Delta Dental Plan of California, Inc. v. Mendoza

Decision Date27 March 1998
Docket NumberNo. 96-15245,96-15245
Parties21 Employee Benefits Cas. 2835, 98 Cal. Daily Op. Serv. 2233, 98 Daily Journal D.A.R. 3098 DELTA DENTAL PLAN OF CALIFORNIA, INC., a California corporation; Rockwell International Corporation, a Delaware corporation, Plaintiffs-Appellees, v. Gary MENDOZA, Commissioner, Commissioner of Corporations of the State of California, Defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Carol Dorward, San Francisco, CA, for defendant-appellant.

Matthew L. Larrabee, San Francisco, CA, for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of California; Fern M. Smith, District Judge, Presiding. D.C. No. CV-95-03316-FMS.

Before: FLETCHER and REINHARDT, Circuit Judges, and WARDLAW, * District Judge.

FLETCHER, Circuit Judge:

The Commissioner of Corporations of the State of California ("the Commissioner") appeals a decision by the district court granting declaratory and injunctive relief to Delta Dental Plan of California, Inc. ("Delta") and Rockwell International Corporation ("Rockwell"). The district court held that the Commissioner's Cease and Desist Order is preempted by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001, et. seq., as it relates to Delta's ERISA-governed plans. Because we conclude that, pursuant to Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), the district court should have abstained from hearing the merits of this action, we reverse and remand to the district court for dismissal.

I.

The Knox-Keene Health Care Service Plan Act of 1975, Cal. Health & Safety Code §§ 1340-1399.5 ("Knox-Keene Act") regulates health care service plans in the State of California. It was enacted to insure that residents of California receive quality, low-cost health care from financially stable health care plans, and that they receive the information necessary to make informed decisions regarding their health plan needs. Cal. Health & Safety Code § 1342.

Many health care service plans under the Knox-Keene Act are established for the purpose of providing dental benefits to employees and their dependents and thus are regulated concurrently by ERISA. Delta, plaintiff/appellee in this case, is a non-profit corporation organized and licensed under the Knox-Keene Act to provide group dental health care plans in California. Approximately 9.3 million Californians are enrolled in a Delta dental plan. The terms of a benefit package vary depending on the needs of a particular employer, or "plan sponsor." Approximately 60% of all Delta plans are governed by ERISA.

The terms and conditions of a particular group dental health care plan are set forth in a "Plan Contract" between the plan sponsor and Delta. Delta's primary responsibilities under a plan contract include processing requests for benefits, calculating the amount of the benefit provided by the plan, and handling the payment of benefits to or on behalf of plan beneficiaries.

Plaintiff/appellee Rockwell is a Delaware corporation with its principal place of business in California. Rockwell contracted with Delta to provide its employees and other designated beneficiaries with dental benefits. Rockwell sponsors several Delta employee welfare benefit plans that provide dental benefits. All are governed by ERISA and all share the same basic structure. Rockwell's plan contracts with Delta stipulate that all questions regarding contractual interpretation or enforcement are to be governed by California state law, including the Knox-Keene Act.

The plan contracts between Rockwell and Delta provide that Delta will pay a specified percentage (varying between 40% and 100% depending upon the type of dental service provided and the status of the employee covered) of the patient's dental bill. Delta calculates the percentage it is obligated to pay using the lesser of two billing measures: (1) "usual, customary, and reasonable" fees ("UCR fees") or (2) "fees actually charged." By definition, the UCR fee is "usual" (the amount the dentist regularly charges and receives, or the lowest such fee, for a given service); "customary" (within a range of usual fees charged and received for a particular service by similarly-situated dentists); and "reasonable" (either usual or customary, or if greater than customary, otherwise justified). The second defined measure, the "fee actually charged," represents the fee for a particular dental service (the UCR fee) less any amount which is discounted, waived, or rebated, or which the dentist does not use good faith efforts to collect. The beneficiary is obligated to pay the remaining percentage of his or her dental bill. These remaining fees are known as "Patient Copayments."

Delta allows beneficiaries to obtain dental services from any dentist. When beneficiaries obtain services from a "Participating Dentist" (a dentist under contract with Delta), Delta pays its percentage of the fees directly to that dentist. In contrast, when beneficiaries obtain dental services from a non-participating dentist, the patient is required to pay the full amount of the bill to the dentist first, and Delta subsequently reimburses the patient for the percentage of the fee stipulated by the plan contract. Any California licensed dentist can become a participating dentist by signing a "Participating Dentist Agreement" with Delta, agreeing to abide by its terms, and submitting a list of his or her UCR fees. Approximately 17,000 California dentists are Delta participating dentists--comprising nearly 95% of all dentists in the state.

Delta's Participating Dentist Agreement contains two provisions pertaining to patient copayments. First, Rule 3 requires participating dentists to "charge and make reasonable efforts to collect from an eligible patient the entire amount payable by the patient under the terms of the applicable dental care contract." Second, Rule 13 attempts to enforce the above obligations by refusing payment to participating dentists who work in dental practices which fail to comply with Delta's rules. Rule 13 declares that no participating dentist may submit claims for dental services rendered if he or she works with:

(a) a participating dentist who is subject to mandatory prior authorization or whose list of usual fees has been modified by Delta because of failure to collect patient copayments; or (b) a participating dentist who does not comply with any portion of these rules; or (c) a non-participating dentist whose billing practices or policies would violate any portion of these rules if he or she were a participating dentist.

After treating a Delta beneficiary, a participating dentist signs and submits a claim to Delta, called an "Attending Dentist's Statement," which lists the "fee actually charged." The Attending Dentist's Statement contains the following provision: "I will charge and intend to collect the entire portion of the fees stated above which Delta determines to be the patient's responsibility, and I will not waive, reduce or rebate any of that portion unless I expressly so state on this form." According to Delta, when a participating dentist fails to make a good faith effort to collect patient copayments in accordance with Rule 3, patients effectively receive a discount, and the "fee actually charged" is inflated because, by definition, it is not supposed to reflect any discounts or waived copayments. Thus, if Delta calculates the percentage it is obligated to pay based on this inflated amount, it would be paying more than its anticipated responsibility. According to Delta, its copayment plan is designed to strike a balance between cost and efficient use of medical resources; reduced costs can result in people obtaining more medical treatment than necessary. Consequently, when a participating dentist fails to collect patient copayments, Delta takes adverse action, either reducing benefits owed to that dentist or terminating his or her contract with Delta.

Dr. Dennis Hardin is a participating dentist who operates a network of dental offices in Southern California known as either SmileCare Dental Group or Community Dental Services (hereinafter, "SmileCare"). SmileCare devised a "Supplemental Plan" for Delta beneficiaries known as "SmileCare Coverage Plus." Smile care and the defendant/appellant contend that this supplemental plan complements the primary insurance provided by Delta by permitting patients to pay an annual "premium" in lieu of any copayments. This plan has been licensed under the Knox-Keene Act since 1988 and represents one of two licensed "supplemental" insurance plans in California. Many Delta beneficiaries have since enrolled in SmileCare's supplemental plan, including employees of such plan sponsors as Rockwell, McDonnell Douglas, Kaiser Permanente, Lockheed, Northrop, General Motors, and Fedco.

SmileCare's billing scheme attracts patients by reducing the amount they are responsible to pay in any given year. By doing so, however, SmileCare effectively waives the copayments its patients are responsible for paying. Thus, SmileCare's supplemental plan violates both Delta's plan contract, which requires the "fee actually charged" to reflect any amount discounted, and Delta's contract with participating dentists, which requires dentists to collect copayments under Rules 3 and 13.

Delta took action against SmileCare shortly after the State licensed SmileCare's Supplemental Plan. In addition to assigning all SmileCare-affiliated dentists to a single, reduced fee schedule to reflect SmileCare's practice of waiving patient copayments, Delta also began requiring SmileCare dentists to obtain authorization before providing basic dental treatment, such as fillings and teeth cleanings. Delta did not impose this requirement on any other providers. Appellant argues this preauthorization requirement subjected patients to undue delays,...

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