prairie Medical Group, Inc. However,

when the first La Vida entity answered the initial complaint, it indicated its actual name

was “La Vida Medical Group, Inc.”

4

The HMO’s are: Blue Cross of California dba Anthem Blue Cross of California,

Health Net of California, Inc., Cigna Healthcare of California, Inc., Aetna Health of

California, Inc., Pacificare of California dba Secure Horizons Health Plan of America,

Care 1st Health Plan, California Physician’s Service dba Blue Shield of California, and

SCAN Health Plan.

5

The emergency room physician plaintiffs are Centinela Freeman Emergency

Medical Associates, Sherman Oaks Emergency Medical Associates, Valley Presbyterian

Emergency Medical Associates, and Westside Emergency Medical Associates.

6

The radiology plaintiff is Centinela Radiology Medical Group.

7

The radiology plaintiff had a prior contract with La Vida, but terminated it

effective April 1, 2005. Its complaint is based on facts occurring after it terminated the

contract.

5

HMO’s or La Vida. Our references to “emergency physicians” refer, in general, to

physicians who provide emergency services to enrollees in HMO’s and IPA’s with

whom the physicians have no contractual relationship.8

2. Law Governing HMO’s and IPA’s

In order to understand plaintiffs’ allegations, a brief review of the law governing

HMO’s and IPA’s is helpful. HMO’s are governed by the Knox-Keene Health Care

Service Plan Act of 1975 (Knox-Keene Act). (Health & Saf. Code, § 1340;

Van de Kamp v. Gumbiner (1990) 221 Cal.App.3d 1260, 1269.) While the Knox-Keene

Act had many goals, two of them identified by the Legislature were: (1) “[h]elping to

ensure the best possible health care for the public at the lowest possible cost by

transferring the financial risk of health care from patients to providers” (Health & Saf.

Code, § 1342, subd. (d)); and (2) “[e]nsuring the financial stability [of HMO’s] by

means of proper regulatory procedures.” (Health & Saf. Code, § 1342, subd. (f).) As to

the former, HMO’s are required to provide basic health care services to their enrollees.

8

In its complaint, the radiology plaintiff alleged that its members provided

services on both an emergency and non-emergency basis, and argued that the HMO’s

were obligated to reimburse them for both types of services. As to the non-emergency

services, the radiology plaintiff alleged that, as its members work in a hospital setting,

they “are powerless to do anything to control their income model or ensure payment of

their claims, lacking the ability to pick and choose which patients to treat. Rather, they

must perform their services for all patients who are at the hospital.” As such, they

argued they were entitled to compensation for their non-emergency services. On

appeal, in which the emergency room and radiology plaintiffs filed consolidated

briefing, it appears that the radiology plaintiff focuses solely on the services its

members provided on an emergency basis. To the extent the radiology plaintiff

continues to pursue its claim for reimbursement of non-emergency services, we reject

the argument. As we shall discuss, the statutory requirements and policy concerns

which define and motivate our result in this case, and to which this opinion is limited,

relate only to compulsory services provided on an emergency basis.

6

(Health & Saf. Code, § 1367, subd. (i).) This requirement includes emergency health

care services. (Health & Saf. Code, § 1345, subd. (b)(6).) As to the latter legislative

goal, HMO’s must prove to the Department of Managed Health Care (Department) that

they are financially sound. (Health & Saf. Code, § 1375.1, subd. (a)(1).)

An HMO may contract with an IPA, which is considered a type of “risk-bearing

organization.” (Health & Saf. Code, § 1375.4, subd. (g)(1).) The IPA is a group of

physicians that contracts with an HMO to provide services for the plan’s enrollees, for

which it receives compensation on a capitated or fixed payment basis. (Ibid.) As

a risk-bearing organization, the IPA is also statutorily responsible for processing and

paying claims made by physicians for services rendered by those physicians that are

covered under the payments made by the plan to the IPA. (Id. at subd. (g)(1)(C).)

As HMO’s which contract with IPA’s are, basically, transferring responsibility

for some or all of their enrollees to the IPA’s, the IPA’s are subject to certain financial

condition requirements. Indeed, in determining whether an HMO is financially sound,

the Department is to consider the “financial soundness of the plan’s arrangements for

health care services” and its agreements with providers. (Health & Saf. Code, § 1375.1,

subds. (b)(1) & (b)(3).) Moreover, the Knox-Keene Act imposes specific requirements

on any contract between an HMO and an IPA, including a contractual provision

requiring the IPA to provide regular financial information to the HMO to “assist the

[HMO] in maintaining the financial viability of its arrangements for the provision of

health care services . . . . ” (Health & Saf. Code, § 1375.4, subd. (a)(1).) The

7

Department has also promulgated regulations requiring the IPA to make direct financial

reports to the Department. (Cal. Code Regs., tit. 28, § 1300.75.4.2.)

There are minimal financial criteria which every IPA must meet on a regular

basis. (Health & Saf. Code, § 1375.4, subd. (b)(1)(A).) Should the IPA fail to meet

those requirements, the IPA and the HMO’s with which it contracts should agree to

a “corrective action plan,” approved by the Department,9 designed to bring the IPA back

into compliance. (Health & Saf. Code, § 1375.4, subd. (b)(4).)

When an HMO’s contract with its IPA requires the IPA to pay claims,

regulations impose certain conditions on the contract. Among other things, the contract

must require the IPA to submit to the plan a quarterly claims payment performance

report 30 days after the close of each quarter, disclosing its compliance status with

relevant statutes. (Cal. Code Regs., tit. 28, § 1300.71, subd. (e)(3)(i).) The IPA’s

quarterly report shall include records of each physician dispute the IPA received, and

the disposition of each dispute. (Id. at subd. (e)(3)(ii).) Finally, the contract shall

include a provision “authorizing the plan to assume responsibility for the processing and

timely reimbursement of provider claims in the event that the [IPA] fails to timely and

accurately reimburse its claims.” (Id. at subd. (e)(6).) The regulation further indicates

that the plan’s “obligation to assume responsibility for the processing and timely

9

Should the plans and the IPA fail to agree on the terms of the corrective action

plan, the Department shall determine them. (Health & Saf. Code, § 1375.4,

subd. (b)(4).)

8

reimbursement of . . . claims may be altered to the extent that the [IPA] has established

an approved corrective action plan . . . . ”10 (Ibid.)

3. Law Governing Emergency Medical Services and

Reimbursement Therefor

Under state and federal law, emergency services and care “shall be provided to

any person requesting the services or care” at any hospital with appropriate facilities

and qualified personnel. (Health & Saf. Code, § 1317, subd. (a); 42 U.S.C.

§ 1395dd(b).) Such services and care are to be provided without regard to the patient’s

“insurance status, economic status [or] ability to pay.” (Health & Saf. Code, § 1317,

subd. (b).) Indeed, the emergency services and care shall be provided without first

questioning the patient as to insurance or ability to pay. (Health & Saf. Code, § 1317,

subd. (d); 42 U.S.C. § 1395dd(h).)

As the Knox-Keene Act requires emergency services and care to be provided

without questioning the patient as to insurance or ability to pay, the Act also requires

that, when emergency services have been provided to plan enrollees, the HMO or its

IPA “shall reimburse” the physicians.11 (Health & Saf. Code, § 1371.4, subd. (b).) That

section also provides that “[a] health care service plan may delegate the responsibilities

10

We note that while the first sentence of this subdivision provides that the contract

between the HMO and its IPA must “authoriz[e]” the plan to assume responsibility

when the IPA fails to timely and accurately reimburse provider claims, the second

sentence refers to an “obligation” to assume that responsibility. In other words, the

regulation does not merely direct the HMO to contractually guarantee that it may

reassume the obligation, it implies that in some circumstances the HMO must do so.

11

The reimbursement is to be “the reasonable and customary value” for the

services provided. (Cal. Code Regs., tit. 28, § 1300.71, subd. (a)(3)(B).)

9

enumerated in this section to the plan’s contracting medical providers.”12 (Health &

Saf. Code, § 1371.4, subd. (e).)

4. Allegations of the Complaints

We now turn to the allegations of the two complaints. Plaintiffs allege that,

pursuant to their statutory duties, they provided services and care on an emergency basis

to La Vida enrollees. Plaintiffs allege that they provided emergency services to La Vida

enrollees in the HMO’s, although plaintiffs were not parties to any provider agreement

with either La Vida or the HMO’s. After plaintiffs provided emergency services to

La Vida enrollees, they sought reimbursement from La Vida.

According to the allegations of the complaints, however, La Vida was unable to

pay. It is unclear at what point La Vida became financially unsound. Plaintiffs allege,

however, that at the time the HMO’s delegated their responsibilities to La Vida and

throughout the duration of those contracts, the HMO’s “knew or should have known of

La Vida’s insolvency based on [1] financial reports submitted periodically by La Vida,

[2] notice directly from La Vida and indirectly from Plaintiffs and other health care

providers, and [3] the inadequate amounts of their own capitation payments to

12

We do note, however, that the regulations provide that “[a] plan’s contract with

a . . . capitated provider shall not relieve the plan of its obligations to comply with”

several enumerated statutes, including Health and Safety Code section 1371.4.

(Cal. Code Regs., tit. 28, § 1300.71, subd. (e)(8).)

10

La Vida.” Nonetheless, the HMO’s “delegated and continued delegating their payment

obligations to La Vida.”13

Plaintiffs allege that “[r]ather than helping to resolve the growing number of

Plaintiffs’ unpaid claims, the [HMO’s] instead advised Plaintiffs to continue submitting

claims directly to La Vida and continued their insufficient capitation payments, despite

lacking any reasonable expectation that Plaintiffs’ claims would be properly reimbursed

and the mountain of evidence to the contrary.” This allegedly continued until

mid-2010, when the HMO’s ultimately terminated their contracts with La Vida.

Thereafter, La Vida went out of business.

As against the HMO’s,14 plaintiffs alleged causes of action for negligence, unfair

competition, quantum meruit, open book account, and services rendered. Both groups

of plaintiffs were represented by the same counsel, and the two complaints were

virtually identical.15 The cases were deemed related.

13

Plaintiffs clearly alleged that the HMO’s knew or should have known of

La Vida’s insolvency at the time of their initial delegation to La Vida. However, the

pleadings are not clear as to when that occurred. Indeed, while the plaintiffs indicate

that, “beginning in 2007 and continuing through each quarter thereafter,” La Vida failed

to meet the Department’s minimal financial criteria, they do not allege whether any act

of delegation occurred after that date. Nor do plaintiffs specifically allege that the

HMO’s knew or should have known of La Vida’s insolvency prior to 2007.

14

Plaintiffs’ complaints also named La Vida as a defendant. La Vida, however, is

not a party to this appeal.

15

One of the HMO’s, SCAN Health Plan, was named in the radiology plaintiff’s

action only.

11

5. The Demurrers

The HMO’s demurred to the complaints, arguing that the delegation of their

statutory obligation to compensate emergency physicians for emergency services was

both statutorily-permitted and absolute. That is, once the plans had permissibly

delegated the obligation to La Vida,16 the emergency physicians had no recourse to the

HMO’s for payments La Vida was unable to make. As to negligence, the plans argued

that no duty arose for them to protect the financial interests of the third-party plaintiffs

under the seminal case of Biakanja v. Irving (1958) 49 Cal.2d 647 (Biakanja).17

16

The HMO’s argued that their delegations to La Vida were, in fact, fully

permitted by the Department, in that, at the time of the delegations, La Vida appeared

on a list of qualified providers posted on the Department’s website. To the extent that

the HMO’s are contending that their delegations to La Vida were necessarily reasonable

because of La Vida’s appearance on this list, the argument is better suited to summary

judgment than demurrer. Preliminarily, plaintiffs’ complaints do not allege the date or

dates of the HMO’s original delegations to La Vida, and the HMO’s demurrers do not

seek judicial notice of any evidence establishing those dates. In any event, the HMO’s

argue that the delegation contracts were entered into “during or before 2007.” The

HMO’s submitted documentation in support of their demurrers which demonstrated that

the Department’s website indicated that, for the second quarter of 2007, La Vida had

failed to meet the Department’s requirement of resolving at least 95% of its claims

within 45 days, and was therefore subject to a CAP. In addition, the Department’s

website showed, for the 2007 fiscal year, that La Vida had failed to meet three of the

Department’s four grading criteria, including the requirement for maintaining positive

working capital. At least with respect to those delegation contracts entered into in 2007,

this raises a question as to how much the HMO’s knew of La Vida’s financial troubles

at the time of the delegations. We are unwilling to state that, as a matter of law, it is

reasonable for an HMO to enter into a delegation contract with an IPA it knows (or

should know) is then currently subject to a CAP for failing to meet the Department’s

grading criteria.

17

Biakanja identified several factors to be considered in determining whether

a duty exists. “The determination whether in a specific case the defendant will be held

liable to a third person not in privity is a matter of policy and involves the balancing of

various factors, among which are the extent to which the transaction was intended to

12

Additionally, the HMO’s argued that, to the extent the complaints sought equitable

relief for unfair competition, the court should abstain from resolving the claim, as it

involved complex issues of economic health care policy better determined by the

Legislature and the Department.

The HMO’s also represented that, from 2007 through 2009, La Vida was subject

to a Department-approved corrective action plan.18 The HMO’s argued that, while

La Vida was subject to the corrective action plan, the HMO’s could not have terminated

their delegation contracts with La Vida, “which is what Plaintiffs claim the [HMO’s]

should have done.”19 As we shall discuss, however, the plaintiffs do not argue that the

affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the

plaintiff suffered injury, the closeness of the connection between the defendant’s

conduct and the injury suffered, the moral blame attached to the defendant’s conduct,

and the policy of preventing future harm. [Citations.]” (Biakanja, supra, 49 Cal.2d at

p. 650.)

18

It does not appear to be seriously disputed that La Vida was subject to

a corrective action plan. However, the fact is not technically before this court. The

HMO’s sought to establish the existence of a corrective action plan by means of

a request for judicial notice of a letter and e-mail from the Department which referenced

the corrective action plan. Plaintiffs opposed the request for judicial notice of these two

documents. The trial court did not rule on the request for judicial notice. On appeal, the

HMO’s have not requested that this court take judicial notice of these documents.

19

This argument is something of an oversimplification. The applicable regulation

provides that if a plan proposes to transfer enrollees away from an IPA “that is

compliant” with a corrective action plan, and if the reassignment is based, on part, on

the IPA’s failure to meet financial requirements, the plan must request Department

approval for the transfer. The Department may disapprove the transfer if it determines

that: (1) the proposed reassignment will likely cause the IPA’s failure within three

months; (2) the IPA “has the financial and administrative capacity to provide timely

access to care through an adequate network of qualified health care providers”; and

(3) the IPA is not denying or delaying basic health care services or continuity of care to

its enrollees. (Cal. Code Regs., tit. 28, § 1300.75.4.5, subd. (a)(6).) Although the

13

plans should have terminated their delegation contracts with La Vida in their entirety;

they alleged only that the plans should have reassumed the responsibility to reimburse

them for emergency services rendered.

In opposition to the demurrer, the plaintiffs again argued that the HMO’s

“delegated their own payment responsibilities to IPA[’]s that the [p]lans knew were

financially insolvent. Despite being informed on an ongoing basis that claims were not

being paid and the IPA[’]s were unlikely to ever pay them, the [HMO’s] continued to

delegate as long as they possibly could.”

6. Ruling, Judgment and Appeal

The trial court sustained the demurrers without leave to amend. The trial court

concluded that the Knox-Keene Act permits delegation, and there is no liability for the

delegator if the delegatee fails to pay. As the delegation was permissible, all causes of

HMO’s sought judicial notice of the fact that La Vida was subject to a corrective action

plan, they did not provide any evidence that La Vida was “compliant” with its

corrective action plan. The HMO’s also did not provide evidence that they had

requested a transfer and the Department denied it; or, in the alternative, that a request

would have been denied because the three criteria above would have been established as

a matter of law. In fact, to the extent there is evidence on these matters, it is to the

contrary. At some point in the process, it appears that the Department was amenable to

the termination of the delegation contracts to La Vida; one HMO apparently terminated

La Vida shortly before the Department ultimately ordered the remaining HMO’s to do

so. Indeed, the HMO’s conceded the point by implication, stating that “[a]t no time

from 2007 through the first three quarters of 2009” did the Department permit the

Health Plans to terminate their La Vida delegations. But the Health Plans did not

actually terminate La Vida until May or June of 2010, leaving some three quarters of

a year in which they could have terminated La Vida, but did not. Moreover, given that

the regulations provide that corrective action plans are generally to be completed within

one year (Cal. Code Regs., tit. 28, § 1300.75.4.8, subd. (a)(5)), the plans’ assertion that

La Vida was subject to a corrective action plan from 2007 through 2009 strongly

suggests that La Vida may not have been “compliant” with its plan.

14

action based on La Vida’s failure to pay (unfair competition, quantum meruit, open

book account, and services rendered) fail. As to the negligence cause of action, the

court concluded that Biakanja bars relief. Specifically, the trial court concluded that

there can be no cause of action for negligence unless the alleged negligent act was

intended to harm the plaintiff specifically, as opposed to a class to which the plaintiff

happens to belong. Here, the trial court found no intent to harm plaintiffs specifically.

The court found that this fact alone required sustaining the demurrer, regardless of the

remaining Biakanja factors, although it noted that the other factors weighed against

recognizing a duty. In the course of its discussion, the court noted that the plaintiffs

“have not alleged any facts to suggest the insolvency of [La Vida] was foreseeable to

the health plans at the time the health plans delegated their payment obligations to

[La Vida].”20

Judgment was entered in favor of the HMO’s. The plaintiffs filed timely notices

of appeal. We consolidated the cases on appeal.21

20

As noted above (see footnote 13, ante), this is correct. However, plaintiffs did

allege that the HMO’s knew or should have known of La Vida’s financial problems at

the time of the initial delegation. Given the procedural posture of the case, if the trial

court had concluded this fact was important to its reasoning and rationale, we assume

leave to amend would have been granted.

21

Amicus curiae briefs have been filed by the California Chapter of the American

College of Emergency Physicians, California Medical Association, California Hospital

Association, California Orthopaedic Association, California Radiological Society, and

California Society of Pathologists, in support of plaintiffs; and California Association of

Health Plans and California Association of Physician Groups in support of the HMO’s.

15

ISSUES ON APPEAL

The main issue on appeal is whether a cause of action exists, on behalf of

emergency physicians, against HMO’s, for the negligent delegation of the obligation to

reimburse the emergency physicians, when the HMO’s have delegated their duty to an

IPA they knew or had reason to know was financially unable to satisfy it. After

resolving this question in the affirmative, we then address the related question of

whether the cause of action necessarily includes a negligent failure to reassume the

reimbursement obligation, once the HMO’s know or should know that the delegatee is

unable to execute the duty delegated to it. We answer this question in the affirmative as

well. We reject the HMO’s argument that we should abstain from resolving this

dispute.

DISCUSSION

1. Standard of Review

“In reviewing the sufficiency of a complaint against a general demurrer, we are

guided by long-settled rules. ‘We treat the demurrer as admitting all material facts

properly pleaded, but not contentions, deductions or conclusions of fact or law.

[Citation.] We also consider matters which may be judicially noticed.’ [Citation.]

Further, we give the complaint a reasonable interpretation, reading it as a whole and its

parts in their context. [Citation.] When a demurrer is sustained, we determine whether

the complaint states facts sufficient to constitute a cause of action. [Citation.] And

when it is sustained without leave to amend, we decide whether there is a reasonable

possibility that the defect can be cured by amendment: if it can be, the trial court has

16

abused its discretion and we reverse; if not, there has been no abuse of discretion and

we affirm. [Citations.] The burden of proving such reasonable possibility is squarely

on the plaintiff. [Citation.]” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

2. Existing Authority

As noted above, the main issue on appeal is whether a cause of action exists for

negligent delegation of an HMO’s statutory obligation to reimburse emergency

physicians. In addressing this question, we are not writing on a clean slate. Two courts

have addressed the question directly, reaching contradictory results. (Compare

California Emergency Physicians Medical Group v. PacifiCare of California (2003)

111 Cal.App.4th 1127, 1135-1136 (CEP) [finding no negligence cause of action] with

Ochs v. PacifiCare of California (2004) 115 Cal.App.4th 782, 796-797 (Ochs) [finding

such a cause of action exists].) We will ultimately conclude that Ochs is the better

reasoned of the two opinions, and follow it. As these cases are best understood in

context of the development of the law, we must begin with two cases predating CEP

and Ochs.

a. Cases Involving Physicians Who Had Contracted

With the IPA

Unfortunately, La Vida is not the first IPA to fail, leaving physicians unpaid.

The first cases involving physicians seeking compensation from an HMO for services

rendered to enrollees in IPA’s for which the IPA’s were unable to pay, involved

physicians who had directly contracted with the IPA’s. The first such case was

California Medical Assn. v. Aetna U.S. Healthcare of California, Inc. (2001)

17

94 Cal.App.4th 151 (California Medical). In that case, the plaintiff physicians22 argued

that, in order to have access to the majority of insured patients in the state, it was

necessary to participate in HMO’s. In order to participate in the defendant HMO, the

plaintiff physicians were required to enter into agreements with the IPA’s.23 When the

IPA’s were unable to pay “due to their actual or imminent insolvency,” the physicians

brought suit against the HMO.

The physicians relied on Health and Safety Code section 1371, which provides

that a plan must reimburse a physician’s claim within a certain number of days. The

statute further provides, “The obligation of the plan to comply with this section shall not

be deemed to be waived when the plan requires its medical groups, independent practice

associations, or other contracting entities to pay claims for covered services.” The

physicians argued that this provision required the HMO to make timely payment when

its IPA’s failed to do so. In California Medical, supra, 94 Cal.App.4th at p. 161,

Division One of the Fourth Appellate District disagreed. Construing the non-waiver

clause in the context of the full statute, the entire Knox-Keene Act, and legislative

history, the court concluded that the clause simply provided that the procedural

requirements of Health and Safety Code section 1371 apply to an HMO’s delegatees as

well as the HMO itself. (California Medical, supra, 94 Cal.App.4th at pp. 161-163.)

22

The named plaintiff was actually the physicians’ assignee.

23

Indeed, in their agreements with the IPA’s, the plaintiff physicians agreed to

look solely to the IPA’s for payment. (California Medical, supra, 94 Cal.App.4th at

p. 157, fn. 7.)

18

A similar factual situation arose later that same year, before Division Two of the

Fourth Appellate District, in Desert Healthcare Dist. v. PacifiCare FHP, Inc. (2001)

94 Cal.App.4th 781 (Desert Healthcare). In Desert Healthcare, the plaintiff physician

group had directly contracted with the IPA, and the group was unpaid when the IPA

failed. (Id. at p. 785.) The physician group brought suit against the HMO, alleging

a cause of action for negligence. Specifically, it sought to pursue a cause of action for:

(1) negligent failure to ensure the financial stability of the IPA; (2) negligence per se for

violating Health and Safety Code section 1371; and (3) negligence arising from the

special relationship between the plaintiff physician group and the HMO. (Desert

Healthcare, supra, 94 Cal.App.4th at p. 785.) The court concluded there was no duty to

ensure the financial stability of the IPA. Specifically, the Desert Healthcare court

looked to the Biakanja factors. The first such factor is “the extent to which the

transaction was intended to affect the plaintiff.” (Biakanja, supra, 49 Cal.2d at p. 650.)

The Desert Healthcare court found that this factor could not be met, stating, “The

conduct alleged to have been negligent must have been intended to affect that particular

plaintiff, rather than just a class of persons to whom the plaintiff happens to belong.

[Citation.] The failure to show a particularized effect precludes a finding of a special

relationship giving rise to a duty, because, to the extent the plaintiff was merely affected

in the same way as other members of the plaintiff class, the case is nothing more than

a traditional products liability or negligence case in which economic damages are not

available. [Citation.] The most that [plaintiffs] can show is that [the HMO]’s

transaction with [the IPA] was intended to affect any hospitals that were unfortunate

19

enough to contract with [the IPA], thus precluding a finding of duty.” (Desert

Healthcare, supra, 94 Cal.App.4th at p. 792.)

The Desert Healthcare court went on to state that, even if other Biakanja factors

weighed in favor of finding a duty, it would not find a duty due to policy reasons.

(Id. at p. 792.) The court explained that recognition of a duty to manage one’s business

affairs so as to prevent purely economic loss to third parties in their financial

transactions is the exception, not the rule, in negligence law. In particular, the court

stated, when plaintiffs are sophisticated, knowledgeable entities, they should be

encouraged to rely on their own prudence, diligence, and contracting power, as well as

other informational tools. (Id. at pp. 792-793.) As plaintiff was “a large corporate

entity well versed in the intricacies of the health care financing system,” it was “more

than capable of protecting itself through diligence and prudence, and by exercising its

own considerable contracting power.” (Id. at p. 793.)

Before addressing CEP and Ochs, we emphasize the fundamental distinction

between the two cases just discussed and the instant case. In California Medical and

Desert Healthcare, the plaintiffs had voluntarily contracted with the IPA; in the instant

case, the plaintiffs had not contracted with La Vida or any of the HMO’s. While the

plaintiff in Desert Healthcare could have “protect[ed] itself through diligence and

prudence, and by exercising its own considerable contracting power,” the plaintiffs in

the instant case were required by statute to provide emergency services and care to

La Vida enrollees, and had no means to protect themselves from La Vida’s insolvency.

As we shall discuss, we find this distinction critical.

20

b. CEP Extends Desert HealthCare to Emergency Physicians

In 2003, Division One of the Fourth Appellate District was presented with the

case of emergency physicians who had not contracted with the IPA. When the IPA

(which ultimately went bankrupt) failed to reimburse the plaintiff emergency physician

group for emergency services provided to its enrollees, the emergency physician group

sued the HMO which had delegated responsibility for the enrollees to the IPA. (CEP,

supra, 111 Cal.App.4th at pp. 1129-1130.)

This case concerned not section 1371 of the Health and Safety Code, but rather

section 1371.4, which specifically provides that the plans must reimburse the

emergency physicians. As discussed above, that section also provides that “[a] health

care service plan may delegate the responsibilities enumerated in this section to the

plan’s contracting medical providers.” 24 (Health & Saf. Code, § 1371.4, subd. (e).)

The CEP court concluded, based on its reading of the statutory language and legislative

history, that the Legislature’s use of the word “delegate” was intended to mean the duty

24

Health and Safety Code section 1371.4 , subdivision (b) provides that “[a] health

care service plan, or its contracting medical providers, shall reimburse providers for

emergency services and care provided to its enrollees . . . . ” (Italics added.) At the

time of the CEP case, the italicized language was not part of the statute. That language

was added by a 2008 amendment. (Stats. 2008, ch. 603, § 4.) The legislative history of

the statute gives no explanation for the amendment, and the parties in the instant appeal

attach no significance to it. We assume that the amendment was a clarification of

existing law, as the language added to subdivision (b) follows from the delegation

allowed pursuant to subdivision (e). In their petition for rehearing, the HMO’s seek an

opportunity to brief the legislative history of this amendment. As our decision is in no

way “based upon” the legislative history, no rehearing is necessary on that ground.

(Gov. Code, § 68081.) In any event, interpretation of Health and Safety Code

section 1371.4 has always been at issue in this case. If the HMO’s had believed the

legislative history of the amendment was relevant, they could have discussed it in their

initial appellate briefing.

21

was fully delegable and that, if a health plan delegated its statutory duty, it retained no

liability. (CEP, supra, 111 Cal.App.4th at pp. 1132-1133.)

The CEP plaintiff had alleged a cause of action for negligence, based on an

alleged duty to use due care so as not to cause harm to plaintiff’s financial interests.

The court found there was no such duty, relying on the Desert Healthcare court’s

analysis of the Biakanja factors. (CEP, supra, 111 Cal.App.4th at pp. 1135-1136.) The

court acknowledged that the factual scenario was somewhat different as the CEP

plaintiff had not contracted with the intermediary, but nonetheless concluded that Desert

Healthcare’s analysis of the first Biakanja factor applied. The CEP court stated that,

“the most [plaintiff] can show is that [the HMO’s] contract with [the IPA] was intended

to affect any emergency services provider whom [the IPA] had an obligation to pay.”

(Id. at p. 1136.) This was insufficient, in the view of the CEP court, to establish that the

HMO’s conduct was directed toward the plaintiff. (Ibid.) Moreover, the CEP court

stated that, even if the other Biakanja factors applied, it would not find a duty existed,

because such a duty would be contrary to the absolute right to delegate found in Health

and Safety Code section 1371.4, subdivision (e).25 (CEP, supra, 111 Cal.App.4th at

p. 1136.)

25

In the HMO’s brief on appeal, they argued that the CEP court concluded Health

and Safety Code section 1371.4, subdivision (e) provided a safe harbor against any

negligence claim, however, regardless of Biakanja. The CEP court’s analysis of the

negligence cause of action consists of a full page of discussion of the Biakanja factors

(CEP, supra, 111 Cal.App.4th at pp. 1135-1136), followed by a short paragraph stating

only, “Even assuming [plaintiffs] could satisfy some of the Biakanja factors, we would

still find no duty as a matter of policy. The Legislature has approved risk-sharing plans,

such as capitation, and has allowed health care service plans to delegate payment

22

c. Ochs Takes a Different Position

In 2004, Division Six of the Second Appellate District26 addressed the same

factual scenario as in CEP,27 but reached the opposite result. The plaintiff emergency

physician had not contracted with the IPA or the defendant HMO. When the IPA failed,

the plaintiff emergency physician sought compensation from the HMO, alleging causes

of action for, among other things, a statutory violation of Health and Safety Code

section 1371.4, and negligence.

On appeal from an order sustaining the HMO’s demurrer without leave to

amend, the Ochs court agreed with CEP that the language and legislative history of

Health and Safety Code section 1371.4 compel the conclusion that the duty to pay

emergency physicians is delegable, and that the delegating HMO retains no liability.

responsibility to contracting medical providers. Finding a duty in this situation is

directly contrary to section 1371.4, subdivision (e) of the Knox-Keene Act.” (Id. at

p. 1136.) It is not at all clear that the CEP court was concluding that Health and Safety

Code section 1371.4 barred a negligence action as a matter of law, as opposed to simply

concluding that policy reasons would outweigh any Biakanja factors that would favor

finding a duty.

26

We identify the courts from which these cases originated only for the purpose of

noting that, at the time the Ochs court addressed the issue, the three existing opinions

had originated from the same appellate district. Thus, there was hardly a statewide

unanimity of opinion on the issue.

27

Indeed, it appears that both cases arose out of the failure of the same IPA, Family

Health Network. (CEP, supra, 111 Cal.App.4th at p. 1130; Ochs, supra,

115 Cal.App.4th at pp. 787-788.)

23

Thus, no cause of action existed against the HMO for violating Health and Safety Code

section 1371.4.28 (Ochs, supra, 115 Cal.App.4th at pp. 789-793.)

On appeal, the emergency physician argued that he could allege that the HMO

knew or should have known that the IPA was insolvent, at the time it contracted with

the IPA. The court concluded that the plaintiff should be granted leave to amend to

plead a negligence cause of action based on this fact. (Ochs, supra, 115 Cal.App.4th at

pp. 796-797.) The court enumerated the Biakanja factors and concluded that they could

support the existence of a duty. (Id. at p. 797.) The court specifically disagreed with

CEP and Desert Healthcare to the extent that those cases held that, when economic

damages are sought, the conduct must have been intended to affect the specific plaintiff,

rather than persons of the class to which the plaintiff belongs. Instead, the Ochs court

stated, “it is well established that liability for negligent conduct may be imposed when

28

The court added, in language with which we agree, the following commentary:

“Ochs argues that it is unjust to allow PacifiCare to delegate its statutory duty to pay for

noncontract emergency services when physicians are required by law to provide such

services regardless of a patient’s inability to pay. We have no quarrel with the

proposition that emergency care providers should be paid for the important services they

provide, and, were we writing on a clean slate, we might well conclude that it is

preferable for the health care service plan to bear the ultimate cost when an intermediary

that it has selected becomes insolvent. But we are not at liberty to rewrite the relevant

statutes or review their legislative history to comport with a generalized sense of

fairness. The Knox-Keene Act is a comprehensive scheme for regulating health care

plans, and its provisions are the product of a variety of interests and concerns. The

Legislature addressed some of the concerns of emergency room physicians when it

enacted section 1371.4 in 1994 and required health care service plans to pay for

emergency services by noncontracting physicians. But this new right was tempered by

a provision that specifically allowed plans to delegate their payment responsibilities,

thus allowing them to better manage their costs and pass the savings along to their

insureds. Whatever the flaws of the current system, the solution must come from the

Legislature and not the courts.” (Ochs, supra, 115 Cal.App.4th at p. 793.)

24

a duty is owed to the plaintiff or to a class of which the plaintiff is a member.

[Citations.]” (Id. at p. 797.)

d. Balance Billing is Prohibited

In Ochs, the plaintiff had also sought a declaration that if the IPA and the HMO

did not pay the plaintiff emergency physician’s bills, the plaintiff could bill the patients

directly. The Ochs court rejected the argument based on misjoinder of defendants.

(Ochs, supra, 115 Cal.App.4th at p. 796.) However, it noted, in dicta, that it appeared

that the emergency physician may, in fact, have a remedy against the individual

patients, who would then have a remedy against the HMO with whom they had

contracted. (Ibid.)

This analysis was based on Health and Safety Code section 1379, a statute which

prohibits a physician which has contracted with a plan from billing the patient for any

sums owed by the plan (a practice known as “balance billing.”) As the statute clearly

applies to physicians who have contracted with HMO’s, the Ochs court took the

position that emergency physicians who have not contracted with HMO’s are not barred

from balance billing. (Ochs, supra, 115 Cal.App.4th at p. 796.) Five years after Ochs,

however, the Supreme Court rejected this interpretation, concluding that emergency

physicians may not balance bill patients, even if they had not contracted with the plans.

(Prospect Medical Group, Inc. v. Northridge Emergency Medical Group (2009)

45 Cal.4th 497 (Prospect).)

Prospect is important to our analysis for both what it did decide and what it did

not decide. In Prospect, there was no issue of an insolvent IPA; indeed, for the

25

purposes of its discussion, the Supreme Court used the term “HMO’s” to refer to both

the HMO’s and their delegatee organizations. In that context, the court concluded that

balance billing was inappropriate. Interpreting the Knox-Keene Act as a whole, the

court concluded “that billing disputes over emergency medical care must be resolved

solely between the emergency room doctors, who are entitled to a reasonable payment

for their services, and the HMO, which is obligated to make that payment. A patient

who is a member of an HMO may not be injected into the dispute. Emergency room

doctors may not bill the patient for the disputed amount.” (Prospect, supra, 45 Cal.4th

at p. 502.) The court stated in a footnote, however, that its holding was limited to the

situation before it, “billing the patient for emergency services when the doctors have

recourse against the patient’s HMO. We express no opinion regarding the situation

when no such recourse is available; for example, if the HMO is unable to pay or

disputes coverage.” (Id. at p. 507, fn. 5.)

As Prospect was not concerned with an insolvent IPA, and, in fact, considered

IPA’s and HMO’s the same for the purposes of its analysis, it did not expressly resolve

the issue of whether an emergency physician can balance bill a patient when the IPA is

insolvent and the HMO refuses to pay. However, language in the opinion suggests that

the court would not permit balance billing in that situation either. Specifically, the court

rejected the Ochs dicta suggesting balance billing may be possible, explaining that

Health and Safety Code “[s]ection 1371.4, subdivision (b), does not say that patients

must pay the emergency room doctors and then turn to their HMO’s for reimbursement.

Rather it states that the ‘health care service plan . . . shall reimburse providers for

26

emergency services and care provided to its enrollees . . . . ’ This language does not

authorize the roundabout route of the doctor collecting from the patient, who must then

collect from the HMO. Rather, it mandates that the HMO pay the doctor directly. It

does not involve the patient in the payment process at all.” (Id. at p. 509.) This strongly

suggests that the Supreme Court would not permit an emergency physician, unpaid by

an insolvent IPA, to balance bill the patient, who would then have a remedy against the

HMO. “[U]nder the Knox-Keene Act, HMO members are not liable to pay for

emergency care.” (Id. at p. 510.) Emergency physicians should instead resolve their

disputes directly with the HMO’s.29 (Id. at p. 508.)

3. A Cause of Action Exists for Negligent Delegation

Given the agreement of CEP and Ochs on the issue, it is too late in the day to

argue that emergency physicians have a direct cause of action against HMO’s under

Health and Safety Code section 1371.4 when the IPA’s fail to reimburse the emergency

physicians for services provided to their enrollees. Indeed, plaintiffs in this case do not

expressly allege such a cause of action. Instead, they argue, pursuant to Ochs, that they

have a cause of action against the defendant HMO’s for negligent delegation of the

Health and Safety Code section 1371.4 duty. In other words, it is clear that the HMO’s

have a duty under Health and Safety Code section 1371.4, subdivision (b) to reimburse

29

Prior to the Prospect decision, Bell v. Blue Cross of California (2005)

131 Cal.App.4th 211 held that an emergency physician may directly sue a plan for

reasonable reimbursement, even when the physician had not contracted with the plan.

(Id. at p. 220.) In Prospect, the Supreme Court stated, “Because emergency room

doctors prevailed in Bell [citation] and won the right to resolve their disputes directly

with HMO’s, no reason exists to permit balance billing.” (Prospect, supra, 45 Cal.4th

at p. 508.)

27

plaintiffs for emergency services provided to the HMO’s enrollees. It is also clear that

under Health and Safety Code section 1371.4, subdivision (e), the HMO’s may delegate

that duty to their “contracting medical providers” (e.g., IPA’s). The critical question

raised by this case is (1) whether HMO’s may delegate their reimbursement duty to any

IPA, regardless of the financial stability of that IPA, or (2) whether the HMO’s have

a duty not to delegate their Health and Safety Code section 1371.4 reimbursement

obligation to an IPA that the HMO’s know, or have reason to know, is financially

unable to meet that duty.

The parties agree that the resolution of this question is governed by Biakanja and

its progeny. The law imposes no liability for alleged wrongdoing unless the defendant

owed a duty to the plaintiff to avoid the asserted wrongdoing. “Whether such a duty

existed is a question of law and depends on a judicial weighing of the policy

considerations for and against the imposition of liability under the circumstances.”

(Goodman v. Kennedy (1976) 18 Cal.3d 335, 342.) “Privity of contract is no longer

necessary to recognition of a duty in the business context and public policy may dictate

the existence of a duty to third parties.” (Quelimane Co. v. Stewart Title Guaranty Co.

(1998) 19 Cal.4th 26, 58.) “Even when only injury to prospective economic advantage

is claimed, recovery is not foreclosed. Where a special relationship exists between the

parties, a plaintiff may recover for loss of expected economic advantage through the

negligent performance of a contract although the parties were not in contractual

privity.” (J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 804.)

28

The factors to be considered in determining the existence of a duty, as set forth in

Biakanja, include: (1) the extent to which the transaction was intended to affect the

plaintiffs; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that

the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s

conduct and the injury suffered; (5) the moral blame attached to the defendant’s

conduct; and (6) the policy of preventing future harm. (Biakanja, supra, 49 Cal.2d at

p. 650.) Later cases have considered additional factors, including whether extending

liability would impose an undue burden on the defendant’s profession. (Giacometti v.

Aulla, LLC (2010) 187 Cal.App.4th 1133, 1137.) We consider each of these factors.

a. The Transaction Was Intended to Affect the Plaintiffs

First, we consider the extent to which the transaction was intended to affect the

plaintiffs. The HMO’s had a statutory duty of reimbursement to emergency physicians;

by means of the transaction in question, they delegated that duty, allegedly to an IPA

they knew or had reason to know was unable to fulfill that duty. The delegation

transaction was necessarily intended to have an effect on the plaintiffs; it had a direct

impact on whether they would receive compensation for the emergency services that

they provided to the HMO’s enrollees.

In this case, the trial court, in reliance on Desert Healthcare, concluded that the

transaction was not intended to affect the plaintiffs, as the factor could only be found

true if the conduct was intended to affect the particular plaintiff physicians, rather than

a class of persons to which the plaintiffs happen to belong. The law is not so absolute.

Our Supreme Court “has repeatedly eschewed overly rigid common law formulations of

29

duty in favor of allowing compensation for foreseeable injuries caused by a defendant’s

want of ordinary care.” (J’Aire Corp. v. Gregory, supra, 24 Cal.3d at p. 805.) Liability

may be imposed when there is a duty of care owed by the defendant to the plaintiff or to

a class of which the plaintiff is a member. (Ott v. Alfa-Laval Agri, Inc. (1995)

31 Cal.App.4th 1439.) Such a duty can arise from statute or contract, the nature of the

defendant’s activity, the relationship between the parties, or even the interdependent

nature of human society. (Id. at p. 1449; J’Aire Corp. v. Gregory, supra, 24 Cal.3d at

p. 803.)

We agree that the standard formulation, requiring a duty to be owed to the

plaintiff specifically, rather than a class to which the plaintiff belongs, is sufficient in

the usual case, in which the plaintiff and defendant are strangers to one another.

(See e.g., Ott v. Alfa-Laval Agri, Inc., supra, 31 Cal.App.4th at pp. 1455-1456 [plaintiffs

simply purchased defendant’s product]; cf. Quelimane Co. v. Stewart Title Guaranty

Co., supra, 19 Cal.4th at p. 58 [plaintiffs wanted defendants to sell title insurance for

properties plaintiffs sought to sell].) This matter, however, is not the usual case. The

defendant HMO’s owed a statutory duty to emergency physicians; it is their allegedly

negligent delegation of that duty which is at issue. The existence of the HMO’s

statutory duty owed to the entire class of emergency physicians who provide emergency

services and care to the plans’ enrollees justifies the conclusion that the plans’ conduct

was intended to affect the plaintiffs, even though they were part of a class.

30

b. The Harm to Plaintiffs Was Foreseeable

The second factor is the foreseeability of harm to the plaintiffs. It is alleged that

the defendant HMO’s knew or should have known of La Vida’s financial difficulties at

the time of the initial delegations. Indeed, the plaintiffs further allege that the HMO’s

“knew or should have known that their neglect of La Vida’s financial shortcomings

would result in the failure of Plaintiffs to receive reasonable reimbursement for their

covered services.” If proven, this would establish the second factor.30

c. It Is Certain That Plaintiffs Were Injured

The third Biakanja factor is the degree of certainty that the plaintiff suffered

injury. Had the HMO’s delegated their Health and Safety Code section 1371.4

reimbursement duty to a financially stable IPA, or had not delegated it at all, the

plaintiffs would have been reimbursed in a reasonable amount for the emergency

services they provided defendants’ enrollees. Thus, the plaintiffs were injured by

defendants’ allegedly negligent delegation.

30

In their petition for rehearing, the HMO’s argue, for the first time, that the harm

to plaintiffs was not foreseeable at the time the HMO’s entered into the delegation

contracts, as the delegation contracts pre-dated the Supreme Court’s Prospect opinion

prohibiting balance billing. In other words, the HMO’s argue that, at the time of the

delegation, it was believed that emergency physicians could balance bill their patients if

the IPA did not pay, so it was not foreseeable that the emergency physicians would be

harmed by the delegation, even if they knew of La Vida’s financial shortcomings. We

disagree. The HMO’s had a statutory obligation to reasonably reimburse the emergency

physicians; it is alleged that they delegated that obligation to an IPA which they knew

(or should have known) was unable to satisfy it. If true, the financial harm to the

emergency physicians was foreseeable, even if it was generally believed that the

emergency physicians could seek reimbursement from the patients, whose own financial

situation was wholly unknown.

31

d. There Is a Close Connection Between the Allegedly

Negligent Delegation and the Harm Suffered

The fourth factor is the closeness of the connection between the defendants’

conduct and the injury suffered. While it can be said that La Vida’s failure was the

direct cause of the plaintiffs not being reimbursed, La Vida’s failure would have had no

impact on them (as they had not contracted with La Vida), had defendant HMO’s not

delegated their statutory reimbursement duty to La Vida. The plaintiffs allege that the

HMO’s knew or had reason to know of La Vida’s financial difficulties at the time of the

delegation; thus, there is a close connection between the delegation of the statutory

reimbursement duty to a financially troubled IPA and the result that the plaintiffs were

not reimbursed.

e. Substantial Moral Blame Attaches to Defendants’ Alleged Conduct

The fifth factor is the moral blame attaching to the defendants’ conduct. Here,

we necessarily consider and emphasize the unique position in which the plaintiffs find

themselves. They are required by law to provide emergency services to all patients in

need, regardless of ability to pay. Emergency physicians cannot pick and choose their

patients, but must simply treat all emergency patients. The law then imposes a duty on

the HMO’s – those entities which had contracted with the patients and agreed, for

receipt of a premium, to provide them with basic medical care, including emergency

services – to reimburse the emergency physicians for the emergency services provided

to their enrollees. In other words, the HMO’s had contracted with the patients to

provide them, for a price, with health care services, including emergency services, with

32

the understanding that those services may be provided by physicians whom the HMO’s

would be required to reimburse even though there was no contractual relationship

between the HMO’s and the emergency physicians involved.

There is no bar to a plan transferring a portion of its received premiums for an

enrollee to an IPA in the form of capitation payments, and transferring responsibility for

that enrollee’s medical care to the IPA. But when the plan, as was alleged in this case,

transfers its obligations to an IPA it knows, or has reason to know, will be financially

unable to fulfill its obligations, the result is that the emergency physicians will be forced

(by statute) to continue providing emergency services to the IPA’s enrollees, with no

possibility of receiving their (statutorily-mandated) reimbursement.

We cannot sanction such a result. “ ‘The prompt and appropriate reimbursement

of emergency providers ensures the continued financial viability of California’s health

care delivery system.’ ” (Bell v. Blue Cross of California, supra, 131 Cal.App.4th at

p. 218.) The burden of providing services to the poor cannot be accomplished at the

expense of one particular group of people. (Cunningham v. Superior Court (1986)

177 Cal.App.3d 336, 348 [court’s attempt to compel an attorney to work pro bono

denies attorney equal protection of the law].) Forcing emergency physicians to work for

free would be unconscionable. (Bell v. Blue Cross of California, supra,

131 Cal.App.4th at p. 220.)

HMO’s which would shirk their statutory obligation to reimburse emergency

physicians by delegating that obligation to an IPA they know or have reason to know is

33

financially unable to meet that obligation would, in effect, have the emergency

physicians treat their enrollees for free. This is morally blameworthy.31

f. Future Harm Would Be Prevented by Imposing Liability

for Negligent Delegation

The sixth factor is the policy of preventing future harm. Imposing a duty on

HMO’s to not delegate their reimbursement duty to IPA’s they know, or have reason to

know, are financially unsound would protect emergency physicians from future

economic harm they cannot otherwise avoid.

g. No Undue Burden Would Be Imposed on HMO’s

In addition to the original six Biakanja factors, we also consider policy issues,

such as whether extending liability would impose an undue burden on the defendants’

profession. We do not believe that imposing liability for negligent delegation would

impose an undue burden on HMO’s. Initially, an HMO liable for negligent delegation

would only be forced to reimburse the physicians the amount for which the HMO would

have been statutorily-liable to pay had the HMO made no delegation of that obligation.

In other words, the obligation to reimburse emergency physicians was originally

imposed on the HMO; we are simply holding that if the HMO intends to delegate that

31

As already noted (see fn. 30, ante), the HMO’s have emphasized the fact that the

initial delegations to the IPA’s predated the Supreme Court’s Prospect decision. They

argue that, it was therefore understood, at the time, that the emergency physicians would

not be working without compensation, as they could balance bill their patients. While it

is possible that, at the time of the initial delegations, the HMO’s believed that the

emergency physicians could seek reimbursement by the means of balance billing their

patients, we fail to see how passing the costs of emergency treatment from the HMO’s

(who have a statutory duty to pay for it) to the HMO’s own enrollees, is any less

blameworthy.

34

responsibility to another, it must delegate it to an entity which it reasonably believes can

meet it. If the HMO cannot delegate non-negligently, it should not delegate at all. If it

does, it should do so at its own risk and not place that burden on the non-contracting

emergency physicians who are legally unable to protect themselves.32

Moreover, as a practical matter, liability for negligent delegation will not impose

additional burdens on HMO’s to research the financial status of their delegatee IPA’s.

As we have discussed, HMO’s are already required to prove their own financial

soundness to the Department, and part of the Department’s inquiry in that regard

involves a review of the HMO’s contracts with its IPA’s. (Health & Saf. Code,

§ 1375.1, subds. (b)(1) & (b)(3).) Thus, an HMO should already be well aware of the

financial soundness of the IPA’s with which it contracts, and should avoid contracting

with IPA’s whose financial condition is questionable.

h. Conclusion on Negligent Delegation

As each of the Biakanja factors weighs in favor of finding a cause of action for

negligent delegation, and policy considerations weigh in favor of such a result as well,

we agree with the Ochs court and conclude that a cause of action for negligent

delegation exists in favor of emergency physicians who allege an HMO, with whom

32

The HMO’s argue that, if they are required to pay for the emergency services

when they have delegated that responsibility to the IPA, they will be paying for the

services twice – once by means of the capitated payments to the IPA, and again by

paying the emergency physicians. But the HMO can avoid such risk by the simple

expedient of not choosing to delegate its obligations to an IPA it knows or has reason to

know is unable to meet those obligations. Put another way, the HMO can, by its

actions, avoid such a loss whereas the emergency physicians cannot.

35

they have no contractual relationship, negligently delegated its Health and Safety Code

section 1371.4 duty to an IPA it knew or had reason to know was financially unsound.

Our conclusion is not barred by Health and Safety Code section 1371.4,

subdivision (e).33 We agree that HMO’s are permitted to delegate their reimbursement

duty to IPA’s, and an emergency physician, as a general rule, has no recourse against

the HMO if the IPA fails to meet its obligation. However, when the HMO is alleged to

have negligently delegated the obligation, the emergency physician has a cause of

action.34

33

The HMO’s argue that Health and Safety Code section 1371.4 provides a safe

harbor for delegation, and any delegation, including a negligent one, is not actionable.

We disagree. Health and Safety Code section 1371.4, subdivision (e) is not an

immunity statute; it does not expressly provide that no causes of action may be brought

for an improper delegation. (Cf. Gentry v. eBay, Inc. (2002) 99 Cal.App.4th 816, 828,

on which the HMO’s rely, which considered a federal statute expressly providing that

no liability may be imposed under any inconsistent state law.) Health and Safety Code

section 1371.4 simply provides that an HMO may delegate the responsibilities; it does

not provide that there is immunity for an act of delegation in violation of a duty owed to

third parties. As explained in Ochs, Health and Safety Code section 1371.4 provides

immunity unless a duty is otherwise established. (Ochs, supra, 115 Cal.App.4th at

p. 794.) The HMO’s argument is akin to suggesting that a driver’s license provides the

driver immunity for negligently operating a vehicle or a handgun permit provides the

gun owner immunity for negligently storing or discharging the firearm. That Health and

Safety Code section 1371.4, subdivision (e) provides the HMO’s with permission to

delegate their statutory duties does not immunize the HMO’s for doing so negligently.

34

The distinction is significant. The Knox-Keene Act provides that “[a] plan, any

entity contracting with a plan, and providers are each responsible for their own acts or

omissions, and are not liable for the acts or omissions of, or the costs of defending,

others. Any provision to the contrary in a contract with providers is void and

unenforceable. Nothing in this section shall preclude a finding of liability on the part of

a plan, any entity contracting with a plan, or a provider, based on the doctrines of

equitable indemnity, comparative negligence, contribution, or other statutory or

common law bases for liability.” (Health & Saf. Code, § 1371.25.) This provision

means that there is no vicarious liability for another entity’s acts or omissions, but,

36

i. The Result Is Different for Non-Emergency Services

We emphasize again that our conclusion applies only to non-contracting

physicians who have provided emergency services, as mandated by statute, to patients

enrolled in the IPA and HMO. The Biakanja factors compel a different result with

respect to non-emergency services. Consider the non-emergency services provided by

the radiology plaintiff. The radiology physicians seeks reimbursement for services

provided on a non-emergency basis, which they were contractually required to provide

by their hospital employer. As already noted, we recognize that the first Biakanja

factor—whether the transaction was intended to affect the plaintiff—is, as a general

rule, not satisfied when the defendant’s conduct was intended to affect a class of

persons to which the plaintiff belongs, rather than the particular plaintiff. However, the

element can be satisfied when the defendant owes a statutory duty to the class in which

the plaintiff is a member, and the alleged negligence relates to the satisfaction (in this

case, the delegation) of that duty. Here, when considering non-emergency radiological

services, the HMO’s have no statutory duty to reimburse the radiology plaintiff for such

services. Thus, the normal formulation of the rule applies, and the radiology physicians

cannot show that the HMO’s delegation of the reimbursement obligation was intended

to affect them. The first Biakanja factor could not be satisfied by the radiology plaintiff

with respect to non-emergency services.

instead, each entity is liable for its own acts and omissions. (Watanabe v. California

Physicians’ Service, supra, 169 Cal.App.4th at p. 64.) We do not hold that the HMO’s

are liable for their IPA’s failure to pay; that would be improper vicarious liability. We

hold, instead, that the HMO’s are liable for their own negligence in delegating to IPA’s

which they knew, or had reason to know, would be unable to pay.

37

The analysis of the fifth Biakanja factor – the moral blame attaching to

defendants’ conduct – also does not support the radiology physicians’ claim for

reimbursement for non-emergency services. The radiology physicians are not

compelled by any statute to provide non-emergency treatment to enrollees in

a financially unsound IPA; if they are required to do so by contract with their hospital,

entry into that contract was their choice. While there is moral blame attached to HMO’s

who would shirk their obligation to compensate emergency physicians and thereby

force emergency physicians to work for free, due to their statutory obligations, no such

blame attaches to HMO’s when the radiologists may be forced to perform

non-emergency services for free due to the radiologists’ own contractual obligation to

do so. They have voluntarily accepted the risk of non-payment for their services.

Finally, we are concerned with the burden which would be placed on the HMO’s

if we found a duty running to the radiology physicians to not delegate to a financially

unsound IPA. While the radiology physicians had no contract with the HMO’s or IPA,

and thus are admittedly not a preferred provider of the HMO’s or IPA, they are seeking

compensation for services provided in a non-emergency context which they were

contractually committed to perform. There is no statutory duty compelling them to

provide such services and, as far as the HMO’s and IPA are concerned, those services

are provided as volunteers.35 If a physician chooses to contract with an IPA, the

physician has effectively chosen to accept the risk of that IPA’s failure. When

35

The HMO’s and IPA may have a contractual duty to their enrollees to partially

compensate the non-preferred provider radiologists, but this is not alleged as a basis for

the radiology physicians to recover in this case.

38

a physician chooses to voluntarily provide services to an IPA enrollee, the result should

be the same. If we find a duty in either of such circumstances, physicians would be

encouraged to provide non-emergency services to patients when the physicians have no

contractual relationship with the HMO or IPA, which could undermine the entire HMO

system as we know it.

4. The HMO’s Duty Not To Negligently Delegate Is A Continuing One

As the physicians have alleged that the HMO’s were negligent in their initial

delegation decision, and we have concluded a cause of action exists for negligent

delegation, the HMO’s demurrers should not have been sustained. However, as the

parties have briefed the issue, we also discuss whether the duty of the HMO’s is

a continuing one.

Preliminarily, we note the difficulty in determining at this stage of the litigation,

as a matter of law, the difference between a negligent delegation and a negligent failure

to de-delegate. If, for example, a plan’s contract with an IPA was renewed annually, is

each renewal to be considered a new delegation? When an HMO adds a new enrollee,

and that enrollee’s risk is assigned to the IPA, is the delegation of the obligation to pay

reimbursement for services rendered to that enrollee a new delegation? When an

emergency physician treats a patient, is the obligation to pay for that particular

treatment newly delegated at the time the obligation arises? The record before us does

not include any of the delegation contracts, and we therefore cannot determine whether

any particular decision occurring after the initial contract between the HMO and the

39

IPA is a new delegation or simply a failure to reassume the delegated obligation or to

“de-delegate.”

In any event, it is clear to this court that the factors which compel us to find

a cause of action for negligent delegation also mandate our conclusion that the duty to

not delegate to an IPA which the HMO knows, or has reason to know, to be financially

unsound is a continuing one, and a cause of action therefore exists for the failure to

promptly reassume the obligation when an HMO knows or has reason to know that the

IPA to which it has made an initial delegation is now financially unable to meet the

delegated duty.36

Consideration of the seven factors discussed above, when the HMO is alleged to

have known or had reason to know that the IPA is financially unsound and is not, in

fact, fulfilling its duty to reimburse emergency physicians, is largely the same: (1) the

transaction is still intended to affect the emergency physicians; (2) the foreseeability of

harm, if the IPA has already begun to fail to perform, is even stronger; (3) the

emergency physicians will clearly have suffered injury; (4) the closeness of the

36

We are not suggesting that the HMO has a duty to “de-delegate” the IPA in its

entirety. We are simply holding that, when the HMO knows or has reason to know that

its IPA cannot meet its financial obligation of reimbursing emergency physicians, the

HMO must reassume that obligation to reimburse the emergency physicians. We

emphasize that the applicable regulations require an HMO’s contract with its IPA to

include a term “authorizing the plan to assume responsibility for the processing and

timely reimbursement of provider claims in the event that the [IPA] fails to timely and

accurately reimburse its claims.” (Cal. Code Regs., tit. 28, § 1300.71, subd. (e)(6).) We

are holding that, under appropriate circumstances, the HMO may be required to exercise

this provision, with respect to emergency physician reimbursement. The IPA would

continue to have the responsibility to provide all non-emergency services to its

enrollees.

40

connection between the failure to reassume the obligation to pay and the injury is the

same; (5) the moral blame attaching to the HMO’s conduct is the same or greater;37

(6) the policy of preventing future harm is the same; and (7) no additional burden is

imposed on the HMO’s, as the statutes and regulations require the IPA’s to regularly

report on their financial condition and claims payment performance to the HMO’s.

(Health & Saf. Code, § 1375.4, subd. (a)(1); Cal. Code Regs., tit. 28, § 1300.71,

subd. (e)(3).) As the factors are the same, the result is the same, and plaintiffs may

pursue a cause of action for negligent failure to reassume this previously delegated

obligation.38

37

In the instant case, the plaintiffs allege that, as they were unpaid by La Vida, they

sought help from the HMO’s, whose response was for them to continue submitting their

bills to La Vida. If true, this reflects a certain degree of callousness; it appears that the

HMO’s were content to leave the plaintiffs between the Scylla of the statutes requiring

them to provide emergency treatment and the Charybdis of an IPA which it knew or had

reason to know would never pay for such treatment.

38

As we discussed above, the Supreme Court in Prospect explicitly stated that it

was not considering the issue of whether balance billing was appropriate in cases in

which the HMO/IPA was unable to pay. (Prospect, supra, 45 Cal.4th at p. 507, fn. 5.)

Based on language in the opinion, we have expressed the view that, if such issue were

presented, the Supreme Court would, nonetheless, ultimately conclude that balance

billing is inappropriate in cases in which the IPA, but not the HMO, is unable to pay. If,

however, the Supreme Court takes a different position, and concludes that balance

billing is acceptable when the IPA is unable to pay, the result would surely be that

emergency physicians would balance bill their patients when the IPA cannot pay, and

the patients would then resubmit the bills to their HMO’s for payment pursuant to their

contracts with their HMO’s (which include coverage for emergency services). In short,

the end result would be the same as the result we reach here: when the IPA (but not the

HMO) is financially unsound, the HMO would ultimately be responsible to compensate

the emergency physicians. Our result, which allows the emergency physicians to seek

their remedy directly from the HMO, is consistent with the principles which motivated

the Prospect decision, as it would eliminate the patient as an intermediary in the billing

dispute.

41

5. The Abstention Defense is Inapplicable

Before the trial court, the HMO’s argued that the doctrine of abstention should

apply to the cause of action for unfair competition. On appeal, the HMO’s extend this

argument to all causes of action, arguing that the courts should abstain from resolving

even a dispute over the existence of a negligence cause of action.

There are various theories underlying the application of judicial abstention.

“Courts may abstain when the lawsuit involves determining complex economic policy,

which is best handled by the Legislature or an administrative agency. [Citation.]”

(Alvarado v. Selma Convalescent Hospital (2007) 153 Cal.App.4th 1292, 1298.)

Abstention may also be appropriate “when granting the requested relief would require

a trial court to assume the functions of an administrative agency, or to interfere with the

functions of an administrative agency.” (Ibid.) However, judicial abstention applies

only in cases of equity. (Shuts v. Covenant Holdco LLC (2012) 208 Cal.App.4th 609,

625; Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1362.) As the bulk of

plaintiffs’ complaint sounds in negligence and seeks damages, judicial abstention is

simply not applicable. In any event, this is not an appropriate case for abstention. We

do not here involve the courts in complex issues of economic or health care policy, nor

do we interfere with the administrative jurisdiction of the Department. We simply

42

conclude that when an HMO negligently delegates its statutory duty to reimburse

emergency physicians to an IPA it knows or has reason to know is unable to fulfill that

duty, or negligently continues its delegation once it knows or has reason to know that

the IPA is unable to do so, the HMO may be liable to the emergency physicians.39

39

As we reverse the judgment on the basis that plaintiffs have properly pleaded

a cause of action for negligent delegation (and/or could state a cause of action for failure

to reassume the delegated obligation), we discuss the other causes of action pleaded by

plaintiffs (which all seek compensatory relief for the violation of the same primary right

of plaintiffs – their right to be paid for services). We note, however, that plaintiffs’

cause of action for unfair competition (Bus. & Prof. Code, § 17200), appears to seek

damages, not restitution, and would therefore fail. (Zhang v. Superior Court (2013)

57 Cal.4th 364, 371.)

43

DISPOSITION

The judgment is reversed, and the matter remanded to the trial court with

directions to conduct further proceedings consistent with this opinion. The plaintiffs

shall recover their costs on appeal.

CERTIFIED FOR PUBLICATION

CROSKEY, J.

WE CONCUR:

KLEIN, P. J.

ALDRICH, J.

44