Allied Anesthesia Med. Grp., Inc. v. Inland Empire Health Plan

• Decision Date: 10 June 2022
• Docket Number: E074729
• Parties: ALLIED ANESTHESIA MEDICAL GROUP, INC. et al., Plaintiffs and Appellants, v. INLAND EMPIRE HEALTH PLAN, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

80 Cal.App.5th 794

295 Cal.Rptr.3d 801

ALLIED ANESTHESIA MEDICAL GROUP, INC. et al., Plaintiffs and Appellants,

v.INLAND EMPIRE HEALTH PLAN, Defendant and Respondent.

E074729

Court of Appeal, Fourth District, Division 2, California.

Filed June 10, 2022

Kessenick, Gamma & Free, Michael A. Gawley, James M. Cooper and Jason M. Allen for Plaintiffs and Appellants.

Tucker Ellis and Traci L. Shafroth for California Society of Anesthesiologists as Amici Curiae on behalf of Plaintiffs and Appellants.

Athene Law, Long X. Do, Felicia Sze and Eric Chan for California Medical Association as Amici Curiae on behalf of Plaintiffs and Appellants.

Grignon Law Firm, Margaret M. Grignon, Anne M. Grignon ; Kennaday Leavitt Owensby, Jack A. Janov, Curtis S. Leavitt and James F. Novello for Defendant and Respondent.

Daponde Simpson Rowe, Michael J. Daponde and Darcy L. Muilenburg for California Association of Health Plans and Local Health Plans of California as Amici Curiae on behalf of Defendant and Respondent.

OPINION

McKINSTER Acting P. J. Defendant and respondent Inland Empire Health Plan (IEHP) is a health care service plan subject to the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act). ( Health & Saf. Code, § 1340 et seq. ) It contracts with certain medical groups and providers to provide medical care at reduced costs to eligible beneficiaries of the California Medical Assistance Program (Medi-Cal or Medicaid) who are enrolled with IEHP. ( Health & Saf. Code, § 1342.6.) Plaintiffs and appellants Allied Anesthesia Medical Group, Inc., and Upland Anesthesia Medical Group (plaintiffs) are groups of doctors who provided anesthesia services to IEHP's enrollees for elective, nonemergency surgeries. Plaintiffs had no provider contract with IEHP; however, they had exclusive agreements with the hospitals. Plaintiffs were paid at the Medi-Cal fee schedule rate.

In this action, plaintiffs claim that IEHP should have paid them at the reasonable and customary value rate for their services instead of the Medi-Cal fee schedule rate. Their third amended complaint (TAC) contains causes of action for breach of implied-in-fact contract, breach of contract (third party beneficiary), and requested a declaratory judgment based solely upon the Knox-Keene Act and the Claims Settlement Practices regulation ( Cal. Code Regs., tit. 28, § 1300.71, subd. (a)(3)(B) (regulation 1300.71)). IEHP demurred on several grounds, including (1) the cause of action for breach of implied-in-fact contract fails to sufficiently plead "mutual assent" and "legal consideration"; and (2) the cause of action for breach of contract (third party beneficiary) fails to allege how plaintiffs are the express, intended third party beneficiaries of any contract between IEHP and the California Department of Health Care Services (department). The trial court agreed with IEHP, sustained its demurrer without leave to amend, and entered judgment on February 7, 2020.

On appeal, plaintiffs contend IEHP is obligated to pay them the reasonable and customary value rate for their services to IEHP's enrollees. We disagree and affirm.

I. PROCEDURAL BACKGROUND AND FACTS

A. Background.

Plaintiffs are medical groups with anesthesia medical practices. IEHP is the local initiative Medi-Cal managed care plan that "operates under a joint powers agreement between Riverside and San Bernardino Counties to provide health coverage for Medi-Cal participants. [It] arranges and pays for medical services to plan members by contracting with [independent practice associations] and others for the delivery of those services." ( Inland Empire Health Plan v. Superior Court (2003) 108 Cal.App.4th 588, 590, 133 Cal.Rptr.2d 735 ( IEHP v. Superior Court ), disapproved on other grounds in Quigley v. Garden Valley Fire Protection Dist. (2019) 7 Cal.5th 798, 814, 249 Cal.Rptr.3d 548, 444 P.3d 688.) Riverside and San Bernardino Counties have adopted a two-plan model for Medi-Cal managed care. "Under the Two-Plan Model, a county requires its Medi-Cal beneficiaries to enroll in one of two managed care plans: a public entity HMO known as a ‘local initiative,’ or a commercial HMO. The [department] pays each plan on a capitated basis (a fixed amount per member per month) for each Medi-Cal recipient, regardless of the level of services used by each recipient. In exchange, the plan assumes all financial responsibility for its members' care and must pay health care service providers directly."

IEHP's contract with the department to provide health coverage for Medi-Cal participants (sometimes referred to as the contract) obligates IEHP to "comply with a number of requirements regarding its relationships with medical providers." It "may enter into [s]ubcontracts with other entities in order to fulfill the obligations of the [c]ontract." However, all "[s]ubcontracts shall be in writing and in accordance with the requirements of the 42 CFR 438.230(b)(2), Knox-Keene [Act], Health and Safety Code Section 1340 et seq. ; Title 28, Section 1300 et seq.; Welfare and Institutions Code Section 14200 et seq. ; Title 22 CCR Section 53800 et seq. ; and other applicable Federal and State laws and regulations." And, it must specify the services to be provided and provide a "[f]ull disclosure of the method and amount of compensation or other consideration to be received by the subcontractor" from IEHP. The department must approve subcontracts. Even if there is no written subcontract between IEHP and providers like plaintiffs, the contract authorizes compensation.

IEHP had no provider contract with plaintiffs; however, plaintiffs had exclusive¹ agreements with the health care facilities that performed surgeries for IEHP's Medi-Cal HMO enrollees. Thus, for years, plaintiffs provided anesthesia

services to IEHP's Medi-Cal HMO enrollees for elective, nonemergency surgeries—like hysterectomies, knee and hip replacements, corneal transplants, open-heart surgeries, and brain surgeries—for which anesthesia was needed. Before plaintiffs provided anesthesia services, either the health care facility at which the surgery would be performed or the surgeon performing the procedure requested IEHP's authorization to perform the surgery. After plaintiffs provided its services, they invoiced IEHP, which paid the invoices at the Medi-Cal fee schedule rate, which sets payment at an amount "below reasonable and customary value."

B. Plaintiffs' Claims.

Believing they should have been paid the reasonable and customary value for their anesthesia services, plaintiffs initiated this action against IEHP on March 23, 2018. They alleged five causes of action: breach of implied-in-fact contract, breach of contract (third party beneficiary), unfair competition, quantum meruit, and declaratory judgment. IEHP demurred, plaintiffs amended their complaint, IEHP demurred again, and plaintiffs filed a second amended complaint (SAC). The SAC reduced the number of causes of action to three: breach of implied-in-fact contract, breach of contract (third party beneficiary), and declaratory judgment. The thrust of the SAC was that IEHP's approval of surgical procedures for its enrollees constituted implied authorization, through custom and practice, for plaintiffs to be paid based on the reasonable and customary value of their anesthesia services instead of the Medi-Cal fee schedule rate. IEHP demurred again, and the trial court found that plaintiffs' implied-in-fact claim failed because there was, inter alia, no "meeting of the minds with regard to specific payment amounts for services rendered pursuant to such an implied contract," and their breach of contract (third party beneficiary) claim failed because plaintiffs are not third party beneficiaries of the contract. The court sustained the demurrer with leave to amend.

On May 16, 2019, plaintiffs filed the TAC, which alleged the same three causes of actions alleged in the SAC. Plaintiffs concede that the Medi-Cal managed care delivery system most relevant in this case is the two-plan model under which Medi-Cal beneficiaries enroll in one of two managed care plans: "a public entity HMO known as a ‘local initiative,’ or a commercial HMO[, and t]he [department] pays each plan on a capitated basis (a fixed amount per member per month) for each Medi-Cal recipient, regardless of the level of services used by each recipient." They admit that (1) they are enrolled as Medi-Cal providers, (2) they provided nonemergency anesthesia services for IEHP's Medi-Cal HMO enrollees, and (3) they were paid based on the fixed Medi-Cal fee schedule rate. However, they assert that IEHP was required "to comply with all applicable Knox-Keene [Act] regulations, including [regulation 1300.71]" and "pay [them] the reasonable and customary value for their services."

On June 24, 2019, IEHP demurred to plaintiffs' TAC on the grounds that (1) the cause of action for breach of implied-in-fact contract fails to sufficiently plead "mutual assent" and "legal consideration"; and (2) the cause of action for breach of contract (third party beneficiary) fails to allege how plaintiffs are the express, intended third party beneficiaries of any contract between IEHP and the department. IEHP further asserted that regulation 1300.71 is "superseded by Medi-Cal Act regulation[s] " (e.g., Cal. Code Reg., tit. 22 § 51503 ), "preempted by Federal Medicaid regulation[s] " (e.g., 42 C.F.R. § 447.15 ), "excludes Medi-Cal Managed Care Plans like IEHP from the regulation, " "does not apply to [p]laintiffs' nonemergency claims, " and "does not apply because there is no private right of action under [regulation] 1300.71." More specifically, IEHP cited California Code of Regulations, title 22, section 51503 and Welfare and Institutions Code section 14124.70, subdivision (c), and argued that the "Medi-Cal Physician Fee Schedule governs all physician ‘services and procedures’ that ‘are a benefit of the Medi-Cal program,’ " and "reasonable value means the Medi-Cal Fee Schedule for all Medi-Cal...