Samura v. Kaiser Foundation Health Plan, Inc.

• Decision Date: 17 August 1993
• Docket Number: A057515,Nos. A055730,s. A055730
• Court: California Court of Appeals Court of Appeals
• Parties: , 16 Employee Benefits Cas. 2705 Arthur Bradley SAMURA, Plaintiff and Appellant, v. KAISER FOUNDATION HEALTH PLAN, INC., et al., Defendants and Appellants.

Page 20

22 Cal.Rptr.2d 20

17 Cal.App.4th 1284, 16 Employee Benefits Cas. 2705

Arthur Bradley SAMURA, Plaintiff and Appellant, v. KAISER FOUNDATION HEALTH PLAN, INC., et al., Defendants and Appellants.

Nos. A055730, A057515.

Court of Appeal, First District, Division 1, California.

Aug. 17, 1993.

Review Denied Dec. 16, 1993.

Manuel Glenn Abascal and Kathy S. Abascal, Berkeley, and Stephen Kaus, San Francisco, for plaintiff and appellant.

Kennedy P. Richardson, Mark Palley and Lillian F. Hamrick, Oakland, for defendants and appellants.

NEWSOM, Associate Justice.

The Kaiser Foundation Health Plan, Inc., the Permanente Medical Group, Inc., and Kaiser Foundation Hospitals (hereafter Health Plan or Kaiser) appeal a judgment of the Alameda County Superior Court requiring extensive changes in the third party liability provision in service agreements with members. The theories alleged in the original complaint, 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 multi-faceted legal challenge to the third party liability provision, 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 appeal. At Health Plan's request, it subsequently delivered a statement of decision clarifying the legal basis for the order. The provisions of the order were incorporated in a judgment, filed on October 10, 1991, from which Kaiser now appeals. Samura filed a cross-appeal 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 organization 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 agreements with individual members and group service agreements with employers and union trust funds. The individual and group service agreements contain certain 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 subsequently recovers a settlement or judgment as compensation for the injury, the member will pay Health Plan for the services from the proceeds of the settlement or judgment. A separate schedule establishes the fees for the medical services. ¹ The provision gives the Health Plan "a lien on the settlement or judgment" 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 proceeds of the settlement or judgment. Samura has abandoned 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 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 of 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 proceeds of any judgment or settlement obtained by Health Plan (or its designee) 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 provision are summarized in a pamphlet, entitled "Disclosure 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 settlement 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 attorneys. 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 attorney's fees. ³ When the third party claim results in a recovery through a settlement or judgment, the department ordinarily demands full payment of the charges, reduced only by a pro rata share of the attorney's contingency fee. But in the event that the recovery does not adequately compensate the member, the department 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. [p] C) If the plaintiff or his attorney is compelled to accept a final recovery which is totally disproportionate to the amount of damages and severity of injury (due to liability problems or inadequate insurance coverage), our third party reimbursement may be negotiated further."

The manager of the third party liability department testified that, as a rule of thumb, the department declines to negotiate a reduction of its charges if the tort recovery is three times the amount of its bill. The critical 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 "significant 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 following 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 department waived Samura's claim in accordance with its "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: [p] 1. Rewrite the TPL term in plain English and give greater prominence to the term in the contract. [p] 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 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. [p] 3. Provide in the contract that [Health Plan] will share pro rata in the costs of litigation and attorney fees. [p] 4. Refrain from calling the TPL term a 'reduction.' [p] 5. Inform members in the medical payment order that [Health Plan] will share pro rata in litigation costs and in attorney fees. [p] 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. [p] 7. Refrain from combining the medical payment order with a medical information release authorization form. [p] 8. Refrain from including any representations that the TPL term excludes or reduces coverage in the contract or standard form letters to members and/or their attorneys. [p] 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."

As it purports to enjoin unfair competition pursuant 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 any "unlawful, unfair or fraudulent business practice." ⁴ "California courts have consistently interpreted such language broadly. An 'unlawful business activity' includes ' "anything that can properly be called a business 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 important provision--presents other issues of substantive law. The paragraph implies that the third party liability provision cannot be validly enforced against members who are not "adequately...