Myers v. State Bd. of Equal.
| Decision Date | 25 September 2015 |
| Docket Number | B255445 |
| Citation | 240 Cal.App.4th 722,192 Cal.Rptr.3d 864 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Michael D. MYERS, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION et al., Defendants and Respondents. California Physicians' Service et al., Real Parties in Interest and Respondents |
Ajalat, Polley, Ayoob & Matarese and Richard J. Ayoob, Glendale; Gianelli & Morris, Robert S. Gianelli, and Timothy J. Morris, Los Angeles, for Plaintiff and Appellant.
Adam M. Cole, San Francisco, and Teresa R. Campbell for Defendant and Respondent Dave Jones, California Insurance Commissioner.
Hogan Lovells, Vanessa O. Wells, Victoria C. Brown, Menlo Park, and Rachel A. Patta for Real Party in Interest and Respondent Blue Cross of California.
Manatt, Phelps & Phillips, Gregory N. Pimstone, Ronald B. Turovsky, and Joanna S. McCallum, Los Angeles, for Real Party in Interest and Respondent California Physicians' Service.
Carol L. Ventura, Drew Brereton, and Sheila F. Gonzalez, Fairfield, for California Department of Managed Health Care as Amicus Curiae on behalf of Real Parties in Interest and Respondents, California Managed Health Care and Blue Cross of California.
INTRODUCTION
KITCHING, Acting P.J.Article XIII, section 28 of the California Constitution imposes a tax of 2.35 percent on the amount of gross premiums received each year by “each insurerdoing business in this state” (Cal. Const., art. XIII, § 28 , subd. (b), italics added; see id., subds. (c) & (d).) The tax differs from the corporate franchise tax imposed on all other businesses, which is calculated on the basis of the business's “net income.” (Rev. & Tax. Code, § 23151, subd. (f) , italics added.)
The issue in this appeal is whether California Physicians' Service, doing business as Blue Shield of California (Blue Shield), and Blue Cross of California, doing business as Anthem Blue Cross (Blue Cross; collectively, Real Parties in Interest) are “insurers” under the California Constitution's gross premium tax provision.
A taxpayer brought a mandamus action to compel state officials to collect the gross premium tax from Real Parties in Interest. Real Parties in Interest contended, inter alia, they could not, as a matter of law, be regarded as “insurers” under the Constitution's gross premium tax provision, because they are “health care service plans” under the Knox–Keene Health Care Service Plan Act of 1975, Health and Safety Code section 1340 et seq . (the Knox–Keene Act). They argued that regulatory status determines if an entity is an “insurer” and subject to the gross premium tax under the Constitution. The trial court agreed with Real Parties in Interest and sustained their demurrers without leave to amend. We reverse, and conclude, pursuant to People ex rel. Roddis v. California Mut. Assn. (1968) 68 Cal.2d 677 [68 Cal.Rptr. 585, 441 P.2d 97] (Roddis ), that the taxpayer can maintain this action because the complaint alleges facts sufficient to support an inference that indemnifying against future contingent medical expenses represents a significant financial proportion of Real Parties in Interest's businesses.
FACTS1 AND PROCEDURAL HISTORY
Plaintiff Michael D. Myers (Plaintiff) filed this action against the Board of Equalization (BOE), the state Insurance Commissioner, and the State Controller (collectively, the State Defendants), to compel the State Defendants to assess and collect the gross premium tax from Real Parties in Interest. Plaintiff alleges Real Parties in Interest are among the largest health “insurers” in this state by virtue of the significant premiums they collect in exchange for agreeing to indemnify their enrollees against contingent medical expenses, largely through preferred provider organization, or PPO, plans. Despite this, Plaintiff alleges Real Parties in Interest have not paid the gross premium tax that is paid by every other company that issues similar fee-for-service indemnity health insurance contracts.
The trial court sustained Real Parties in Interest's demurrers to Plaintiff's complaint on three grounds. As for the principal ground, which we address in the major part of this opinion, the court concluded that Real Parties in Interest could not, as a matter of law, be regarded as “insurers” under the Constitution's gross premium tax provision, because they are “health care service plans” under the Knox–Keene Act and, as such, are subject to a different regulatory scheme than the one that governs the business of licensed insurance companies in this state. The court also concluded that Plaintiff's action was barred, under the res judicata doctrine, by a judgment in a prior taxpayer action to compel the BOE to assess and collect the gross premium tax from Blue Cross. Finally, the court determined that Plaintiff lacked standing because the requested relief would effectively enjoin the state from collecting the corporate franchise tax from Real Parties in Interest. For the reasons discussed in this opinion, we reject each of these grounds, and reverse the judgment.
The California Medical Association incorporated Blue Shield in 1939 as a not-for-profit mutual benefit corporation. Blue Shield's founding purpose was to arrange health care for Californians with limited incomes, originally less than $3,000 per year, who did not have adequate funds to pay for medical treatment.
In its early years, Blue Shield contracted directly with California physicians to provide covered medical services to Blue Shield subscribers for a set periodic rate. Under this original model, Blue Shield had no contractual obligation to indemnify its subscribers for medical expenses; rather, the financial risk of providing expensive medical care that exceeded the contracted rate fell entirely upon the treating physicians who had contracted with Blue Shield.
Beginning in the 1960's, Blue Shield expanded its membership and services by removing existing income restrictions and offering health care indemnity contracts that obligated Blue Shield to pay for its members' medical treatment. At the time, state law only required Blue Shield to register with the California Attorney General as a Knox-Mills Health Plan Act (Gov. Code, former § 12530 et seq. ; Knox-Mills Act) prepaid health plan, even though the Knox-Mills Act lacked regulatory oversight mechanisms to ensure Blue Shield maintained sufficient reserves to meet its growing indemnity obligations.
In 1975, the Legislature repealed the Knox-Mills Act and enacted the Knox-Keene Act. In 1978, the Department of Corporations designated Blue Shield a California health care service plan (HCSP)—one of four original licensees under the Knox-Keene Act. As a former Knox-Mills Act health plan, and in recognition that Blue Shield primarily issued health indemnity contracts, the Department of Corporations permitted Blue Shield to continue to write new fee-for-service indemnity contracts as an HCSP, unlike the vast majority of other HCSPs licensed under the Knox–Keene Act.
Blue Shield utilizes a form of indemnity-based health contract that allows members to obtain covered medical care from “preferred providers” at discounted group rates. Under this arrangement, the hospitals and physicians with whom Blue Shield contracts comprise Blue Shield's PPO. Blue Shield members who obtain medical care from preferred providers pay smaller out-of-pocket costs than for medical care received from non-preferred providers, while Blue Shield pays reduced fee-for-service rates for the medical care preferred providers render to Blue Shield members. Consistent with their indemnity structure, the PPO contracts provide that if Blue Shield pays for medical treatment stemming from injuries caused by a third party, then Blue Shield will retain “ ‘an equitable right to restitution’ ” to recover the medical costs “ ‘paid by Blue Shield of California on a fee-for-service basis.’ ”
Over the last decades, Blue Shield has offered two broad product lines: PPO plans and health maintenance organization (HMO) plans.2 As of June 2012, Blue Shield reported that 1,824,766 members were enrolled in its PPO plans across California. Blue Shield's PPO membership is approximately twice that of the members enrolled in its HMO plans. As of June 2012, Blue Shield's PPO network consisted of 53,710 physicians and 363 hospitals.
PPO plans are customarily characterized as health insurance plans and, as such, are subject to oversight by the Department of Insurance. Like other PPO plans, Blue Shield's PPO contracts are fee-for-service indemnity health contracts that place the financial risk of paying a member's covered contingent medical care costs on Blue Shield, less the required deductible and coinsurance payment by the member. Despite this, while other PPO plans offered in California are subject to regulation by the Department of Insurance, Blue Shield's PPO plans are overseen by the Department of Managed Health Care (DMHC)—Blue Shield's regulator since 1999 under the Knox-Keene Act. In its final report of its routine medical survey of Blue Shield, dated October 14, 2006, the DMHC disclosed that “[Blue Shield] was permitted the option to include its Preferred Provider Organization (PPO) products under the jurisdiction of the Department of Corporations, the state regulatory agency for the [Knox-Keene] Act at that time.”
As of the filing of the complaint, Blue Shield had over 2.8 million enrollees for its PPO and HMO plans, representing the third highest enrollment of all health carriers in California and generating nearly $7 billion in annual premiums or “ ‘dues.’ ” In 2012, Blue Shield paid over $5.2 billion for non-capitated medical expenses, representing over three times the amount Blue Shield paid for capitated expenses ($1.7 billion). Figures set forth in the complaint suggest Blue Shield has paid at least two to three times more in fee-for-service...
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