Myers v. Board of Equalization , 192 Cal. Rptr. 3d 864 ( 2015 )

Filed 9/25/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
MICHAEL D. MYERS, B255445
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BS143436)
v.
STATE BOARD OF EQUALIZATION
et al.,
Defendants and Respondents.
CALIFORNIA PHYSICIANS’ SERVICE
et al.,
Real Parties in Interest and
Respondents.
APPEAL from a judgment of the Superior Court of Los Angeles County,
Jane L. Johnson, Judge. Reversed.
Ajalat, Polley, Ayoob & Matarese and Richard J. Ayoob; Gianelli & Morris,
Robert S. Gianelli and Timothy J. Morris for Plaintiff and Appellant.
Adam M. Cole and Teresa R. Campbell for Defendant and Respondent Dave
Jones, California Insurance Commissioner.
Hogan Lovells, Vanessa O. Wells, Victoria C. Brown 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 for Real Party in Interest and Respondent California Physicians’
Service.
Carol L. Ventura, Drew Brereton, and Sheila F. Gonzalez, 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
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 insurer
doing business in this state” (Cal. Const., art. XIII, § 28, subd. (b), italics added; 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) 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. Real Parties 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-
2
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 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 (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’
businesses.
FACTS1 AND PROCEDURAL HISTORY
Plaintiff Michael Myers filed this action against the State 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. Plaintiff alleges Real Parties 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 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’ 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 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,
1
“Because this matter comes to us on demurrer, we take the facts from
[P]laintiff’s complaint, the allegations of which are deemed true for the limited purpose
of determining whether [P]laintiff has stated a viable cause of action.” (Stevenson v.
Superior Court (1997) 16 Cal. 4th 880, 885.)
3
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. For the
reasons discussed in this opinion, we reject each of these grounds, and reverse the
judgment.
1. Allegations Regarding Blue Shield
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 Act pre-paid 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 health plan, and in recognition that Blue
Shield issued primarily health indemnity contracts, the Department of Corporations
4
permitted Blue Shield to continue to write new fee-for-service indemnity contracts as a
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 Preferred Provider Organization (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
2
The complaint alleges Blue Shield’s HMO plans share some of the indemnity
characteristics of its PPO plans. According to the complaint, under most of Blue
Shield’s HMO plans, Blue Shield contracts with Independent Physician Associations
and Medical Groups to provide certain, but not all, outpatient professional medical
services. Unlike a traditional capitation arrangement—under which the contracted
medical professional receives a fixed fee to provide all medical services to the HMO’s
members during a covered period, thereby shouldering the risk that the cost of such
services will exceed the agreed upon fee—the complaint alleges Blue Shield assumes
a share of the financial risk of paying for medical services provided by the contracted
Independent Physician Associations and Medical Groups. Further, since Blue Shield
does not have capitation agreements with hospitals or pharmacies, the complaint alleges
Blue Shield assumes all the financial risk of covering contingent hospital and
pharmaceutical charges incurred by its HMO enrollees on a fee-for-service or per diem
basis.
5
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 co-insurance 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 of
California, 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 medical expenses over the last decade as
compared to charges paid under a capitation agreement.
Since 1952, Blue Shield has been exempt from all state franchise tax, including
the gross premiums tax, pursuant to findings made by the Franchise Tax Board (FTB)
under former Revenue and Taxation Code section 23701.3 According to the FTB
3
Former Revenue and Taxation Code section 23701, like the current iteration of
the statute, provides tax exempt status for certain qualifying nonprofit organizations.
6
opinion letter, Blue Shield’s tax-exempt status could be subject to forfeiture in the event
“[Blue Shield] change[s] the character of [its] organization, the purposes for which [it]
[was] organized, or [its] method of operation.”
2. Allegations Regarding Blue Cross
Blue Cross was established in 1936 as a not-for-profit hospital service
organization. In 1983, Blue Cross implemented one of the first PPO programs in
California. Three years later, Blue Cross formed its first HMO plan. In 1996, Blue
Cross changed its status to a “for profit” health plan.
Blue Cross was regulated by the Department of Insurance until January 1983,
when, through a series of legislative acts, it came under the jurisdiction of the
Department of Corporations—the predecessor to Blue Cross’s current regulator under
the Knox-Keene Act, the DMHC. The same legislative acts deemed Blue Cross a
“grandfathered” Knox-Mills pre-paid health plan and enabled Blue Cross, like Blue
Shield, to continue issuing health plans with an indemnity component even after the
DMHC assumed regulatory jurisdiction.4
Blue Cross PPO plans provide coverage for doctor office visits, hospital stays,
emergency medical treatment, medical diagnostic services, outpatient services,
prescription drugs and other medical benefits. The amounts Blue Cross pays under its
PPO contracts are dependent upon coinsurance and deductable options and whether the
medical care is provided by a Blue Cross “in-network” physician or a hospital that
charges a lower “volume discount” rate negotiated by Blue Cross. Blue Cross PPO
plans also provide coverage for more costly out-of-network medical treatment.
4
In support of this allegation, the complaint cites Health and Safety Code
section 1396.5, which provides, “A nonprofit hospital corporation which substantially
indemnified subscribers and enrollees and was operating in 1965 under Chapter 11A
(commencing with Section 11490) of Part 2 of Division 2 of the Insurance Code and
which is regulated under the Knox-Keene Health Care Service Plan Act shall enjoy the
privileges under the act which would have been available to it had it been registered
under the Knox-Mills Health Plan Act and applied for a license under the Knox-Keene
Health Care Service Plan Act in 1976.” For purposes of reviewing the judgment, we
will assume the statute applied to Blue Cross.
7
The complaint alleges on information and belief that Blue Cross issues more
PPO plans in California than any other HCSP or insurance company in the state, and
that more Blue Cross members receive benefits under its PPO products than its HMO
products. The complaint also alleges on information and belief that Blue Cross, like
Blue Shield, was given the option to have the Department of Corporations oversee its
PPO plans, rather than the Department of Insurance, which oversees all other PPO
health insurance plans issued in California.
Blue Cross financial statements from 2002 through 2012 show Blue Cross’s
annual fee-for-service payments on behalf of its members have been approximately five
to six times larger than its pre-paid capitation payments to healthcare providers over the
subject decade. In 2012, Blue Cross’s fee-for-service payments totaled more than
$7.2 billion, as compared to the $1.8 billion in fixed fees it paid pursuant to capitation
agreements with physicians and hospitals. Since 1983, when Blue Cross came under
the jurisdiction of the Department of Corporations pursuant to the Knox-Keene Act,
Blue Cross has not paid any gross premium taxes.
3. The 2004 Lawsuit
In November 2004, the Foundation for Taxpayer and Consumer Rights (FTCR)
and Shari Rosenman (collectively, the FTCR plaintiffs) filed a taxpayer action pursuant
to Code of Civil Procedure section 526a5 against the BOE, the State Controller and the
State of California. The complaint sought declaratory and injunctive relief to compel
“the assessment and collection of hundreds of millions of dollars in unpaid gross
premium taxes owed to the State of California by [Blue Cross] on the premiums it
receives from its [PPO] health insurance plan subscribers” (the 2004 Lawsuit).
5
Code of Civil Procedure section 526a provides in relevant part: “An action to
obtain a judgment, restraining and preventing any illegal expenditure of, waste of, or
injury to, the estate, funds, or other property of a county, town, city or city and county
of the state, may be maintained against any officer thereof, or any agent, or other
person, acting in its behalf, either by a citizen resident therein, or by a corporation, who
is assessed for and is liable to pay, or, within one year before the commencement of the
action, has paid, a tax therein.”
8
The FTCR plaintiffs alleged the “PPO plans sold by Blue Cross are a type of
indemnity health insurance” and that approximately 41 percent of Blue Cross’s health
insurance business in California was attributable to its PPO products. At all relevant
times, however, Blue Cross allegedly paid the franchise tax on its net profits, not the
constitutionally-mandated gross premium tax paid by other health insurers selling PPO
indemnity insurance products. This allegedly allowed Blue Cross to reap “an enormous
competitive advantage” over other health insurers in California. As the FTCR plaintiffs
asserted in their complaint, “[a]lthough the franchise tax rate of 8.83% is greater than
the premium tax rate of 2.35%, because the base for the gross premium tax is gross
premiums instead of net income, the gross premium tax collects a greater share of an
insurance company[’s] premium revenue than is proportionally collected from a health
plan by the franchise tax.” The FTCR plaintiffs maintained that the relief sought would
“level the playing field for all California health insurers and result in a more competitive
and fair environment for health care insurers.”
The public entity defendants and Blue Cross, as a real party in interest, filed
demurrers to the FTCR plaintiffs’ complaint. The demurrers argued (1) the plaintiffs
lacked standing under Code of Civil Procedure section 526a because the relief sought
would effectively enjoin the FTB from collecting the franchise tax from Blue Cross; and
(2) the public entity defendants had no duty to collect the gross premium tax because
Blue Cross was a HCSP under the Knox-Keene Act and, therefore, not an “insurer”
under Article XIII, section 28 of the Constitution.
The trial court sustained the demurrers without leave to amend. With respect to
the constitutional issue, the court concluded Blue Cross was not an “insurer” under
Article XIII, section 28. Citing the fact that “[i]nsurers are registered with and regulated
by the Insurance Commissioner and Department of Insurance,” while Blue Cross had
been licensed as a HCSP under the Knox-Keene Act since 1993, the court reasoned that
the Legislature and relevant state agencies, including the Department of Insurance, the
DMHC, and the FTB, had determined that Blue Cross was a health plan and not an
insurer for tax purposes. Because, in the court’s view, these agencies made
9
“discretionary policy determinations” with respect to Blue Cross’s status, the court
concluded such determinations were “not subject to judicial review by means of a
taxpayer action.” Accordingly, the court held Blue Cross’s status as a licensed HCSP
was dispositive and barred declaratory or injunctive relief compelling the public entity
defendants to assess and collect the gross premium tax from Blue Cross.
While acknowledging the demurring parties’ argument that the FTCR plaintiffs’
action could not be maintained under Code of Civil Procedure section 526a because it
would necessarily enjoin the FTB from collecting the franchise tax, the trial court
applied a different analysis to the standing issue. The court reasoned that a taxpayer has
standing under Code of Civil Procedure section 526a to compel the collection of a tax
only if the subject public agencies have “nondiscretionary duties that required the
collection of those funds.” Working from that premise, the court settled on the same
rationale that it employed to resolve the constitutional issue--that is, because the
relevant agencies made a discretionary policy determination to characterize Blue Cross
as a HCSP, and HCSPs are not subject to the gross premium tax, the court concluded
the FTCR plaintiffs had no standing to compel the public entity defendants to collect the
gross premium tax.
The FTCR plaintiffs appealed from the judgment, but then abandoned the appeal
before submitting the case to the appellate court for a decision.
4. The Instant Action
In July 2013, Plaintiff filed the instant action, styled as a verified
petition/complaint for writ of mandamus and declaratory judgment, against the State
Defendants. The complaint sought to compel the State Defendants to “perform their
respective ministerial duties mandated by the California Constitution and Revenue and
Taxation Code . . . regarding the determination, assessment, and collection of the gross
premium tax” with respect to Real Parties. The complaint also sought a declaratory
judgment determining “whether Blue Shield and Blue Cross are ‘insurers’ as that term
is used within Article XIII, section 28 of the California Constitution.” Plaintiff asserted
10
he had standing to sue for the requested relief pursuant to Code of Civil Procedure
section 526a.
The complaint’s central theory for relief is that Real Parties’ PPO products are
indemnity health insurance contracts and, because these indemnity products represent
the vast majority of Real Parties’ business in the state, the complaint asserts Real Parties
are “insurers” under the Constitution and the premiums they collect in California are
subject to the gross premium tax. Despite this, the complaint alleges the State
Defendants have failed to perform their ministerial duty to assess and collect the gross
premium tax from Real Parties. That failure, the complaint asserts, “constitutes a waste
of tax monies owed to the state warranting mandamus.”
After the trial court related the instant action to the 2004 Lawsuit filed by the
FTCR plaintiffs, the parties filed a joint initial status conference statement setting forth
their respective positions on the core factual and legal issues presented by the
complaint’s allegations. The BOE stated it had “no position” regarding Plaintiff’s
entitlement to relief, observing that under the relevant Revenue and Taxation Code
provision the BOE’s duty to assess the gross premium tax is “under the direction of the
Department of Insurance and purely ministerial.” The Controller similarly stated that it
“makes no determination as to whether entities, such as [Real Parties], are insurers for
purposes of administering [the gross premium tax].” The Controller added, “This
determination is made by the Insurance Commissioner.” As for the Insurance
Commissioner, he stated: “The core legal issue is whether [Real Parties] are insurers
11
subject to gross premium tax under California Constitution article XIII, section 28. The
Commissioner contends the answer is yes.”6
Real Parties filed separate demurrers to the complaint. Both demurrers asserted
the judgment in the 2004 Lawsuit barred the instant action under the res judicata
doctrine and that, on the merits, Real Parties’ status as a licensed Knox-Keene HCSP
regulated by the DMHC—not the Insurance Commissioner—conclusively established
they were not “insurers” subject to the gross premium tax. Blue Cross also argued, as it
had in the 2004 Lawsuit, that Plaintiff lacked standing under Code of Civil Procedure
section 526a because the relief he sought would effectively enjoin the FTB from
collecting franchise tax from Blue Cross. Blue Shield also challenged Plaintiff’s
standing, but argued it was lacking with respect to the relief affecting Blue Shield
because such relief—a writ of mandate compelling the State Defendants to collect gross
premium taxes from Blue Shield—was inconsistent with Blue Shield’s tax-exempt
status.
Plaintiff opposed the demurrers, arguing, among other things, that (1) the
requisite elements of res judicata were not present, but even if they were, the court
should invoke the doctrine’s public interest exception in view of the public revenue
component and constitutional dimension of the claims; (2) the Real Parties’ regulatory
designation under the Knox-Keene Act could not trump the State Defendants’
constitutionally-mandated ministerial duty to collect the gross premium tax from entities
substantially engaged in the business of selling indemnity insurance in California; and
6
The BOE and Controller each filed answers reaffirming that their ministerial
duties with respect to assessing the gross premium tax were dictated by the Insurance
Commissioner. The Insurance Commissioner stated in his answer that Article III,
section 3.5 of the Constitution precludes him from declaring a statute unenforceable or
refusing to enforce a statute on the basis of it being unconstitutional without an
appellate court determination. Accordingly, the Insurance Commissioner stated he must
give deference to the relevant provisions of the Insurance Code and Health and Safety
Code deeming Real Parties to be HCSPs. He added, however, that he “contends those
statutes are unconstitutional to the extent they immunize [Real Parties] from premium
tax.”
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(3) Real Parties’ standing arguments were based on flawed interpretations of the
relevant legal authorities.
The trial court sustained Real Parties’ demurrers without leave to amend. The
court determined that all elements for invoking res judicata were present and declined to
apply the public interest exception, observing “this case deals with questions of
economic public policy [that] do not lie within this Court’s prerogative.” The court also
determined that Real Parties’ regulatory designation under the Knox-Keene Act was
dispositive and precluded a finding that Real Parties were “insurers” subject to the gross
premium tax under the Constitution. Finally, the court concluded Plaintiff lacked
standing under Code of Civil Procedure section 526a, reasoning that the gross premium
tax is “ ‘in lieu of’ ” other taxes and, therefore, the relief requested by Plaintiff would
“ ‘inherently enjoin collection of the corporate franchise tax paid by Blue Cross.’ ”
DISCUSSION
1. Taxation of Insurance Companies in California
Before we address the issues in this case, we must place this matter in context by
examining the specific taxing scheme for insurers that lies at the heart of this
controversy. In California, insurance companies are taxed differently than other
corporations doing business in the state. While regular corporations are subject to
a corporate franchise tax of 8.84 percent, calculated on the basis of the corporation’s
“net income” (Rev. & Tax. Code, § 23151, subd. (f), italics added),7 the California
Constitution imposes a tax of 2.35 percent on the amount of gross premiums received
each year by “each insurer doing business in this state” (Cal. Const., art. XIII, § 28,
subd. (b), italics added; id., subds. (c) & (d).) For most types of insurers, this tax is in
lieu of all other taxes and fees payable to the state, except property taxes and vehicle
license fees. (Id., subd. (f).) Thus, insurance companies do not pay tax on other forms
of income, such as investment income, and income earned from other trades or
7
Banks and financial corporations, and Subchapter S corporations, are subject to
different tax rates on their net income. (See Rev. & Tax. Code, §§ 23186, 23802.)
13
businesses. (See Mutual Life Ins. Co. v. City of Los Angeles (1990) 50 Cal. 3d 402, 410
[“the ‘in lieu’ provision was intended to preclude the state or any of its subdivisions
from exacting any other revenue from the specified corporations (except local taxes on
real estate) and was granted in exchange for the payment of a tax on gross, rather than
net, premiums, and at an adjustable rate higher than would otherwise be applied”].)
A July 2008 report by the Legislative Analyst’s Office observes that “[t]he
economics of the insurance industry is a key reason for the special treatment of
insurance companies” with respect to taxation in California. The report explains the
rationale as follows: “Most [corporate franchise tax] taxpayers calculate their income
by subtracting costs incurred in the production of a good or service from the revenues
received from their sale. Insurance companies, by contrast, collect their revenues up
front [in the form of premiums], then make payments to policyholders based on
contingent events that occur many months or years later. Thus, it can be difficult to
‘match up’ revenues to related expenses. In an income tax framework, insurers ideally
would be allowed to deduct the current value of all future obligations (claims) covered
by the insurance policies they have written when calculating their taxable income for a
given year. [However,] [b]ecause the actual amount of these obligations is uncertain, as
are the amount of investment earnings on accumulated premiums received during the
intervening period, an accurate determination of the theoretically appropriate amount of
taxable income proves very difficult to achieve in practice.” “For this reason,” the
Legislative Analyst’s Office report concludes, “a [gross] premiums tax was adopted.”
2. Knox-Keene Licensed Health Care Service Plans
The other leg of this controversy concerns the regulatory regime applicable to
licensed HCSPs under the Knox-Keene Act. Again, some background in this area is
necessary to put our resolution of the parties’ opposing positions in context.
In 1975, the Legislature adopted the Knox-Keene Act with the express intent and
purpose to “promote the delivery and the quality of health and medical care to the
people of the State of California who enroll in, or subscribe for the services rendered by,
a [HCSP] by accomplishing all of the following: [¶] (a) Ensuring the continued role of
14
the professional as the determiner of the patient’s health needs . . . . [¶] (b) Ensuring
that subscribers and enrollees are educated and informed of the benefits and services
available . . . . [¶] (c) Prosecuting malefactors who make fraudulent solicitations or who
use deceptive methods . . . . [¶] (d) Helping to ensure the best possible health care for
the public at the lowest possible cost by transferring the financial risk of health care
from patients to providers. [¶] (e) Promoting effective representation of the interests of
subscribers and enrollees. [¶] (f) Ensuring the financial stability thereof by means of
proper regulatory procedures. [¶] (g) Ensuring that subscribers and enrollees receive
available and accessible health and medical services rendered in a manner providing
continuity of care. [¶] (h) Ensuring that subscribers and enrollees have their grievances
expeditiously and thoroughly reviewed by the [DMHC].” (Health & Saf. Code,
§ 1342.)
In relevant part, the Knox-Keene Act defines those HCSPs that are subject to the
law’s regulations as “Any person who undertakes to arrange for the provision of health
care services to subscribers or enrollees, or to pay for or to reimburse any part of the
cost for those services, in return for a prepaid or periodic charge paid by or on behalf of
the subscribers or enrollees.” (Health & Saf. Code, § 1345, subd. (f).) HCSPs as
defined in and regulated by the Knox-Keene Act are under the jurisdiction of the
DMHC. (Health & Saf. Code, § 1341.) Though such entities are authorized to provide
direct payment or reimbursement coverage for their enrollees’ medical expenses,
HCSP’s are statutorily exempted from the Insurance Department’s jurisdiction, and are
not subject the Insurance Code’s regulations. (Ins. Code, § 740, subd. (g).) This
exemption extends to HCSPs offering fee-for-service coverage through a PPO plan.
(Id., § 742.)
Finally, because HCSPs include, by definition, entities that agree to “pay for or
to reimburse” enrollees for the cost of medical services in exchange for a “prepaid or
periodic charge” (Health & Saf. Code, § 1345, subd. (f)(1)), the Knox-Keene Act
includes capitalization requirements and vests financial oversight authority in the
DMHC. (Id., §§ 1376, 1377, & 1399, subd. (c).)
15
3. The Complaint Alleges Sufficient Facts to Find Real Parties Are
“Insurers” under the Gross Premium Tax Provision of the Constitution
With the forgoing background, we can distill the novel constitutional question
presented by this appeal as follows: Are allegations that Real Parties receive a
substantial share of their annual premiums in exchange for agreeing to indemnify
enrollees against contingent medical expenses sufficient to state a claim that Real
Parties are “insurer[s]” subject to the Constitution’s gross premium tax? We hold the
answer is yes, because these allegations support an inference that indemnifying against
future contingent claims represents a significant financial proportion of Real Parties’
businesses as balanced against the health care service aspect of their businesses.
Accordingly, we conclude the trial court erred in sustaining Real Parties’ demurrers.
To reiterate, the Constitution imposes the gross premiums tax on “each insurer
doing business in this state” (Cal. Const., art. XIII, § 28, subd. (b), italics added; id.,
subds. (c) & (d).) In relevant part, the Constitution defines the term “ ‘Insurer’ ” to
“include[ ] insurance companies or associations and reciprocal or interinsurance
exchanges.” (Cal. Const., art XIII, subd. (a).) The definition, by its use of the word
“includes,” is not restrictive, and our Supreme Court has looked outside the
Constitution, to definitions provided by the Insurance Code, for guidance in assessing
the scope of the gross premium tax provision. (See, e.g., Metropolitan Life Ins. Co. v.
State Bd. of Equalization (1982) 32 Cal. 3d 649, 654 (Metropolitan Life); Title Ins. Co.
v. State Bd. of Equalization (1992) 4 Cal. 4th 715, 725.)
16
As the court observed in Metropolitan Life, “[t]he Legislature has defined
insurance as ‘a contract whereby one undertakes to indemnify another against loss,
damage, or liability arising from a contingent or unknown event.’ ” (Metropolitan Life,
supra, 32 Cal.3d at p. 654, quoting Ins. Code, § 22.) “The person who undertakes to
indemnify another by insurance is the insurer, and the person indemnified is the
insured.” (Ins. Code, § 23; see Metropolitan Life, at p. 654.) Under these definitions,
“insurance necessarily involves two elements: (1) a risk of loss to which one party is
subject and a shifting of that risk to another party; and (2) distribution of risk among
similarly situated persons.” (Metropolitan Life, at p. 654, citing California Physicians’
Service v. Garrison (1946) 28 Cal. 2d 790, 803-804.)
Plaintiff contends the complaint’s allegations demonstrate that Real Parties are
“insurers” under the Constitution’s gross premium tax provision, notwithstanding that
Real Parties are statutorily designated as HCSPs for regulatory purposes. In support of
this contention, Plaintiff relies upon our Supreme Court’s opinion in Metropolitan Life.
There, the court recognized that the gross premium tax’s purpose is to “exact payments
from insurers doing business in California” by “approximat[ing] the volume of business
done in this state, and thus the extent to which insurers have availed themselves of the
privilege of doing business in California.” (Metropolitan Life, supra, 32 Cal.3d at
p. 656.) And, for this purpose, the Supreme Court stressed that we must “look beyond
the formal labels the parties have affixed to their transactions and seek, rather, to discern
the true economic substance” of the arrangement. (Id. at pp. 656-657.)
As for the complaint’s allegations, Plaintiff emphasizes that Real Parties receive
a substantial portion of their premiums each year in exchange for agreeing to indemnify
their enrollees against a risk of loss occasioned by contingent medical expenses, and in
doing so, Real Parties’ contracts effectively spread the financial risk posed by those
contingent medical events among the millions of Californians who pay premiums to
enroll in Real Parties’ PPO plans. Specifically, the complaint alleges Blue Shield paid
over $5.2 billion for indemnity claims in 2012, as compared to $1.7 billion for non-
indemnity based claims, and Blue Cross paid over $7.2 billion for indemnity claims, as
17
compared to $1.8 billion for non-indemnity based claims. Plaintiff contends application
of the gross premium tax must be determined by examining Real Parties’ “business
activity” in the state—not simply their regulatory status—and the complaint’s
allegations support the claim that Real Parties operate as “insurers” for purposes of
imposing the Constitution’s gross premium tax.
Plaintiff contends this is a factual issue, which the trial court improperly resolved
on demurrer by drawing unwarranted inferences from Real Parties’ regulatory
obligations. Rather than resolve the issue based solely on regulatory status, Plaintiff
argues the trial court should have applied the test set forth in Roddis to assess whether
the complaint’s allegations concerning Real Parties’ business activities supported the
claim that they are “insurers” under the Constitution’s gross premium tax provision.
Because Roddis supplies a legal standard against which Plaintiff’s allegations may be
measured, we will review the case in some depth.
In Roddis, the Insurance Commissioner brought suit to restrain California Mutual
Association (CMA) from “carrying on business as an insurer without first securing
a certificate of authority pursuant to Insurance Code section 700.” (Roddis, supra,
68 Cal.2d at p. 678.) CMA, which contracted with doctors who agreed to render
services to CMA’s dues paying members and to look exclusively to CMA for payment
of a scheduled fee (id. at pp. 678-679.), claimed it was a “health care service plan”
under the Knox-Mills Act—the predecessor to Knox-Keene. The Roddis court
explained: “If CMA is an insurer then it is subject to the supervision of the Insurance
Commissioner and it must provide paid-in capital (Ins. Code, § 700.01), and a surplus
(Ins. Code, § 700.02) and pay premium taxes. If, as CMA contends, it is a ‘health care
service plan’ pursuant to the Knox-Mills Plan Act (Gov. Code, §§ 12530-12539), then it
is subject to the supervision of the Attorney General and need not meet any statutory
financial responsibility requirements,” as no provisions existed in the Knox-Mills Act to
assure the financial solvency of health care service plans. (Roddis, at p. 679.)
18
The Roddis court began its analysis with the Knox-Mills Act’s statutory
language, which defined “a ‘health care service plan’ as any organization ‘whereby any
person undertakes responsibility to provide, arrange for, pay for or reimburse any part
of the cost of any health care service for a consideration consisting in part of prepaid or
periodic charges; but the provisions of this article shall not apply to such a plan operated
by an insurer. . . .’ ” (Roddis, supra, 68 Cal.2d at p. 680.) While the Knox-Mills Act
did not define the term “insurer,” the court noted “[i]nsurance necessarily involves the
element of indemnity.” (Ibid.) Thus, the court reasoned, the extent of indemnity
offered by the entity represented the critical dividing line between whether an entity was
a “health care service plan” or “insurer” under the Knox-Mills Act. As the court
explained, “The [Knox-Mills Act] permits a health care service plan to ‘reimburse’
a member and thus indicates that service plans may include some indemnity features,
but by excluding an ‘insurer’ from the definition of a ‘health care service plan’ the
Legislature has evinced an intention to limit the extent of indemnity features
permissible. It is this limit we must now determine.” (Id. at p. 681.)
To determine this limit (and thus ascertain the proper regulatory characterization
of an entity claiming to be a Knox-Mills health care service plan) the Roddis court
observed “two policy considerations” must drive the analysis. (Roddis, supra,
68 Cal.2d at p. 682.) First, the court explained, “[w]here indemnity features are present,
the member bears the risk of personal liability for medical services. This is the
insurance risk which can be protected against by financial reserves to assure that the
member will receive the benefits for which he has paid.” (Ibid.) As for the second
consideration, the court emphasized, “there is a strong social policy to encourage the
services which health plans provide the public,” and the Insurance Code’s financial
reserve requirements should not inhibit the development of health plans to meet that
need. (Id. at pp. 682-683.)
19
Cognizant of these two policies, the Roddis court concluded that “where
indemnity is a significant financial proportion of the business, the organization must be
classified as an ‘insurer’ for the purposes of the Knox-Mills Plan Act.” (Roddis, supra,
68 Cal.2d at p. 683.) The court acknowledged that “this determination involves
balancing the indemnity aspects against the direct service aspects of the business,” and
admonished that “only in the context of the plan as a whole can it be determined
whether the indemnity feature is so significant as to warrant imposing the Insurance
Code financial reserve requirements.” (Ibid.) In that regard, the court emphasized,
“[h]ealth care service plans were given special legislative treatment because of the
direct service feature. Only so long as the plans pursue and achieve that objective is the
public assured that the protection of the Insurance Code is not necessary.” (Ibid.)
We conclude Roddis provides the appropriate standard for determining whether
an entity should be regarded as an “insurer” for purposes of assessing the gross
premium tax under article XIII, section 28 of the Constitution. We acknowledge the
critical role that financial solvency concerns played in the Supreme Court’s formulation
of the Roddis test; however, for purposes of assessing whether an entity is an “insurer”
under the Constitution’s gross premium tax provision, we regard this as a distinction
without difference. In Roddis, the court’s concern over financial solvency stemmed
from the fact that CMA had promised to pay for future contingent medical expenses, yet
its ultimate liability for such expenses was unknown at the time it collected dues from
its covered members. The same concern supported adoption of the gross premium tax.
According to the Legislative Analyst’s Office, the economics of insurance indemnity
arrangements—that is, the fact that insurers receive premiums up front, without
knowing what related expenses will be paid on those premiums in the future, thereby
rendering them unable to determine the net profits attributable to those premiums at the
end of the tax year—was the “key reason” for adopting the gross premium tax. The
Roddis test, which focuses on whether “indemnity is a significant financial proportion
of the business” (Roddis, supra, 68 Cal.2d at p. 683), is suitably calibrated to this unique
aspect of the insurance industry.
20
Further, in Metropolitan Life our Supreme Court observed that the gross
premium tax’s purpose is to “exact payments from insurers doing business in
California” by “approximat[ing] the volume of business done in this state, and thus the
extent to which insurers have availed themselves of the privilege of doing business in
California.” (Metropolitan Life, supra, 32 Cal.3d at p. 656.) For this purpose, the court
mandated that we “look beyond the formal labels the parties have affixed to their
transactions and seek, rather, to discern the true economic substance” of the
arrangement. (Id. at pp. 656-657.) Thus, contrary to Real Parties’ contention, it is not
determinative that Real Parties are designated as HCSPs for regulatory purposes. Under
Metropolitan Life, the court must look beyond this regulatory label to the true economic
substance of Real Parties’ business operations to determine whether those operations are
such that the gross premium tax best approximates the extent to which Real Parties have
availed themselves of the privilege of doing business in California. Insofar as the
complaint alleges Real Parties’ business operations consist predominately of selling and
administering indemnity based health insurance policies, it is reasonable to conclude
that the gross premium tax best captures the volume of business Real Parties conduct in
this state, notwithstanding their regulator labels.
As discussed, the underlying reason for this state’s adoption of the gross
premium tax was to simplify the taxation of insurance companies that, in contrast to
other businesses, have difficulty calculating their net profits in a given tax year because
they collect revenues up front in the form of premiums, then make indemnity payments
to policyholders based on contingent events that occur many months or years later. The
complaint’s allegations support a reasonable inference that Real Parties’ business
operations raise similar difficulties with respect to taxation of their net profits—that is,
under Real Parties’ PPO policies they collect premiums up front, but do not make
payments on the policies unless and until a contingent medical event occurs. Thus,
because a significant financial portion of Real Parties’ business operations allegedly
consist of indemnity contracts, the underlying rationale for applying the gross premium
tax to other insurance companies applies equally to Blue Cross and Blue Shield.
21
Guided by Roddis, Metropolitan Life, and the underlying purpose of the gross
premium tax, we conclude the complaint’s allegations concerning the proportion of
annual payments Real Parties made pursuant to their PPO plans are sufficient to support
the requested mandamus relief. The complaint alleges Blue Shield paid over $5.2
billion for indemnity based medical expenses in 2012, as compared to $1.7 billion for
non-indemnity based expenses. Similarly, the complaint alleges Blue Cross paid over
$7.2 billion for indemnity based medical expenses in 2012, as compared to $1.8 billion
for non-indemnity expenses. Under the Roddis test, Plaintiff has adequately stated a
claim that Real Parties should be regarded as “insurers” for the purpose of assessing the
gross premium tax. The trial court erred in sustaining Real Parties’ demurrers on this
basis.
4. The Public Interest Exception to Res Judicata Applies
Having resolved the novel constitutional issue, we turn to the trial court’s other
grounds for sustaining Real Parties’ demurrers. As an independent ground for
sustaining Real Parties’ demurrers, the trial court found that the judgment in the 2004
Lawsuit by the FTCR plaintiffs barred the instant action under the doctrine of res
judicata. Plaintiff maintains that the elements for imposing the res judicata bar are not
present, but even if they were, he should be allowed to maintain this action under the
doctrine’s public interest exception. We agree that the exception applies.
In City of Sacramento v. State of California (1990) 50 Cal. 3d 51, our Supreme
Court formulated the public interest exception as follows: “ ‘[W]hen the issue is
a question of law rather than of fact, the prior determination is not conclusive either if
injustice would result or if the public interest requires that relitigation not be foreclosed.
[Citations.] . . . .’ ” (Id. at p. 64.) The City of Sacramento court concluded that the
public interest exception applied to allow relitigation of an issue concerning whether
costs expended by local governments for mandatory unemployment coverage must be
reimbursed by the state pursuant to article XIII B of the Constitution. (City of
Sacramento, at pp. 57, 64-65.) In applying the exception, the court emphasized that
“[w]hether [such] costs are reimbursable under article XIII B . . . constitutes a pure
22
question of law” and, because the issue concerned public finances, “the consequences of
any error transcend those which would apply to mere private parties.” (City of
Sacramento, at p. 64.) Under those circumstances, the court held res judicata could not
be invoked to “permanently foreclose” the court from examining the issue. (Id. at
p. 65.)
In Arcadia Unified School Dist. v. State Dept. of Education (1992) 2 Cal. 4th 251,
the Supreme Court applied the public interest exception to permit a second lawsuit
regarding the constitutionality of a state statute permitting school districts to charge
students for transportation. (Id. at pp. 256-259.) Among the considerations that
compelled application of the exception, the court cited the fact that it ordered the
appellate decision in the prior action depublished, which fostered “demonstrable
uncertainty” about the statute’s validity. (Id. at p. 257.) And, as a practical matter, the
court observed applying the res judicata bar would mean the constitutionality of the
statute would never again be litigated, in which case “there would be no opportunity for
anyone ever to challenge the legal grounds of the unpublished ruling.” (Id. at p. 258.)
Stressing that the matter involved “a pure question of law,” which “affects the public in
general,” the court held the public interest exception applied. (Id. at p. 259.)
As in City of Sacramento and Arcadia Unified School Dist., the trial court in the
2004 Lawsuit determined the applicability of the Constitution’s gross premium tax as
a pure question of law. Also like those cases, the prior determination concerned
a matter affecting public finances and, by extension, the interests of the public at large.
The payment of taxes is always important to the public welfare; indeed, it is vital to the
existence of the public services government provides. (See State Bd. of Equalization v.
Superior Court (1985) 39 Cal. 3d 633, 639.) Were the trial court’s prior decision to act
as a bar to future taxpayer suits, there would be no appellate guidance for the relevant
state agencies concerning this important fiscal issue. For these reasons, we conclude the
public interest exception applies.
23
5. The Action Does Not Enjoin the Collection of Tax
Lastly, in sustaining Real Parties’ demurrers, the trial court reasoned that the
relief requested by Plaintiff would necessarily enjoin the state from collecting the
corporate franchise tax from Real Parties, because the gross premium tax is imposed on
insurers “in lieu of” the corporate franchise tax. (Cal. Const., art. XIII, § 28, subd. (f).)
And, because an action to enjoin the collection of taxes is barred by the Constitution,
the court concluded Plaintiff lacked standing to pursue such relief under Code of Civil
Procedure section 526a. The ruling misapprehends the relevant authorities.
Code of Civil Procedure section 526a authorizes a taxpayer to bring an action
against public officers to “obtain a judgment, restraining and preventing any illegal
expenditure of, waste of, or injury to, the estate, funds, or other property of a county,
town, city or city and county of the state.” While the statutory language refers to
a prohibitory injunction, it is well-settled that taxpayers have standing under
section 526a to seek mandamus relief to compel government officials to comply with
a mandatory duty. As the court stated in Vasquez v. State of California (2003)
105 Cal. App. 4th 849 (Vasquez), “It is established that an action lies under section 526a
not only to enjoin wasteful expenditures, but also to enforce the government’s duty to
collect funds due the State.” (Vasquez, at p. 854.)
Article XIII, section 32, of the Constitution, provides: “No legal or equitable
process shall issue in any proceeding in any court against this State or any officer
thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to
be illegal, an action may be maintained to recover the tax paid, with interest, in such
manner as may be provided by the Legislature.” Thus, under the Constitution, a
taxpayer is not permitted to pursue an action to enjoin an allegedly illegally assessed tax
(under Code of Civil Procedure section 526a or otherwise); rather, the taxpayer’s
remedy is to pay the assessed tax and then commence an action for its refund. (See
Pacific Gas & Electric Co. v. State Bd. of Equalization (1980) 27 Cal. 3d 277, 284.)
“The policy behind [Article XIII, section 32, of the Constitution] is to allow revenue
24
collection to continue during litigation so that essential public services dependent on the
funds are not unnecessarily interrupted.” (Id. at p. 283.)
As noted, Code of Civil Procedure section 526a authorizes a taxpayer action to
“enforce the government’s duty to collect funds due the State.” (Vasquez, supra,
105 Cal.App.4th at p. 854.) Plaintiff’s action seeks mandamus relief to command the
State Defendants to assess and collect the gross premium tax from Real Parties, it does
not seek to enjoin the state from collecting any other taxes or fees. Whatever effect the
“in lieu of” clause of the gross premium tax provision has on the corporate franchise
taxes the state has previously collected from Real Parties is a matter for Real Parties to
raise in a subsequent tax refund action. It has no effect on Plaintiff’s standing under
Code of Civil Procedure section 526a to prosecute the current action.
25
DISPOSITION
The judgment is reversed and the order sustaining Real Parties’ demurrers is
vacated. Plaintiff Michael D. Myers is entitled to costs.
CERTIFIED FOR PUBLICATION
KITCHING, Acting P. J.
We concur:
ALDRICH, J.
JONES, J.*
*
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant
to article VI, section 6 of the California Constitution.
26