DaVita, Inc. v. Amy's Kitchen, Inc.

• Decision Date: 05 April 2019
• Docket Number: Case No. 18-cv-06975-JST
• Court: U.S. District Court — Northern District of California
• Parties: DAVITA, INC., et al., Plaintiffs, v. AMY'S KITCHEN, INC., et al., Defendants.

379 F.Supp.3d 960

DAVITA, INC., et al., Plaintiffs,

v.AMY'S KITCHEN, INC., et al., Defendants.

Case No. 18-cv-06975-JST

United States District Court, N.D. California.

Signed April 5, 2019

Brendan Stephen Maher, John Randolph Stokes, Peter K Stris, Rachana Ambarish Pathak, Stris & Maher LLP, Los Angeles, CA, Michael Nicholas Donofrio, Pro Hac Vice, Stris & Maher LLP, Montpelier, VT, for Plaintiffs.

Catriona Lavery, Susman Godfrey L.L.P., Dale Joseph Giali, Mayer Brown LLP, Los Angeles, CA, Floyd G. Short, Pro Hac Vice, Katherine Marie Peaslee, Susman Godfrey L.L.P., Seattle, WA, Laura Rose Hammargren, Pro Hac Vice, Nancy Ginsberg Ross, Pro Hac Vice, Richard E. Nowak, Pro Hac Vice, Mayer Brown LLP, Chicago, IL, for Defendants.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS

Re: ECF Nos. 25, 40, 41

JON S. TIGAR, United States District Judge

In this action for violations of the Employee Retirement Income Security Act ("ERISA") and Medicare as Secondary Payer Act ("MSPA"), along with related state claims, Defendants Amy's Kitchen, Inc. and Amy's Kitchen, Inc. Employee Benefit Health Plan (collectively, "Amy's") move to dismiss the complaint under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). ECF No. 25. Plaintiffs oppose the motion. ECF No. 40. For the reasons set forth below, the motion is GRANTED in full, with prejudice as to the ERISA and MSPA claims, and without prejudice as to refiling the state claims in the appropriate state court.

I. BACKGROUND

A. Factual Background

Plaintiffs DaVita, Inc. and Star Dialysis, LLC (collectively, "DaVita") are dialysis treatment providers. ECF No. 1 ("Compl.") ¶¶ 1, 12-13. Amy's Kitchen is a California corporation that makes and sells organic foods, and it is the sponsor and plan administrator of the Amy's Kitchen Employee Benefit Health Plan ("Plan" or "Amy's Plan"). Id. ¶¶ 14, 16. DaVita provides dialysis treatment to beneficiaries of the Plan who suffer from end-stage renal disease

("ESRD"). Id. ¶ 1. ESRD is another term for kidney failure, the last stage of chronic kidney disease. Id. ¶ 18. Dialysis substitutes many of the normal functions of the kidneys when they have stopped working well enough for the individual to survive otherwise. Id. ¶ 19. Until 2017, Amy's Plan paid DaVita an "in-network" rate for dialysis treatment that was "significantly lower than the usual and customary rates DaVita charges." Id. ¶ 1. As of January 1, 2017, Amy's Plan eliminated network coverage and "dramatically reduced reimbursement" for dialysis. Id. ¶ 2.

According to DaVita, this elimination of coverage violates the MSPA, which allocates payment responsibility between Medicare and private payers. Compl. ¶¶ 2-4. Before the MSPA was passed by Congress, private insurers had an incentive to push ESRD sufferers onto Medicare because individuals with ESRD are entitled to Medicare regardless of age or financial status. Id. ¶ 3. The MSPA reversed this coverage shifting by making "private insurers ... the ‘primary’ payers and Medicare the ‘secondary’ payer" during an individual's first 30 months of ESRD-based Medicare eligibility. Id. (quoting Bio-Med. Applications of Tenn., Inc. v. Cent. States Se. & Sw. Areas Health & Welfare Fund , 656 F.3d 277, 278 (6th Cir. 2011) ). DaVita claims that Amy's Plan violates this "foundational principle" by eliminating in-network coverage of dialysis, which creates incentives for patients with ESRD to drop out of Amy's Plan and rely on Medicare, where their payment obligations would be significantly lower. Id. ¶¶ 4, 6.

The rate DaVita is paid for dialysis treatment depends on whether the patient's insurance is government-sponsored or private, and whether DaVita is in-network or out-of-network. See Compl. ¶¶ 25-27. For government-sponsored plans like Medicare, the government unilaterally sets the reimbursement rate, which is usually significantly lower than rates paid by private plans. Id. ¶ 26. For private insurance plans, the rates depend on whether DaVita is in-network or out-of-network with the plan. Id. ¶ 27. When DaVita is "in-network," DaVita is paid a contractually negotiated rate. Id. When DaVita is "out-of-network," it is generally paid according to an industry standard rate known as the "usual, customary, and reasonable" ("UCR") rate. Id. DaVita's out-of-network payment rates are on average higher than its in-network rates. Id.

Amy's Plan is a preferred provider organization ("PPO") health plan, meaning it incentivizes participants to select healthcare providers that have contracted with the plan for discounted rates. Compl. ¶ 29. In-network coverage generally protects beneficiaries from having to pay any charged amounts not paid for by the plan, a practice known as "balance billing." Id. ¶ 30. Until December 31, 2016, Amy's Plan beneficiaries had access to DaVita as an in-network provider. Id. ¶ 36. Amy's Plan also covers out-of-network providers who have not contracted with the Plan. Id. ¶ 31. The Plan pays non-network providers a percentage of what the Plan considers to be the UCR rate for the provided services, leaving the beneficiary to pay higher copayments, along with balance billing. Id.

Amy's Plan also relies on third-party claims administrators such as Anthem Blue Cross and regional Blue Cross Blue Shield entities. Compl. ¶ 32. These entities determine whether to process claims for benefits on a network or non-network basis. Id. Apart from any specific plan, Blue Cross entities have their own networks of contracted and preferred healthcare providers, establishing in-network reimbursement rates for the providers' services. Id. ¶ 33. Plans then contract with the Blue Cross entities and gain access to these provider networks for their beneficiaries. Id. DaVita has contracted with one of these entities, Blue Cross of Oregon, to provide discounted dialysis treatment. Id.

DaVita's claims here stem from claims for treatment rendered by DaVita to Patient 1, an Amy's Plan beneficiary, which were processed by Blue Cross of Oregon on an in-network basis. See Compl. ¶ 34. Up through December 2016, DaVita received the rates it had negotiated with Blue Cross of Oregon, which are substantially lower than the usual and customary rates DaVita charges for its services. Id. On January 1, 2017, Amy's Plan "effectively eliminated network coverage for dialysis treatment." Id. ¶ 40. On that date, the Plan was amended to include a "Dialysis Benefit Preservation Program," which carves dialysis treatment out of the Plan's in-network/out-of-network approach described above. Id. ¶ 41. Instead, dialysis-related claims are subject to "mandated cost review," with dialysis providers no longer treated as in-network. Id.

Neither party disputes that the Plan amendments were designed to save costs on dialysis treatment. See Compl. ¶ 39 ("This case arises from the Plan's efforts to save money on dialysis treatment."); ECF No. 25 at 12-13. According to Amy's, due to the highly concentrated market for dialysis providers, providers like DaVita are able to "discriminatorily charge plans ... much higher rates for dialysis than they charge government and commercial payers in order to subsidize those larger payers." ECF No. 25 at 13. In response, Amy's Plan adopted the Dialysis Benefit Preservation Program as a "cost-control measure" to effectuate its "fiduciary obligation to preserve Plan assets." Id. DaVita alleges these actions violated provisions of ERISA and the MSPA, and also asserts related state law claims. See Compl.

B. Procedural History

DaVita brings suit against Amy's alleging five causes of action. See generally Compl.

First, DaVita alleges that Amy's Plan violates two MSPA provisions: one that prohibits an insurer from "tak[ing] into account that an individual is entitled to or eligible for" Medicare based on ESRD; see Compl. ¶¶ 64-65 (quoting 42 U.S.C. § 1395y(b)(1)(C)(i) ); and a second that prohibits an insurer from "differentiat[ing] in the benefits it provides between individuals having end stage renal disease

and other individuals covered by such plan on the basis of ... the need for renal dialysis, or in any other manner," id. ¶ 66 (quoting 42 U.S.C. § 1395y(b)(1)(C)(ii) ). DaVita claims these violations entitle it to double damages under the MSPA's enforcement provision, 42 U.S.C. 1395y(b)(3)(A), both in its own right and as Patient 1's assignee. Id. ¶¶ 69, 73.

Second, DaVita, as Patient 1's assignee, seeks injunctive and other equitable relief under 29 U.S.C. § 1132(a)(3) of ERISA to address allegedly illegal plan terms, including reformation to conform the plan to the requirements of federal law, as well as attorneys' fees. Id. ¶ 78.

Third, DaVita seeks relief under 29 U.S.C. § 1132(a)(1)(B), an ERISA provision allowing recovery of benefits due under the Plan, and attorneys' fees under 29 U.S.C. § 1132(g). Id. ¶ 83.

Fourth, DaVita alleges that Amy's Plan failed to adequately disclose material terms of the Plan, breaching its fiduciary duty under ERISA. Id. ¶ 85. Specifically, DaVita claims that the Plan "failed to (1) adequately disclose to beneficiaries that there would be no in-network treatment for dialysis, and (2) that payment rates for dialysis would be significantly lower than for all other care." Id. ¶ 87. DaVita argues that ERISA entitles misled beneficiaries to recover under theories of surcharge, reformation, and estoppel. Id. ¶ 89.

Fifth, DaVita brings claims for negligent misrepresentation, promissory estoppel, and quantum meruit under state law, in its own right as a healthcare provider. Id. ¶¶ 94, 98.

Amy's now moves to dismiss DaVita's complaint. ECF No. 25. Amy's argues that: (1) DaVita lacks statutory standing to bring ERISA claims on its own behalf (Counts 2, 3, and 4); (2) DaVita lacks Article III standing to bring ERISA claims on behalf of Patient 1 (Counts 2, 3, and 4); (3) DaVita lacks Article III standing to bring its MSPA claim as an assignee of Patient 1 (Count 1); (4) DaVita has not alleged any actual expenses paid by Medicare, as required to...