Appendix — Samura v. Kaiser Foundation Health Plan, Inc.

Supreme Court, U:8,

FILED

~) 93150 2 MAR 161994

No. OFFICE OF THE CLERK

In the Supreme Court of the United States

October Term, 1993

Arthur Bradley Samura,

Petitioner,

Vv.

Kaiser Foundation Health Plan, Inc.,

The Permanente Medical Group, Inc., and

Kaiser Foundation Hospitals, Inc.

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

TO THE CALIFORNIA COURT OF APPEAL,

FIRST APPELLATE DISTRICT, DIVISION ONE

RALPH SANTIAGO ABASCAL*

MANUEL GLENN ABASCAL

KATHY SHULL ABASCAL

2102 Fifth Street

Berkeley, California 94710

(510) 540-6118

* Attorney of Record

—-—

:

DS yp FRI OO OO ee a OSA ee ES fey eee DEC PTT ae ae eee ae ey

“ i ‘ OE Tate, z ¢ “

APPENDIX TO PETITION FOR CERTIORARI

Table of Contents

California Court of Appeal Opinion

Samura v. Kaiser Foundation Health Plan,

Inc., et al.,

17 Cal.App.4th 1284 (1999) ............. Pages 1-23

2. California Superior Court Decision

Samura v. Kaiser Foundation Health Plan,

Inc., et al.,

Superior Court for the State of California,

County of Alameda, No. 605676-4 . Pages 24-29

3. California Superior Court Judgment

Samura v. Kaiser Foundation Health Plan,

Inc., et al.,

Superior Court for the State of California,

County of Alameda, No. 605676-4 Pages 30-32

4. Fede:al District Court Remand Order

Samura v. Kaiser Foundation Health Plan,

Inc., et al.,

715 F.Supp. 971 (N.D.Cal. 1989) ..... Page 33-38

5. Order Denying Review

California Supreme Court,

BIOs BN iitiinitescicndccecenssinsdicorscsece Page 39

6. The Health Maintenance Organization Act,

42 U.S.C. §300e(a)&(b)(1) .............. Pages 40-42

2 Kaiser Foundation Health Plan, Inc.

Third Party Liability Term. ........... Pages 43-46

1. Samura v. Kaiser Foundation Health Plan, Inc.

17 Cal. App. 4th 1284; 22 Cal.Rptr. 2d 20; (Aug.

1993)

ARTHUR BRADLEY SAMURA, Plaintiff and Appel-

lant, v.

KAISER FOUNDATION HEALTH PLAN, INC.., et al.,

Defendants and Appellants.

Nos. A055730, A057515.

California Court of Appeal,

First Appellate District,

Division One.

Decided Aug 17, 1993.

COUNSEL

Manuel Glenn Abascal and Kathy S. Abascal for Plain-

tiff and Appellant.

Kennedy P. Richardson, Mark Palley and Lillian F.

Hamrick for Defendants and Appellants.

OPINION

NEWSOM, J. — The Kaiser Foundation Health Plan,

Inc., The Permanente Medical Group, Inc., and Kaiser

Foundation Hospitals (hereafter Health Plan or Kai-

ser) appeal a judgment of the Alameda County Supe-

rior Court requiring extensive changes in the third

party liability provision in service agreements with

members. The theories alleged in the original com-

plaint, filed by the plaintiff, Arthur Bradley Samura,

on November 20, 1985, were greatly expanded in a first

amended complaint filed about three and one-half years

later. This amended complaint states a multifaceted

legal challenge to the third party liability provision,

(1)

together with associated administrative practices, and

seeks injunctive relief on behalf of Samura and other

Health Plan members similarly situated pursuant to

Business and Professions Code sections 17200 and

17203.

Following trial, the court issued an order on May 31,

1991, granting the relief that is the subject of this ap-

peal. At Health Plan’s request, it subsequently deliv-

ered a statement of decision clarifying the legal basis

for the order. The provisions of the order were incor-

porated in a judgment, filed on October 10, 1991, from

which Kaiser now appeals. Samura filed a cross-ap-

peal claiming the right under state and federal law to

an order enjoining the administration of the third party

liability provision in any form.

Health Plan is a nonprofit health maintenance orga-

nization licensed under the Knox-Keene Health Care

Service Plan Act of 1975 (Health & Saf. Code, § 1340 et

seq., hereafter Knox-Keene Act) and qualified under

the federal Health Maintenance Organization Act of

1973. Like other health maintenance organizations, it

provides health care services, in consideration for the

payment of monthly dues, pursuant to service agree-

ments with individual members and group service

agreements with employers and union trust funds. The

individual and group service agreements contain cer-

tain standard limiting conditions, including the third

party liability provision at issue here. Health Plan does

not itself provide medical care but rather contracts with

the other defendants, The Permanente Medical Group,

Inc., and Kaiser Foundation Hospitals, for the actual

health care services.

The third party liability provision provides that, if a

member receives medical services under the service

agreement for an injury caused by a third party and

2

subsequently recovers a settlement or judgment a

compensation for the injury, the member will pay

Health Plan for the services from the proceeds of the

settlement or judgment. A separate schedule estab-

lishes the fees for the medical services.!1 The provision

gives the Health Plan “a lien on the settlement or judg-

ment” for the purpose of collecting its charges. As a

means of enforcing the lien, subdivision 6C(1)(d) of the

provision gives Health Plan a right of subrogation

against the third party, and subdivision (e) accords

priority to the Health Plan lien in payment of the pro-

ceeds of the settlement or judgment. Samura has aban-

doned his challenge to the subrogation provision in this

suit, choosing to pursue it in a separate lawsuit. This

appeal thus concerns the provisions of subdivision (e)

and related administrative practices.

Subdivision (e) provides: “Health Plan (or its desig-

nee) shall be entitled to the payment, reimbursement,

and subrogation as provided in this Section C(1) re-

gardless of whether the total amount of the recovery of

the Member (or his or her estate, parent or legal guard-

ian) on account of the injury or illness is less than the

actual loss suffered by the Member (or his or her estate,

parent or legal guardian). The proceeds of any judg-

ment or settlement obtained by Health Plan (or its des-

ignee) or the Member (or his or her estate, parent or

legal guardian) on account of the injury or illness shall

first be applied to satisfy Health Plan’s (or its

designee’s) claims, liens, and other rights under this

Section C(1).”

The principal features of the third party liability pro-

vision are summarized in a pamphlet, entitled “Disclo-

1 The reasonableness of the fees is not at issue here as respondent

abandoned his challenge to the fee schedule in the lower court.

3

sure Form & Evidence of Coverage,” which is given to

all members. In a concisely written paragraph, Health

Plan again claims a lien on the proceeds of a settle-

ment or judgment in the full amount of its charges.2

Health Plan collects its charges under this provision

through a third party liability department that sends

an array of standard letters to members and their at-

torneys. Upon learning that a member is pursuing a

claim against a third party, the department sends the

member a “medical payment order” itemizing the

charges for medical services rendered and notifying the

member of Health Plan’s right of reimbursement. An

accompanying letter sent to the member’s attorney

states that, if the bill is paid promptly in full, Health

Plan will bear a pro rata share of the member’s attor-

ney fees.3 When the third party claim results in a re-

2 “If injury or illness is claimed to be caused by any act or omission of

a third party, services and other benefits are furnished or arranged by

Medical Group physicians and Kaiser Permanente medical facilities at

non-member rates. Payment is the member's responsibility, except that

the member is not required to pay any portion of such charges for ser-

vices which is in excess of the total amount collected from or on behalf of

the third party on account of such acts or omissions, whether by settle-

ment or judgment and Health Plan (or its designee) shall have a lien on

the settlement or judgment for that purpose. At Health Plan's (or its

designee’s) request, the member (or his/her estate, parent or guardian)

shall execute a lien form(s) directing his or her attorney or the third

party to make payments to Health Plan (or its designee). In the event

that Health Plan is required to institute legal action to enforce its lien,

the member shall reimburse Health Plan for the reasonable costs of col-

lection, including attorney's fees.”

3 The letter sent to Samura’s attorney stated: “It is our current policy

to allow a reduction of our bill if the net amount due is promptly paid in

full. The reduction is on a pro rata basis, equal to the contingency per-

centage charged to your client. The reduction does not apply to an agreed

upon compromise of our claim, nor does it apply to any supplemental

charges previously paid by the member.”

4

covery through a settlement or judgment, the depart-

ment ordinarily demands full payment of the charges,

reduced only by a pro rata share of the attorney’s con-

tingency fee. But in the event that the recovery does

not adequately compensate the member, the depart-

ment may express a willingness to negotiate a further

reduction in its claim. A standard letter states: “B) If

liability problems compel the plaintiff or his attorney

to compromise a claim for a figure substantially below

the reasonable norm, our charge may be negotiated in

a related fashion. [{] C) Ifthe plaintiff or his attorney

is compelled to accept a final recovery which is totally

disproportionate to the amount of damages and sever-

ity of injury (due to liability problems or inadequate

insurance coverage), ovr third party reimbursement

may be negotiated further.”

The manager of the third party liability department

testified that, as a rule of thumb, the department de-

clines to negotiate a reduction of its charges if the tort

recovery is three times the amount of its bill. The criti-

cal considerations, however, are the relation of the tort

recovery to the member’s economic losses, such as lost

wages or lost earning capacity, and the prospect of “sig-

nificant on-going” future medical costs. In some cases,

the department will waive its rights to reimbursement

entirely. As an example of a case in which it would

consider waiving its rights, the manager used the fol-

lowing hypothesis: if the member is billed for $ 20,000

but recovers only $ 15,000 and “if the future medical is

going to be $ 100 thousand and he’s now a paraplegic

and will never be able to return to work, not only will

we probably significantly consider reducing the case,

but waiving our rights to reimbursement.” Even though

he did not present such an extreme case, the depart-

ment waived Samura’s claim in accordance with its

5

“normal approach” because his recovery was less than

his lost wages.

The order on appeal enjoins Health Plan “to clarify

and explain the TPL [third party liability] terms in its

agreements as follows: [{] 1. Rewrite the TPL term in

plain English and give greater prominence to the term

in the contract. [{] 2. Include a provision in the con-

tract that standardizes and clarifies the method of re-

ducing the amount of its claim if a member is not ad-

equately compensated by a settlement agreement in

third party litigation and include a provision in the

TPL term for determining whether or not a member is

adequately compensated. [{] 3. Provide in the contract

that [Health Plan] will share pro rata in the costs of

litigation and attorney fees. [{] 4. Refrain from calling

the TPL term a ‘reduction.’ [{] 5. Inform members in

the medical payment order that [Health Plan] will

share pro rata in litigation costs and in attorney fees.

({] 6. Inform members in the medical payment order

that [Health Plan) may reduce the amount of its claim

if the member is not adequately compensated. [{] 7.

Refrain from combining the medical payment order

with a medical information release authorization form.

({] 8. Refrain from including any representations that

the TPL term excludes or reduces coverage in the con-

tract or standard form letters to members and/or their

attorneys. [] 9. Standardize form letters regarding the

TPL term to ensure that all members are informed of

(Health Plan’s] practice of reducing its claim to share

pro rata in costs of litigation and attorney fees.”

(la) As it purports to enjoin unfair competition pur-

suant to Business and Professions Code section 17203,

the propriety of the order depends on the definition of

unfair competition in Business and Professions Code

section 17200. The term was there defined to include

6

any “unlawful, unfair or fraudulent business practice.”4

“California courts have consistently interpreted such

language broadly. An ‘unlawful business activity’ in-

cludes ‘ “anything that can properly be called a busi-

ness practice and that at the same time is forbidden by

law.”’” (People v. McKale (1979) 25 Cal.3d 626, 632

[159 Cal.Rptr. 811, 602 P.2d 731); Barquis v. Merchants

Collection Assn. (1972) 7 Cal.3d 94, 113 [101 Cal.Rptr.

745, 496 P.2d 817].)

As the statement of decision makes clear, the order

is largely premised on alleged violations of the Knox-

Keene Act, but paragraph 2—by far the most impor-

tant provision—presents other issues of substantive

law. The paragraph implies that the third party liabil-

ity provision cannot be validly enforced against mem-

bers who are not “adequately compensated” by the tort

recovery from the third party causing their injury. We

will first examine the case law in point.

With the exception of two out-of-state decisions which

we have no reason to follow, the courts have upheld

third party liability provisions according to their terms.

In Block v. Cal. Physicians’ Service (1966) 244

Cal.App.2d 266 [53 Cal.Rptr. 51], which concerned the

service agreement of a health maintenance organiza-

tion like Health Plan, the court rejected a challenge to

a third party liability provision as being an assignment

of a cause of action for personal injuries. (Accord, Lee

v. State Farm Mut. Auto. Ins. Co. (1976) 57 Cal.App.3d

458, 465-466 [129 Cal.Rptr. 271].) Although the Block

decision did not consider the enforceability of the pro-

vision against a beneficiary receiving inadequate com-

4 As amended, the code currently provides for any “unlawful unfair or

fraudulent business act or practice.” (Stats. 1992, ch. 430, § 2.)

7

pensation from the third party, this issue was addressed

by Travelers Indem. Co. v. Ingebretsen (1974) 38

Cal.App.3d 858 [113 Cal. Rptr. 679], in the closely analo-

gous context of a subrogation clause. Property insur-

ance companies there asserted third party claims

against a judgment partially compensating

homeowners for losses sustained in a landslide. The

court rejected a claim that the insurance companies

should be denied any recovery until the homeowners

were fully compensated for the losses. Under the cir-

cumstances of the case, it held that the “the insurer

should be entitled to subrogation without regard to

whether the insured has first been ‘made whole.” (Id.

at p. 866.)

Other jurisdictions have enforced third party liabil-

ity provisions against undercompensated beneficiaries.

In re Estate of Scott (1991) 208 Ill.App.3d 846 [153

Ill.Dec. 647, 567 N.E.2d 605), upheld such a provision

even though it served to deplete a grossly inadequate

recovery for a disabling injury. Dismissing an argu-

ment that the provision was “inequitable,” the court

held: “This is not a case based in equity, but rather on

contractual terms.” (Jd. at p. 607.) Again, Sargeant v.

Local 478 Health Benefits & Ins. Fund (D.Conn. 1990)

746 F.Supp. 241, found no authority in Connecticut law

for qualifying an insurer’s right to enforce a third party

liability provision. A line of decisions applying federa!

substantive law under the Employee Retirement In-

come Security Act of 1974 (29 U.S.C. § 1001 et seq.)

has similarly enforced third party liability provisions

where the beneficiary claimed to be inadequately com-

pensated by the recovery from the third party. (Molina

v. Retail Clerks Unions etc. Benefit Fund (1980) 111

Cal.App.3d 872 [168 Cal.Rptr. 906]; Provident Life and

_ Ace. Ins. Co. v. Linthicum (W.D.Ark. 1990) 743 F.Supp.

8

662; Hunt by Hunt v. Sherman (Minn. 1984) 345 N.W.2d

750.) Other decisions have refused to restrict enforce-

ment of a third party liability provisions to the portion

of the recovery attributable to medical expenses. (Fore-

most Life Ins. Co. v. Waters (1982) 415 Mich. 303 [329

N.W.2d 688]; Dugan v. Nickla (N.D.Ill. 1991) 763

F.Supp. 981.)

Two decisions, however, have limited the enforcement

of third party liability provisions on the ground of pub-

lic policy. Westendorf by Westendorf v. Stasson (Minn.

1983) 330 N.W.2d 699, 702, construed a vaguely worded

third party liability provision in the light of an appli-

cable Minnesota regulation and concluded that it gave

a health maintenance organization the right “only to

payments specifically collected by the enrollee for ...

medical expenses.” In addition, since the provision did

not expressly give the health maintenance organiza-

tion priority to the disputed proceeds, the court relied

on the general rule that “absent express contract terms

to the contrary, subrogation will not be allowed where

the insured’s total recovery is less than the insured’s

actual loss.” (Id. at p. 703.) Powell v. Blue Cross and

Blue Shield (Ala. 1990) 581 So.2d 772, went a step fur-

ther. The third party liability provision expressly gave

the insurer first priority over proceeds that the benefi-

ciary collected from a third party, specifying: “‘... The

right to reimbursement ... comes first even if a Mem-

ber is not paid for all of his claim for damages against

the other person ....’“ (Jd. at p. 774, italics omitted.)

The court, however, found the provision to be inconsis-

tent with the traditional equitable principle denying a

right of subrogation “until the plaintiff/insured has been

fully compensated for her loss.” (Id. at p. 773.) Refus-

ing to “undermine the equitable principles upon which

subrogation is based” (Jd. at p. 775), it held “that the

9

insurer has no right to subrogation unless and until

the insured is made whole for his loss.” (Jd. at p. 777.)

The Westendorf decision can clearly be distinguished

from the present case. There is no comparable Califor-

nia regulation affecting interpretation of the third party

liability provision, and the language of the provision

here explicitly gives Health Plan priority to the pro-

ceeds of a recovery from a third party. The Powell deci-

sion is in point but it stands in opposition to a line of

authority allowing the insured and insurer to modify

by contract the traditional equitable rule conditioning

the right of subrogation on the insured’s full compen-

sation. (Peterson v. Ohio Farmers Ins. Co. (1963) 175

Ohio St. 34 [23 Ohio Op.2d 311, 191 N.E.2d 157,

159-160]; Garrity v. Rural Mut. Ins. Co. (1977) 77 Wis.2d

537 (253 N.W.2d 512, 515-516); Hill v. State Farm Mut.

Auto. Ins. Co. (Utah 1988) 765 P.2d 864, 868; Culver v.

Insurance Co. of North America (1989) 115 N.J. 451

[559 A.2d 400, 402-404].)

Health Plan also argues that the Department of

Corporations, which is entrusted with the regulation

of health maintenance organizations, has in effect sanc-

tioned the third party liability provision at issue here.

Pursuant to Health and Safety Code section 1352.1,

subdivision (a), Health Plan has submitted the origi-

nal health service Agreement and every subsequent

amendment to the department for its review without

receiving any objection. Under some unusual circum-

stances, such repeated administrative review followed

by an absence of objection may be entitled to much the

same effect as actual approval. (Bernardini v. Home

and Automobile Insurance Co. (1965) 64 Ill._App.2d 465

(212 N.E.2d 499, 501); Smith v. Motor Club of America

Ins. Co. (1959) 54 N.J.Super. 37 [148 A.2d 37, 41];

Demmery v. National Union Fire Insurance Co. (1967)

10

210 Pa.Super. 193 [232 A.2d 21, 24].) In an appropri-

ate case, it may serve to invoke the rule that a regula-

tory agency’s interpretation of a statute it is respon-

sible for enforcing is entitled to “great weight.” (West-

ern Oil & Gas Assn. v. Monterey Bay Unified Air Pollu-

tion Control Dist. (1989) 49 Cal.3d 408, 425 [777 P.2d

157].) However, the rule has no application to the

present case since the Department of Corporation’s

nonobjection to the provision cannot be clearly linked

to the interpretation of any statute it is charged with

enforcing. (See Armistead v. State Personnel Board

(1978) 22 Cal.3d 198, 204-205 [149 Cal.Rptr. 1, 583 P.2d

744]; Delgado v. Heritage Life Ins. Co. (1984) 157

Cal.App.3d 262, 273 [203 Cal.Rptr. 672]; Frenzer v.

Mutual Ben. H. & A. Assn. (1938) 27 Cal.App.2d 406,

414 [81 P.2d 197].)

Samura’s argument based on public policy is simi-

larly inconclusive. (See Gantt v. Sentry Insurance

(1992) 1 Cal.4th 1083, 1095 [4 Cal.Rptr.2d 874, 824

P.2d 680].) Government Code section 985, which au-

thorizes the trial court to reduce the amount of the con-

tractual lien under some circumstances, applies nar-

rowly to judgments against a public entity. Labor Code

section 4903.1, subdivisions (a)(2) and (4), gives the

appeals board discretionary authority to reduce the

amount of liens claimed by health benefit plans against

an applicant’s settlement recovery but allows unre-

stricted enforcement of liens against the proceeds of

workers’ compensation awards. Two other statutes limit

the state’s lien for recovery of Medi-Cal benefits (Welf.

& Inst. Code, § 14124.78) and hospital liens for emer-

gency services (Civ. Code, § 3045.4) to one-half a

beneficiary’s tort recovery, but these isolated provisions

are not enough to evidence a general public policy.

(1b) On balance, our review of applicable law does

11

not reveal any persuasive support for the rule effected

in paragraph 2 of the judgment, that is, a rule limiting

enforcement of the third party liability provision “if a

member is not adequately compensated by a settlement

agreement in third party litigation.” But neither does

the decisional law offer any consistently persuasive

rationale for the third party liability provision; the

various reasons offered in justification of the provision

are all of limited application and may be entirely ab-

sent in some hard cases.

Block v. Cal. Physicians’ Service, supra, 244

Cal.App.2d 266, regards the third party liability provi-

sion as serving the goals of cost reduction and avoid-

ance of double recovery: “The clause is ... part of an over-

all program sanctioned and encouraged by the Legisla-

ture ... to provide medical and hospital services on a

nonprofit basis at a minimum expense to those partici-

pating. [Citation.] ... While [plaintiff] has a right to

seek to be made whole, it is unfair for him to seek en-

richment by double recovery which would result from

retention of all proceeds of the settlement of his suit

against Cray and of all medical and hospital benefits

paid to him by defendant Service under its agreement—

for the same injuries—all eventually at the cost of the

participating members of the plan.” (/d. at p. 273.) But

the justification of cost reduction will apply to any ex-

clusion or limitation on insurance coverage, or, for that

matter, to elimination of insurance coverage altogether;

it has no peculiar force as a rationale for the third party

liability provision. Moreover, the possibility of a double

recovery—or, in the case of a health maintenance orga-

nization, a windfall recovery for medical expenses that

the insured did not incur—arises only where the in-

sured recovers the cost of medical expenses from the

third party. The third party liability provision is not

12

limited to this element of recovery, and respondent ar-

gues plausibly that various factors, such as

underinsurance, compromise, and attorney fees, tend

to prevent any actual windfall in most cases.

Language in certain cases suggests another possible

rationale for the third party liability provision: the

parties may reasonably agree to give the payment of

medical costs a higher priority than the recovery of

noneconomic damages for pain and suffering. Thus, in

Hartford Accident & Indemnity Co. v. Gropman (1984)

163 Cal.App.3d Supp. 33 [209 Cal.Rptr. 468], the court

precluded the defendant from showing the portion of

her tort recovery that related to medical bills, “as op-

posed to other special damages and general damages

for pain and suffering.” (Jd. at pp. Supp. 38, 41.) This

justification, of course, will apply only when the recov-

ery includes damages for pain and suffering.

Though never clearly articulated, the most important

rationale may turn on the concept of fault; it may be

thought that the burden of medical expenses should

be placed on the wrongdoer. In Wright v. Department

of Benefit Payments (1979) 90 Cal.App.3d 446 [153

Cal.Rptr. 474], where the state sought to recoup the

amount of Medi-Cal benefits from a personal injury

settlement, the court alluded to the concept of fault in

rejecting a due process objection: “Traditional notions

of due process and fundamental fairness are not of-

fended by a statutory scheme which permits the public

treasury to be reimbursed from Patrick’s recovery from

the party who caused the injuries for which Medi-Cal

paid for the treatment.” (Jd. at p. 451.) This justifica-

tion assumes that the recovery from the party at fault

will create a fund from which medical costs may be

paid without burdening the injured party. But where

the tort victim does not recover enough from the third

13

party to compensate for lost wages, future loss of earn-

ing capacity, or uninsured future medical expenses, the

victim will also bear the burden of paying medical ex-

penses from the tort recovery; in such cases, the third

party liability provision may represent a heavy bur-

den on the injured party by reducing recovery of ac-

tual economic losses.

In short, the third party liability provision may some-

times operate in a harsh and one-sided manner with-

out any justification, which raises the possible appli-

cation of the doctrine of unconscionability. As embod-

ied in Civil Code section 1670.5, subdivision (a), the

concept of “unconscionability has both a ‘procedural’

and a ‘substantive’ element.” (A & M Produce Co. v.

FMC Corp. (1982) 135 Cal.App.3d 473, 486 [186

Cal.Rptr. 114, 38 A.L.R.4th 1].) “The former includes

(1) ‘oppression,’ which refers to an inequality of bar-

gaining power resulting in no real negotiation and the

absence of meaningful choice; and (2) ‘surprise,’ which

occurs when ‘the supposedly agreed-upon terms of the

bargain are hidden in a prolix printed form drafted by

the party seeking to enforce the disputed terms.’ ... [{]

‘Substantive’ unconscionability consists of an alloca-

tion of risks or costs which is overly harsh or one-sided

and is not justified by the circumstances in which the

contract was made. [Citation.] Presumably both pro-

cedural and substantive unconscionability must be

present before a contract will be held unenforceable.

However, a relatively larger degree of one will com-

pensate for a relatively smaller degree of the other.”

(Dean Witter Reynolds, Inc. v. Superior Court (1989)

211 Cal.App.3d 758, 767-768 [259 Cal.Rptr. 789].)

(1c) In those cases where the third party liability

provision has a harsh and one-sided impact, a Health

Plan member could unquestionably present a strong

14

defense to the enforcement of the provision on this

ground. The provision is not subject to negotiation (al-

though a prospective member may possibly have the

option of shopping for an alternative health plan with-

out the provision). And it represents a departure from

the general pattern of the health service agreement

that may arguably result in surprise.

We have not found any decision actually adjudicat-

ing a third party liability provision as being unenforce-

able on the ground of unconscionability, but the issue

is not in dispute in this appeal. Displaying a commend-

able candor, Health Plan concedes that judges can “re-

ject applications of subparagraph (e) that shock their

conscience.” To its credit, it has adopted a policy of

waiving the provision in hard cases, despite the ab-

sence of precise legal guidelines.

In summary, we have seen that paragraph 2 of the

judgment reflects an improper distinction between

adequately and inadequately compensated members.

The boundaries of legality in the application of the third

party liability provision are found rather in the doc-

trine of unconscionability. Should the judgment be re-

vised to refer instead to the doctrine of

unconscionability? The question is linked to another

asserted omission in the third party liability provision

which is addressed in paragraph 3 of the judgment—

reference to the common fund rule. (6) It is well es-

tablished that, when two or more parties are entitled

in common to a fund created by a recovery from a third

party, and the costs of litigation have been borne by

only one of them, the courts in the exercise of their

inherent equitable powers will require the apportion-

ment of costs and attorney fees. (Lee v. State Farm

Mut. Auto. Ins. Co., supra, 57 Cal.App.3d 458, 466-468.)

(1d) Thus, the courts will reduce Health Plan’s lien

15

under the third party liability provision by its pro rata

share of the member’s costs in securing a judgment or

settlement from the third party.

In its statement of decision, the trial court based its

order in part on the principle, enunciated in People v.

McKale, supra, 25 Cal.3d 626, 635, that it is an unfair

or fraudulent business practice “to assert a contrac-

tual right that one does not have.” (Cf. People v. Cus-

tom Craft Carpets, Inc. (1984) 159 Cal.App.3d 676,

683-684 [206 Cal.Rptr. 12].) The third party liability

provision at issue asserts an unqualified right to re-

cover the cost of medical services from a member’s re-

covery from a third party. In fact, Health Plan’s right

of recovery is qualified in two respects—by the doctrine

of unconscionability and by the common fund rule. The

failure of the third party liability provision to refer to

the limitations on Health Plan’s right of recovery, the

trial court suggests, constitutes a form of unfair com-

petition under Business and Professions Code section

17200.

We do not consider, however, that the present case

comes within the McKale principle. The defendant

mobilehome park in the McKale decision included cer-

tain unlawful provisions in its rules and regulations

which it did not actually attempt to enforce. Despite

the lack of enforcement, the court held that the use of

the provisions could still be enjoined: “When a

mobilehome park operator requires tenants to sign park

rules and regulations which the park is prohibited by

law from enforcing, those tenants are likely to be de-

ceived, and allegations of unfair competition based

thereon are sufficient to withstand demurrer.” (25

Cal.3d at p. 635.)

In contrast, the third party liability provision at is-

sue here is entirely lawful on its face but, like many

16

contract provisions, may be subject to certain defenses

and exceptions in application. Health Plan does not

try to outline in advance all the factors that may affect

application of the provision but rather employs form

letters acknowledging these limitations when they

arise. Upon learning of a member’s claim against a

third party, it routinely sends to the member’s attor-

ney a letter alluding to its obligation to reduce its claim

under the common fund rule. This practice, we find,

has no significant tendency to mislead. Again, follow-

ing recovery by settlement or judgment, it considers

whether enforcement of its lien would work a hard-

ship on the member and expresses a willingness to

negotiate a reduction of its claim where the possibility

of hardship exists. (7)(See fn. 6) (1e) We express no

opinion as to whether Health Plan actually avoids prob-

lems of unconscionability in this manner—the evidence

on this point is conflicting—but we do not consider that

it acts unlawfully in negotiating the issue on a case by

case basis. In the absence of regulatory guidelines pro-

mulgated by the Department of Corporations,5 the

unsettled state of the law and the many potential vari-

ables bearing on the issue make it difficult to resolve

the problem of unconscionability through a set for-

5 The matter plainly calls for legislative or regulatory action. As

indicated by our analysis, the third party liability provision in practice

runs the gamut from essential fairness to unconscionability. Some ap-

propriate formula or guideline might avoid its application, or modify its

rigor, in hard cases. Respondent notes ironically “that persons who are

Kaiser members through Medi-Cal fare better than persons who pay dues

directly.” (See Welf. & Inst. Code, § 14124.78.) But despite the desirabil-

ity of some such limitation, we cannot say that Health Plan acted unlaw-

fully in failing to incorporate a precautionary formula of some kind in

the provision.

17

mula.6

We turn now to the question whether the order on

appeal was properly based on violations of the Knox-

Keene Act. (8) We note preliminarily that Business

and Professions Code sections 17203 and 17200 do not

confer on Samura a general power to enforce the act.

This power has been entrusted exclusively to the De-

partment of Corporations, preempting even the com-

mon law powers of the Attorney General. (Health &

Saf. Code, §§ 1341 and 1346; Van de Kamp v. Gumbiner

(1990) 221 Cal.App.3d 1260 [270 Cal. Rptr. 907].) Among

other things, the Department of Corporations has ex-

clusive power to regulate the provisions of heaith ser-

vice agreements of health maintenance organizations

and the content of the required disclosure form and

evidence of coverage pamphlets. (Health & Saf. Code,

§§ 1351 and 1363.)

But, despite the existence of a statutory enforcement

scheme, Samura may still sue to enjoin acts which are

made unlawful by the Knox-Keene Act. In People v.

McKale, supra, 25 Cal.3d 626, the Supreme Court held

6 Though the issue has never been adjudicated, a practice of enforc-

ing the third party liability provisions with disregard for considerations

of unconscionability might constitute an unfair business practice in vio-

lation of the unfairness term of Business and Professions Code section

17200. (Shadoan v. World Savings & Loan Assn. (1990) 219 Cal.App.3d

97, 101 [268 Cal.Rptr. 207]; People v. Casa Blanca Convalescent Homes,

Inc. (1984) 159 Cal. App.3d 509, 530 [206 Cal. Rptr. 164, 53 A.L.R.4th 661).)

But the record here contains no finding of such a practice. We see no

other issue relating to the unfairness term of Business and Professions

Code section 17200 deserving of extended discussion. The term does not

give the courts a general license to review the fairness of contracts but

rather has been used to enjoin deceptive or sharp practices. (See Com-

mittee on Children’s Television, Inc. v. General Foods Corp. (1983) 35

Cal.3d 197 [197 Cal.Rptr. 783, 673 P.2d 660); People v. Bestline Products,

Inc. (1976) 61 Cal.App.3d 879, 915 [132 Cal.Rptr. 767].)

18

that existence of such a distinct enforcement scheme

does not preclude a suit to enjoin unfair competition

premised on an unlawful practice. The district attor-

ney there sued to enjoin multiple violations of the

Mobilehome Parks Act which the Commission on Hous-

ing and Community Development was expressly au-

thorized to enforce. The Supreme Court held “that even

though a specific statutory enforcement scheme exists

a parallel action for unfair competition is proper pur-

suant to applicable provisions of the Business and Pro-

fessions Code.” (Id. at p. 632.) Following McKale, other

decisions have upheld use of Business and Professions

Code section 17200 to enjoin acts which are declared

to be unlawful under a statutory enforcement scheme.

(People v. Los Angeles Palm, Inc. (1981) 121 Cal.App.3d

25, 33-35 [175 Cal.Rptr. 257]; People v. Casa Blanca

Convalescent Homes, Inc., supra, 159 Cal.App.3d 509,

516-520, 531.)

(1f) In its statement of decision, the trial court re-

lied on a number of provisions of the Knox-Keene Act,

including Health and Safety Code sections 1342, sub-

division (b), section 1360, subdivision (a)(2) and (a)(3),

section 1363, subdivisions (a) and (c), and section 1367,

subdivision (h). However, only section 1360, subdivi-

sion (a)(2) and (a)(3), defines an unlawful act that may

be enjoined as unfair competition under the Business

and Professions Code; the other statutes pertain to the

exercise of the Department of Corporation’s regulatory

power.

Health and Safety Code section 1360, subdivision (a)

broadly prohibits deceptive practices in advertising or

soliciting participation in a health care service plan:

“No plan, solicitor, solicitor firm, or representative shall

use or permit the use of any advertising or solicitation

which is untrue or misleading, or any form of evidence

19

of coverage which is deceptive.” Subdivision (a)(2) and

(a3) provide that a statement may be deemed mis-

leading or deceptive even if it is literally true.’

We note that by its terms Health and Safety Code

section 1360 has little relevance to the matters enjoined

in the judgment. The statute does not apply to commu-

nications between Health Plan and its members; it

therefore has no application to paragraphs 5, 6, 7 or 9

of the court’s order. Moreover, we construe the statute

as applying only to the deceptive “use” of documents in

advertising or solicitation. Documents that are not

actually used for this purpose will not come within the

terms of the statute, even though they come within the

definition evidence of coverage under Business and

Professions Code section 1345. Thus, since there is no

evidence that the health care service contract here was

actually used in acquainting the public with the terms

of the plan, we have no need to consider whether the

contract complies with the statutory standards of sec-

tion 1360.

7 ©... For purposes of this article: [{] (2) A written or printed statement

or item of information shall be deemed misleading whether or not it may

be literally true, if, in the total context in which the statement is made or

such item of information is communicated, such statement or item of

information may be understood by a person not possessing special know!-

edge regarding health care coverage, as indicating any benefit or advan-

tage, or the absence of any exclusion, limitation, or disadvantage of pos-

sible significance to an enrollee, or potential enrollee or subscriber, in a

plan, and such is not the case. [{] (3) An evidence of coverage shall be

deemed to be deceptive if the evidence of coverage taken as a whole and

with consideration given to typography and format, as well as language,

shall be such as to cause a reasonable person, not possessing special know-

ledge of plans, and evidence of coverage therefor to expect benefits, ser-

vice charges, or other advantages which the evidence of coverage does

not provide or which the plan issuing such coverage or evidence of cover-

age does not regularly make available to enrollees or subscribers covered

under such evidence of coverage.”

20

Under our interpretation, Health and Safety Code

section 1360 applies only to paragraph 4 of the judg-

ment—a rather trivial provision enjoining Health Plan

“from calling the [third party liability] term a ‘reduc-

tion.’ “ We find nothing misleading or deceptive in the

use of this term. The Knox-Keene Act has three classi-

fications of provisions limiting coverage: exceptions,

reductions and limitations. (Health & Saf. Code, §

1362.) Since the third party liability provision ordi-

narily requires partial payment for a health care ser-

vice provided to a member, it best fits the definition of

a reduction in benefits. (Health & Saf. Code, § 1362,

subd. (c); Cal. Code Regs., tit. 10, § 1300.67.4, subd.

(a)(3).)

The other statutory provisions cited in the statement

of decision serve to govern the Department of Corpora-

tions in the exercise of its regulatory powers. Health

and Safety Code section 1342 contains a statement of

legislative purpose; section 1363 regulates the content

of the disclosure form provided to prospective mem-

bers; and section 1367 sets forth certain requirements

for health care service plans and requires service agree-

ments to be “fair, reasonable, and consistent with the

objectives of this chapter.” In relying on these provi-

sions, the court improperly sought to enforce compli-

ance with the regulatory guidelines and requirements

of the Knox-Keene Act. Thus, paragraph 1 requires

that the third party liability term be written “in plain

English” and be given “greater prominence”; para-

graphs 5, 6 and 7 concern statements in the medical

payment order sent to members subject to the third

party liability provision; paragraph 8 concerns repre-

sentations that the third party liability term “excludes

or reduces” coverage; and paragraph 9 concerns con-

tent of standard form letters.

21

It is immaterial whether or not the challenged con-

tract provisions and business practices comply with

these portions of the Knox-Keene Act because the stat-

utes do not define unlawful acts that may be enjoined

under Business and Professions Code section 17200.8

In basing its order on these provisions, the trial court

assumed a regulatory power over Health Plan that the

Legislature has entrusted exclusively to the Depart-

ment of Corporations. Samura unquestionably has

certain remedies if the Department of Corporations fails

to discharge its responsibilities under the Knox-Keene

Act (see Health & Saf. Code, § 1397), but the courts

cannot assume general regulatory powers over health

maintenance organizations through the guise of enforc-

ing Business and Professions Code section 17200. (Cf.

Rubin v. Green (1993) 4 Cal.4th 1187, 1201 1202 [17

Cal.Rptr.2d 828, 847 P.2d 1044].) To the extent that

the order on appeal is based on portions of the Knox-

Keene Act having a purely regulatory import, it im-

properly invades the powers that the Legislature en-

trusted to the Department of Corporations.

(9) In a separate appeal, Samura claims that the

trial court erred in refusing to enjoin enforcement of

the third party liability provision in any form. It raises

only one issue not covered in the preceding analysis—

the applicability of the federal Health Maintenance

Organization Act of 1973 (42 U.S.C. §300e et seq.). The

federal statute provides certain forms of financial as-

sistance and other benefits to qualifying health main-

tenance organizations. Samura points out that the act

specifically authorizes a health maintenance organi-

8 Our observation extends to the many other provisions of the Knox-

Keene Act cited in Samura’s brief.

22

zation to seek reimbursement from workers’ compen-

sation benefits (42 U.S.C. 300e(b)(1\(D)), and argues

that this narrow authorization implies that federally

qualified health maintenance organizations are pro-

hibited from adopting broader provisions providing for

reimbursement from third parties. We find it unnec-

essary to enter into the complicated legislative and

regulatory history in point. Whatever may be the im-

pact of the provision on Health Plan’s status under the

Health Maintenance Organization Act, we find noth-

ing in the statute or related regulations that declares

a third party liability provision to be unlawful as a

matter of substantive law. Hence, assuming without

deciding that Business and Professions Code section

17200 can be employed to enjoin violations of federal

law, Samura cannot predicate a cause of action under

section 17200 on violation of the federal Act. (Cf. People

ex rel. Dept. of Transportation v. Naegele Outdoor Ad-

vertising Co. (1985) 38 Cal.3d 509, 523 [213 Cal.Rptr.

247, 698 P.2d 150]; Diaz v. Kay-Dix Ranch (1970) 9

Cal.App.3d 588 [88 Cal.Rptr. 443].)

Since the trial court’s order must be reversed, we do

not reach the question whether Samura’s cause of ac-

tion is preempted by the Employee Retirement Income

Security Act of 1974 (29 U.S.C. § 1001 et seq.) to the

extent that it applies to group plans of employers and

unions.

The judgment is reversed.9 Costs to Health Plan.

Strankman, P. J., and Stein, J., concurred.

9 Our reversal of the judgment also entails reversal of the lower court’s

order awarding attorney fees with respect to which Health Plan has filed

a separate notice of appeal.

23

2. Samura v. Kaiser Foundation Health Plan, Inc.,

et al.,

Superior Court for the State of California,

County of Alameda, No. 605676-4.

Statement of Decision, Oct. 10, 1991.

A central feature of an HMO is that its members

are not charged fees based on the extent of medical

care which they receive but instead are charged a peri-

odic pre-set membership fee which pays for basic health

care. (H&S Code § 1340, et seq; 42 U.S.C. §300e.)

Kaiser’s! TPL term is inconsistent with this central

feature. Under the TPL term, Kaiser charges its mem-

bers fees-for-services based on the frequency, time and

cost of health care. A TPL bill can be greater than the

total recovery. (Emerson) Some members of the pub-

lic would select other health care coverage in order to

avoid the TPL term. (Samura) Because of the nature

and effect of the TPL term, it must be prominently dis-

closed and explained in plain, everyday English in or-

der to reveal that members must share any recovery

with Kaiser and to permit the public to make informed

choices. (H&S §§ 1342(b), 1360(a)(2), (a3), 1363(a),

1374.22(b); see Lee v. State Farm Mut. Auto Ins. Co.

(1976) 57 Cal.App.3d 458.

However, Kaiser leads the public to expect that it

charges only the membership dues and nominal supple-

mental payments for health care services. The form

1 “Kaiser” hereafter refers defendants collectively: They present

themselves and operate with regard to the TPL term in a manner that

causes the public to consider them as a single entity. Each defendant is

jointly and severally liable.

(24)

and content of Kaiser’s writings do not disclose in a

clear and prominent manner that members are charged

prevailing rates, i.e., “Non-Member Rates,” as though

the person was not a Kaiser member for each of the

services (in addition to full membership dues) if the

member collects anything from a third party. Kaiser

receives many calls from members who are surprised

to learn of the existence of the TPL term or who are

confused about its meaning. (Emerson)

In various writings, the TPL term is titled “Reduc-

tion.” The title is misleading. (H&S § 1363(c).) The

TPL term does not (and an HMO cannot) reduce the

extent of medical services available to the member, it

changes the amount which the member must pay for

benefits if the member recovers from a third party. The

term is sub-titled “Emergency Services Received at

Kaiser Foundation Hospitals” even though it applies

to all types of health care and not only to emergency

care. The TPL term erroneously states that services

are provided in exchange for Non-Member Rates when,

in fact, services are provided because membership dues

were timely paid; the TPL term imposes a surcharge

for services which is computed using Non-Member

Rates). In addition, Kaiser’s materials assert that the

TPL term “excludes” coverage of services delivered to

members injured by third parties if the member recov-

ers from the third party which is false and misleading.

HMO documents must be intelligible to a “reason-

able person, not possessing special knowledge of plans”.

(H&S § 1360 (a)(3).) Kaiser must rewrite the TPL term

in plain English, purge any indication that the TPL

term “reduces” or “excludes” coverage from every de-

scription or summary of the term and place the TPL

term where it is likely to be read and understood by its

members. (H&S § 1360; Lee v. State Farm, supra, at

25

pp. 469-471.)

A TPL term is not unfair if the member is fully

compensated and the term is applied to preclude the

member from receiving a windfall. (Block v. Cal. Phy-

sicians’ Service (1966) 244 Cal.App.2d 266, 273.) How-

ever, it is unfair to the member to use the TPL term to

take an inequitable portion of the member’s under-re-

covery. (Lee v. State Farm, supra, 57 Cal.App.3d 458;

see also, Westendorf by Westendorf v. Stasson (Minn.

1983) 330 N.W.2d 699, 703.) Kaiser sometimes dis-

counts the amount of its TPL claim if it is convinced

that a member was substantially undercompensated,

but members are not consistently informed that they ;

may seek a discount because they were not fully com- |

pensated. (Emerson.) At the same time, Kaiser claims

the contractual prerogative to take 100% of a member’s |

recovery even if the member was grossly

undercompensated. It is an unfair trade practice to

|

|

assert a contractual right that one does not have. (Peo.

v. McKale (1979) 25 Cal.3d 626.)

Kaiser’s terms must be fair to its members, and

the terms must shift the risks of the cost of basic health

care to Kaiser. (H&S §1367(h).) It is unfair to require |

a Kaiser member to pay for basic health care on a fee- |

for-service basis for all care simply because the mem- |

ber has received some money from a tortfeasor. Kaiser

does not assume the risk of providing basic health care

if it claims more than a pro rata share of a recovery.2

undercompensated to aveid a windfall to Kaiser at the expense of the

member. The TPL claims are based on Non-Member Rates. Kaiser does

not calculate its costs. The rates may exceed Kaiser’s costs and when

they do, Kaiser receives a windfall at its members’ expense. Ultimately,

the requirement that HMO contracts shift the financial cost of health

j

2 Also, Kaiser must discount TPL claims when members are ,

’

26

Kaiser must reduce its TPL claim proportionately when

a recovery does not fully compensate a member; also,

this must be standardized and adequately disclosed.

Kaiser must pay a pro rata share of the attorneys fees

and costs incurred in creating the fund from which the

TPL claim is paid. (Lee v. State Farm, supra, at pp.

468-469.) Kaiser’s contribution to fees and costs is

essential for the TPL term to be fair and for the agree-

ment to retain its risk-shifting character. Kaiser does

not disclose in a consistent manner its obligation and

practice to discount the TPL claim on request, and it

contributes its share only when requested to do so.

(Emerson.) The TPL term and other documents sent

to members must disclose that Kaiser will contribute

to fees and costs.

When Kaiser suspects a TPL event, Kaiser sends

the member an MPO requesting the member promise

to pay Kaiser’s full TPL claim from any subsequent

recovery without a discount for fees, costs or under-

recovery. (PX-52; Emerson.) Kaiser’s MPO must ex-

plain that a fair discount of the TPL claim will be made

for fees, costs or hardship.

Kaiser is not an ERISA plan although Kaiser mem-

bership may be offered as a plan benefit by funded

ERISA plans. (Hewlett-Packard Co. v. Barnes (9th

1978) 571 F.2d 502, 504.) Kaiser is equivalent to an

insurer for purposes of ERISA. (Manasen v. Cal. Dent.

Serv. (1976) 424 F.Supp. 657.) ERISA does not pre-

empt state laws regulating insurance. The Knox-Keene

Act and decisional law governing reimbursement pro-

visions of insurance contracts constitute laws regulat-

care to the HMO requires that Kaiser discount its TPL claim even if the

result is that Kaiser collects less than its costs.

27

ing insurance within the meaning of ERISA. (/bid.,

FMC Corp. v. Holliday (1990) __ U.S. ___ (12 EBC

2689); United Food v. Pacyga (9th 1986) 801 F.2d 1157.)

Plaintiff’s section 17200 claims based on these insur-

ance laws are saved from ERISA preemption because

Kaiser is not a self-funded ERISA plan. A section 17200

claim standing alone does not relate to ERISA. State

laws requiring Kaiser’s advertising materials to be

truthful and accurate do not “relate” to ERISA. (Fort

Hallifax v. Coyne (1987) 482 U.S. 1.) This case does not

involve the issue of benefits due under an ERISA plan,

it involves whether an HMO doing business in Califor-

nia with ERISA plans must conform its business prac-

tices with the state’s laws regulating HMOs. ERISA

does not preempt plaintiff's claims.

The HMO Act does not expressly authorize or pro-

hibit TPL terms. (42 U.S.C. 300e (b)(1).) The regula-

tions enacted to implement the HMO Act do not ex-

pressly authorize or prohibit TPL terms. HHS (which

is charged with implementing the HMO Act) has never

disapproved a contract containing a TPL term. The

TPL term does not violate the HMO Act.

Plaintiff stipulated that this complaint does not

reach contracts between Kaiser and members of fed-

eral employee groups.’ Also, plaintiff did not challenge

Kaiser's practice of seeking reimbursement of payments

made to other hospitals that had provided emergency

care to Kaiser members (sometimes called “out of plan

benefits”). This court did not consider any aspect of that

practice.

3 However, while this Court lacks jurisdiction to compel Kaiser to make

the TPL term clear and prominent for federal employees, the benefit from

rewriting the term need not be denied to them merely because of their

status.

28

The court reserves jurisdiction over this action to

implement the terms of the judgment.

Dated: 10/10/91

Hon. Dawn Girard, Judge,

Alameda County Superior Court

29

3. Samura v. Kaiser Foundation Health Plan, Inc.,

et al

Superior Court for the State of California,

County of Alameda, No. 605676-4.

Judgment, Oct. 10, 1991.

JUDGMENT AFTER TRIAL BY COURT

This action come on regularly for trial on March

4, 1991. Plaintiff appeared through his attorney, Law

Office of Manuel Glenn Abascal, by Manuel Abascal

and Kathy Shull Abascal, and defendants Kaiser

Foundation Health Plan, Inc., The Permanente Medi-

cal Group, Inc. and Kaiser Foundation Hospitals, (here-

after collectively “Kaiser”), appeared through their joint

attorney, Law Office of Kennedy P. Richardson, by

Kennedy P. Richardson. A jury trial having been

waived, the court having heard and considered the

pleadings and all documents filed relating to this ac-

tion, the testimony of witnesses and exhibits admit-

ted, and the argument of counsel, the matter having

been submitted for decision and the court having is-

sued its statement of decision, the court orders, ad-

judges and decrees that:

Judgment be and is hereby entered in favor of

plaintiff and against defendants and each of them on

Count One and Count Two of the First Amended Com-

plaint granting injunctive relief, costs of suit and

attorney’s fees.

The Northern California Region of the Kaiser

Foundation Health Plan, Inc., The Permanente Medi-

cal Group, Inc. and Kaiser Foundation Hospitals, and

each of them, are enjoined to clarify and explain the

(30)

TPL terms in its agreements as follows:

i. Rewrite the TPL term in plain English

and give greater prominence to the term in the con-

tract.

2. Include a provision in the contract that

standardizes and clarifies the method of reducing the

amount of its claim if a member is not adequately com-

pensated by a settlement agreement in third party liti-

gation.and include a provision in the TPL term for de-

termining whether or not a member is adequately com-

pensated.

3. Provide in the contract that Kaiser will

share pro rata in the costs of litigation and attorney

fees.

4. Refrain from calling the TPL term a “re-

duction.”

5. Inform members in the medical payment

order that Kaiser will share pro rata in litigation costs

and in attorney fees.

6. Inform members in the medical payment

order that Kaiser may reduce the amount of its claim

if the member is not adequately compensated.

7. Refrain from combining the medical pay-

ment order with a medical information release autho-

rization form.

8. Refrain from including any representa-

tions that the TPL term excludes or reduces coverage

in the contract or standard form letters to members

and/or their attorneys.

9. Standardize form letters regarding the

TPL term to ensure that all members are informed of

Kaiser’s practice of reducing its claim to share pro rata

in costs of litigation and attorney fees.

Kaiser is ordered to report in writing to the court

within sixty (60) days of the filing of this judgment in

31

the Superior Court. The report shall fully describe all

actions and policies undertaken, approved or adopted

or announced toward the end of implementing this or-

der, judgment and decree. Said report shall be filed in

this action and served on counsel for plaintiff. The court

or either of the parties may notice a hearing on the

matters in the report. As used herein, “actions” shall

mean: (1) the actual steps which Kaiser contends dem-

onstrates compliance, or progress toward compliance,

with the matters ordered to be changed by this order,

judgment and decree.

The Court retains jurisdiction to enforce com-

pliance with this order, judgment and decree and to

modify the terms of this judgment from time to time as

appear just to ensure such compliance as well as to

evaluate Kaiser’s progress in achieving and maintain-

ing compliance. The Court’s jurisdiction to enforce com-

pliance shall expire three years after the judgment is

final or sooner, upon order of the court.

The Court reserves jurisdiction to consider a

timely filed application by plaintiff for attorney fees.

DATED: 10/10/91

Honorable Dawn Girard, Judge

Alameda County Superior Court

32

4. SAMURA v. KAISER FOUNDATION HEALTH

PLAN, INC. 715 F. Supp. 970 (N.D.Cal. 1989)

ARTHUR BRADLEY SAMURA, Plaintiff,

v.

KAISER FOUNDATION HEALTH PLAN, IN C., et al.,

Defendants.

No. C-89-1413-WWS

United States District Court

N.D. California

July 18, 1989

Manuel Glenn Abascal, Kathy S. Abascal, Berkeley,

Cal., Stephen Kaus, Kaus, Kerr & Wagstaffe, San Fran-

cisco, Cal., for plaintiff.

Kennedy P. Richardson, Oakland, Cal., for defen-

dants.

ORDER

SCHWARZER, District Judge

Plaintiff has moved pursuant to 28 U.S.C. sec-

tion 1447(c) to remand this action to the Superior Court

of the State of California, County of Alameda, from

which it was removed, on the ground that the removal

was improvident and untimely. Plaintiff also requests

costs and attorney fees incurred in making the motion.

I. FACTS

Plaintiff filed a class action on November 20,

1985, in Alameda County Superior Court against Kai-

(33)

ser Foundation Health Plan, Inc. (“Health Plan”), al-

leging that Health Plan’s practice of asserting liens in

excess of provider costs on recoveries obtained from

third parties constitutes an unfair business practice in

violation of the California Unfair Practices Act, Cal.

Bus. & Prof. Code, §§ 17200, et seg. On October 27,

1987, Health Plan filed a first amended answer to the

complaint asserting as an affirmative defense that the

complaint “is barred and preempted by section 514(a)

of the federal Employee Retirement Security Act of

1974, 29 U.S.C. § 1144(a).”

On April 10, 1989, plaintiff filed a first amended

complaint adding Permanente Medical Group and Kai-

ser Foundation Hospitals, Inc. as defendants. The first

amended complaint for the first time alleged that de-

fendants are a federal qualified Health Maintenance

Organization under 42 U.S.C. sections 300e, et seq.,

and that their practice of collecting more than prepaid

dues from its members is a violation of section 300e

and therefore a violation of the Unfair Practices Act.

On April 25, 1989, more than thirty days after

service of the original complaint, defendants removed

the action to this court. The petition for removal in-

voked federal question jurisdiction under 28 U.S.C. §

1331 on two grounds:

1. that plaintiff has stated a claim under 42

U.S.C. § 300e, and

2. that all of the allegations of the complaint re-

late to an employee benefit plan and are therefore pre-

empted by section 514 of ERISA, 29 U.S.C. § 1144.

34

[1] Plaintiff has moved to remand on the ground

that the action was not timely removed.!

II. DISCUSSION

A. iti

(2) Defendants contend that removal was timely

because it came within thirty days of service of the

amended complaint which added two new defendants.

The addition of defendants, however, does not start the

time for removal running anew when the original com-

plaint was removable. The decision in Cantrell v. Great

Republic Insurance Company, 873 F.2d 1249 (9th Cir.

1989), is squarely in point.

The result in Cantrell did not turn on the later

named defendant’s close association with the litigation

but, even if it did, the instant defendants are plainly

in a similar position, having the same counsel, having

filed a joint answer and being part of a group of closely

affiliated entities.

It is noteworthy, too, that the Cantrell complaint

also had been filed in 1985 and was removed two years

later on the ground of ERISA preemption.

In view of Cantrell, there is no need to discuss

the prior state of the law. It should be noted, however,

that the decision on which defendants place principal

reliance, Garside v. Osco Drug, Inc., 702 F. Supp. 19

(D.Mass. 1988), makes it clear that the published opin-

ions have rejected the view advanced by defendants

here. And Garside, of course, was a reverse

1 Plaintiff also raises defendants’ failure to comply with the proce-

dural requirement of 28 U.S.C. § 1446(a), as amended in 1988 by Pub. L.

100-702, Title X, § 1016(b). Defendants’ filing of a verified petition for

removal rather than a notice of removal reflects their inattention to the

applicable law but is not a “defect” warranting remand under section

1447(c).

35

remand case where the removing defendant sought

remand for the purpose of judge-shopping.

B. Addition of a New Federal Cause of Ac-

tion

[3] Defendants also contend that the addition of a

claim under the federal HMO act restarts the period of

removal. The simple answer to this contention is con-

tained in the removal statute itself which provides in

pertinent part:

If t) bated by thee tnlite) alanine 1 )

removable, a notice of removal may be filed

within thirty (30) days after receipt by the de-

fendant through service or otherwise, of a copy

of an amended pleading, motion, order or other

paper from which it may first be ascertained that

the case is one which is or has become remov-

able.,....

28 U.S.C. § 1446(b) (emphasis added).

Changes to a complaint that create a new basis

for removal do not undo the original waiver. “If a case

is removable from the outset, it must be removed within

the initial thirty-day period specified by § 1446(b); sub-

sequent events do not make it ‘more removable’ or

‘again removable’.” Hubbard v. Union Oil Company,

601 F. Supp. 790, 795 (S.D.W.Va. 1985).

“The courts have read into the statute an excep-

tion for the case where the plaintiff files an amended

complaint that so changes the nature of [the] action as

to constitute ‘substantially a new suit begun that day.”

Wilson v. Intercollegiate (Big Ten) Conference Athletic

Association, 668 F.2d 962, 965 (7th Cir. 1982) (quoting

Fletcher v. Hamlet, 116 U.S. 408, 410, 6 S.Ct. 426, 429,

29 L.Ed. 679 (1886)). The Wilson court went on to ex-

plicate the relevant policy considerations governing the

application of this exception:

36

The purpose of the 30-day limitation is twofold:

to deprive the defendant of the undeserved tac-

tical advantage that he would have if he could

wait and see how he was faring in state court

before deciding whether to remove the case to

another court system; and to prevent the delay

and waste of resources involved in starting a case

over in a second court after significant proceed-

ings, extending over months or even years, may

have taken place in the first court. These con-

siderations might be overborne in a case where

a plaintiff, seeking to mislead the defendant

about the true nature of his suit and thereby

dissuade him from removing it, included in his

initial complaint filed in a state court an incon-

sequential but removable federal count unlikely

to induce removal and then, after the time for

removal had passed without action by the de-

fendant, amended the complaint to add the true

and weighty federal grounds that he had been

holding back. ... But this case presents the op-

posite pattern. Wilson tendered his fundamen-

tal federal claim, that defendants had violated

his equal protection and due process rights un-

der the U. S. Constitution, at the very outset.

His amended complaint added one purely pro-

cedural count which clearly did not alter the

character of the suit . . . and a number of other

federal counts, all apparently makeweights and

some never pressed at all. It seems inconceiv-

able to us (and defendants do not argue) that

Wilson’s lawyer adopted this pleading sequence

in order to discourage the defendants from ex-

37

ee ee a ee a ee ee ee ee ee ee ee a es

ercising their right to removal, or that it could

have had that effect.

668 F.2d at 965.

This case falls into the same pattern. The

amended complaint did not change the nature of the

underlying claim. The reference to the federal HMO

act merely provides an added standard governing ap-

plication of the Unfair Practices Act.

Defendants should never have filed a petition

for removal in 1989. Their arguments are makeweights

at best, presumably intended to cure their earlier ne-

glect to move in a timely fashion. They should have

known that their tenuous contentions could not over-

come the firmly established policy that “removal stat-

utes are construed strictly against removal.” Libhart

v. Santa Monica Dairy Co., 592 F.2d 1062, 1064 (9th

Cir. 1979).

Counsel for plaintiff are directed to submit proof

of attorney fees and expenses, which will be awarded

pursuant to 28 U.S.C. § 1447(c), along with a proposed

order awarding fees and expenses and remanding the

action.

IT IS SO ORDERED.

38

5. Samura v. Kaiser Foundation Health Plan,

Inc., et al.,

California Supreme Court, No. 8035199

First Appellate District, Division One,

No. A055730/A057515

S035199

IN THE SUPREME COURT OF THE STATE OF

CALIFORNIA

IN BANK

ARTHUR BRADLEY SAMURA, Appellant

v.

KAISER FOUNDATION HEALTH PLAN INCOR-

PORATED Et Al., Appellants

And Companion Case

Petition for review DENIED.

Kennard, J. and Arabian, J. are of the opinion

the petition should be granted.

The requests for an order directing

depublication of the opinion are denied.

Lucas,

Chief Justice

(39)

6. THE HEALTH MAINTENANCE ORGANIZATION

ACT, 42 U.S.C. § 300 (a) & (b) (1) (1993).

§ 300e. Requirements of health maintenance

organizations

(a) “Health maintenance organization” defined.

For purposes of this title, the term “health maintenance

organization” means a public or private entity which

is organized under the laws of any State and which (1)

provides basic and supplemental health services to its

members in the manner prescribed by subsection (b),

and (2) is organized and operated in the manner

prescribed by subsection (c).

(b) Manner of supplying basic and supplemental

health services to members. A health maintenance

organization shall provide, without limitations as to

time or cost other than those prescribed by or under

this title, basic and supplemental health services to its

members in the following manner:

(1) Each member is to be provided basic health

services for a basic health services payment which (A)

is to be paid on a periodic basis without regard to the

dates health services (within the basic health services)

are provided; (B) is fixed without regard to the

frequency, extent, or kind of health service (within the

basic health services) actually furnished; (C) except in

the case of basic health services provided a member

who is a full-time student (as defined by the Secretary)

at an accredited institution of higher education, is fixed

under a community rating system; and (D) may be

supplemented by additional nominal payments which

may be required for the provision of specific services

(within the basic health services), except that such

payments may not be required where or in such a

(40)

manner that they serve (as determined under

regulations of the Secretary) as a barrier to the delivery

of health services. Such additional nominal payments

shall be fixed in accordance with the regulations of the

Secretary. If a health maintenance organization offers

to its members the opportunity to obtain basic health

services through a physician not described in subsection

(b)(3)(A), the organization may require, in addition to

payments described in clause (D) of this paragraph, a

reasonable deductible to be paid by a member when

obtaining a basic health service from such a physician.

A health maintenance organization may include a

health service, defined as a supplemental health service

by section 1302(2) [42 USCS §300e-1(2)], in the basic

health services provided its members for a basic health

services payment described in the first sentence. In the

case of an entity which before it became a qualified

health maintenance organization (within the meaning

of section 1310(d) [42 USCS § 300e-9(d)]) provided

comprehensive health services on a prepaid basis, the

requirement of clause (C) shall not apply to such entity

until the expiration of the forty-eight month period

beginning with the month following the month in which

the entity became such a qualified health organization.

The requirements of this paragraph respecting the

basic health services payment shall not apply to the

provision of basic health services to a member for an

illness or injury for which the member is entitled to

benefits under a workmen’s compensation law or an

insurance policy but only to the extent such benefits

apply to such services. For the provision of such

services for an illness or injury for which a member is

entitled to benefits under such a law. the health

maintenance organization may, if auth. .zed by such

law, charge or authorize the provider of such services

41

to charge, in accordance with the charges allowed under

such law, the insurance carrier, employer, or other

entity which under such law is to pay for the provision

of such services or, to the extent that such member has

been paid under such law for such services, such

member. For the provision of such services for an illness

or injury for which a member is entitled to benefits

under an insurance policy, a health maintenance

organization may charge or authorize the provider of

such services to charge the insurance carrier under such

policy or, to the extent that such member has been paid

under such policy for such services, such member.

42

7. Kaiser Foundation Health Plan, Inc.,

Third Party Liability term.

The 1991 TPL term provided as follows:

“Reductions. The benefits of Members are sub-

ject to the following Reductions:

(1) Injuries or Illnesses Caused or Alleged

to be Caused by Third Parties. Members are re-

quired to pay for services as follows:

(a) Emergency Services Received at Kai-

ser Foundation Hospitals. If an injury or illness is

caused or alleged to be caused by any act or omission

of a third party, services and other benefits are fur-

nished or arranged by Physicians and Hospitals at Non-

Member Rates. Payment of these charges is the

Member’s responsibility, except that the Member is not

required to pay any portion of such charges for ser-

vices and other benefits which is in excess of the total

amount that the Member, (or his or her estate, parent

or legal guardian) received from or on behalf of the third

party on account of such acts or omissions, whether by

settlement or judgment. Payment shall be made from

the proceeds of the settlement or judgment, and Health

Plan (or its designee) shall have a lien on the settle-

ment or judgment for that purpose. At Health Plan’s

(or its designee’s) request the Member (or his or her

estate, parent or legal guardian) shall execute a lien

form(s) directing his or her attorney or the third party

to make payments to Health Plan (or its designee). In

the event that Health Plan is required to institute le-

gal action to enforce its lien, the Member shall reim-

burse Health Plan for the reasonable costs of collec-

tion, including attorney’s fees.

(43)

(b) Emergency Services Received at Facilities

Other than Kaiser Foundation Hospitals. If any

injury or illness is caused or alleged to be caused by

any act or omission of a third party, payments under

Section S of the benefit Schedule(s) are made for the

services of non-Medical Group Physicians, any hospi-

tals other than Kaiser Foundation Hospitals, and other

providers not contracting with Health Plan however,

the Member must reimburse Health Plan for any

amounts paid by Health Plan up to the total amount

that the Member, (or his or her estate, parent or legal

guardian) receives from or on behalf of the third party

on account of such acts or omissions, whether by settle-

ment or judgment. Reimbursement is the Member’s

responsibility and shall be made from the proceeds of

the settlement or judgment, and Health Plan shall have

a lien on the settlement or judgment for that purpose.

At Health Plan’s request the Member (or his or her

estate, parent or legal guardian) shall execute a lien

form(s) directing his or her attorney or the third party

to make payments directly to Health Plan (or to its

designee). In the event that Health Plan is required to

institute legal action to enforce its lien, the Member

shall reimburse Health Plan for the reasonable costs

of collection, including attorney’s fees.

The Member further agrees that he or she (or

his or her estate, parent or legal guardian) will notify

Health Plan of any actual or potential claim or legal

action which the Member anticipates bringing or has

brought against any third party arising from the al-

leged acts or omissions not later than 30 days subse-

quent to submitting or filing a claim or legal action

against the third party.

(c) Medicare Member Covered by Motor Ve-

hicle Insurance Policy. When hospital has provided

services to a Medicare Member or Part A Member for

an injury or illness described in subsection 1(a) or 1(b)

above, Hospitals will, in compliance with federal law,

seek reimbursement under the medical expense pay-

ment provisions of any motor vehicle insurance policy

covering the Member. Each such Member must furnish

information about the existence and terms of such

policy, and complete and submit all claims, releases

and other documents necessary for Hospitals to com-

ply with federal law.

(d) Subrogation Agreement. At Health

Plan’s request, a member (or his or her estate, parent

or legal guardian) shall executive [sic] a written

subrogation agreement which subrogates Health Plan

(or its designee) to all claims, causes of action, and other

rights which the Member (or his or her estate, parent

or legal guardian) may have against a third party or

an insurer, government program, or other source of

coverage for monetary damages, compensation or in-

demnification on account of the injury or illness alleg-

edly caused by the third party. Under this subrogation

agreement, Health Plan (or its designee) shall be

subrogated to such claims, causes of action, and rights

only to the extent of the total payment and reimburse-

ment to which Health Plan (or its designee) would oth-

erwise be entitled under subparagraphs (a) and (b)

above. The subrogation agreement shall grant Health

Plan (or its designee) a lien on any judgment or settle-

ment which the Member (or his or her estate, parent

or legal guardian) may obtain against a third party.”

45

(e) Priority of Health Plan’s Claim.

Health Plan (or its designee) shall be entitled to the

payment, reimbursement, and subrogation as provided

in this Section C(1) regardless of whether the total

amount of the recovery is less than the actual loss suf-

fered by the Member (or his or her estate, parent or

legal guardian) on account of the injury or illness is

less than the actual loss suffered by the member (or

his or her estate, parent or legal guardian). The pro-

ceeds of any judgment or settlement obtained by Health

Plan (or its designee) or the Member (or his or her es-

tate, parent or legal guardian) on account of the injury

or illness shall first be applied to satisfy Health Plan’s

(or its designee’s) claims, liens, and other rights under

this Section C(1).

(2) Medicare. Benefits are reduced by any

benefits to which a Member is entitled under Medi-

care.

46