Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc.

Filed 11/14/16

IN THE SUPREME COURT OF CALIFORNIA

CENTINELA FREEMAN EMERGENCY )

MEDICAL ASSOCIATES et al., )

)

Plaintiffs and Appellants, )

) S218497

v. )

) Ct.App. 2/3 B238867

HEALTH NET OF CALIFORNIA, )

INC., et al., )

) Los Angeles County

Defendants and Respondents. ) Super. Ct. No. BC449046

____________________________________)

CENTINELA RADIOLOGY )

MEDICAL GROUP, )

)

Plaintiff and Appellant, )

)

v. )

)

)

HEALTH NET OF CALIFORNIA, )

INC., et al., )

) Los Angeles County

Defendants and Respondents. ) Super. Ct. No. BC415203

____________________________________)

Both state and federal law require any licensed hospital that has appropriate

facilities and qualified personnel to provide emergency medical services or care

regardless of a patient‟s ability to pay. (Health & Saf. Code, § 1317, subds. (a),

1

(b);1 42 U.S.C. § 1395dd (b), (h).) If the patient is an enrollee in a health care

service plan,2 the plan is required by statute to reimburse the emergency service

provider for necessary emergency medical services and care. (§ 1371.4,

subd. (b).) Plans are permitted, however, to delegate this financial responsibility

to their contracting medical providers. (§ 1371.4, subd. (e), hereafter

section 1371.4(e).)

In this case, each defendant health care service plan (hereafter Health Plan)

delegated its emergency services financial responsibility to its contracting medical

providers, three individual practice associations (IPAs).3 Allegedly, these three

IPAs failed to comply with multiple state financial solvency requirements

beginning in 2007, and continuing through each quarter for the following four

years, resulting in their failure to reimburse the plaintiff noncontracting service

providers for the emergency care that they provided to enrollees of defendant

Health Plans. The noncontracting emergency service providers allege that at the

time of delegation and throughout the duration of the delegation contracts between

the Health Plans and the IPAs, the Health Plans knew or should have known that

these IPAs were insolvent. The providers further claim that under the

1 All further statutory references are to the Health and Safety Code unless

otherwise indicated.

2 Health care service plans are defined in section 1345, subdivision (f). They

are commonly known as health maintenance organizations or HMOs. (Watanabe

v. California Physicians’ Service (2008) 169 Cal.App.4th 56, 59, fn. 3.)

3 “Section 1373, subdivision (h)(6), defines an individual practice association

by reference to title 42 United States Code section 300e-1(5), which provides as

relevant: „The term “individual practice association” means a . . . legal entity

which has entered into a services arrangement (or arrangements) with persons who

are licensed to practice medicine.‟ ” (Prospect Medical Group, Inc. v. Northridge

Emergency Medical Group (2009) 45 Cal.4th 497, 502, fn. 3 (Prospect Medical).)

2

circumstances, the Health Plans lacked any reasonable expectation that the IPAs

would reimburse their emergency service claims. Rather than helping to resolve

the growing number of their unpaid claims, the noncontracting emergency service

providers allege, the Health Plans simply advised them to continue submitting

their claims to the insolvent IPAs. The IPAs eventually went out of business.

Plaintiff providers then brought actions seeking reimbursement from the Health

Plans.

We granted review to consider whether a health care service plan‟s

delegation of its financial responsibility to an IPA or other contracting medical

provider group pursuant to section 1371.4(e) relieves it of any obligation to pay

providers‟ claims for covered emergency services and care or if, as plaintiffs

contend, a health care service plan has a common law tort duty to noncontracting

emergency service providers to act reasonably in making an initial delegation and

a continuing tort duty to protect such noncontracting providers from financial

harm resulting from any subsequent insolvency of its delegate.4 We conclude that

a health care service plan may be liable to noncontracting emergency service

providers for negligently delegating its financial responsibility to an IPA or other

contracting medical provider group that it knew or should have known would not

be able to pay for emergency service and care provided to the health plan‟s

enrollees. We further conclude that a health care service plan has a narrow

4 In addition to the briefs of the parties, we have received a number of amicus

curiae briefs. The California chapter of the American College of Emergency

Physicians and the California Medical Association have filed briefs in support of

plaintiffs. Counsel for the California Association of Health Plans and CAPG

(formerly known as the California Association of Physicians Groups) have filed

briefs in support of defendants. We requested and received an amicus curiae brief

from the California Department of Managed Health Care.

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continuing common law tort duty to protect noncontracting emergency service

providers once it makes an initial delegation of its financial responsibility.

Specifically, a health care service plan may be liable to noncontracting emergency

service providers for negligently continuing or renewing a delegation contract with

an IPA when it knows or should know that there can be no reasonable expectation

that its delegate will be able to reimburse noncontracting emergency service

providers for their covered claims.

A brief summary of the factual and procedural background of this matter

and a general overview of the statutory and regulatory backdrop provides context

for the parties‟ contentions and our conclusions.

I. FACTUAL AND PROCEDURAL BACKGROUND

The consolidated appeal in this matter involved two related actions. In the

Centinela Freeman action, four California partnerships of emergency room

physicians (hereafter Centinela Freeman), sued various health care service plans

and three IPAs (known collectively as La Vida) to which the plans delegated their

financial responsibilities to pay emergency service claims.5 In the Centinela

5 Plaintiffs in the Centinela Freeman action are Centinela Freeman

Emergency Medical Associates, Sherman Oaks Emergency Medical Associates,

Valley Presbyterian Emergency Medical Associates, and Westside Emergency

Medical Associates.

Defendant Health Plans in the Centinela Freeman action are Health Net of

California, Inc., Blue Cross of California, PacifiCare of California, California

Physicians‟ Service, Cigna Healthcare of California, Inc., Care 1st Health Plan,

and Aetna Health of California, Inc.

As the Court of Appeal recognized, “[t]he precise names of the three La

Vida entities are unclear. They were named as: (1) La Vida Medical Group &

IPA, doing business as 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.”

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Radiology action, Centinela Radiology Medical Group (hereafter Centinela

Radiology), a partnership of radiologists who provided emergency and

nonemergency radiology services to enrollees of various health care service plans,

filed a nearly identical complaint against the three La Vida IPAs and the same

plans sued in the Centinela Freeman action.6

According to both complaints, none of the plaintiff medical groups

contracted with La Vida or any of the Health Plans for the provision of services,

but each had provided covered emergency services and care to the Health Plans‟

enrollees who were assigned to La Vida. Plaintiffs alleged that they sought

reimbursement for their services and care from La Vida because defendant Health

Plans had delegated their responsibility to pay covered claims to La Vida, but La

Vida either did not pay or did not fully pay their claims.

As relevant here, both complaints set forth a negligence cause of action

alleging that the Health Plans are responsible for payment of plaintiffs‟ claims,

despite their delegation of financial responsibility to La Vida, because at the time

of the Health Plans‟ delegation to La Vida and throughout the duration of those

6 Centinela Radiology‟s complaint initially did not include California

Physicians‟ Service as a defendant. Although not entirely clear from the record, it

appears that California Physicians‟ Service may have been added by amendment,

as well as an additional health plan, SCAN Health Plan.

Centinela Radiology‟s complaint sought reimbursement from the Health

Plans for services provided on both an emergency and nonemergency basis. On

appeal, however, the Court of Appeal observed that Centinela Radiology appeared

to focus solely on the emergency services provided by its members and the court

expressly limited its opinion to plaintiffs‟ negligence claims for a failure to pay for

compulsory services provided on an emergency basis. Likewise, our grant of

review, and therefore our conclusions, are limited to a health care service plan‟s

duty of care to noncontracting emergency service providers who provide, under

statutory compulsion, emergency care to the plans‟ enrollees.

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delegation contracts, the Health Plans “knew or should have known” of La Vida‟s

insolvency and yet the Health Plans negligently delegated and continued to

delegate their payment obligations to La Vida.7 According to the complaints, the

three La Vida IPAs failed to comply with multiple state financial solvency

requirements beginning in 2007, and continuing through each quarter for the next

four years, resulting in their failure to pay the plaintiff noncontracting service

providers for the emergency care that they provided to enrollees of defendant

Health Plans during this time. The complaints alleged that instead of “helping to

resolve” the increasing number of unpaid claims by emergency providers, the

Health Plans advised plaintiffs to continue submitting claims directly to La Vida

and continued their insufficient capitation payments8 to La Vida, despite the

7 The complaints also allege causes of action for quantum meruit, unfair

competition, open book account, and services rendered. Only plaintiffs‟

negligence cause of action is at issue before us. As noted, plaintiffs allege in their

negligence cause of action that the Health Plans knew or should have known “at

the time” of delegation and “throughout the duration” of the contracts of La Vida‟s

insolvency and inability to pay. The complaints do not clearly allege when La

Vida became insolvent and unable to pay emergency service claims, although it is

alleged that starting in 2007 La Vida failed to comply with multiple state financial

solvency requirements. The complaints do not clearly allege when the Health

Plans first entered into their delegation contracts with the three La Vida entities.

But from the quoted language, and contrary to the assertion of the Health Plans, it

appears plaintiffs have alleged a cause of action for negligence on both a theory of

negligent initial delegation and a theory of negligent continuation of delegation.

We consider both theories.

8 Capitation payments are made in connection with a risk-sharing

arrangement between a health plan and a contracting medical provider under

which the provider receives compensation on a “capitated basis.” “ „[C]apitated

basis‟ ” is defined by regulation to mean “fixed per member per month payment or

percentage of premium payment wherein the provider assumes the full risk for the

cost of contracted services without regard to the type, value or frequency of

services provided.” (Cal. Code Regs., tit. 28, § 1300.76, subd. (d).)

6

absence of any reasonable expectation that La Vida would reimburse plaintiffs.

The Health Plans, it was alleged, knew La Vida was in financial trouble through

their receipt of financial reports and other information, including an advisement in

October 2009 that La Vida‟s lender had filed a petition for relief under the

bankruptcy laws and had withdrawn $4 million dollars from La Vida‟s account,

and that La Vida was unable to obtain funding from capital markets. The

complaints alleged that defendant Health Plans waited until May and June 2010,

years after La Vida began openly demonstrating financial instability, to finally

discontinue their capitation payments to La Vida and terminate their delegation

contracts. La Vida went out of business shortly thereafter.

The Health Plans demurred to the complaints. They contended that once

they delegated to La Vida their statutory obligation to reimburse emergency care

providers for emergency services, as permitted by section 1371.4(e), plaintiffs had

no recourse against them for payments that La Vida was unable to make. As to

plaintiffs‟ negligence cause of action, the Health Plans argued that under the

seminal case of Biakanja v. Irving (1958) 49 Cal.2d 647 (Biakanja), they owed

third party plaintiffs no common law duty of care to protect their financial

interests.

The trial court sustained defendants‟ demurrers without leave to amend and

entered judgment in favor of defendant Health Plans. Both Centinela Freeman and

Centinela Radiology appealed, and the cases were consolidated.

The Court of Appeal concluded that plaintiffs had properly pleaded, or

could plead, a cause of action for negligent initial delegation and a cause of action

for negligent failure to reassume the delegated financial obligation, that is, a

violation of the Health Plans‟ continuing duty of care. Therefore, it reversed the

judgment. We granted defendant Health Plans‟ petition for review.

7

II. STATUTORY AND REGULATORY BACKGROUND

Health care service plans are governed by the Knox-Keene Health Care

Service Plan Act of 1975 (the Knox-Keene Act or Act). (Health & Saf. Code,

§ 1340 et seq.) The Knox-Keene Act “is „a comprehensive system of licensing

and regulation‟ [citation], formerly under the jurisdiction of the Department of

Corporations (DOC) and presently within the jurisdiction of the Department of

Managed Health Care (DMHC) (§ 1341; Stats. 1999, ch. 525, § 1(a); Stats. 2000,

ch. 857, §§ 19, 100).” (California Medical Assn. v. Aetna U.S. Healthcare of

California, Inc. (2001) 94 Cal.App.4th 151, 155, fn. 3 (California Medical);

accord, Prospect Medical, supra, 45 Cal.4th at p. 504.)

The intent and purpose of the Legislature in enacting the Knox-Keene Act

was “to promote the delivery and the quality of health and medical care to the

people of the State of California who enroll in, or subscribe for the services

rendered by, a health care service plan or specialized health care service plan.”

(§ 1342.) The Legislature sought to accomplish this purpose by, among other

things, (1) “transferring the financial risk of health care from patients to providers”

in order to “[h]elp . . . ensure the best possible health care for the public at the

lowest possible cost,” (2) imposing “proper regulatory procedures” in order to

“[e]nsur[e] the financial stability” of the system, and (3) establishing a system that

ensures health care service plan “subscribers and enrollees receive available and

accessible health and medical services rendered in a manner providing continuity

of care.” (Id., subds. (d), (f), & (g).)

Section 1342.6 reiterates the Act‟s purpose of providing “high-quality

health care coverage in the most efficient and cost-effective manner possible,” and

finds that “it is in the public interest to promote various types of contracts between

public or private payers of health care coverage, and institutional or professional

providers of health care services.” Among the contracts the Act permits are

8

“contracts that contain incentive plans that involve general payments, such as

capitation payments, or shared-risk arrangements.” (§ 1348.6, subd. (b).) The Act

expressly allows contracts in which health care service plans delegate to the plans‟

contracting medical providers the plans‟ financial responsibility to reimburse

emergency service providers‟ claims. (§ 1371.4(e).) Noncontracted emergency

service providers are entitled to reimbursement at the reasonable and customary

rate for the emergency services they perform. (Cal. Code Regs., tit. 28, § 1300.71,

subd. (a)(3)(B).)

Allowing health care service plans to shift to their contracting medical

providers the financial risk associated with the provision of medical care carries

with it a risk that the providers will at some point become financially insolvent.

Over time the Legislature became concerned with the increasing number of

provider groups, including IPAs, that had assumed the financial risk for the

medical care of plan enrollees under capitation payment contracts with plans and

that had subsequently declared bankruptcy. (Department of Managed Health Care

(Winter 2001) vol. 17, No. 2, Cal. Reg. L.Rptr. 28, 29.) The bankruptcies left

“physicians unpaid for medical services already rendered and patients stranded

and forced to change physicians.” (Ibid.) The state had no basis to intervene

because, at that time, there were no statutory or regulatory provisions governing

the provider groups or their contracts with the plans. (Id. at p. 30.)

In 1999, the Legislature addressed this fiscal solvency crisis through the

passage of Senate Bill No. 260. (Stats. 1999, ch. 529 (1999-2000 Reg. Sess.)

(Sen. Bill No. 260) § 1.) Senate Bill No. 260 created the Financial Solvency

Standards Board. (§ 1347.15, subd. (a), added by Stats. 1999, ch. 529, § 1,

pp. 3666-3667.) The purpose of the board is to (1) advise the director of the

DMHC “on matters of financial solvency affecting the delivery of health care

services[,]” (2) “[d]evelop and recommend . . . financial solvency requirements

9

and standards relating to plan operations, plan-affiliate operations and

transactions, plan-provider contractual relationships, and provider-affiliate

operations and transactions[,]” and (3) “[p]eriodically monitor and report on the

implementation and results of the financial solvency requirements and standards.”

(§ 1347.15, subd. (b)(1)-(3).)

Senate Bill No. 260 also added statutory provisions (§§ 1375.4, 1375.5,

1375.6) that regulate contracts between health care service plans and provider

groups, including IPAs, which are now collectively referred to as “risk-bearing

organizations” (RBOs). (§ 1375.4, subd. (g).) Notably, section 1375.4 specifies

contract provisions concerning the RBOs‟ administrative and financial capacity

that must be included in every risk arrangement contract between an RBO and a

health care service plan. (§ 1375.4, subd. (a).) Section 1375.5 provides that any

delegation of financial risk in a contract between a plan and an RBO must first be

negotiated and agreed to between them. Section 1375.4 requires the DMHC to

periodically evaluate contracts between plans and RBOs “to determine if any

audit, evaluation, or enforcement actions should be undertaken” by the DMHC.

(§ 1375.4, subd. (c).) In addition, the DMHC must adopt regulations that, at a

minimum, (1) create a process for reviewing or grading RBOs based on specific

criteria concerning their financial viability, (2) mandate disclosure of certain risk

assessment information to RBOs by health care service plans, (3) require reporting

to the DMHC by both the health care service plans and RBOs, (4) provide for

DMHC audits, and (5) institute a process for corrective action plans. (§ 1375.4,

subd. (b)(1)-(4).)

The DMHC has adopted regulations complying with these directives.

(Cal. Code Regs., tit. 28, § 1300.75.4 et seq.; hereafter all cites to “Regulations”

are to tit. 28 Cal. Code Regs. Regulations § 1300.75.4 et seq. are commonly

known as the “Solvency Regulations.”) Through the method of requiring terms

10

and provisions to be included in every contract involving a risk arrangement

between a health care service plan and an RBO, the Solvency Regulations require

plans to provide to their RBOs at specified frequencies detailed risk arrangement

disclosures, including (but not limited to) information about the group or

individual members delegated to the RBO, the type of risk arrangement, “a matrix

of responsibility for medical expenses,” “projected utilization rates” and “costs for

each major expense service group,” and “all factors used to adjust payments or

risk-sharing targets.” (Id., § 1300.75.4.1, subd. (a).) By the same method, the

Solvency Regulations require contracting RBOs to report to the DMHC, on a

quarterly and annual basis, information regarding the RBO‟s organization and

detailed statements of compliance, or lack thereof, with multiple fiscal solvency

requirements and grading criteria. (Id., § 1300.75.4.2; see also § 1375.4, subd.

(a)(1) [requiring RBOs to furnish financial information to the plans].) Health care

service plans must also provide quarterly and annual reports to the DMHC

concerning their contracted RBOs. (Solvency Regs., § 1300.75.4.3.) RBOs must

notify the DMHC and each of its contracting plans (and each plan must also

independently notify the DMHC) any time the RBO experiences “any event that

materially alters its financial situation or threatens its solvency.”

(Id., §§ 1300.75.4.2, subd. (f); -1300.75.4.3, subd. (e).)

In addition to imposing these reporting requirements, the Solvency

Regulations provide that every contract involving a risk arrangement between a

health care service plan and an RBO must include a provision that requires the

RBO to permit the DMHC to examine its books and records and to comply with

the DMHC‟s review and audit process. (Solvency Regs., §§ 1300.75.4.2,

subd. (g), 1300.75.4.7, subd. (a)(1).) Each contract must permit the DMHC to

“[o]btain and evaluate supplemental financial information” from the RBO under

described circumstances where the RBO‟s financial situation may be impacting its

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performance. (Id., § 1300.75.4.7, subd. (a)(2).) And, every plan must have

adequate procedures in place to ensure that it undertakes appropriate review of its

RBOs‟ reported financial status and appropriate action in the event of any

notification by the DMHC of a deficiency by an RBO. (Id., § 1300.75.4.5,

subd. (a)(1)-(3).)

A health care service plan is subject to disciplinary action for any failure to

comply with section 1375.4 and the Solvency Regulations. (Solvency Regs.,

§ 1300.75.4.5, subd. (d).) And the DMHC “may seek and employ any

combination of remedies and enforcement procedures provided under the Knox-

Keene Act to enforce” section 1375.4 and the Solvency Regulations.

(Id., § 1300.75.4.5 subd. (e).)

One of the most important Solvency Regulations, for purposes of the issue

before us, is section 1300.75.4.8 governing corrective action plans (CAPs). A

CAP is designed to correct any financial solvency or claims payment deficiencies

experienced by an RBO. (§ 1375.4(b)(4); Solvency Regs., § 1300.75.4, subd. (g).)

RBOs that have such deficiencies must self-initiate a CAP proposal and submit it

to the DMHC and to every health care service plan with which it has a contractual

risk arrangement.9 (Id., § 1300.75.4.8, subd. (a).) The CAP must identify all of

the health care service plans with which the RBO has risk arrangement contracts,

state all of the RBO‟s deficiencies (including failure to meet DMHC grading

criteria regarding payment of claims), describe the actions the RBO has taken or

will take to correct them, include a timeframe for completing the corrective action,

9 In addition to self-initiated CAPs, the DMHC “may direct [an RBO] to

initiate a CAP whenever [it] determines that [the RBO] has experienced an event

that materially alters its ability to remain compliant with the Grading Criteria.”

(Solvency Regs., § 1300.75.4.8, subd. (k).)

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and specify a schedule for submitting progress reports to the DMHC and its

contracting health plans. (Ibid.; see id., § 1300.75.4.2, subd. (b)(1)(B), (2)(A).)

Health care service plans have a limited period of time to object and

propose revisions to the RBO‟s CAP. (Solvency Regs., § 1300.75.4.8, subd. (c).)

If objections are filed, the RBO may submit a revised CAP, to which the health

care service plan may again object and propose revisions. (Id., § 1300.75.4.8

subds. (d), (e).) Differences are to be discussed and reconciled, if possible, at a

settlement conference held by the DMHC. (Id., § 1300.75.4.8 subd. (f).)

The DMHC approves, disapproves, or modifies the CAP, which then

becomes the final CAP. (Solvency Regs., § 1300.75.4.8, subds. (g), (h), (i); see

§ 1375.4, subd. (b)(4) [in the event the RBO and health care service plans fail to

agree on the terms of the CAP, the DMHC shall determine them].) Health care

service plans must “cooperate [i]n the implementation of a final CAP.” (Solvency

Regs., § 1300.75.4.5, subd. (a)(4).) Plans must advise the DMHC if they become

aware of its RBO‟s failure to comply with the final CAP. (Id., § 1300.75.4.5,

subd. (a)(5).) A plan‟s ability to transfer plan enrollees from an RBO that is

compliant with a final CAP is restricted. (Id., § 1300.75.4.5 subd. (a)(6).)

In addition to addressing the RBO fiscal solvency crisis by these measures,

the Legislature, in 2000, added a requirement that health care service plans

provide a “fast, fair, and cost-effective” provider claims dispute resolution

mechanism and to make such mechanism “accessible to noncontracting providers

for the purpose of resolving billing and claim disputes.” (§ 1367, subd. (h), as

amended by Stats. 2000, ch. 825 (1999-2000 Reg. Sess.) § 2, p. 5712.)

The Solvency Regulations, however, do not prevent a health care service

plan from taking action to terminate its risk arrangement contract with an RBO

that is fiscally unsound prior to the approval of a final CAP. The Solvency

Regulations specifically require that every contract involving a risk arrangement

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between a plan and an RBO must provide that the RBO‟s “failure to substantially

comply with the contractual” provisions required by the Solvency Regulations

“shall constitute a material breach of the risk arrangement contract.” (Solvency

Regs., § 1300.75.4.5, subd. (b).) Thus, for example, a plan that determines the

financial difficulties encountered by its RBO are of such a magnitude that

restoration of its financial solvency cannot reasonably be anticipated through the

adoption of a final CAP has the option of refusing to engage in the CAP approval

process, terminating its contract with the RBO, and either delegating its financial

responsibility to a different RBO or reassuming the obligation to pay emergency

service providers for necessary emergency medical services and care.

This statutory and regulatory landscape nevertheless failed to eliminate

concern about the payment of provider claims, especially payment of the claims of

emergency service providers. In 2001, the Legislature attempted to address this

issue by amending section 1371.4 to require health care service plans to pay

emergency service providers on a fee-for-service basis if their delegated RBO

failed to pay. (Sen. Bill No. 117 (2001-2002 Reg. Sess.) § 2, subd. (f) (Senate Bill

No. 117).) The Governor, however, vetoed Senate Bill No. 117. After noting the

already existing financial solvency and accountability laws, he stated in part:

“SB117 would adversely affect HMO patient care by injecting the government

into allowing or prohibiting delegated risk arrangements between HMOs and

physician groups based upon the type of service. This bill would also likely result

in increased premiums by removing the financial incentives currently in place to

reduce unnecessary emergency room utilization and a disincentive to provide

preventive and non-emergency urgent care.” (Governor‟s veto message to Sen. on

Sen. Bill No. 117 (Oct. 10, 2001), Sen. J. (2001-2002 Reg. Sess.) p. 3083.)

In summary, the Knox-Keene Act contemplates and encourages the

delegation by health care service plans to their RBOs of the plans‟ responsibility

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to pay emergency service providers‟ claims as part of a managed health care

model. A complex statutory and regulatory system has been put in place to set

financial solvency standards for RBOs, require reporting of financial and risk

assessment information between plans and RBOs and to the DMHC, monitor

compliance of RBOs with the solvency standards, and correct deficiencies by

RBOs in meeting their obligations, primarily through the CAP process. Plans play

a critical role in this scheme. Noncontracting emergency service providers,

however, have virtually no role. They must, nevertheless, continue to provide

emergency services under compulsion of federal and state law. (§ 1317,

subds. (a), (b); 42 U.S.C. § 13955dd. (a), (h).)

III. PLAINTIFFS’ ASSERTED CAUSE OF ACTION FOR NEGLIGENCE

A. Standard of Review

The rules by which the sufficiency of a complaint is tested against a general

demurrer are well settled. “ „ “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 . . . .‟ ” (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126,

quoting Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “ „The burden of proving

such reasonable possibility is squarely on the plaintiff.‟ ” (Ibid.) Our examination

of the complaint is de novo. (McCall v. PacifiCare of Cal. Inc. (2001) 25 Cal.4th

412, 415.)

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B. A Cause of Action Arising from the Statutory and Regulatory

Provisions

Plaintiffs concede that they have no “per se cause of action” against the

Health Plans under the Knox-Keene Act because the Act permits health care

service plans to delegate to IPAs and other RBOs their financial responsibility to

pay emergency service providers. (§ 1371.4(e).) As explained by Ochs v.

PacifiCare of California (2004) 115 Cal.App.4th 782 (Ochs) and California

Emergency Physicians Medical Group v. PacifiCare of California (2003) 111

Cal.App.4th 1127 (California Emergency Physicians), the statutory language

permitting “ „delegation‟ ” indicates that the obligation is not a “nondelegable”

duty for which the plans must retain ultimate responsibility. (Ochs, supra, at

pp. 789-790; California Emergency Physicians, supra, at pp. 1131-1132.) The

legislative history of section 1371.4(e) also reflects the intent to absolve health

care service plans of any statutory liability to pay in the event the delegated IPA or

other RBO becomes insolvent. (Ochs, supra, at pp. 790-792; California

Emergency Physicians, supra, at pp. 1132-1133.) Indeed, the legislative

understanding that a residual duty to pay is not included in the existing provisions

of the Knox-Keene Act is demonstrated by the Legislature‟s approval and the

Governor‟s veto of Senate Bill No. 117 in 2001, which, as we have noted earlier,

would have added a specific requirement that plans pay emergency service

providers if their contracted IPAs did not. (Ochs, supra, at pp. 791-792;

California Emergency Physicians, supra, at p. 1132.) Finally, legislative intent

against imposing statutory liability can be discerned in the contrast of section

1371.4(e), which allows the transfer of the financial risk of emergency care to

IPAs or other RBOs, with other statutory provisions in which the Legislature has

expressly precluded plans from transferring to RBOs the financial risk of certain

other treatments and medical services. (§ 1375.8, subd. (b)(2)(A)-(F).) Under the

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Knox-Keene Act, health care service plans are not statutory guarantors of their

contracted IPAs‟ financial obligations (see California Medical, supra, 94

Cal.App.4th at pp. 160-167) and no duty of care arises from its provisions.

Plaintiffs argue, however, that a health care service plan has a duty under

section 1300.71, subdivision (e)(6) of the DMHC‟s regulations to reassume

payment obligations when its delegate fails to pay a provider‟s claims. (Regs.,

§ 1300.71, subd. (e)(6), hereafter Regulations section 1300.71(e)(6).)

Regulations section 1300.71(e) concerns claims settlement practices that

expressly permits health care service plans to “contract with a claims processing

organization for ministerial claims processing services or contract with capitated

providers that pay claims” subject to certain described conditions. (Regs.,

§ 1300.71, subd. (e).) Among the specified conditions is a requirement that the

claims processing contract “include provisions authorizing the plan to assume

responsibility for the processing and timely reimbursement of provider claims in

the event that the claims processing organization or the capitated provider fails to

timely and accurately reimburse its claims.” (Id., § 1300.71 (e)(6), italics added.)

But plaintiffs point to later language in the same subdivision that states “[t]he

plan‟s obligation to assume responsibility for the processing and timely

reimbursement of a capitated provider‟s provider claims may be altered” by an

approved CAP. (Ibid., italics added.) From the regulation‟s use of the term

“obligation” in this latter provision, plaintiffs would have us conclude that the

DMHC intends health plans to pay them if the health plans‟ contracted IPA or

other RBO does not.

Plaintiffs read subdivision (e)(6) of Regulations section 1300.71 in

isolation. But regulations, like statutes, must be read as a whole and construed in

context, keeping the regulatory purpose in mind. (Dyna-Med, Inc. v. Fair

Employment & Housing Com. (1987) 43 Cal.3d 1379, 1387 [stating the rule of

17

construction for statutes]; Cal Drive-In Restaurant Assn. v. Clark (1943) 22 Cal.2d

287, 292 [noting that the same rules of construction and interpretation apply to

regulations of administrative agencies]; Diablo Valley College Faculty Senate v.

Contra Costa Community College Dist. (2007) 148 Cal.App.4th 1023, 1037

[same].) When we read Regulations section 1300.71 as a whole, we are not

persuaded that Regulations section 1300.71 (e)(6) addresses a health care service

plan‟s duty in the event of the insolvency of its delegated IPA or other RBO.

Rather, Regulations section 1300.71 is directed at the process for and timing of

submission and settlement of providers‟ claims. (E.g., Regs., § 1300.71, subd. (b)

[Claim Filing Deadline]; id., subd. (c) [Acknowledgement of Claims]; id.,

subd. (d) [Denying, Adjusting or Contesting a Claim and Reimbursement for the

Overpayment of Claims]; id., subd. (g) [Time for Reimbursement]; id., subd. (h)

[Time for Contesting or Denying Claims]; id., subds. (i) & (j) [interest and

penalties for late payment of claims].) The apparent purpose of Regulations

section 1300.71(e)(6) is the further promotion of accurate and timely claims

processing and settlement, and nothing suggests that the DMHC intended to

address by this provision, buried in a regulation concerning claims processing, the

broader question of a health plan‟s ultimate responsibility to pay in the event of its

delegate‟s financial insolvency.

Moreover, even if the regulation could be construed otherwise, “[a]n

administrative agency cannot by its own regulations create a remedy which the

Legislature has withheld. [Citations.]” (Dyna-Med, Inc. v. Fair Employment &

Housing Com., supra, 43 Cal.3d at p. 1389; see Desert Healthcare Dist. v.

PacifiCare FHP, Inc. (2001) 94 Cal.App.4th 781, 793 (Desert Healthcare) [A

negligence duty of care cannot be created through administrative regulations]; Cal.

Service Station etc. Assn. v. American Home Assurance Co. (1998) 62 Cal.App.4th

116, 1175-1176 [same].) A statutory remedy for unpaid emergency service

18

providers has been withheld by the Governor‟s veto of Senate Bill No. 117 in

2001.

C. A Cause Of Action For Negligent Initial Delegation

The Centinela Freeman and Centinela Radiology complaints allege,

however, that the Health Plans are liable under common law tort principles of

negligence because at the time of their initial delegation of their financial

responsibility to pay emergency service claims to La Vida they knew or should

have known that La Vida was insolvent and unable to pay those claims.

“The threshold element of a cause of action for negligence is the existence

of a duty to use due care toward an interest of another that enjoys legal protection

against unintentional invasion. [Citations.] Whether this essential prerequisite to

a negligence cause of action has been satisfied in a particular case is a question of

law to be resolved by the court.” (Bily v. Arthur Young & Co. (1992) 3 Cal.4th

370, 397 (Bily); accord, Beacon Residential Community Assn. v. Skidmore,

Owings & Merrill LLP (2014) 59 Cal.4th 568, 573 (Beacon Residential).)

The Health Plans rely in part on the statutory and regulatory scheme in

arguing that the alleged common law duty does not exist. First, they assert that the

provisions of the Knox-Keene Act, with its implementing regulations, which

recognize and permit negotiated risk-shifting contracts between health care service

plans and IPAs and other RBOs under specified contract terms and conditions,

necessarily preclude the recognition of a common law duty. (E.g., §§ 1348.6,

subd. (b), 1375.4, 1375.5, 1375.6; Solvency Regs., §§ 1300.75.4.1, 1300.75.4.2,

1300.75.4.5, 1300.75.4.7, 1300.75.4.8.) Although the Act and the regulations

contain detailed provisions governing the relationship of plans and IPAs under

such contracts, neither the Act nor the regulations speak to a health care service

plan‟s responsibility, if any, to noncontracting emergency service providers in

19

entering into a relationship with an IPA or other RBO wherein the plan makes a

delegation of its financial responsibility to pay for emergency services pursuant to

section 1371.4(e).

Second, the Health Plans point to section 1371.25, which precludes

vicarious liability by providing, in relevant part, 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.” However, section 1371.25 further provides that “[n]othing 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.” Thus, if a health care service plan owes a duty of care to noncontracting

emergency service providers under the common law in initially contracting with

an IPA or other RBO, section 1371.25 does not preclude a finding of negligence

liability on the part of the plan for its own conduct in breaching its duty and

proximately causing injury. We turn to the question of whether health care service

plans owe such a duty of care.

Because the statutory and regulatory scheme does not preclude the

existence of a duty, we consider whether general tort principles lead to a duty in

these circumstances. Although “[r]ecognition of a duty to manage 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[,] [p]rivity 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 (Quelimane).) The test for determining the

existence of such an exceptional duty to third parties is set forth in the seminal

case of Biakanja, supra, 49 Cal.2d at page 650, as follows: “The determination

20

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 [1] the extent to which the transaction was intended to affect the

plaintiff, [2] the foreseeability of harm to him, [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.”

The first Biakanja factor focuses on “the extent to which the transaction

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

have stated that liability for negligent conduct may be imposed “where there is a

duty of care owed by the defendant to the plaintiff or to a class of which the

plaintiff is a member.” (J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 803, italics

added; see Beacon Residential, supra, 59 Cal.4th at p. 586.)10 Here, plaintiff

10 Two previous cases have rejected negligence claims asserted by emergency

service providers against health care service plans on the basis of the inability of

the emergency service providers to satisfy this first factor, but those cases failed to

recognize that the duty of care may be owed to a class of which the plaintiff is a

member. Desert Healthcare, supra, 94 Cal.App.4th at page 792, reasoned that

“[t]he 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.” And, “[t]he 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.” (Ibid.) The reviewing court

in California Emergency Physicians agreed. (California Emergency Physicians,

supra, 111 Cal.App.4th at pp. 1135-1136.) However, as the court in Ochs

recognized, the rule is not so restrictive. (Ochs, supra, 115 Cal.App.4th at

pp. 797-798.) Desert Healthcare Dist. v. PacifiCare FHP, Inc., supra,

94 Cal.App.4th 781and California Emergency Physician Medical Group v.

PacifiCare of California, supra, 111 Cal.App.4th 1127, are disapproved to the

extent they are inconsistent with this opinion.

21

noncontracting emergency service providers are a specific and well-defined class,

which was reasonably identifiable by their practice specialization, hospital

affiliation, and geographic location at the time that the Health Plans negotiated and

included a delegation term in their contracts with La Vida. Although the contracts

between the Health Plans and La Vida may have broadly covered all health care

services rendered for the Health Plans‟ enrollees, the specific contractual

delegation of the Health Plans‟ statutory obligation to reimburse emergency

service providers for their emergency services and care (§ 1371.4, subds. (b), (e))

was necessarily intended to have an effect on plaintiffs. Before the delegation,

plaintiffs could seek reimbursement directly from the Health Plans for their

compulsorily provided emergency services. As a direct result of the delegation

contracts, however, plaintiffs were forced to submit their claims to La Vida, who

was responsible for reimbursing, contesting, or denying the claims in a timely

fashion. If La Vida failed in its processing or payment responsibilities, plaintiffs‟

statutory recourse was limited to action against La Vida.

These circumstances distinguish these actions from the two cases on which

the Health Plans place heavy reliance in arguing that this first Biakanja factor is

not met. In Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co.

(2002) 27 Cal.4th 705, we concluded that an escrow company did not owe a duty

of care to the plaintiff assignee of a promissory note that was to be paid as part of

a refinance transaction. (Id. at pp. 707-708, 715.) In considering the first factor

identified in Biakanja, we found the escrow transaction “ „was not intended to

affect or benefit‟ ” the plaintiff and “ „any impact that [the] transaction may have

had on [the plaintiff] was collateral to the primary purpose of the escrow.‟ ”

(Summit Financial, at p. 715.) In Goodman v. Kennedy (1976) 18 Cal.3d 335, we

concluded that an attorney for officers of a corporation did not owe a duty of care

to the plaintiff purchasers of stock from the corporate officers. (Id. at pp. 339,

22

344.) We found “[a]ny buyers‟ „potential advantage‟ from the possible purchase

of the stock „was only a collateral consideration‟ ” to the attorney‟s advice to the

corporate officers regarding their sale of stock. (Id. at p. 344.) In contrast, the

Health Plans‟ delegation to La Vida under section 1371.4(e) was specifically

intended to change who was responsible to reimburse plaintiffs for their covered

services. The impact on plaintiffs cannot be characterized as “collateral” to the

delegation.

The second Biakanja factor considers the foreseeability of harm to the

plaintiffs. (Biakanja, supra, 49 Cal.2d at p. 650.) Assuming as true for purposes

of demurrer plaintiffs‟ allegations that the Health Plans knew or should have

known at the time of entering into the contracts with La Vida that La Vida was

insolvent, it is not difficult to conclude that the Health Plans could have

reasonably anticipated that La Vida would be unable to pay noncontracting

emergency service providers‟ claims for services and care provided to their

enrollees. It was readily foreseeable that shifting the risk of processing and paying

any subsequently incurred emergency service claims to La Vida under such

circumstances was likely to result in harm to plaintiffs.

There is no real dispute that plaintiffs have suffered actual injury and thus,

meet the third Biakanja factor. (Biakanja, supra, 49 Cal.2d at p. 650.) Plaintiffs

allege that they submitted their claims to La Vida and La Vida either did not pay

or did not fully pay their claims and now has gone out of business.

The fourth factor is “the closeness of the connection between the

defendant[s‟] conduct and the injury suffered.” (Biakanja, supra, 49 Cal.2d at

p. 650.) Here, it is clear that La Vida‟s financial difficulties and insolvency must

be considered the immediate and direct cause of plaintiff‟s economic injury.

However, it was the Health Plans‟ delegation to La Vida of their statutory

obligation to reimburse emergency providers that brought noncontracting

23

emergency service providers, such as plaintiffs, into a position of risk from La

Vida‟s insolvency. Without such a delegation by the Health Plans, La Vida‟s

financial instability and insolvency would have had no impact on plaintiffs.

Therefore, if, as plaintiffs allege, the Health Plans knew or should have known at

the time of entering into the delegation contracts with La Vida that La Vida would

be unable to pay plaintiffs‟ claims, the fact that the Health Plans nevertheless

transferred to La Vida the responsibility to process and reimburse plaintiffs‟

claims is closely connected to plaintiffs‟ losses. These circumstances distinguish

these actions from Quelimane, supra, 19 Cal.4th 26, on which the Health Plans

rely. (Id. at p. 58 [the relationship between a title insurance company‟s refusal to

issue title insurance on tax-defaulted properties and purchasers‟ lost profit was

“tenuous at best”].)

The fifth Biakanja factor is “the moral blame attach[ing] to . . .

defendant[s‟] conduct.” (Biakanja, supra, 49 Cal.2d at p. 650.) It bears repeating

that plaintiffs are noncontracting emergency service providers. As the Court of

Appeal described the situation: “[Plaintiffs] 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 [health care service

plans] — 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 [plans] had contracted

with the patients to provide them, for a price, with health care services, including

emergency services, with the understanding that those services may be provided

by physicians whom the [plans] would be required to reimburse even though there

was no contractual relationship between the [plans] and the emergency physicians

24

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

[should] 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 believe it is unfair and morally

blameworthy for a health plan to take advantage of the statutory compulsion

requiring noncontracting emergency service providers to continue providing their

services in such a way. Because the emergency care providers rely exclusively on

health care service plans to arrange payment for services received by their

enrollees, plans that transfer those responsibilities onto an IPA they know or

should know will not make those payments have not only shirked their statutory

obligations, but have essentially withheld from emergency care providers the fair

compensation to which they are entitled. Forcing others to provide professional

services for the benefit of one‟s own customers, without any reasonable prospect

of payment, is morally blameworthy.

We further conclude that imposing a duty on health care service plans to act

reasonably, by choosing a financially solvent IPA or other RBO if they opt to

delegate their reimbursement obligation, will protect noncontracting emergency

service providers from future economic harm that such providers would otherwise

not be able to avoid. Thus, the sixth Biakanja factor, which considers the policy

of preventing future harm, also supports the imposition of such a duty.

In addition to arguing for an analysis of the Biakanja factors different from

what we have expressed, defendants rely on Bily, supra, 3 Cal.4th 370, to argue

that they owe no duty of care to plaintiffs. In Bily, we acknowledged the Biakanja

25

checklist of factors, but nevertheless declined to impose a duty running from the

auditor of a public company to nonclient investors in the company. (Bily, supra,

at pp. 397-398, 406.) We identified “three central concerns” with allowing “all

merely foreseeable third party users of audit reports to sue the auditor on a theory

of professional negligence.” (Id. at p. 398.) First, we were concerned that the

auditor could face vast numbers of suits and limitless financial liability far out of

proportion to its fault and the connection between the auditor‟s conduct and the

third party‟s injury. (Id. at pp. 399-402.) Second, we found that the class of

plaintiffs was generally more sophisticated business lenders and investors, who

could control and adjust their risks by contract rather than rely on tort liability.

(Id. at pp. 402-403.) Third, we recognized that potential liability to third parties

would more likely result in “an increase in the cost and decrease in the availability

of audits and audit reports with no compensating improvement in overall audit

quality.” (Id. at pp. 404-405.) We are not persuaded that consideration of these

factors requires the rejection of a duty of care on the part of a health care service

plan making an initial delegation of financial risk.

First, we recognize that imposition of a duty on health care service plans to

act reasonably in making an initial delegation of the responsibility to reimburse

noncontracting emergency service providers for their compulsory services may, if

violated, result in a number of suits by such providers for an undetermined amount

in claims. But such providers are a limited and identifiable class of potential

plaintiffs, whose services can be anticipated and likely statistically estimated.

Moreover, even if such estimation is not always possible, it can hardly be said that

imposition of a duty of care will likely result in a vast number of suits and

limitless financial liability on the part of the plans that will be disproportionate to

their fault. That is, unlike the secondary role played by the auditor in Bily, there is

a “ „close connection‟ ” to the economic injury suffered by noncontracting

26

emergency service providers if a plan brings them into a relationship with an

insolvent IPA or other RBO through its unreasonable delegation of its statutory

financial responsibilities. (Bily, supra, 3 Cal.4th at p. 401; see Beacon Residential,

supra, 59 Cal.4th at pp. 581-583.) There is in effect a lineal connection between

such alleged unreasonable conduct by a plan and the providers‟ injury.

Nor can the class of noncontracting emergency service providers, unlike the

more sophisticated business lenders and investors class of plaintiffs in Bily, control

and adjust their risks by contract rather than rely on tort liability. (Bily, supra, 3

Cal.4th at pp. 402-403; see Beacon Residential, supra, 59 Cal.4th at pp. 584-585.)

The law requires emergency medical services or care to be provided at any

licensed hospital that has appropriate facilities and qualified personnel regardless

of a patient‟s ability to pay. (§ 1317, subds. (a), (b); 42 U.S.C. § 1395dd (b), (h).)

Indeed, emergency service and care must be provided without even first

questioning the patient as to insurance or ability to pay. (§ 1317, subd. (d); 42

U.S.C. § 1395dd (h); see Bell v. Blue Cross of California (2005) 131 Cal.App.4th

211, 215.) And, if it turns out that the patient is enrolled in a health care service

plan and the noncontracting emergency service providers are not paid by the

plan‟s delegated IPA or other RBO because of the delegate‟s insolvency, it is

questionable whether the providers can seek reimbursement from the patient. (See

Prospect Medical, supra, 45 Cal.4th at pp. 502, 507 & fn. 5.) Thus,

noncontracting emergency services providers must provide necessary services, but

are generally at the mercy of a plan‟s delegation to an IPA or other RBO of the

responsibility for their reimbursement.

Third, in Bily, we recognized that imposition of a duty of care to third

parties, with its attendant potential for liability, would more likely result in “an

increase in the cost and decrease in the availability of audits and audit reports with

no compensating improvement in overall audit quality.” (Bily, supra, 3 Cal.4th at

27

pp. 404-405.) In contrast here, nothing suggests that health care service plans will

be prevented or deterred from entering into delegation contracts if they are

required to act reasonably in so doing. Imposing a duty on plans to act reasonably

in choosing an IPA or other RBO will promote a healthy functioning of the

managed health care model endorsed by the Knox-Keene Act. Indeed, a

requirement that health care service plans reasonably select financially solvent

delegates will more likely result in timely processing and ultimate payment of

covered emergency service claims, which will in turn support the continuing

availability and provision of such emergency services.

For the reasons given above, we conclude that health care service plans owe

a duty of care to noncontracting emergency service providers in entering into their

initial delegation contracts with IPAs or other RBOs and that the allegations of the

Centinela Freeman and Centinela Radiology complaints are sufficient to state a

cause of action for negligent initial delegation by the Health Plans.

D. A Cause of Action for Negligent Failure to Reassume the Delegated

Responsibility

The Court of Appeal found that the factors that compel a finding of a

common law duty of care on the part of a health care service plan in initially

delegating its payment responsibility to an IPA under section 1371.4(e) also

mandate a conclusion that the duty is a continuing one. Thus, it concluded, a plan

has a duty to promptly reassume its delegated obligation to pay noncontracting

emergency service providers when it knows or should know that its delegated IPA

has become financially unable to meet its delegated responsibility.

We agree that a health care service plan has a continuing duty of care to

noncontracting emergency service providers, but we conclude the breadth of such

duty is affected by the statutory goal of avoiding disruption of patients‟ medical

care. We hold that a health care service plan‟s duty to reassume the financial

28

responsibility it has delegated to a contracting medical provider group is triggered

by the plan‟s receipt of information through which the plan becomes aware or

should become aware that there can be no reasonable expectation that its delegate

will be able to reimburse covered claims from noncontracting emergency service

providers. That is, a health care service plan that initially responsibly delegates

financial responsibility to an IPA or other RBO may reasonably expect that any

financial difficulties subsequently experienced by its delegate can be adequately

addressed through the CAP process and an approved final CAP. In such situation,

a plan normally does not act negligently when it properly engages in and

cooperates with the DMHC in such process. Doing so is required by section

1300.75.4.8 of the Solvency Regulations and affirmatively supports continuity of

care by delegated medical provider groups to their patients, the plan‟s enrollees,

one of the express goals of the Knox-Keene Act. (§ 1342, subd. (g).) Indeed, the

Act, as implemented by the Solvency Regulations, specifically contemplates and

favors rehabilitation of financially struggling RBOs in support of such purpose.

(§ 1375.4(b)(4); Solvency Regs., § 1300.75.4.8.) However, a plan at all times

retains a continuing duty to monitor and assess whether such an expectation is in

fact reasonable under the particular circumstances presented and to timely take

available, appropriate action to protect noncontracting emergency service

providers when it knows or should know that there can be no reasonable

expectation that its delegated IPA or other RBO will be able to reimburse their

covered claims for emergency services.

We briefly discuss how the Biakanja factors support imposing this

continuing common law duty of care.

As noted earlier, the first Biakanja factor considers whether “the transaction

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

agree with the Court of Appeal that after the initial delegation, health care service

29

plans necessarily intend to affect the potential plaintiff class of noncontracting

emergency service providers by continuing or renewing their delegation to an IPA

or other RBO of their responsibility to pay emergency service providers under

section 1371.4(e).

The second Biakanja factor focuses on the foreseeability of harm to

noncontracting emergency services providers. Plaintiffs allege that the Health

Plans knew or should have known that the three La Vida IPAs failed to comply

with multiple state financial solvency requirements beginning in 2007, and

continuing through each quarter for the following four years, resulting in their

failure to reimburse the plaintiff noncontracting service providers for the

emergency care that they provided to enrollees of defendant Health Plans during

that time. They allege that the Health Plans were advised in October 2009 that La

Vida‟s lender sought protection under the bankruptcy laws and withdrew $4

million dollars from La Vida‟s account, and that La Vida was unable to obtain

funding from capital markets. The complaints allege that under the circumstances

the Health Plans lacked any reasonable expectation that La Vida would reimburse

plaintiffs, but nevertheless the plans waited until May and June 2010, years after

La Vida began openly demonstrating financial instability, to finally discontinue

their capitation payments to La Vida and terminate their delegation contracts.

Assuming the truth of these allegations for purposes of demurrer, plaintiffs‟

financial harm was foreseeable.

And again, there is no dispute that plaintiffs have suffered actual injury,

meeting the third Biakanja factor. (Biakanja, supra, 49 Cal.2d at p. 650.)

The fourth factor is “the closeness of the connection between defendants‟

conduct and the injury suffered.” (Biakanja, supra, 49 Cal.2d at p. 650.) In

considering this factor, we note that, as we have earlier explained, the Legislature

has provided, through the Knox-Keene Act, comprehensive regulation of the

30

managed health care system under the jurisdiction of the DMHC. (Prospect

Medical, supra, 45 Cal.4th at p. 504.) It has approved various risk-shifting

arrangements by plans (§ 1348.6, subd. (b)), specifically allowing plans to

delegate their responsibility to pay for emergency services and care.

(§ 1371.4(e).) It has recognized and addressed the evolving problem of insolvency

of delegated IPAs and other RBOs through the establishment of the DMHC‟s

Financial Solvency Standards Board (§ 1347.15) and a regulatory framework that

is intended to ensure the fiscal performance of IPAs and other RBOs by early

identification of performance deficiencies and implementation of CAPs.

(§§ 1375.4, 1375.5 ,1374.6; see Department of Managed Health Care, vol. 17,

No. 2, Cal. Reg. L.Rptr., supra, at pp. 29-30.) As described earlier, the CAP

collaborative system is specifically aimed at correcting identified deficiencies of a

financially unstable delegated IPA or other RBO. (Solvency Regs., § 1300.75.4.8,

subd. (a)(4) & (5).) Such instability may be caused by a myriad of economic and

business circumstances, which may be outside the control of the delegated IPA or

other RBO. The instability may be unrelated to the health care service plans‟

actions.

When, however, in light of those particular circumstances, a health care

service plan can have no reasonable expectation that its delegated IPA or other

RBO will be able to pay the claims of noncontracting emergency service providers

through a CAP process, we believe the eventual failure of its delegate to pay such

claims can be considered closely connected to the plan‟s conduct. (Biakanja,

supra, 49 Cal.2d at p. 650.) A plan that knows or should know that the financial

problems of its delegated IPA or other RBO are of such a magnitude that the

initiation or continuation of a CAP process will not result in payment of the

noncontracting emergency service providers‟ covered claims, but nevertheless

takes no available action to protect such providers, directly places those providers

31

in a position of additional financial risk because of their statutory obligation to

provide emergency services to the plan‟s enrollees.

Here, plaintiffs‟ complaints allege that the Health Plans knew or should

have known of La Vida‟s financial deficiencies, which spanned the course of four

years. Plaintiffs allege that the Health Plans were specifically advised that La

Vida‟s lender had filed a petition for relief under the bankruptcy laws in October

2009 and had withdrawn millions of dollars from La Vida‟s account, and that La

Vida had no alternate financing. Plaintiffs allege that the Health Plans continued

their La Vida delegation contracts without any reasonable expectation, under these

circumstances, that La Vida would reimburse plaintiffs‟ emergency service claims.

Such allegations sufficiently allege a close connection between Health Plans

conduct and plaintiffs‟ financial injury.

To the extent that health care service plans engage in the CAP process in

good faith and with a reasonable expectation that a final CAP will result in

payment of providers‟ claims, no moral blame can be assigned to their failure to

act outside of that process to reassume the obligation to pay the claims of

noncontracting emergency service providers. (Biakanja, supra, 49 Cal.2d at

p. 650.) Both the statutes and the regulations strongly favor rehabilitation of

financially troubled IPAs or other RBOs through the CAP process and such

rehabilitation depends on the cooperation of health care service plans, who should

not fear that cooperation with the regulatory process exposes them to tort liability.

But, in the limited situation where a health care service plan knows or should

know that there can be no reasonable expectation of a successful CAP resulting in

reimbursement of the claims of noncontracting emergency service providers, the

failure of health care service plans to take available action to protect such

providers is morally blameworthy.

32

Finally, imposing a continuing duty of care, as we have defined it, on health

care service plans will help prevent future economic harm to noncontracting

emergency service providers. (Biakanja, supra, 49 Cal.2d at p. 650.)

We expressly decline, however, to impose a continuing duty of care broader

than the one we have described because of the balance of policy interests at play

here. (Bily, supra, 3 Cal.4th at pp. 404-405.) A health care service plan should

not be required to reassume its delegated financial responsibility to pay

noncontracting emergency service providers, for example, at the first sign that its

delegate is experiencing financial difficulty or when it receives notice that there

has been a failure to pay noncontracting emergency service providers‟ covered

claims or based on the initiation of CAP proceedings alone. Imposition of such a

broad common law tort duty would risk interfering with the statutory and

regulatory CAP process for the rehabilitation of troubled RBOs because it would

incentivize a health care service plan to terminate its delegation contracts and

reassign its patient enrollees and thus interrupt medical care in lieu of the CAP

process. Such action would undermine the carefully balanced and comprehensive

managed health care scheme established by the Knox-Keene Act (§ 1342), which

expressly approves delegation contracts (§ 1371.4(e)) and supports a regulatory

framework for the restoration of fiscal stability to financially deficient RBOs

(Solvency Regs., § 1300.75.4.8, subd. (a)(4) & (5)), in part to ensure continuity of

patient care. (§ 1342, subd. (g).)

IV. CONCLUSION

We conclude that health care service plans owe a common law tort duty to

noncontracting emergency service providers to act reasonably in initially

delegating their financial responsibility to an IPA or other RBO under section

1371.4(e). The Court of Appeal correctly determined, therefore, that a cause of

action exists in favor of noncontracting emergency service providers that allege, as

33

here, that a health care service plan negligently delegated its duty to pay

emergency service claims to an IPA that it knew or should have known was

financially unsound. We also conclude that a health care service plan has a

narrow continuing common law tort duty to noncontracting emergency providers

to monitor and assess the financial condition of its delegate and to timely take

available, appropriate action to protect noncontracting emergency service

providers when it knows or should know that there can be no reasonable

expectation that its delegated IPA or other RBO will be able to reimburse their

covered claims for emergency services. The Court of Appeal correctly

determined, therefore, that a cause of action exists in favor of noncontracting

emergency service providers, as pleaded or could be pleaded here, for a violation

of such continuing duty. The trial court erred in sustaining the Health Plans‟

demurrers without leave to amend.

34

V. DISPOSITION

The judgment of the Court of Appeal, which reversed the trial court‟s order

sustaining defendants‟ demurrers to the complaints, is affirmed. The matter is

remanded to the Court of Appeal with directions that it remand these consolidated

actions to the trial court for further proceedings consistent with this opinion.

CANTIL-SAKAUYE, C. J.

WE CONCUR:

WERDEGAR, J.

CHIN, J.

CORRIGAN, J.

LIU, J.

CUÉLLAR, J.

KRUGER, J.

35

See last page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc.

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted XXX 225 Cal.App.4th 237

Rehearing Granted

__________________________________________________________________________________

Opinion No. S218497

Date Filed: November 14, 2016

__________________________________________________________________________________

Court: Superior

County: Los Angeles

Judge: John Shepard Wiley, Jr.

__________________________________________________________________________________

Counsel:

Michelman & Robinson, Andrew H. Selesnick, Damaris L. Medina, Robin James and Jason O. Cheuk for

Plaintiffs and Appellants.

Francisco J. Silva, Long X. Do and Michelle Rubalcava for California Medical Association, California

Hospital Association, California Orthopaedic Association, California Radiological Society and California

Society of Pathologists as Amici Curiae on behalf of Plaintiffs and Appellants.

Law Office of Astrid G. Meghrigian and Astrid G. Meghrigian for California Chapter of the American

College of Emergency Physicians as Amicus Curiae on behalf of Plaintiffs and Appellants.

Reed Smith, Kurt C. Peterson, Kenneth N. Smersfelt, Zareh A. Jaltorossian; Grignon Law Firm and

Margaret M. Grignon for Defendant and Respondent Blue Cross of California doing business as Anthem

Blue Cross.

Crowell & Moring, William A. Helvestine, Ethan P. Schulman and Damian D. Capozzola for Defendant

and Respondent Health Net of California, Inc.

Crowell & Moring and Jennifer S. Romano for Defendant and Respondent Pacificare of California doing

Business as Secure Horizons Health Plan of America.

Manatt, Phelps & Phillips, Gregory N. Pimstone , Joanna S. McCallum and Jeffrey J. Maurer for Defendant

and Respondent California Physicians‟ Service doing business as Blue Shield of California.

Hernandez Schaedel & Associates, Gonzalez Saggio & Harlen, Zuber Lawler & Del Duca, Don A.

Hernandez and Jamie L. Lopez for Defendant and Respondent SCAN Health Plan.

Gibson, Dunn & Crutcher, Krik A. Patrick, Richard J. Doren and Heather L. Richardson for Defendant and

Respondent Aetna Health of California.

DLA Piper, Cooley, William P. Donovan, Jr., and Matthew D. Caplan for Defendant and Respondent

Cigna HealthCare of California, Inc.

Page 2 – S281497 – counsel continued

Counsel:

Barger & Wolen, John M. LeBlanc; Hinshaw & Culbertson, Sandra I. Weishart and Larry M. Golub for

California Association of Health Plans and CAPG as Amicus Curiae on behalf of Defendants and

Respondents.

Carol L. Ventura, Drew Brereton and Sheila M. Tatayon for California Department of Managed Health

Care as Amici Curiae.

Counsel who argued in Supreme Court (not intended for publication with opinion):

Andrew H. Selesnick

Michelman & Robinson

10880 Wilshire Boulevard, 19th Floor

Los Angeles, CA 90024

(310) 564-2670

Margaret M. Grignon

Grignon Law Firm

5150 E. Pacific Coast Highway, Suite 200

Long Beach, CA 90804

(562) 285-3171