Prime Healthcare La Palma v. Kaiser Foundation Health Plan CA2/7

Filed 8/25/21 Prime Healthcare La Palma v. Kaiser Foundation Health Plan CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
PRIME HEALTHCARE LA B296487
PALMA, LLC, et al.,
Appellants, (Los Angeles County
v. Super. Ct. No. BC390969)
(JCCP No. 4580)
KAISER FOUNDATION
HEALTH PLAN, INC., et al.,
Respondents.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Ann I. Jones, Judge. Affirmed.
King & Spalding, Stephen L. Goff; Greines, Martin, Stein &
Richland, Kent L. Richland, David E. Hackett; and A. Joel
Richlin for Appellants.
Buchalter, Andrew H. Selesnick and Efrat M. Cogan for
American College of Emergency Physicians, State Chapter of
California, Inc. as Amicus Curiae on behalf of Appellants.
Manatt, Phelps & Phillips, Gregory N. Pimstone, Joanna S.
McCallum; Marion’s Inn and Mark Palley for Respondents.
_____________________________________
Prime Healthcare La Palma, LLC and related entities1
(collectively Prime) sued Kaiser Foundation Health Plan, Inc.
and affiliated entities2 (collectively Kaiser) seeking additional
payments for health care services Prime provided to Kaiser
members. Kaiser, in turn, sought reimbursement for
overpayments it had made to Prime. The parties agreed to
arbitrate their dispute, which involved 47,000 individual claims
from 2004 through 2014.
A panel of three arbitrators issued a multi-million dollar
damage award in favor of Kaiser. The superior court denied
Prime’s petition to vacate the award, granted Kaiser’s petition to
confirm the award and entered judgment in favor of Kaiser.
Relying on the parties’ agreement the arbitration award
could be reviewed for legal error, Prime3 appeals the judgment,
1 The other Prime hospitals are Alvarado Hospital, LLC;
Prime Healthcare Centinela, LLC; Veritas Health Services, Inc.;
Desert Valley Hospital, Inc.; Prime Healthcare Services—Encino,
LLC; Prime Healthcare Services—Garden Grove, LLC; Prime
Healthcare Huntington Beach, LLC; Prime Healthcare
Services III, LLC; Prime Healthcare Paradise Valley, LLC; Prime
Healthcare Services—San Dimas, LLC; Prime Healthcare
Services, II, LLC; and Prime Healthcare Anaheim, LLC.
2 The other Kaiser parties are Kaiser Foundation Hospitals
and Southern California Permanente Medical Group, Inc.
3 The notice of appeal indicated Vanguard Health Systems,
Inc.; Anaheim VHS Limited Partnership; Huntington Beach VHS
Limited Partnership; and Vanguard Acquisition Partnership
Number 2, LP (collectively Vanguard) and Prime Healthcare
Services, Inc., as well as the Prime hospitals, appeal the superior
court judgment. However, the parties’ appellate briefs only
identified the Prime hospitals as appellants.
2
contending the arbitration panel and the superior court
committed reversible error in three distinct categories:
1. The panel and the superior court erred in ruling that
Prime lacked standing to assert claims under California’s unfair
competition law and that it was proper for the arbitrators to
decline to decide those claims on the merits.
2. The panel should have rejected Kaiser’s claims to be
reimbursed for overpayments as time-barred and voluntarily
made.
3. The panel and the court erred in concluding the Prime
parties’ Medicare Advantage claims were subject to federal
preemption and administrative exhaustion.
We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Parties and Litigation
The Prime parties are a group of 13 Southern California
acute care hospitals owned and operated by Prime Healthcare
Services, Inc. The Kaiser parties form part of a not-for-profit
organization that operates a “closed service model” under which
its members generally receive health care from Kaiser or Kaiser-
affiliated facilities but are sometimes treated at a non-Kaiser
hospital, usually for emergency medical services.
Prime filed suit in state and federal court seeking
reimbursement for Kaiser’s alleged failure to pay, or adequately
pay, for emergency and other health care services rendered by
Prime to Kaiser health plan members at Prime’s hospitals. The
litigation commenced in January 2008 with the filing of five state
court actions by several of the Prime hospitals against Kaiser. In
July 2009 the Los Angeles Superior Court entered an order
coordinating the five actions and an additional matter. In
3
November 2011 three of the Prime hospitals filed new actions
against Kaiser in three different counties. In January 2012 those
three cases were added to the original coordinated actions. In
October 2013 all the actions were ordered consolidated for trial.
Prime’s first consolidated complaint alleged Kaiser had
engaged “in a long-running scheme to pressure emergency
department physicians to transfer [Kaiser Foundation Health
Plan, Inc.] members to Kaiser hospitals when they are not stable
and safe for transfer, disrupt patient care in [Prime’s] emergency
departments and to withhold payment from [Prime] of amounts
to which [Prime is] legally entitled for having rendered
emergency medical services to [Kaiser Foundation Health Plan,
Inc.] members.”
Kaiser filed cross-complaints against Prime seeking relief
for overpayments. Kaiser’s third amended cross-complaint
asserted categories of overpayment damages that included
payments made at rates exceeding the reasonable value of
Prime’s services and improper billings.
2. The Arbitration Agreement
On February 7, 2015 the parties settled a substantial
portion of their dispute and agreed to arbitrate their remaining
claims. The arbitration agreement, under the heading “Scope of
Arbitration,” stated the parties agreed to “binding arbitration . . .
in lieu of litigation in any court” of the consolidated Los Angeles
Superior Court proceeding, “including, without limitation,
Prime’s Medicare Advantage Claims and Kaiser’s Medicare
Advantage cross-claims”; a related case filed by Prime addressing
2013-2014 claims; and “any and all cross-claims Kaiser wishes to
advance in response” to Prime’s 2013-2014 claims. Kaiser also
4
agreed to dismiss its common law fraud cause of action, and
Prime agreed to dismiss a federal lawsuit.
In a separate section, under the subheading “Disputes
Concerning Scope,” the arbitration agreement provided, “In the
event of a dispute between the Parties concerning the scope of
arbitration, the Arbitrators shall decide, in the exercise of sound
discretion, the dispute.”
Under the heading “Decision and Final Award,” the
arbitration agreement provided, “The Arbitrators shall have the
power to grant all legal and equitable remedies available to the
Parties under California law, including, but not limited to,
preliminary and permanent private injunctions, specific
performance, reformation, cancellation, accounting, and
compensatory damages, at the Arbitrators’ discretion. The
Arbitrators shall not be empowered to make mistakes of law or
legal reasoning.” Under that same heading the agreement
further provided, “The Final Award shall be conclusive and
binding and may be confirmed thereafter as a judgment by the
Superior Court of the State of California, subject only to
challenge on the grounds set forth in California Code of Civil
Procedure Section 1285 et seq. or on the grounds that the
Arbitrators exceeded his/her/their powers by making a mistake of
law or legal reasoning. The Parties agree that the court shall
have jurisdiction to review, and shall review, all challenged
findings of law and legal reasoning based on a de novo review.”
The arbitration agreement also provided, as to the
Medicare Advantage claims, “[T]he arbitrators will be empowered
to determine whether those claims should be dismissed based on
federal preemption and/or exhaustion of administrative remedies,
and that the agreement to arbitrate does not waive or alter any
5
such defenses and arguments that the parties would have had in
the federal or state courts.”
3. The Arbitration and Final Award
The arbitration proceeded before a panel of three
arbitrators in nine phases (including a damages phase) over a
three-year period, with awards following each phase. The panel
heard 67 days of live testimony and argument and issued several
partial final awards and interim awards, which were summarized
in, and attached as appendices to, the final arbitration award.
On May 1, 2017 the panel issued a tentative decision. The
parties submitted objections, and in June 2017 the panel issued
an order on the objections to the tentative decision.
On March 19, 2018, determining both Kaiser and Prime
were entitled to a damages award, with Kaiser’s amount
exceeding Prime’s, the panel issued a final arbitration award
entitling Kaiser to a net multi-million dollar recovery against
Prime and identifying the Kaiser parties as the prevailing
parties.4
4 Specifically, the panel determined Kaiser Foundation
Health Plan, Inc. was entitled to an award against Prime
Healthcare Services, Inc. and the Prime hospitals on some claims
or causes of action and against Prime Healthcare Services, Inc.,
several of the Prime hospitals and Vanguard on other claims or
causes of action. The panel also determined Prime Healthcare
Services, Inc. and the Prime hospitals were entitled to an award
against Kaiser Foundation Health Plan, Inc. on certain claims or
causes of action. Kaiser Foundation Hospitals and Southern
California Permanente Medical Group, Inc. were dismissed with
prejudice. The Medicare Advantage claims were dismissed for
lack of jurisdiction.
6
4. The Petitions To Confirm and To Vacate the Arbitration
Award and the Superior Court’s Order and Judgment
Kaiser petitioned in the consolidated and coordinated
superior court action to confirm the arbitration award, and Prime
petitioned to vacate it.5 After hearing argument, the superior
court on February 11, 2019 issued an order granting Kaiser’s
petition and denying Prime’s. On February 26, 2019 the superior
court entered a judgment confirming the final arbitration award.
DISCUSSION
1. Grounds for Vacating an Arbitration Award and
Standard of Review
When parties agree to private arbitration, the scope of
judicial review is strictly limited to give effect to the parties’
intent to bypass the judicial system and thereby avoid potential
delays at the trial and appellate levels. (E.g., Richey v.
AutoNation, Inc. (2015) 60 Cal.4th 909, 916; Moncharsh v. Heily
& Blase (1992) 3 Cal.4th 1, 10; Branches Neighborhood Corp. v.
CalAtlantic Group, Inc. (2018) 26 Cal.App.5th 743, 750.) The
exclusive grounds on which a court may vacate an arbitration
award are identified in Code of Civil Procedure section 1286.2,
which include, in subdivision (a)(4), the arbitrator exceeded his or
her powers. (See Richey, at p. 916 [“courts are authorized to
5 The petition to vacate the final arbitration award was filed
using a Judicial Council of California form that requests the
name of each petitioner. Prime Healthcare Services, Inc., unlike
the Prime hospitals, was not named as a petitioner seeking to
vacate the award. In a separate request for judicial notice filed in
support of their petition to vacate, the Prime hospitals stated the
petition to vacate was filed only by “Prime Healthcare La Palma,
LLC, and the other petitioner-hospitals.”
7
vacate an award if it was (1) procured by corruption, fraud, or
undue means; (2) issued by a corrupt arbitrator; (3) affected by
prejudicial misconduct on the part of the arbitrator; or (4) in
excess of the arbitrator’s powers”].)
Generally, “‘[a]rbitrators, unless specifically required to act
in conformity with rules of law, may base their decision upon
broad principles of justice and equity,’” and a court may not
review the merits of the controversy between the parties, the
validity of the arbitrator’s reasoning or the sufficiency of the
evidence supporting the arbitration award. (Moncharsh v. Heily
& Blase, supra, 3 Cal.4th at pp. 10-11.) However, “‘[a]n exception
to the general rule assigning broad powers to the arbitrators
arises when the parties have, in either the contract or an agreed
submission to arbitration, explicitly and unambiguously limited
those powers. [Citation.] “The powers of an arbitrator derive
from, and are limited by, the agreement to arbitrate. [Citation.]
Awards in excess of those powers may . . . be corrected or vacated
by the court.”’” (Cable Connection, Inc. v. DIRECTV, Inc. (2008)
44 Cal.4th 1334, 1356; see id. at p. 1355 [“[i]f the parties
constrain the arbitrators’ authority by requiring a dispute to be
decided according to the rule of law, and make plain their
intention that the award is reviewable for legal error, the general
rule of limited review has been displaced by the parties’
agreement”].)
We review de novo a superior court’s judgment confirming
an arbitration award, including a determination whether the
arbitrator exceeded his or her powers in granting relief. (Richey
v. AutoNation, Inc., supra, 60 Cal.4th at p. 918, fn. 1; Advanced
Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 376, fn. 9;
8
VVA-TWO, LLC v. Impact Development Group, LLC (2020)
48 Cal.App.5th 985, 998.)
We also review de novo questions of statutory construction.
(California Building Industry Assn. v. State Water Resources
Control Bd. (2018) 4 Cal.5th 1032, 1041.) “Our primary task ‘in
interpreting a statute is to determine the Legislature’s intent,
giving effect to the law’s purpose. [Citation.] We consider first
the words of a statute, as the most reliable indicator of legislative
intent.’” (Ibid.) The words of the statute are to be given “‘their
usual and ordinary meaning.’” (Imperial Merchant Services, Inc.
v. Hunt (2009) 47 Cal.4th 381, 387.)
“‘Rules governing the interpretation of statutes also apply
to interpretation of regulations. [Citation.] “In interpreting
regulations, the court seeks to ascertain the intent of the agency
issuing the regulation by giving effect to the usual meaning of the
language used so as to effectuate the purpose of the law, and by
avoiding an interpretation which renders any language mere
surplusage.”’” (In re Villa (2013) 214 Cal.App.4th 954, 964; see
In re Cabrera (2012) 55 Cal.4th 683, 688 [“‘we defer to an
agency’s interpretation of its own regulations, particularly when
the interpretation implicates areas of the agency’s expertise’”];
Environmental Protection Information Center v. California Dept.
of Forestry & Fire Protection (2008) 44 Cal.4th 459, 490 [“[a]s a
general matter, courts will be deferential to government agency
interpretations of their own regulations, particularly when the
interpretation involves matters within the agency’s expertise and
does not plainly conflict with a statutory mandate”].)
9
2. Prime Was Not Prejudiced by the Arbitrators’ Ruling
Regarding UCL Standing
a. Procedural background
i. The first consolidated complaint’s allegations
In the first consolidated complaint Prime alleged the
federal Emergency Medical Treatment and Active Labor Act of
1986 (EMTALA) (42 U.S.C. § 1395dd) and California’s Health
and Safety Code section 13176 et seq. prohibit providers such as
the Prime hospitals from discharging or transferring patients
who arrive with an emergency medical condition until the
hospital provides emergency medical services to the patient,
regardless of his or her insurance or financial status, and Kaiser
is legally required to reimburse providers for providing such
services to its members. Based on this premise, Prime asserted a
cause of action against Kaiser under California’s unfair
competition law (UCL) (Bus. & Prof. Code, § 17200 et seq.) for a
variety of alleged unlawful business practices, including
underpayment of claims for emergency medical services by using
a flawed methodology for calculating those services’ reasonable
and customary value. On its UCL claims Prime sought a
monetary recovery it characterized as restitution, interest and an
order permanently enjoining Kaiser parties engaging in the
alleged unlawful acts and practices.
ii. The arbitration’s reasonable and customary
methodology phase
The arbitration panel heard as a discrete phase the issue of
the methodology used by Kaiser to determine and pay the
6 Statutory references are to the Health and Safety Code
except where otherwise stated.
10
reasonable and customary value of the emergency health care
services provided by Prime hospitals as non-contracted providers
pursuant to California Code of Regulations, title 28,
section 1300.71, subdivision (a)(3)(B)
(regulation 1300.71(a)(3)(B)).7 The evidentiary hearing occurred
over three days in November 2015.
On March 10, 2016 the panel issued a partial final award
for the reasonable and customary methodology phase.8 In the
factual background the panel described the statutory and
regulatory context of the issue, relying in part on responses by
the Department of Managed Health Care (Department) to public
comments to proposed regulation 1300.71(a)(3)(B) and the
Department’s final statement of reasons for promulgating
regulation 1300.71 on July 25, 2003. The panel explained
section 1371.4 requires health plans to reimburse providers for
emergency services until the care results in the stabilization of
the plan’s enrollee and section 1371.35, subdivision (a), requires
health maintenance organizations to reimburse undisputed
completed claims within 45 days. Regulation 1300.71(a)(3)(B)
implements sections 1371.4 and 1371.35 by defining how to
timely reimburse non-contracted claims: Plans can pay the
reasonable and customary value of the provided health care
services by adopting a reasonable and customary methodology
that “uses ‘statistically credible information that is updated at
least annually’ and that ‘takes into consideration’ the six factors
7 References to a regulation are to section 1300.71 (and its
subdivisions) of title 28 of the California Code of Regulations
unless otherwise stated.
8 The award was attached as Appendix E to, and
summarized in, the March 19, 2018 final arbitration award.
11
outlined in a worker’s compensation case, Gould v. WCAB [1992]
4 Cal.App.4th 1059, 1071 [(Gould)].” Quoting
regulation 1300.71(a)(3)(B), the panel stated those six factors are
“(i) [t]he provider’s training, qualification[s], and length of time in
practice; (ii) the nature of the services provided; (iii) the fees
usually charged by the provider; (iv) prevailing provider rates
charged in the general geographic area in which the services
were rendered; (v) other aspects of the economics of the medical
provider’s practice that are relevant; and (vi) any unusual
circumstances in the case.”
As articulated by the panel, Prime claimed Kaiser’s
reasonable and customary methodology was not compliant with
regulation 1300.71(a)(3)(B) and Kaiser should pay Prime’s
undiscounted billed charges and 15 percent statutory interest on
the underpaid sums. Kaiser contended Prime lacked standing to
assert a direct action for a determination regarding the
components of its reasonable and customary methodology; the
panel should abstain from making that determination because
the Department had jurisdiction over the reasonable and
customary methodology issue; Prime could not use the UCL to
litigate the issue; the Department had already reviewed Kaiser’s
methodology and allowed it; and the methodology complied with
all of regulation 1300.71(a)(3)(B)’s criteria, resulting in Kaiser
having already paid fair market value for Prime’s services.
The panel ruled Prime lacked standing to challenge
Kaiser’s reasonable and customary methodology and, even if
Prime had standing, it was appropriate for it to abstain from
ruling on that challenge. The panel explained, although Prime
claimed Kaiser’s noncompliance with regulation 1300.71(a)(3)(B)
constituted the requisite unlawful act, the regulation merely
12
“contains ‘generally worded criteria’ which appear to be
guidelines for discretionary review which is in the province of the
[Department].” While the Department requires that plans “shall
‘take into consideration,’ the Gould factors,” the Department
provides discretion for plans in designing their reasonable and
customary methodology; thus, there was “no single way” for a
plan to design that methodology, and “it [was] for the
[Department] to exercise its discretion in reviewing and
monitoring plans’ [reasonable and customary methodology].”
Quoting a July 24, 2012 Alameda County Superior Court decision
(Cal. Pacific Medical Center v. Kaiser Foundation Health Plan
(Super. Ct. Alameda County, No. RG0842608), the panel
concluded regulation 1300.71(a)(3)(B) “contains generally worded
criteria, but does not define what is lawful or unlawful.”
(Emphasis in bold omitted.)
The panel also observed the Department, in an amicus brief
in another matter,9 had stated, “‘Sections that are “purely
regulatory” in nature are within the exclusive jurisdiction of the
[Department] to enforce, for they require the exercise of
discretion.’”10 The arbitrators essentially concluded Prime’s
9 The panel quoted from the Department’s amicus brief dated
March 17, 2005 in Bell v. Blue Cross of California, Second
District Court of Appeal, Division One, No. B174131 (arbitration
exhibit RCRV0395, which was also filed in superior court as
Prime’s exhibit PHS57 in connection with the petitions to confirm
and vacate the arbitration award). Prime has asked this court to
take judicial notice of various documents, including the
Department’s March 17, 2005 amicus brief in Bell v. Blue Cross of
California. We grant that motion, which was unopposed.
10 The panel also quoted Samura v. Kaiser Foundation Health
Plan, Inc. (1993) 17 Cal.App.4th 1284, 1301-1302: “[T]he courts
13
challenge to Kaiser’s reasonable and customary methodology
constituted an attack on an improper payment pattern or
practice, requiring a discretionary determination within the
Department’s exclusive jurisdiction.
Although the panel concluded Prime did not have standing
to litigate Kaiser’s reasonable and customary methodology in its
UCL claim, the panel noted that Prime was pursuing in another
phase of the arbitration quantum meruit claims for the
reasonable value of emergency services rendered to Kaiser’s
enrollees. The panel clarified the scope of its ruling on standing:
“To the extent that any UCL action seeks restitution . . . , such
action is subsumed in that reasonable value phase based on
quantum meruit. For the reasons set forth herein, however, and
to the extent that Prime is seeking also to enjoin Kaiser under
the UCL from its alleged non-compliance with
[regulation] 1300.71 [and sections] 1371.4[] and 1371.35, Prime
may not do so.”
iii. The arbitration’s reasonable value phase
The evidentiary hearing for the reasonable value phase was
conducted over eight days in July 2015 and an additional day in
November 2016. As explained by the panel, the issue to be
determined was the reasonable value of emergency services
cannot assume general regulatory powers over health
maintenance organizations through the guise of enforcing
Business and Professions Code section 17200. [Citation.] To the
extent that the order on appeal is based on portions of the Knox-
Keene Act having a purely regulatory import, it improperly
invades the powers that the Legislature entrusted to the
Department of Corporations,” which the panel described as the
Department’s predecessor.
14
provided by Prime hospitals to Kaiser members who received
such services at a Prime hospital when the members lacked the
option, or chose not, to go to a Kaiser hospital and when no
contract existed between Prime and Kaiser governing the prices
for the services. Kaiser reimbursed Prime using various
methodologies, and on certain occasions Kaiser’s payments
averaged between 80 and 90 percent of Prime’s full billed
charges. Prime sought additional reimbursement amounts equal
to 100 percent of its full billed charges, which it asserted
constituted reasonable value.
The parties offered documentary evidence and called
witnesses, including expert witnesses. Prime’s model was “based
upon a single metric”: what Kaiser paid for emergency services
“to the most comparable hospitals under the most closely
comparable terms.” Kaiser’s model was “based upon a broader
range of three market metrics,” including what Prime hospitals
accepted for emergency services from other commercial payors.
On May 1, 2017 the panel issued a partial final award on
the reasonable value phase.11 According to the panel, the parties
agreed Children’s Hospital Central California v. Blue Cross of
California (2014) 226 Cal.App.4th 1260 (Children’s Hospital)
“provides the legal framework for the analysis of reasonable
value.” The panel stated, “As relevant here, the Court of Appeal
in Children’s Hospital held that the six Gould factors set forth in
[regulation] 1300.71(a)(3)(B) are not the exclusive measure of
valuing the services provided by a non-contracted provider who
provided post-stabilization emergency services that were
11 This award was attached as Appendix F to, and
summarized in, the 2018 final arbitration award.
15
rendered to Medi-Cal beneficiaries. Rather those factors are the
minimum criteria for reimbursement of a claim, not the exclusive
criteria. . . . [¶] . . . [¶] . . . The teaching of Children’s Hospital is
that reasonable value is to be determined by all relevant
economic factors as listed above and is not to be restricted to the
Gould factors or to any single economic metric. [¶] Accordingly,
Prime is entitled to the reasonable value of its services,
determined in accordance with the quantum meruit criteria
enunciated in Children’s Hospital.”
The panel adopted the reasonable value calculations of
Kaiser’s expert witnesses because “they were both more legally
accurate and more analytically persuasive” and “Kaiser’s model
more accurately applied the teachings of Children’s Hospital.”
Moreover, “Kaiser’s model analyzed market data for multiple
years whereas Prime’s experts picked only one year and a single
metric.” The panel identified several “analytic problems with
Prime’s model,” including “Prime selected only a single year,
2012, for comparisons, a year that represented the highest single
level of Kaiser’s payments to other hospitals.” The panel
concluded that “Kaiser’s approach with its more comprehensive
data set is the appropriate approach under [Children’s Hospital’s]
direction that the scope of the rates accepted by or paid to a
hospital by other payors is the primary and most reliable
indicator of the value of the services in the marketplace.”
iv. The arbitration’s damages phase
The damages phase of the arbitration was conducted in
December 2016 and January 2017, with closing argument in
February 2017. Among the issues to be determined in this phase
was whether Kaiser had a right to recover overpayments,
including any Kaiser payments made to Prime at rates that
16
exceeded the reasonable value of Prime’s services as determined
using the method or rate the panel had deemed appropriate in
the prior reasonable value phase. The panel also determined the
amount of damages, if any, to which Prime was entitled on its
claims. The panel in its final arbitration award ruled Kaiser had
paid amounts exceeding the reasonable value of Prime’s
emergency health care services and was entitled to recover
against Prime.
v. The superior court’s order on the petitions to
confirm and to vacate the final arbitration award
relating to the reasonable and customary phase
The superior court agreed that Prime lacked standing to
challenge Kaiser’s reasonable and customary methodology,
ruling, “Prime is not seeking to enjoin any act that has been
declared unlawful.” Regulation 1300.71(a)(3)(B), the court
explained, “does not declare any unlawful act that may be
enjoined through the UCL,” providing only generally worded
criteria for determining reasonable and customary value.12 After
pointing out that the panel had concluded Prime’s UCL
restitution claim was “‘subsumed in th[e] reasonable value phase
based on quantum meruit,’” the court ruled Prime had forfeited
its counter-argument that it was entitled to its full billed charges
plus 15 percent interest as restitution by failing to assert this
theory during the arbitration proceedings. Even in the absence of
forfeiture, the court continued, the additional relief sought by
Prime “would not restore the status quo, and instead, would
award Prime a non-restitutionary penalty.” Moreover, 15 percent
12 The superior court also agreed with the panel that
abstention was, in any event, appropriate.
17
interest under sections 1371 and 1371.5 “applies to untimely
reimbursement of uncontested claims.” The panel here had found
that “‘all the claims for which Prime seeks additional
reimbursement . . . were contested.’”
As for the reasonable value phase, the superior court
concluded the panel’s rejection of Prime’s model and acceptance
of Kaiser’s model for calculating reasonable value did not
constitute legal error and was within its discretion. The court
also stated the panel’s “factual findings regarding the
unreliability of Prime’s model are not reviewable under the
limited scope of judicial review agreed upon by the parties in
their Post Dispute Arbitration Agreement.” (Fn. omitted.) With
respect to the arbitration’s damages phase, the court rejected
Prime’s arguments that the panel had erred in ruling Kaiser’s
cross-claims for overpayment were not barred.
b. The UCL
Unfair competition under the UCL includes “any unlawful,
unfair or fraudulent business act or practice . . . .” (Bus. & Prof.
Code, § 17200.) Written in the disjunctive, Business and
Professions Code section 17200 establishes “three varieties of
unfair competition—acts or practices which are unlawful, unfair,
or fraudulent.” (Cel–Tech Communications, Inc. v. Los Angeles
Cellular Telephone Co. (1999) 20 Cal.4th 163, 180; accord, Abbott
Laboratories v. Superior Court of Orange County (2020) 9 Cal.5th
642, 651; Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 949.)
The “unlawful” prong of the UCL “‘borrows’ violations from
other laws by making them independently actionable as unfair
competitive practices.” (Korea Supply Co. v. Lockheed Martin
Corp. (2003) 29 Cal.4th 1134, 1143; accord, Kasky v. Nike,
supra, 27 Cal.4th at p. 949.) The “unfair” prong authorizes a
18
cause of action under the UCL if the plaintiff can demonstrate
the objectionable act, while not unlawful, is “unfair” within the
meaning of the UCL. (Cel–Tech Communications, Inc. v.
Los Angeles Cellular Telephone Co., supra, 20 Cal.4th at p. 182.)
Under the “fraudulent” prong, a business practice violates the
UCL if it “‘is likely to deceive the public.’” (Rubenstein v. The
Gap, Inc. (2017) 14 Cal.App.5th 870, 876; accord, Klein v.
Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1380.)
i. UCL standing
“‘Historically, the UCL authorized any person acting for the
interests of the general public to sue for relief notwithstanding
any lack of injury or damages. [Citation.] At the November 2,
2004, General Election, the voters approved Proposition 64,
which amended the UCL to provide that a private person has
standing to bring a UCL action only if he or she “has suffered
injury in fact and has lost money or property as a result of the
unfair competition.’” . . . [¶] . . . To satisfy Proposition 64 a
plaintiff ‘must now (1) establish a loss or deprivation of money or
property sufficient to qualify as injury in fact, i.e., economic
injury, and (2) show that that economic injury was the result of,
i.e., caused by, the unfair business practice . . . that is the
gravamen of the claim.’” (Sarun v. Dignity Health (2014)
232 Cal.App.4th 1159, 1166; accord, Kwikset Corp. v. Superior
Court (2011) 51 Cal.4th 310, 322.)
ii. UCL restitution
“To achieve its goal of deterring unfair business practices in
an expeditious manner, the Legislature limited the scope of the
remedies available under the UCL. ‘A UCL action is equitable in
nature; damages cannot be recovered.’” (In re Tobacco II Cases
19
(2009) 46 Cal.4th 298, 312; see Korea Supply Co. v. Lockheed
Martin Corp., supra, 29 Cal.4th at p. 1150 [damages are not
available under the UCL].) “Injunctions are ‘the primary form of
relief available under the UCL to protect consumers from unfair
business practices,’ while restitution is a type of ‘ancillary relief.’”
(Kwikset Corp. v. Superior Court, supra, 51 Cal.4th at p. 337.)
Restitution is available “to restore to any person in interest any
money or property . . . which may have been acquired by means of
such unfair competition.” (Bus. & Prof. Code, § 17203; see State
of California v. Altus Finance (2005) 36 Cal.4th 1284, 1303
[“‘[t]hrough the UCL a plaintiff may obtain restitution and/or
injunctive relief against unfair or unlawful practices’”]; see In re
Tobacco Cases II (2015) 240 Cal.App.4th 779, 790.)
Restitution under the UCL must be restorative in nature:
“‘Restitution under [Business and Professions Code]
section 17203 is confined to restoration of any interest in “money
or property, real or personal, which may have been acquired by
means of such unfair competition.” (Italics added.) A restitution
order against a defendant thus requires both that money or
property have been lost by a plaintiff, on the one hand, and that
it have been acquired by a defendant, on the other.’ [Citation.]
‘[C]ompensatory damages are not recoverable as restitution.’”
(Zhang v. Superior Court (2013) 57 Cal.4th 364, 371; accord,
Korea Supply Co. v. Lockheed Martin Corp., supra, 29 Cal.4th at
p. 1149 [the “object of restitution is to restore the status quo by
returning to the plaintiff funds in which he or she has an
ownership interest”]; see In re Vioxx Class Cases (2009)
180 Cal.App.4th 116, 131 [“[t]he difference between what the
plaintiff paid and the value of what the plaintiff received is a
proper measure of restitution”]; Madrid v. Perot Systems Corp.
20
(2005) 130 Cal.App.4th 440, 453 [“in the context of the UCL,
‘restitution’ is limited to the return of property or funds in which
plaintiff has an ownership interest (or is claiming through
someone with an ownership interest)”]; see also Cortez v.
Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 174
[defining restitution as “the return of the excess of what the
plaintiff gave the defendant over the value of what the plaintiff
received”].)
c. The Knox-Keene Act
“Health care service plans are governed by the Knox-Keene
Health Care Service Plan Act of 1975 (the Knox-Keene Act or
Act). ([§ 1340 et seq.].) The Knox-Keene Act ‘is “a comprehensive
system of licensing and regulation” [citation], formerly under the
jurisdiction of the Department of Corporations . . . and presently
within the jurisdiction of the Department of Managed Health
Care.’” (Centinela Freeman Emergency Medical Associates v.
Health Net of California, Inc. (2016) 1 Cal.5th 994, 1004-1005.)
“[T]he Knox-Keene Act ‘compels for-profit health care service
plans to reimburse emergency health care providers for
emergency services to the plans’ enrollees.’” (Prospect Medical
Group, Inc. v. Northridge Emergency Medical Group (2009)
45 Cal.4th 497, 504.)
The Department “has charge of the execution of the laws of
this state relating to health care service plans and the health
care service plan business.” (§ 1341.) The director of the
Department is authorized to adopt rules necessary to implement
the provisions of the Knox-Keene Act, including rules “defining
any terms, whether or not used in [the Act], insofar as the
definitions are not inconsistent with the provisions of [the Act].”
(§§ 1340, 1344.) The director may also “waive any requirement of
21
any rule . . . in any situations where in the director’s discretion
that requirement is not necessary in the public interest or for the
protection of the public, subscribers, enrollees, or persons or
plans subject to [the Act].” (§ 1344, subd. (a).)
d. Prime’s UCL restitution claim
i. Reasonable value
Prime has abandoned its claim for injunctive relief under
the UCL, asserting on appeal only that the judgment confirming
the arbitration award should be reversed because the panel and
superior court erred in ruling Prime could not recover a
restitution award for underpayment for its services based on its
lack of standing, as a provider, to enforce statutory and
regulatory reimbursement rules. Prime’s argument misperceives
(or mischaracterizes) the panel’s decision. As discussed, the
panel determined Prime lacked standing to assert its UCL claim
for injunctive relief for Kaiser’s allegedly improper reasonable
and customary methodology. The record reflects, however, the
panel determined Prime’s UCL restitution claim on the merits, as
the panel indicated it would do. In the reasonable value phase
and the subsequent damages phase, the panel concluded Kaiser
had made payments exceeding the reasonable value of Prime’s
emergency health care services, thereby determining Prime was
not entitled to recover, whether as damages or some form of
restitution properly considered under the UCL, for any alleged
failure of Kaiser’s reasonable and customary methodology to
comply with the Knox-Keene Act.13
13 The parties agree, and the damages award shows, the
panel determined Kaiser had paid amounts exceeding the
reasonable value of Prime’s emergency health care services. The
22
Prime expressly addressed the panel’s approach to the
merits of its UCL restitution claim during the arbitration
proceedings. Prior to issuing its March 19, 2018 final arbitration
award, the panel issued its May 1, 2017 tentative decision, which
summarized its determination regarding the reasonable and
customary methodology issue in nearly identical language as its
discussion of the issue in the final award. Prime objected to the
tentative decision, stating, in part, the panel erred in concluding
that “Prime’s UCL claim [was] subsumed in its quantum meruit
claim” because “Bell [v. Blue Cross of California (2005)
131 Cal.App.4th 211, 214] held that a provider may assert both
claims, . . . so the Tentative errs in eliminating Prime’s UCL
claim on that basis.” In its June 8, 2017 order on the parties’
objections to its tentative decision, the panel responded to
Prime’s objection: “Prime misses the point. The Panel did not
find that the UCL claims by either Prime or Kaiser were
improperly pleaded. The Panel found as a factual matter that
neither party had proven by a preponderance of the evidence a
case of unfair business practices. The Panel continues to believe
that finding was correct.” Rather than “eliminating” Prime’s
UCL claim based solely on lack of standing or abstention, the
panel’s statements in the final arbitration award regarding the
repricing of payments indicate the panel determined Kaiser’s
payments made under its reasonable and customary methodology
exceeded Prime’s services’ reasonable value: For example,
unpersuaded by Prime’s argument that Kaiser may not reject the
rate paid under its reasonable and customary methodology to
“pay at a lower reasonable value rate,” the panel concluded,
“Kaiser is entitled to the difference between the [reasonable and
customary] amounts it paid Prime and the reasonable value rates
that this Panel determined.”
23
panel thus confirmed it had denied the UCL restitution claim on
the merits.
Prime does not challenge on appeal the panel’s reasonable
value determination, including its finding that Prime’s full billed
charges did not reflect the reasonable value of Prime’s services.
Yet, notwithstanding the panel’s conclusion Kaiser had paid
amounts exceeding the reasonable value of Prime’s services,
Prime contends the panel committed reversible error because it
failed to determine whether the reasonable and customary
methodology Kaiser used to pay Prime complied with
regulation 1300.71(a)(3)(B). Prime argues the panel’s decision
“did not discuss the Gould factors,” “did not analyze what
amounts Kaiser would have paid over if its methodology had been
statistically updated annually, as Regulation 1300.71 requires,”
and “[t]here was never a finding about what payments a
compliant [reasonable and customary] methodology would have
yielded.”
Although Prime now argues it is entitled to restitution,
calculated as the difference between the amount that should have
been paid using a methodology compliant with
regulation 1300.71(a)(3)(B) and the amount Kaiser actually paid
under its noncompliant methodology, during the arbitration
Prime for its UCL claim sought the difference between its full
billed charges, which it contended constituted reasonable value,
and the payments Kaiser actually made. Prime’s theory on
appeal of a different measure of restitution is forfeited. (See
Comerica Bank v. Howsam (2012) 208 Cal.App.4th 790, 829 [“[i]n
order to challenge an award in court, a litigant must have raised
the point before the arbitrator”]; see also Moncharsh v. Heily &
Blase, supra, 3 Cal.4th at p. 30 [“[t]he issue would have been
24
waived, however, had Moncharsh failed to raise it before the
arbitrator”].)14
Even if Prime’s new restitution theory were not forfeited,
however, Prime has failed to show it is entitled to “reasonable
and customary value” payments that exceed the reasonable value
of the services rendered by Prime hospitals. (Cf. Prospect
Medical Group, Inc. v. Northridge Emergency Medical Group,
14 In its objections to the tentative decision Prime stated,
“[T]he restitution remedy is a refund of the discounts Kaiser took
under its unlawful [reasonable and customary m]ethodology, and
15% statutory interest.” Similarly, in its closing brief for the
reasonable and customary methodology phase, Prime argued
Kaiser “should be obligated to pay Prime’s undiscounted billed
charges” and “15% interest on all sums the Panel finds due and
owing on the claim, until the date of payment.” Although Prime
stated, “Kaiser could agree to the amounts charged, or pay using
[a reasonable and customary methodology] that complied with
the regulation,” it continued, “Since Kaiser did not comply with
the regulation, it must be deemed to have chosen its option to pay
Prime’s undiscounted charges.” Prime did not contend it sought
the difference between an amount Kaiser should have paid using
a compliant methodology and payments Kaiser already made.
Prime has also cited to nothing in the record showing the panel
had precluded it from introducing evidence of the Gould factors
in the reasonable value phase.
To be sure, Prime argued and presented evidence in the
arbitration proceedings that Kaiser’s methodology was
noncompliant. But it has identified nothing in the record
reflecting any evidence of the amount it contended a compliant
methodology would have yielded or that such amount exceeded
what Kaiser paid, even though, as plaintiff, Prime had the
burden of proof. Nor do the Prime parties on appeal assert what
that amount should be.
25
supra, 45 Cal.4th at p. 508 [“emergency room doctors do not have
unfettered discretion to charge whatever they choose for
emergency services”; “although emergency room doctors ‘are
entitled to “reasonable” compensation for the services rendered,
they cannot lawfully seek unreasonable payment from anyone’”].)
Regulation 1300.71(a)(3)(B) provides no support for Prime’s
argument Kaiser was obligated to pay amounts above reasonable
value. As Prime explains, Kaiser is required by statute to
reimburse Prime for emergency services provided by the Prime
hospitals (see §§ 1371.4,15 1371.3516), and
regulation 1300.71(a)(3)(B) defines reimbursement of a claim as
payment of the “reasonable and customary value for the health
care services rendered based upon statistically credible
information that is updated at least annually and takes into
consideration” the six Gould factors. However, the regulation
does not specify a mathematically defined formula, instead
requiring a value calculation that considers, but need not
necessarily incorporate, the identified factors. Given that one of
15 Section 1371.4, subdivision (b), provides, “A health care
service plan . . . shall reimburse providers for emergency services
and care provided to its enrollees, until the care results in
stabilization of the enrollee,” subject to an exception that is not at
issue in this appeal.
16 Section 1371.35, subdivision (a), provides in part, “A health
care service plan . . . shall reimburse each complete claim, or
portion thereof, whether in state or out of state, as soon as
practical, but no later than 30 working days after receipt of the
complete claim by the health care service plan, or if the health
care service plan is a health maintenance organization,
45 working days after receipt of the complete claim by the health
care service plan.”
26
the factors is “any unusual circumstances in the case,” the
criteria identified in the regulation are necessarily nonexclusive.
(See Prospect Medical Group, Inc. v. Northridge Emergency
Medical Group, supra, 45 Cal.4th at p. 505 [“But how this
amount [the reasonable and customary amount under
regulation 1300.71(a)(3)(B)] is determined can create obvious
difficulties. In a given case, a reasonable amount might be the
bill the doctor submits, or the amount the HMO chooses to pay,
or some amount in between”].)
The elastic nature of the regulation’s definition of
reasonable and customary value was confirmed by the
Department, as discussed in Children’s Hospital, supra,
226 Cal.App.4th at pages 1272 through 1274. Children’s Hospital
involved a dispute over the reasonable value of poststabilization
emergency medical services between Blue Cross and the hospital
that provided those services to enrollees of Blue Cross’s Medi-Cal
managed care plan. The hospital sought its full billed charges,
which it had argued constituted the “reasonable and customary
value” of its services under regulation 1300.71(a)(3)(B). At trial
the hospital applied the regulation’s six-factor test to its billed
charges, introducing, for example, testimony regarding the
hospital’s qualifications, training and experience. The jury
awarded the hospital the difference between the amount of those
charges and the amount Blue Cross had paid. Blue Cross
appealed, arguing the trial court had improperly excluded certain
of Blue Cross’s evidence based on the court’s erroneous conclusion
regulation 1300.71(a)(3)(B) provided the exclusive standard for
determining the reasonable and customary value of the services.
The Fifth District agreed and reversed the judgment. (Children’s
Hospital, at pp. 1264-1265.)
27
The court of appeal explained the Department had defined
“‘reasonable and customary value’” by incorporating language
from Gould, supra, 4 Cal.App.4th 1059, which concluded the
Workers’ Compensation Appeals Board, in deciding the
reasonableness of certain psychotherapy session fees, “‘may
consider evidence regarding’” the same six factors later
incorporated into regulation 1300.71(a)(3)(B). (Children’s
Hospital, supra, 226 Cal.App.4th at pp. 1271-1272.) After
summarizing the Department’s responses to public comments in
connection with regulation 1300.71’s adoption and the
Department’s final statement of reasons for promulgating the
regulation, the court of appeal stated, “In sum, in adopting
[regulation] 1300.71(a)(3)(B), the [Department] established the
minimum criteria for reimbursement of a claim, not the exclusive
criteria. The [Department] refused to set specific amounts noting
that neither billed charges nor government rates are
determinative of the reasonable value of the medical services.
Rather, the [Department] intended that reasonable value be
based on the concept of quantum meruit and that value disputes
be resolved by the courts.” (Children’s Hospital, at pp. 1272-
1273.) The court of appeal continued, “As recognized by the
[Department], [regulation] 1300.71(a)(3)(B)’s directive to pay
noncontracted providers the reasonable and customary value of
their services embodies the concept of quantum meruit,” the
measure of recovery of which “is the reasonable value of the
services, provided they were of direct benefit to the defendant.”
(Id. at p. 1274.) Further, “while the Gould court set forth a
comprehensive set of factors for the situation presented there,
those factors are not exclusive or necessarily appropriate in all
cases”; and, although the hospital was required to demonstrate
28
reasonable value, such value was “not ascertainable from [the
hospital’s] full billed charges alone.” (Id. at p. 1275.) The court of
appeal concluded, “Therefore, the trial court erred in ruling that
[regulation] 1300.71(a)(3)(B) provided the exclusive standard for
determining the reasonable value of the poststabilization
services. The [Department] neither intended nor had the power
to dictate payment rates or change California law on quantum
meruit.” (Id. at p. 1276.)
In the arbitration Prime disputed this analysis, arguing,
because providers always had the ability to sue for reasonable
value by bringing a common law cause of action for quantum
meruit, there would have been no purpose in promulgating
regulation 1300.71(a)(3)(B) if interpreted to allow a payor like
Kaiser to avoid liability for using a noncompliant methodology to
calculate a reimbursement amount by instead paying reasonable
value applying common law principles. However, as explained by
the court in Children’s Hospital, sections 1371 and 1371.35
“impose procedural requirements on claim processing and subject
health care service plans to disciplinary action and penalties for
failure to timely comply with those requirements.” (Children’s
Hospital, supra, 226 Cal.App.4th at p. 1271.)
Regulation 1300.71(a)(3)(B) was intended to clearly define terms
relating to claim settlement and reimbursement and to provide
procedures for plans and providers to prevent unreasonable
delays in payment of provider claims. As such, “the ‘regulations
are intended to set forth the minimum payment criteria to ensure
compliance with the [Knox-Keene] Act’s claims payment and
dispute resolution standards.’” (Children’s Hospital, at pp. 1271,
1273.)
29
In sum, regulation 1300.71(a)(3)(B), with its “reasonable
and customary value” criteria, permits a payor to comply with the
prompt-pay timing provisions of the Knox-Keene Act and avoid
potential action by the Department by paying a noncontracted
provider’s claim for emergency services using a simple, truncated
method (the “‘minimum payment criteria’”) for calculating
reasonable value. Nevertheless, regulation 1300.71(a)(3)(B),
intended by the Department to provide for reimbursement of
reasonable value, does not foreclose a dispute between the
provider and payor regarding the calculated amount to be
resolved in a forum allowing for a more comprehensive
reasonable value inquiry applying traditional quantum meruit
principles. The regulation was neither intended nor should be
construed to require a payor to pay more than reasonable value.
ii. Statutory interest
Prime also argues on appeal the panel’s consideration of
Prime’s UCL restitution claim as part of the panel’s reasonable
value analysis was prejudicial because the panel thereby
prevented Prime from recovering the statutory 15 percent
interest to which it was entitled pursuant to sections 137117 and
1371.35, subdivision (b),18 on all funds Kaiser owed, but failed to
17 Section 1371, subdivision (a)(2), provides, in part, “If an
uncontested claim is not reimbursed by delivery to the claimants’
address of record within the respective 30 or 45 working days
after receipt, interest shall accrue at the rate of 15 percent per
annum beginning with the first calendar day after the 30- or 45-
working-day period.”
18 Section 1371.35, subdivision (b), provides, in part, “If a
complete claim, or portion thereof, that is neither contested nor
denied, is not reimbursed by delivery to the claimant’s address of
record within the respective 30 or 45 working days after receipt,
30
pay, due to its noncompliant reasonable and customary
methodology. Putting aside the serious question whether
recovery of a 15 percent statutory rate of interest qualifies as
restitution under the UCL, sections 1371 and 1371.35 provide for
15 percent interest only for untimely payment of a claim that is
uncontested. The panel denied Prime’s claim for statutory
15 percent interest, in part, on the ground Prime’s
reimbursement claims were contested.
In its reply appellate brief Prime argues Kaiser did not
properly contest its claims for reimbursement, explaining that
sections 1371 and 1371.35 require a plan contesting a claim to
identify the portion of the claim that is contested by revenue
code, as well as the specific reasons for contesting or specific
information needed from the provider to reconsider the claim. It
contends Kaiser failed to satisfy those requirements. The
argument there was insufficient evidence to support the panel’s
factual finding that Kaiser contested Prime’s claims is beyond the
scope of judicial review. (See Moncharsh v. Heily & Blase, supra,
3 Cal.4th at pp. 10-11.) Moreover, Prime forfeited this sufficiency
of the evidence argument by failing to assert it in its opening
appellate brief, despite the superior court’s express reliance on
this aspect of the panel’s finding. (See United Grand Corp. v.
Malibu Hillbillies, LLC (2019) 36 Cal.App.5th 142, 158
[“[f]airness militates against allowing an appellant to raise an
issue for the first time in a reply brief because consideration of
the issue deprives the respondent of the opportunity to counter
the appellant by raising opposing arguments”]; Nolte v. Cedars-
the plan shall pay the greater of fifteen dollars ($15) per year or
interest at the rate of 15 percent per annum beginning with the
first calendar day after the 30- or 45-working-day period.”
31
Sinai Medical Center (2015) 236 Cal.App.4th 1401, 1409-1410
[“‘[a]rguments presented for the first time in appellant’s reply
brief are considered waived’”].)
Substantively, Prime, as the claimant, had the burden of
proving its entitlement to the statutory 15 percent interest.
Prime points to no evidence in the arbitration establishing Kaiser
had not adequately contested Prime’s claims and thus that any
error in the panel’s finding Kaiser had contested Prime’s claims
was prejudicial.
3. The Panel Did Not Commit Legal Error in Allowing
Kaiser To Recover for Overpayments to Prime
Kaiser sought reimbursement (restitution) for
overpayments to Prime, including payments that exceeded the
reasonable value of Prime’s services. Primarily at issue on
appeal are three categories of overpayments: Payments for
services at several Orange County hospitals Prime acquired from
Vanguard Health Systems, Inc. as to which Kaiser continued to
use either the price terms of a letter agreement it had with
Vanguard or rates established through a third-party
intermediary network (MultiPlan); payments for services at
three hospitals acquired by Prime as to which Kaiser continued
to use price terms pursuant to preexisting agreements applicable
to those hospitals, referred to as Direct Contracts rates; and
payments pursuant to Kaiser’s reasonable and customary
methodology. Prime contends Kaiser’s claims for restitution are
time-barred and its payments were, in any event, voluntary and
thus not recoverable.
a. Kaiser’s restitution cross-claims were not time-barred
Section 1371.1, subdivision (a)(1), provides, “Whenever a
health care service plan . . . determines that in reimbursing a
32
claim for provider services an institutional or professional
provider has been overpaid, and then notifies the provider in
writing through a separate notice identifying the overpayment
and the amount of the overpayment, the provider shall reimburse
the health care service plan within 30 working days of receipt by
the provider of the notice of overpayment unless the overpayment
or portion thereof is contested by the provider in which case the
health care service plan shall be notified, in writing, within
30 working days. The notice that an overpayment is being
contested shall identify the portion of the overpayment that is
contested and the specific reasons for contesting the
overpayment.”
Regulation 1300.71(b)(5) provides, “A plan . . . shall not
request reimbursement for the overpayment of a claim, including
requests made pursuant to Health and Safety Code
section 1371.1, unless the plan . . . sends a written request for
reimbursement to the provider within 365 days of the Date of
Payment on the over paid claim. The written notice shall include
the information specified in section (d)(3). The 365-day time limit
shall not apply if the overpayment was caused in whole or in part
by fraud or misrepresentation on the part of the provider.”
Regulation 1300.71(d)(3) provides, “If a plan . . . determines
that it has overpaid a claim, it shall notify the provider in writing
through a separate notice clearly identifying the claim, the name
of the patient, the date of service and including a clear
explanation of the basis upon which the plan . . . believes the
amount paid on the claim was in excess of the amount due,
including interest and penalties on the claim.”
Relying on these provisions, Prime argues Kaiser’s cross-
claims for overpayments, not made until more than 365 days
33
from the date of payment had elapsed,19 were time-barred. The
panel and the superior court rejected Prime’s argument; Prime
has not established they erred in doing so. The two-year
limitations period in Code of Civil Procedure section 339 for an
action “upon a contract, obligation or liability not founded upon
an instrument in writing,” not the 365-day notice period of
regulation 1300.71(d)(3), governs Kaiser’s claims.
Code of Civil Procedure section 312 provides, “Civil actions,
without exception, can only be commenced within the periods
prescribed in this title, after the cause of action shall have
accrued, unless where, in special cases, a different limitation is
prescribed by statute.” “[W]here the Legislature intends that
another or no limitations period applies, it must say ‘so in clear
and unmistakable language.” (County of Marin Assn. of
Firefighters v. Marin County Employees’ Retirement Assn. (1994)
30 Cal.App.4th 1638, 1651.) The plain language of section 1371.1
and regulation 1300.71 does not clearly indicate an intent to limit
the time in which health plans may bring a civil action for
reimbursement against a provider. Although
regulation 1300.71(b)(5) provides a plan shall not request
reimbursement unless it sends a written request for
reimbursement within 365 days, the regulation does not bar a
19 Prime does not indicate when Kaiser first made its claim
for overpayments, and the panel made no finding on that issue.
Although Prime argued in its closing brief in the arbitration that
Kaiser had not established its request for refunds was timely,
under traditional allocations of the burden of proof, it would be
Prime’s responsibility to establish the cross-claims were time-
barred. (See, e.g., Aryeh v. Canon Business Solutions, Inc. (2013)
55 Cal.4th 1185, 1197; Samuels v. Mix (1999) 22 Cal.4th 1, 8-9.)
34
civil court action as a consequence of any violation. To the
contrary, the record before the panel established the Department
has interpreted regulation 1300.71(b)(5) as “not limit[ing] or in
any way affect[ing] a plan’s right to access the courts to prosecute
a civil action to seek reimbursement.”20
As Kaiser argued in the arbitration, subdivision (s) of
regulation 1300.71, titled “Review and Enforcement,” although
containing no restriction of a plan’s ability to file a court action in
the event of a violation of any of that regulation’s requirements,
does provide for discretionary enforcement by the Department.
For example, regulation 1300.71(s)(2) provides in part, “Failure of
a plan to comply with the requirements of [specified sections of
the Health and Safety Code or the Department’s regulations,
including regulation 1300.71] may constitute a basis for
disciplinary action against the plan,” including nonexclusive
“civil, criminal and administrative remedies.” If the Department
determines a plan to be engaged in a “Demonstrable and Unjust
Payment Pattern,” it may assess additional penalties, comprising
any combination of (1) an additional monetary penalty
commensurate with the seriousness of the demonstrable and
unjust payment pattern; (2) imposition for up to three years of a
shorter reimbursement time period; and (3) the appointment of a
conservator to supervise the plan’s claim payment activities.
(Reg. 1300.71(s)(6).)
20 The quoted language is contained in a brief filed by the
Department in Blue Cross of California v. Rouillard, Sacramento
County Superior Court Case No. 34-2014-80001733 (Rouillard
brief). Both Prime and Kaiser relied on the brief and argued
statements in it supported their positions, and the panel relied on
the brief for its ruling.
35
Relying on the Department’s final statement of reasons for
promulgating regulation 1300.71, Prime argues
regulation 1300.71(b)(5) “was added to set forth the maximum
time frame to assert requests for reimbursement of overpayment
of claims.” However, the next sentence of the Department’s final
statement continues regulation 1300.71(b)(5) “was necessary to
ensure that plans . . . do not engage in unfair payment patterns
in violation of Health & Safety Code Section 1371.1.” Thus, a
plan that fails to comply with the 365-day notice requirement of
regulation 1300.71(b)(5) would be unable unilaterally to compel a
provider to comply with section 1371.1’s mandate that the
provider reimburse an uncontested overpayment within
30 working days or pay 10 percent interest after the 30-working-
day period.
The true import of regulation 1300.71(b)(5) as an
administrative provision related to disciplinary proceedings
initiated by the Department, as well as a requirement related to
health plans’ informal dispute resolution processes, rather than
as a limitations provision applicable to civil actions, becomes
apparent when the regulation is viewed in the context in which it
was adopted. Section 1367, subdivision (h)(1), provides, “All
contracts with providers shall contain provisions requiring a fast,
fair, and cost-effective dispute resolution mechanism under which
providers may submit disputes to the plan.” Section 1367,
subdivision (h)(2), provides a plan “shall ensure that a dispute
resolution mechanism is accessible to noncontracting providers
for the purposes of resolving billing and claims disputes.”
Although section 1367 was added to the Health and Safety Code
in 1978 (Stats. 1978, ch. 285, § 4), it was not until 2000 that
health plans were required to expand their informal dispute
36
resolution processes to include noncontracting providers
(Stats. 2000, ch. 825, § 2; Stats. 2000, ch. 827, § 2). At the same
time, the Department, through the addition of section 1371.38,
was directed to “adopt regulations that ensure that plans have
adopted a dispute resolution mechanism pursuant to
subdivision (h) of Section 1367.” (Stats. 2000, ch. 825, § 7;
Stats. 2000, ch. 827, § 7.) In the same legislation the Legislature
expressed its intent in making these changes: “To ensure that
health care service plans and providers do not engage in patterns
of unacceptable practices, the Department of Managed Health
Care should be authorized to assist in the development of a new
and more efficient system of claims submission, processing, and
payment.” (Stats. 2000, ch. 825, § 1; Stats. 2000, ch. 827, § 1.)
In addition to regulation 1300.71, the Department, to
implement amended section 1367, promulgated
regulation 1300.71.38, which provides, “All health care service
plans . . . shall establish a fast, fair and cost-effective dispute
resolution mechanism to process and resolve contracted and non-
contracted provider disputes.” (Epstein v. Vision Service Plan
(2020) 56 Cal.App.5th 223, 232.) “‘Arbitration shall not be
deemed a provider dispute or a provider dispute resolution
mechanism for the purposes of this section.’” (Ibid., quoting
regulation 1300.71.38.)
Regulation 1300.71(b)(5)’s requirement that a plan “shall
not request reimbursement for the overpayment of a claim”
unless it sends a written reimbursement request to the provider
within 365 days applies to a plan’s request made through this
informal dispute resolution process mandated by section 1367.
The Department has argued regulation 1300.71(b)(5) does not
affect civil or common law remedies or restrict a plan’s right to
37
pursue a civil action seeking recovery of overpayments. Rather,
the Department has interpreted regulation 1300.71(b)(5) and
(d)(3) to apply “if health plans seek to realize the efficiencies
available through the non-judicial processes available under
[regulation] 1300.71” or otherwise “reap the financial benefits of
the regulatory scheme,” including “efficiently and automatically
obtain[ing] reimbursement through offset of future claims
payments.”21
Prime’s reliance on Bi-Rite Meat & Provisions Co. v. City of
Hawaiian Gardens Redevelopment Agency (2007)
156 Cal.App.4th 1419 (Bi-Rite) and Superior Strut & Hanger Co.
v. Port of Oakland (1977) 72 Cal.App.3d 987 (Superior Strut) to
refute this interpretation of regulation 1300.71(b)(5) is misplaced.
Neither case concerns the Knox-Keene Act. Bi-Rite involved
submission requirements under regulations of the California
Relocation Assistance Act (Bi-Rite, at p. 1426); Superior Strut
concerned guidelines promulgated by the Commission of Housing
and Community Development under the authority of the
California Relocation Assistance Law (CRAL) that a displaced
party seeking relocation benefits from a public entity file a claim
or application with that entity within 18 months (Superior Strut,
at pp. 992, 1003).
In Bi-Rite a displaced party sought to compel a public
agency to pay relocation benefits. Bi-Rite argued it had timely
filed a claim with the agency within the 18-month limitations
period under California Code of Regulations, title 25,
section 6088 or, alternatively, good cause existed to extend the
limitations period under that regulation’s provision for an
21 See Rouillard brief at pages 10-11.
38
extension upon a proper showing of good cause. (Bi-Rite, supra,
156 Cal.App.4th at pp. 1425, 1432; Cal. Code Regs., tit. 25,
§ 6088.) Bi-Rite did not argue the regulatory limitations
provisions were inapplicable, and the case did not involve any
alleged untimeliness of a civil action or claim filed in arbitration.
This court thus had no occasion to consider the issue. (See
Howard Jarvis Taxpayers Assn. v. Newsom (2019) 39 Cal.App.5th
158, 169 [“‘[i]t is axiomatic that cases are not authority for
propositions not considered’”].)
Superior Strut involved an action by the displaced party
against the Port of Oakland for breach of the port’s duty imposed
by CRAL to pay the company’s relocation assistance costs. The
company had filed a damages claim for relocation costs with the
port on January 7, 1974. The port rejected the claim as untimely,
and the company filed suit. (Superior Strut, supra,
72 Cal.App.3d at pp. 992-993.) The port argued the company’s
claim—presented on January 7, 1974, 14 months after the
company’s November 7, 1972 move—was barred by Government
Code section 911.2, which provides a one-year period to present a
claim to the public entity. The court of appeal rejected the port’s
argument, first holding the company was not required to present
a claim before the port, and then, after explaining the
administrative guidelines promulgated under CRAL provided an
18-month period from the time of the move to present an
application for benefits, holding the trial court was “entitled to
consider the applicable limitations period as that established in
the relocation guidelines.” Accordingly, the lawsuit filed
February 13, 1974 was timely. (Superior Strut, at p. 1003.) None
of the parties had argued the applicable limitations period for the
company’s civil action was governed by any of the statutory
39
limitations periods prescribed in title 2 of part 2 of the Code of
Civil Procedure. (See Code Civ. Proc., § 312.) There was no
dispute by the parties the applicable limitations period for the
company’s civil action was governed by the time in which to
present or file a claim or application for benefits.
b. Satisfying regulation 1300.71(b)(5)’s notice
requirement is not a condition precedent to a lawsuit
As an alternative to its argument that
regulation 1300.71(b)(5) establishes a 365-day limitations period
for a health plan’s civil action for recovery of overpayments,
Prime contends the regulation’s notice requirement functions as a
condition precedent with which plans must comply when filing
suit seeking such a recovery.22 As discussed, however, the
Department has construed the regulation as not affecting a plan’s
ability to file a court action, an interpretation that applies
equally to a condition precedent and to a limitations period. We
defer to the agency’s interpretation, which is fully consistent with
our own view of the role the regulation plays in the overall
administrative scheme.
In an amicus brief the American College of Emergency
Physicians, State Chapter of California, Inc. (ACEP) urges us to
construe regulation 1300.71(b)(5)’s 365-day notice requirement as
a precondition to filing suit by analogy to the claims-filing
requirement of the Government Claims Act (Gov. Code,
§ 810 et seq.), and, specifically, Government Code section 911.2,
22 The panel rejected that argument, concluding, “[N]othing in
the language of [section 1371.1] or [regulation 1300.71(b)(5)]
supports converting the 365-day administrative time limit into a
condition precedent to the filing of a normal action at law (or
arbitration proceeding).”
40
which specifies a limited period in which a claim may be
presented to a public entity. It is true, as ACEP argues, a
claimant’s failure to comply with that presentation requirement
bars a civil action even if the suit would otherwise be timely.
However, Government Code section 945.4 expressly provides,
subject to exceptions, “[N]o suit for money or damages may be
brought against a public entity on a cause of action for which a
claim is required to be presented . . . until a written claim
therefor has been presented to the public entity and has been
acted upon by the board, or has been deemed to have been
rejected by the board.” In sharp contrast, nothing in the Knox-
Keene Act or its implementing regulations expressly conditions a
plan’s right to sue for overpayments upon timely notice of the
overpayment. (Cf. State of California v. Superior Court (2004)
32 Cal.4th 1234, 1240 [“‘“California statutes or ordinances which
condition the right to sue the sovereign upon timely filing of
claims and actions are . . . elements of the plaintiff’s cause of
action and conditions precedent to the maintenance of the
action”’”], italics omitted.)
Similarly inapt is ACEP’s discussion of the requirement
that a complainant must first file a charge with the Equal
Employment Opportunity Commission as a precondition to the
commencement of a court action under title VII of the Civil
Rights Act of 1964 (42 U.S.C. § 2000e et seq.). (See Fort Bend
County, Texas v. Davis (2019) ___ U.S. ___ [139 S.Ct. 1843,
1846].) Pertinent title VII “[e]nforcement provisions” set forth
detailed procedures under which “a civil action may be brought”
“after a charge is filed with the Commission.” (42 U.S.C.
§ 2000e-5(f)(1).) And ACEP’s reliance on Hill v. Newkirk (1994)
26 Cal.App.4th 1047 is also unavailing. In that case the court of
41
appeal affirmed the trial court’s judgment after sustaining,
without leave to amend, a demurrer to a mother’s complaint for
negligence against a foster parent on the ground the mother had
failed to first file a claim with the Foster Family Home and Small
Family Home Insurance Fund, as required by section 1527.6,
subdivision (d). (Hill, at pp. 1050-1052.) However, unlike the
Knox-Keene Act, section 1527.6, subdivision (d)(1), expressly
conditions the right to bring suit against the pertinent party (the
foster parent) on a claim having first been filed.
c. Permitting Kaiser’s restitution claims does not
frustrate the purposes of the Knox-Keene Act
In a final attempt to conjure a basis for construing
regulation 1300.71(b)(5)’s notice requirement as a bar to Kaiser’s
claims, Prime cites Pacific Bay Recovery, Inc. v. California
Physicians’ Services, Inc. (2017) 12 Cal.App.5th 200, 215, which
stated the principle that “quantum meruit recovery is
inappropriate where it would frustrate the law or public policy.”
Allowing Kaiser to bring its restitution claims based on quantum
meruit principles, Prime contends, would “frustrate” the purpose
of the 365-day period to provide notice of overpayment.
The panel’s reasoning in addressing a similar argument in
another context applies to the scope, and potential consequences,
of its ruling concerning regulation 1300.71(b)(5): “Prime’s
lawsuit to recover additional reimbursement for claims paid
under [reasonable and customary rates] triggered Kaiser’s right
to seek to contest the [reasonable and customary] payment and
pay at reasonable value instead”; “once Prime sought a
determination of reasonable value, Kaiser had the reciprocal
right to recover if it were determined that the [reasonable and
customary] rates at which it had paid exceeded reasonable
42
value.” “[I]t would be entirely unfair and illogical,” the panel
wrote in its final award, “to give a provider a one-sided right to
sue a payor to obtain reasonable value” but to “bar the payor
from seeking to establish the correct reasonable value.”
As discussed, the history of the governing legislation and
the regulatory scheme developed in response fully supports the
view the Legislature and the Department did not intend to create
an unbalanced claims settlement process and dispute resolution
mechanism granting providers more rights than those enjoyed by
plans. To the contrary, it indicates an intent that the process
balance the rights of plans and providers. Indeed, the Knox-
Keene Act and its regulations expressly require any dispute
resolution mechanism to be “fair.” (§ 1367, subd. (h)(1);
regulation 1300.71.38.) The legislative history also shows a
primary reason for imposing a fast and cost-effective dispute
resolution mechanism requirement was to address providers’
concerns about obtaining full and timely reimbursement of their
claims from health plans. None of these factors applies where
the provider voluntarily chooses to bring a civil action and the
court (or arbitrator) determines the plan has overpaid. Under
those circumstances the plan has more in common with the
provider awaiting payment of its claims than the payor
attempting to delay the process to avoid payment. Far from
frustrating the purpose of the Knox-Keene Act, to preclude a plan
from recovering overpayments that, as the panel found here,
arose out of the same transactions and same set of claims as
those initiated in a court proceeding by a provider would
encourage providers to forego entirely the plan’s dispute
43
resolution process, filing a lawsuit after waiting at least a year.23
Creating an incentive to avoid the “fast, fair and cost-effective”
informal dispute mechanism the Legislature and Department
intended, not recognizing a plan’s right to recover overpayments
once the provider puts at issue the reasonableness of payments
made, interferes with the legislative and regulatory goals.
d. The voluntary payment doctrine does not bar Kaiser’s
recovery of overpayments
Prime asserts, even if Kaiser’s cross-claim for restitution of
overpayments is not time-barred, any payments Kaiser made in
excess of the reasonable value of the services provided were
23 Subsection (c) of regulation 1300.71.38 requires plans to
establish written procedures for the “submission, receipt,
processing and resolution of contracted and non-contracted
provider disputes,” and subsection (d)(1) prohibits a plan from
imposing a deadline for the receipt of a provider dispute that is
less than 365 days of the plan’s action (or, in the case of inaction,
less than 365 days after expiration of the time for contesting or
denying claims).
In its final statement of reasons for promulgating
regulations 1300.71 and 1300.71.38, the Department explained,
“[Regulation] 1300.71.38(d)(1) . . . sets forth the minimum
timeframe that a payor must allow for the submission of a
provider dispute to its dispute resolution mechanism. The
clarifications were necessary to set forth the minimum standards
that a payor must meet to comply with Section 1367(h). These
minimum standards are not intended to replace or alter existing
common law or other statutory contract remedies. Although a
plan . . . will not be forced to process a provider dispute submitted
more tha[n] a year after its adjudication in its dispute resolution
system, a provider is not precluded from pursuing any other civil
remedy.”
44
voluntary and, as a consequence, not recoverable. (See Steinman
v. Malamed (2010) 185 Cal.App.4th 1550, 1557 (Steinman)
[“‘[p]ayments voluntarily made, with knowledge of the facts,
cannot be recovered’”]; Rest.3d Restitution and Unjust
Enrichment, § 5, com. a [“voluntary payment doctrine” addresses
issues where a payor has established a prima facie claim in
restitution and the defendant/payee responds that the payment
was made voluntarily].)24 The panel concluded Kaiser’s payments
at rates other than reasonable value were not voluntary and the
voluntary payment doctrine did not bar Kaiser from seeking
restitution as to certain (though not all) categories of
overpayments. Once again, we agree.
i. The Vanguard overpayments: background
Kaiser and Vanguard entered into a letter of agreement
providing payment terms for services to be provided by two
Vanguard-affiliated hospitals, West Anaheim Medical Center and
Huntington Beach Hospital, to Kaiser members. The original
term of the letter agreement was to expire on April 30, 2010,
subject to exceptions.
Prime acquired the Vanguard hospitals in 2006 and
informed Kaiser the letter agreement terminated upon the
acquisition. Kaiser disputed the termination and advised Prime
the letter agreement was effective until April 30, 2010. Prime
responded it would no longer perform services at the letter
agreement rate. Kaiser began paying Prime at the MultiPlan
24 Citations to Restatement Third and Rest.3d are to the
Restatement Third of Restitution and Unjust Enrichment.
45
rates, which were higher than the letter a greement rates,25 but
reserved its right to recover the amount in excess of the letter
agreement rates if Kaiser prevailed in contending the letter
agreement remained in effect. Kaiser also expressly reserved “all
of its rights and remedies.”
Kaiser also contended Prime (Vanguard)26 never properly
terminated the letter agreement and it remained in effect even
after April 30, 2010. Despite its assertion it had the continuing
right to pay only the letter agreement rates, Kaiser continued to
reimburse Prime at MultiPlan rates after April 30, 2010 because
at the time there had been no binding decision as to the letter
agreement’s termination date.
The panel determined the letter agreement was effective
until April 30, 2010 and awarded Kaiser damages for amounts
paid to that date in excess of the letter agreement rates. The
panel determined Kaiser’s payments at the MultiPlan rates were
not voluntary and the voluntary payment doctrine did not bar
Kaiser from obtaining restitution of the difference between
payments made at MultiPlan rates and letter agreement rates
through April 30, 2010. The panel stated Kaiser paid the higher
25 For the arbitration’s MultiPlan phase the panel explained,
although there was no direct contractual relationship between
Kaiser and Prime, Prime contended the parties’ contracts with
MultiPlan created the equivalent of a contractual preferred-
provider relationship between Kaiser and Prime, obligating
Kaiser to pay Prime at the MultiPlan rates for every claim.
26 As explained by the panel in its final arbitration award,
although a prior arbitration had determined Prime was not a
party or assignee of the letter agreement, it was undisputed
Prime had indemnified Vanguard and was liable for any
Vanguard-related damages awarded to Kaiser.
46
rates in the mistaken belief Prime could prevail in its contention
the acquisition terminated the letter agreement and under
duress because Prime refused to treat Kaiser patients unless
Kaiser paid rates higher than the letter agreement rates.
For Kaiser’s overpayments after April 30, 2010, the panel
similarly determined those payments were not voluntary because
Prime had continued to assert the letter agreement was not
effective, Kaiser had continued to disagree, and there had been
no resolution of the issue. Thus, Kaiser had continued to be
mistaken as to the letter agreement’s legal termination date and
had operated under the duress of Prime’s refusal to treat Kaiser
patients at letter agreement rates and the potential involvement
of the Department. As explained by the panel, Kaiser contended,
and the panel agreed, its payment at the MultiPlan rate was a
“placeholder” made under a reservation of rights to accommodate
for, and pending the outcome of, litigation. The panel concluded
Kaiser, after April 30, 2010, had paid at MultiPlan rates
pursuant to an effective reservation of rights and was entitled to
pay at reasonable value.
The panel also explained Kaiser had continued to pay at
MultiPlan rates until March 2011 and then had reverted to
paying letter agreement rates up to February 7, 2015.
Nevertheless, the panel determined Kaiser should recover the
difference between the payments it had made and reasonable
value not only with respect to its MultiPlan rate payments but
also its post-March 2011 letter agreement rate payments. It
stated “this finding is eminently fair” because Prime itself
originally acknowledged in the arbitration that Kaiser’s
payments at MultiPlan rates after the letter agreement’s
47
termination should be repriced at reasonable value, which Prime
at the time believed would be higher than MultiPlan rates.
The superior court, in its order granting the petition to
confirm and denying the petition to vacate the arbitration award,
concluded the panel’s determination that all of the Kaiser
overpayment categories were not voluntary constituted factual
findings that were unreviewable under the parties’ arbitration
agreement. The court also ruled, with respect to the Vanguard
overpayments after the letter agreement’s termination, the panel
had made a factual finding Kaiser did reserve its rights and
Prime had, in any event, forfeited its reservation-of-rights
argument.
ii. Vanguard overpayments: payments at MultiPlan
and letter agreement rates after April 30, 2010 are
not subject to the voluntary payment doctrine
Prime, relying on Steinman, supra, 185 Cal.App.4th 1550and Western Gulf Oil Co. v. Title Ins. & Trust Co. (1949)
92 Cal.App.2d 257 (Western Gulf), contends Kaiser’s recovery of
the Vanguard overpayments after April 30, 2010 was barred
absent a reservation of rights27 and asserts Kaiser did not reserve
rights to reprice its payments below the letter agreement rates to
reasonable value. With regard to Kaiser’s post-April 30, 2010
payments at the MultiPlan rates, however, Prime fails to address
the panel’s ruling that Prime effectively forfeited its challenge to
Kaiser’s recovery of damages for the Vanguard overpayments
after April 30, 2010 by originally acknowledging that Kaiser’s
27 Prime does not challenge the panel’s award under the
voluntary payment doctrine for any Vanguard overpayments
before May 1, 2010.
48
payments at MultiPlan rates after the letter agreement’s
termination should be repriced at reasonable value.
In any event, the panel, relying on various arbitration
exhibits, found Kaiser had reserved its rights to the rate “the
Panel ultimately determined was correct.” That factual finding is
not subject to judicial review under the parties’ arbitration
agreement. (See Moncharsh v. Heily & Blase, supra, 3 Cal.4th at
pp. 10-11 [generally, sufficiency of the evidence supporting an
arbitration award is not subject to judicial review]; cf. Steinman,
supra, 185 Cal.App.4th at p. 1556 [trial court’s finding that
payment “was made under protest and was not voluntarily made”
was a factual finding subject to limited appellate review for
substantial evidence].)
As for Kaiser’s post-April 30, 2010 payments at the letter
agreement rates, Prime also fails to show that, under the
circumstances, including the panel’s finding Kaiser made those
payments under the mistaken belief the letter agreement had not
yet terminated, the panel committed an error of law in
concluding restitution was not barred by the voluntary payment
doctrine even if, as Prime argues despite the panel’s contrary
findings, Kaiser did not expressly reserve its rights to seek
recovery of any overpayments and was not acting under duress.
(See American Oil Service v. Hope Oil Co. (1961) 194 Cal.App.2d
581, 585-587 [where overpayments were made under a mistake,
the evidence was insufficient to justify a finding the plaintiff
making the payments “had such knowledge of the facts as would
have rendered the payments voluntary”; “[w]hether the payments
were made voluntarily or through mistake depended upon the
intentions of plaintiff in making them”]; Rest.3d, § 5, com. a [“a
‘voluntary payment’ is a transaction in which the payor chooses
49
to act in the face of knowledge that the payment may not in fact
be due”]; 1 Witkin, Summary of Cal. Law (11th ed. 2017)
Contracts, § 1059, p. 1106 [“[a] person who pays money under the
mistaken belief that he or she is under a duty to do so may
recover it”].)28 Indeed, because Kaiser paid at letter agreement
rates after the April 30, 2010 termination date in accordance
with its own mistaken belief the agreement was still in effect,
and in contravention to Prime’s position otherwise, it would be
incongruous to require Kaiser to have made those payments
under protest or with a reservation of rights. If duress were an
invariable requirement for restitution, a payor who mistakenly
overpays but otherwise makes its payment freely could never
recover. The Prime parties cite no authority requiring such a
result.
Steinman, supra, 185 Cal.App.4th 1550 and Western Gulf,
supra, 92 Cal.App.2d 257, on which Prime relies to argue Kaiser
cannot recover payments otherwise voluntarily made where it
reserved no rights of recovery and was under no duress, are
inapposite. In both cases the payor had paid the amount
demanded by the recipient even though the payor did not agree
28 The Restatement Third, section 6, states, “Payment by
mistake gives the payor a claim in restitution against the
recipient to the extent payment was not due.” The Restatement
Third, section 35, comment d, further states, “Other sections of
this Restatement that authorize restitution to recover an
overpayment (or other overperformance) include no requirement
of formal protest. If a party has paid an overcharge without
realizing it, the restitution claim is based on payment by mistake.
(There can be no ‘protest,’ just as there can be no ‘voluntary
payment,’ before the paying party is aware of the overcharge.
[Citation].)”
50
that amount was in fact due: In Steinman the payor FMA wrote
it would send the demanded funds “under protest” “despite our
belief that your calculation may be in error” (Steinman, at
p. 1557); and in Western Gulf the payor wrote its payment of the
demanded amount “was made solely to avoid a possible forfeiture
of the lease” and “was made without any admission that the
lessor’s royalty oil was not properly chargeable” (Western Gulf, at
p. 261).
The facts of neither case indicate a mistake had been made;
to the contrary, the payor in both cases knowingly paid the
disputed amount demanded. In neither case did the payor assert
the overpayment was made under a mistake or otherwise without
“knowledge of the facts.” Rather, the issue in both cases was
whether the payor had submitted to the demand under protest or
a reservation of rights and (in the case of Steinman), even if it
did, whether that was sufficient to render the payor’s
performance of the demand involuntary in the absence of
something more, including enforcement by coercion. As Prime
indicates, both cases state, “‘Payments of illegal claims enforced
by duress, coercion or compulsion, when the payor has no other
adequate remedy to avoid it, will be deemed to have been made
involuntarily and may be recovered, but the payment must have
been enforced by coercion and there must have been no other
adequate means available to prevent the loss.’” Neither case,
however, stands for the proposition that paying an illegal claim
under duress, coercion or compulsion29 is the exclusive means to
29 The Restatement Third, at comment d of section 35
(pertaining to performance with a reservation of rights of a
disputed obligation in excess of contractual requirements),
explains, “When restitution is authorized under this section, the
51
establish a claim for restitution and is required even in cases of
mistake. (Steinman, supra, 185 Cal.App.4th at p. 1558; Western
Gulf, supra, 92 Cal.App.2d at p. 265.)
In its appellate reply brief, Prime advances several new
arguments to show Kaiser’s mistake regarding the contractual
termination date is not the type of mistake that would allow
Kaiser to avoid the bar of the voluntary payment doctrine.
However, although the panel relied on that mistake as among the
circumstances for finding Kaiser did not make a voluntary
payment and the superior court relied on the panel’s no-
voluntary-payment factual finding (specifically, the unreviewable
nature of that finding) as among the reasons to confirm the
arbitration award, Prime did not raise its arguments concerning
the nature of a mistake necessary to avoid the voluntary payment
doctrine bar in its opening brief. It thus forfeited those
arguments. (See, e.g., United Grand Corp. v. Malibu Hillbillies,
LLC, supra, 36 Cal.App.5th at p. 158.)
Those arguments are also unavailing. Relying on the
panel’s reference with respect to the Direct Contracts
overpayments to Kaiser’s mistake as to whether those contracts
basis of the claim is not the claimant’s statement to the
defendant that he is performing ‘under protest,’ ‘without
prejudice,’ or the like. The reason for restitution is that the
claimant has performed under compulsion, conferring a benefit to
which the defendant was not entitled under the contract.”
Steinman, supra, 185 Cal.App.4th 1550 merely shows that, where
the reason for the claimed involuntariness of a payment of an
illegal claim is that the payment was made under protest or a
reservation of rights (that is, under compulsion), the payor must
also establish something more, including enforcement by
coercion. (Id. at p. 1558.)
52
remained effective as “a legal or factual mistake,” Prime contends
a voluntary payment made under a mistake of law cannot be
recovered: “[I]f Kaiser actually made a mistake of law regarding
the contracts’ termination date,” Prime argues, “that mistake
does not allow it to recover.” Prime relies on a 1931 Supreme
Court case, Westman v. Dye (1931) 214 Cal. 28, 32, and a 1949
Fourth District case, Draper v. Grant (1949) 91 Cal.App.2d 566,
571, neither of which involves a claim for restitution based on
unjust enrichment.
The statement from Westman v. Dye, supra, 214 Cal. 28 on
which Prime relies was a quotation from Harralson v. Barrett
(1893) 99 Cal. 607, 611, which held, if a borrower “‘voluntarily
fulfills his promise to pay interest, it is through a mistake of law
on his part or a waiver of a known right. In either case he is
bound by his own act.’” (Westman, at p. 32.) As explained by the
Westman Court, the Harralson case arose under a section of the
California Constitution repealed in 1906. (Westman, at p. 31.)
Westman itself did not rely on the voluntary payment doctrine or
any distinction between mistakes of law or fact. To the contrary,
the Westman Court, in interpreting usury law applicable to a
defendant’s claim for a refund of excessive (usurious) interest,
declined to apply the rule recognized in other states barring
recovery of usurious interest voluntarily paid and instead held
the defendant was entitled to set off his interest payments
against his principal debt. (Westman, at pp. 30, 34-37; see Stock
v. Meek (1950) 35 Cal.2d 809, 817-818.) The Supreme Court
years later in Stock v. Meek (which, like Westman, also involved a
claim for refund of usurious interest paid) held, “‘[V]oluntary’
payments of interest do not waive the rights of the payors,” and
distinguished Harralson v. Barrett as “not in point” because it
53
“involved a constitutional provision of limited applicability.”
(Stock, at p. 817.)
More importantly, “‘the more modern doctrine [is] that
mistakes of law and fact should be treated alike.’” (Willis v. Bank
of America (1973) 33 Cal.App.3d 745, 752; accord, First Sav. &
Loan Assn. v. Bank of America (1970) 4 Cal.App.3d 393, 395
[“The Bank correctly points out that the older California cases
made a distinction between a mistake of law and a mistake of
fact, and allow restitution only for mistakes of fact. However, the
recent California cases appear to be following the more modern
doctrine that mistakes of law and fact should be treated alike”];
see 1 Witkin, supra, § 1059, p. 1107 [“Under the modern view,
both in contract and quasi-contract actions recovery may be had
for payment under mistake of law as well as mistake of fact”];
Rest.3d, § 5 [“A transfer induced by invalidating mistake is
subject to rescission and restitution”; “[a]n invalidating mistake
may be a misapprehension of either fact or law”], com. g [“The
present section rejects any distinction between mistake of fact
and mistake of law, adopting a conclusion reached long ago by
the better-reasoned American decisions. The old distinction
between mistake of fact and mistake of law is repudiated because
[among other reasons] it has always been theoretically
unsound”].)
Prime also contends in its reply brief Kaiser had
“knowledge of the facts” because it knew Prime claimed the
relevant contracts at issue for the challenged overpayment
categories (the Direct Contracts and, for the Vanguard
overpayments, the letter agreement) were not in effect. Despite
the knowledge of the dispute, it argues, Kaiser paid without
reserving its rights and thus cannot recover its overpayments
54
notwithstanding its claim of mistake. In support of that
argument Prime relies on a single-sentence partial quotation
from the Restatement Third, section 6, comment e: “A more
appropriate statement of the voluntary payment rule . . . is that
money voluntarily paid in the face of a recognized uncertainty as
to the existence or extent of the payor’s obligation to the
recipient may not be recovered, on the ground of ‘mistake,’ merely
because the payment is subsequently revealed to have exceeded
the true amount of the underlying obligation.”
However, whether a payor decides to act in the face of a
recognized uncertainty is only relevant to show the payor has
“consciously assumed the risk” of the mistake. (See Rest.3d, § 5.)
In the language omitted by Prime, the Restatement Third,
section 6, comment e continues, “Because a payor in a business
setting will not gratuitously assume the risk of a recognized
uncertainty as to either the fact or the extent of its liability, a
‘voluntary’ overpayment within the meaning of the voluntary
payment rule will normally occur in the context of a payment
made to settle a claim. Where the terms of settlement involve an
explicit compromise of an uncertain liability, the contractual
mechanism by which a risk of uncertainty is allocated to the
payor is transparent. But there may be settlement even in the
absence of compromise. If a disputed claim is paid in full,
notwithstanding a recognized uncertainty as to the existence or
extent of the payor’s liability, the payor has typically made a
conscious decision that the anticipated cost of resisting the claim
exceeds the amount of the demand. Payment under these
circumstances is ‘voluntary’ to the extent that the settlement is
voluntary.” Comment e clarifies the voluntary payment rule does
not “bar a restitution claim to recover a mistaken payment,
55
notwithstanding that payment was made by way of settlement,
where the mistake in question is not one of the uncertainties that
the parties’ transaction was understood to settle.” It also states,
“The [voluntary payment] rule does not . . . impute knowledge of
relevant circumstances of which the payor is not in fact aware,
describing as ‘voluntary’ a payment that was actually the
consequence of negligence or inadvertence.”30
Here, payment at the letter agreement rates (or the rates
under the relevant contracts for the Direct Contracts
overpayment category) conformed to Kaiser’s own position that
the letter agreement was still in effect, not in acquiescence to
Prime’s contrary view, and not as part of any settlement.31
Kaiser’s being aware Prime disputed the agreements were still in
effect is not the same as Kaiser’s knowing the agreements had
terminated but continuing to pay according to the letter
agreement rates nonetheless.
30 As a general rule, a “claim in restitution is not affected by
the claimant’s negligence, because rights of ownership are not
dependent on the owner’s degree of care.” (Rest.3d, § 5, com. f;
see id., § 5 [“[a] claimant does not bear the risk of a mistake
merely because the mistake results from the claimant’s
negligence”].)
31 Recognizing this distinction, the panel rejected Kaiser’s
claims for overpayments for improper billings where, knowing it
lacked full information and recognizing the uncertainty of the
propriety of Prime’s charges, Kaiser nevertheless paid those
charges in the absence of any compulsion or obligation to do so
despite contending they were improper. The panel determined
Kaiser’s overpayment claims with regard to those charges were
barred as voluntary payments.
56
iii. Direct Contracts overpayments: background
In 2006 and 2008 Prime acquired three hospitals having
agreements with Kaiser (the Direct Contracts). Prime argued it
never assumed those contracts; Kaiser argued the contracts
bound Prime after the acquisition. Kaiser paid post-acquisition
claims at the three hospitals at the contract rates; Prime
contended it was entitled to its full billed charges either as a
penalty or as reflective of reasonable value. The panel found
Prime never assumed the contracts. Kaiser sought restitution of
the difference between the Direct Contracts rates it paid and
reasonable value.
As discussed, the panel found Kaiser was “operating under
a legal or factual mistake,” believing the Direct Contracts
remained in effect after the acquisition and, in reliance on that
mistaken belief, paying Prime at the contract rates, although
Kaiser was actually obligated to pay only reasonable value. The
panel concluded the voluntary payment doctrine thus did not
preclude Kaiser from recovering in restitution the difference
between its payments and reasonable value, as determined by
the panel.
iv. Reasonable and Customary overpayments:
background
In the final arbitration award the panel explained Kaiser
sought restitution for the difference between amounts Kaiser
paid applying its reasonable and customary methodology and
reasonable value as found by the panel. The panel concluded “it
cannot reasonably be said that Kaiser acted voluntarily” and the
57
voluntary payment doctrine did not bar Kaiser from recovering
restitution damages of that difference.
In determining whether Kaiser’s payments were voluntary,
the panel found Kaiser “lacked critical information” for a
reasonable value determination at the time of its payments:
Kaiser had developed its reasonable and customary methodology
in the absence of information, including “rates that Prime
accepted from other payors,” that became available only through
discovery in the parties’ litigation preceding the arbitration. The
panel also found Kaiser had made payments under its reasonable
and customary methodology under legal compulsion because the
Knox-Keene Act requires a health plan to make payment using
that methodology “within short prompt-pay periods.” Kaiser thus
had “no legal alternative” to making payments under its
methodology pending a judicial or arbitration determination of
reasonable value.
v. Kaiser’s Direct Contracts and Reasonable and
Customary overpayments are not subject to the
voluntary payment doctrine
Prime asserts the same arguments—Kaiser cannot recover
payments voluntarily made where it reserved no rights and was
not acting under duress—for the Direct Contracts and
Reasonable and Customary overpayments. For the reasons
discussed with respect to the post-April 30, 2010 Vanguard
overpayments at letter agreement rates, we reject those
arguments.
In addition, as to the Reasonable and Customary
overpayments, Prime makes additional arguments in its reply
brief challenging the panel’s finding that Kaiser lacked essential
information: It argues Kaiser had contended in litigation its
58
reasonable and customary methodology was “fully adequate,”
controlled all “inputs going into that calculation,” and made “its
own, unilateral decision about how much to reimburse.” Prime
forfeited those arguments not only for failure to raise them in its
opening appellate brief (see, e.g., Nolte v. Cedars-Sinai Medical
Center, supra, 236 Cal.App.4th at pp. 1409-1410) but also for
failure to support them with citations to the record and pertinent
legal authority (see Centex Homes v. St. Paul Fire & Marine Ins.
Co. (2018) 19 Cal.App.5th 789, 796-797 [reviewing court may
treat argument as forfeited when appellant fails to provide record
citations supporting its contentions]; Cahill v. San Diego Gas &
Electric Co. (2011) 194 Cal.App.4th 939, 956 [“‘[t]he absence of
cogent legal argument or citation to authority allows this court to
treat the contention as waived’”]). Moreover, Prime fails to show
its arguments concerning the state of Kaiser’s knowledge of
relevant information constitute anything other than a
nonreviewable challenge to a factual finding by the panel.
5. Prime’s State Law Claims Relating to Services Provided
to Kaiser’s Medicare Advantage Members Are Preempted
a. Procedural background
i. Kaiser’s summary adjudication motion and the
panel’s Medicare Advantage partial final award
The Medicare Advantage program permits Medicare
beneficiaries (individuals 65 years of age or older and certain
persons with disabilities) to receive Medicare benefits through
privately managed health care plans. Medicare Advantage
organizations like Kaiser are paid a monthly fee for beneficiaries
who enroll in a Medicare Advantage plan.
In May 2015 Kaiser moved in the arbitration for summary
adjudication of Prime’s state law claims based upon services
59
provided to Kaiser’s Medicare Advantage members. Kaiser
argued Prime could not pursue those claims in the arbitration
because they were preempted by the Medicare Act and also
argued Prime could not pursue those claims in federal court
without first exhausting federal administrative remedies.32
Relying on the “broad preemption clause” of Part C of the
Medicare Act set forth at 42 United States Code section 1395w-
26(b)(3), Kaiser argued Prime’s claims were preempted because
they depend on standards created by the Centers for Medicare &
Medicaid Services (CMS), the agency within the United States
Department of Health and Human Services tasked with
administering the Medicare Advantage program.
In its opposition papers Prime described the substantive
basis for its Medicare Advantage claims, explaining, with
numerous citations to provisions of both the Health and Safety
Code and federal statutes, its various legal obligations.
According to Prime, it is required by California and federal law to
provide a medical screening examination to determine whether
an individual who presents at one of its emergency departments
has an emergency medical condition; provide medical treatment
to stabilize the condition if the physician decides the individual
has one; and provide that care whether or not the individual is
able to pay and may not ask about the individual’s insurance
status or ability to pay “until the emergency medical condition
has been stabilized.” Again citing both state and federal law,
32 In their arbitration agreement the parties agreed “that, as
to the Medicare Advantage claims, the arbitrators will be
empowered to determine whether those claims should be
dismissed based on federal preemption and/or exhaustion of
administrative remedies.”
60
Prime stated health plans must reimburse hospitals for the care
necessary to stabilize the individual’s emergency medical
condition as long as that care was actually provided and, in the
absence of a contract between the hospital and the plan, utilize
reimbursement rates set by California and federal law for the
emergency medical care provided. Prime also advised the panel
that, under California and federal law, “health plans are
prohibited from requiring that emergency medical care be pre-
authorized” “or from requiring members to seek emergency
medical care at a preferred or any particular hospital.” “[T]he
sole authority to determine stability is vested in the treating
physician, and that determination is binding on the health plan,”
Prime averred. Finally, Prime asserted the reimbursement rates
on Prime’s Medicare Advantage claims were undisputed.
Prime argued in its summary adjudication opposition that
“these laws and policies are directly at issue in this case: Kaiser
refused to vest proper authority in the treating physician,
denying claims as ‘unauthorized,’ based on Kaiser’s unilateral
decision in hindsight that the patients were not in need of
emergency services as defined under California law and
EMTALA.” Prime explained, “Prime’s claims are based on
Kaiser’s systematic policy of ignoring the determinations made by
treating physicians at Prime hospitals that patients were not
stable to be transferred to Kaiser hospitals for purely financial
reasons.” Prime continued, “Kaiser used this policy, and its tactic
of bullying non-Kaiser physicians to transfer patients to Kaiser
hospitals to reduce costs,” to “refuse[] to pay for the emergency
treatment, claiming that in its unilateral post hoc review, the
patients were stable for transfer.” “Thus, questions regarding
whether emergency care was required and when patients were
61
stable to be transferred for purely financial reasons will be
governed and resolved by California law and EMTALA.”33 Prime
asserted the consistency of the “Medicare law” with state law and
EMTALA on the issues did not convert a state law claim into one
arising from Medicare.
Prime in its opposition argued its claims were not subject to
administrative exhaustion; complete preemption was inapplicable
to the case; and there was no field, conflict, implied or express
preemption. With regard to express preemption, Prime, among
other matters, argued only “positive state enactments”—that is,
state statutes and administrative regulations—were subject to
preemption and its state common law claims were thus not
expressly preempted.
In a September 8, 2015 partial final award the panel
determined Prime’s claims were not preempted and were not
subject to exhaustion of administrative remedies.
Kaiser, after an unsuccessful petition to vacate the
September 2015 Medicare Advantage partial final award in
superior court, appealed the superior court’s “judgment”
confirming the partial final award. In a published opinion
(Kaiser Foundation Health Plan, Inc. v. Superior Court (2017)
13 Cal.App.5th 1125) this court held we lacked jurisdiction to
consider the appeal and, construing Kaiser’s papers as a petition
for extraordinary writ, issued a peremptory writ of mandate
33 Internal footnotes have been omitted. In those footnotes,
Prime cited California and federal statutory provisions setting
forth the definitions for “emergency medical condition” and
“stabilized” or “[t]o stabilize,” as well as Health and Safety Code
section 1317.2, which provides the conditions for transfer from
one hospital to another of a person needing emergency services.
62
directing the superior court to vacate its judgment confirming the
partial final award and to enter a new order dismissing Kaiser’s
petition to vacate the award.
ii. Kaiser’s motion for reconsideration
On October 9, 2017 Kaiser moved in the arbitration for
reconsideration of the partial final award regarding the Medicare
Advantage claims. Kaiser explained the parties’ dispute
concerned whether the patients’ medical conditions had been
stabilized at the time services were rendered: Kaiser contended
Prime provided services after the patients had been stabilized
and Prime’s services were thus not covered by Medicare
Advantage; Prime asserted it provided services prior to patient
stabilization and its services were covered and should have been
paid. Kaiser represented, if the services were appropriately
prestabilization services, the parties agreed the services would be
covered, with Medicare setting the payment rate.
Kaiser argued the panel should reconsider its Medicare
Advantage partial final award on the ground, in the two years
since the award, federal and state courts had issued new opinions
establishing preemption and administrative exhaustion apply to
Prime’s Medicare Advantage claims. Kaiser also argued
reconsideration was warranted because of Prime’s subsequent
positions in the arbitration and in other litigation acknowledging
that Medicare Advantage regulations were crucial to its Medicare
Advantage claims.
In its opposition Prime asserted, with regard to express
preemption, although “an applicable Medicare standard may
preempt state law,” the panel had properly concluded there was
no such standard here. Prime contended, “Rather, . . the
applicable standards are found in EMTALA. EMTALA is not
63
part of Medicare Part C, and thus could not preempt Prime’s
claims.” Prime stated EMTALA, not Medicare Part C, provided
the standard for determining stability. Prime also argued the
regulatory provisions relied upon by Kaiser govern the relations
between CMS and the Medicare Advantage organization and do
not impact the provider. It further pointed out one of the CMS’s
regulatory provisions on which Kaiser relied was identical to
state law.
iii. The Medicare Advantage second amended interim
award
In a February 2018 second amended interim award
regarding Prime’s Medicare Advantage claims the panel, in a
two-to-one decision, ruled it lacked jurisdiction over Prime’s
Medicare Advantage claims both because Prime had failed to
exhaust its administrative remedies and because the claims were
expressly preempted by Medicare Part C standards.34
iv. The final arbitration award’s dismissal of, and
subsequent superior court proceedings regarding,
Prime’s Medicare Advantage claims
The final arbitration award dismissed Prime’s Medicare
Advantage claims for lack of jurisdiction. The parties briefed and
argued the issues of administrative exhaustion and preemption
in connection with Kaiser’s petition to confirm the arbitration
award and Prime’s petition to vacate it. In its order granting
Kaiser’s and denying Prime’s petition, the superior court
34 The arbitration agreement provided the arbitrators “shall
have the power to grant all legal and equitable remedies
available to the Parties under California law” and did not
mention any power of the panel to grant remedies under federal
law.
64
concluded, with respect to Prime’s claims for services rendered to
Kaiser Medicare Advantage members, the claims were subject to
exhaustion and the state law claims were preempted.
b. General principles of preemption
The United States Supreme Court has traditionally
recognized preemption of state law by federal enactments
pursuant to the supremacy clause (U.S. Const., art. VI, cl. 2) in
three circumstances: (1) express preemption; (2) implied (or field)
preemption; and (3) conflict preemption. (English v. General
Electric Co. (1990) 496 U.S. 72, 78-79.) Express preemption,
which is pertinent here, exists when Congress defines the extent
to which its enactments will displace state law. (Id. at p. 78;
Pacific Gas & Elec. Co. v. State Energy Res. Conservation & Dev.
Comm’n (1983) 461 U.S. 190, 203-204 [“[i]t is well established
that within constitutional limits Congress may pre-empt state
authority by so stating in express terms”].) “If a federal law
contains an express pre-emption clause, it does not immediately
end the inquiry because the question of the substance and scope
of Congress’ displacement of state law still remains.” (Altria
Group, Inc. v. Good (2008) 555 U.S. 70, 76.)
Preemption analysis generally begins with a presumption
against preemption, that is, “with the assumption that the
historic police powers of the States were not to be superseded by
the Federal Act unless that was the clear and manifest purpose of
Congress.” (Rice v. Santa Fe Elevator Corp. (1947) 331 U.S. 218,
230; accord, Altria Group, Inc. v. Good, supra, 555 U.S. at p. 77.)
“This assumption provides assurance that ‘the federal-state
balance’ [citation] will not be disturbed unintentionally by
Congress or unnecessarily by the courts.” (Jones v. Rath Packing
Co. (1977) 430 U.S. 519, 526.) When the text of a federal law
65
containing a preemption clause is open to more than one
plausible interpretation, courts ordinarily “accept the reading
that disfavors pre-emption.” (Bates v. Dow Agrosciences, LLC
(2005) 544 U.S. 431, 449; accord, Altria Group, Inc., at p. 77;
Brown v. Mortensen (2011) 51 Cal.4th 1052, 1064.)
Federal laws may preempt state common law as well as
state legislation. (Riegel v. Medtronic, Inc. (2008) 552 U.S. 312,
324-325 [“in the context of this legislation excluding common-law
duties from the scope of pre-emption would make little sense.
State tort law that requires a manufacturer’s catheters to be
safer, but hence less effective, than the model the FDA has
approved disrupts the federal scheme no less than state
regulatory law to the same effect. Indeed, one would think that
tort law, applied by juries under a negligence or strict-liability
standard, is less deserving of preservation”]; Cipollone v. Liggett
Group, Inc. (1992) 505 U.S. 504, 521; see Jessen v. Mentor Corp.
(2008) 158 Cal.App.4th 1480, 1487, fn. 5.)
c. The Medicare Act
“The Medicare Act, 42 United States Code section 1395
et seq. . . . established a federally subsidized health insurance
program that is administered by the Secretary of Health and
Human Services (the Secretary).” (McCall v. PacifiCare of Cal.,
Inc. (2001) 25 Cal.4th 412, 416.) “Under the Medicare Act, Title
XVIII of the Social Security Act, . . . the Secretary . . . reimburses
the providers of covered health services to Medicare beneficiaries,
see §§ 1395f(b)(1), 1395h, 1395x(v)(1)(A).” (Your Home Visiting
Nurse Services, Inc. v. Shalala (1999) 525 U.S. 449, 450-451.)
Enacted in 1965 (Azar v. Allina Health Services (2019) ___ U.S.
___ [139 S.Ct. 1804, 1808]), “[t]he Medicare Act [was] divided into
two parts. Part A provides insurance for hospital and related
66
posthospital services. [Citations.] Part B provides a voluntary
program of supplementary medical insurance covering, in
general, 80% of the reasonable costs of certain other services,
primarily physicians services and medical supplies.” (Schweiker
v. McClure (1981) 452 U.S. 1301, 1301-1302.)
“[T]he Balanced Budget Act of 1997 [BBA] (Pub. L. 105-33)
. . . establish[ed] a new Part C of the Medicare program, known
as the Medicare+Choice (M+C) program,” in which “every
individual entitled to Medicare Part A and enrolled under
Medicare Part B . . . could elect to receive benefits either through
the original Medicare program or an M+C plan,” subject to
exceptions. (69 Fed.Reg. 46866, 46868 (Aug. 3, 2004).) “The BBA
authorized [CMS] to contract with private organizations offering
a variety of private health plan options for beneficiaries.” (Ibid.)
In 1997 Part C included a preemption clause that provided,
“(A) IN GENERAL.—The standards established under this
subsection shall supersede any State law or regulation (including
standards described in subparagraph (B)) with respect to
Medicare+Choice plans which are offered by Medicare+Choice
organizations under this part to the extent such law or regulation
is inconsistent with such standards. [¶] (B) STANDARDS
SPECIFICALLY SUPERSEDED.—State standards relating to
the following are superseded under this paragraph: [¶] (i) Benefit
requirements. [¶] (ii) Requirements relating to inclusion or
treatment of providers. [¶] Coverage determinations (including
related appeals and grievance processes).” (Pub.L. No. 105-33,
§ 1856(b)(3) (Aug. 5, 1997) 111 Stat. 251.)35
35 Congress again amended the Part C preemption clause in
2000 by inserting the parenthetical “(including cost-sharing
requirements)” after the reference to “Benefit requirements” in
67
Subsequently, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the 2003 Medicare
Modernization Act) replaced the Medicare+Choice program with
the Medicare Advantage program under Part C of Medicare.
(69 Fed.Reg. 46866, 46867 (Aug. 3, 2004); Pub.L. No. 108-173,
§ 201 (Dec. 8, 2003) 117 Stat. 2066 [“any reference to
‘Medicare+Choice’ is deemed a reference to ‘Medicare Advantage’
and ‘MA,’” and “any reference to ‘Medicare Advantage’ or ‘MA’
shall be deemed to include a reference to ‘Medicare+Choice’”]; see
Azar v. Allina Health Services, supra, ___ U.S. ___ [139 S.Ct. at
p. 1809] [“Congress created ‘Medicare Part C,’ sometimes referred
to as Medicare Advantage”].) Generally, under the Medicare
Advantage program, “all beneficiaries . . . have a choice in how
they get their Medicare benefits, whether through a Medicare
Advantage plan [under Medicare Part C] or the traditional fee-
for-service program” under Medicare Parts A and B. (69 Fed.Reg.
46867; see 42 U.S.C., §§ 1395w-21—1395w-22.)
The 2003 Medicare Modernization Act amended the Part C
preemption clause to provide the current language:
“(3) RELATION TO STATE LAWS.—The standards established
under this part shall supersede any State law or regulation
(other than State licensing laws or State laws relating to plan
solvency) with respect to [Medicare Advantage] plans which are
offered by [Medicare Advantage] organizations under this part.”
(Pub.L. No. 108-173, § 232 (Dec. 8, 2003) 117 Stat. 2066;
subparagraph (B)(i) and by adding a new subparagraph (B)(iv):
“(iv) Requirements relating to marketing materials and
summaries and schedules of benefits regarding a
Medicare+Choice plan.” (Pub.L. No. 106-554, § 614 (Dec. 21,
2000) 114 Stat. 2763.)
68
42 U.S.C. § 1395w-26(b)(3).) It is this provision upon which
Kaiser bases its preemption argument.
d. Prime’s Medicare Advantage state law claims were
expressly preempted
On appeal Prime contends the panel (and superior court)
erred in concluding its state law claims relating to services
provided to Kaiser’s Medicare Advantage members were
preempted given the presumption against preemption and the
absence of a showing that Congress clearly intended to preempt
state laws as applicable to its claims. Relying on Cotton v.
StarCare Medical Group, Inc. (2010) 183 Cal.App.4th 437(Cotton) and Yarick v. PacifiCare of California (2009)
179 Cal.App.4th 1158 (Yarick), Prime argues courts have
construed narrowly the Medicare Part C preemption clause on
which Kaiser relies (42 U.S.C. § 1395w-26(b)(3)) and have
rejected Kaiser’s proposed broad preemption of common law
remedies. Prime asserts the Secretary’s guidance confirms
Medicare Part C standards do not preempt state common law
contract claims between providers and Medicare Advantage
organizations like Kaiser. Finally, Prime argues Roberts v.
United Healthcare Services, Inc. (2016) 2 Cal.App.5th 132(Roberts), on which the panel and superior court relied to
conclude Prime’s state claims are preempted, is factually
distinguishable, did not address the Secretary’s guidance and
fails to follow what Prime asserts is the proper preemption
analysis of Yarick and the duty to accept any plausible reading of
a clause disfavoring preemption.
As indicated by Prime’s description of the substantive basis
for its claims when it opposed Kaiser’s summary adjudication
motion, Prime relies in substantial part on California law for the
69
resolution of its claims in an area in which Medicare Part C
regulations have established standards. Specifically, by
regulations the Secretary (through CMS) promulgated under
part 422 of title 42 of the Code of Federal Regulations, the
Secretary has “establishe[d] standards and set[] forth the
requirements, limitations, and procedures for Medicare services
furnished, or paid for, by Medicare Advantage organizations
through Medicare Advantage plans” (42 C.F.R. § 422.1(b)),
including standards governing whether the Medicare Advantage
organization may be financially responsible for emergency
services regardless of whether there is prior authorization for
such services (42 C.F.R. § 422.113(b)(2)(ii)); whether the
Medicare Advantage organization may be financially responsible
regardless of whether its members obtain such services at a
hospital within or outside the organization (42 C.F.R.
§ 422.113(b)(2)(i)); and whether the physician treating the plan
enrollee must determine when the enrollee may be considered
stabilized for transfer and whether that determination is binding
on the Medicare Advantage organization (42 C.F.R.
§ 422.113(b)(3)). In addition, the Secretary has promulgated
standards defining covered emergency services as those “needed
to evaluate or stabilize an emergency medical condition”
(42 C.F.R. § 422.113(b)(1)(ii)(B)) and providing a definition for
“[e]mergency medical condition” (42 C.F.R. § 422.113(b)(1)(i)).
The Secretary has also promulgated standards governing a
Medicare Advantage organization’s financial responsibility for
post-stabilization care services (42 C.F.R. § 422.113(c)), including
providing a definition of such services (ibid.), as well as a
Medicare Advantage organization’s obligation to pay for
emergency services provided by noncontracting providers
70
(42 C.F.R. § 422.100(b)). Prime’s state common law claims
relating to services provided to Kaiser’s Medicare Advantage
members are thus expressly preempted under the plain language
of Medicare Part C’s express preemption clause. (See Roberts,
supra, 2 Cal.App.5th at pp. 139, 143 [determining, in a lawsuit
resting primarily on claims that plan marketing materials
misrepresented the scope of in-network services and thus the
likely copayments due, Medicare Part C standards governing the
content of a Medicare Advantage plan’s marketing materials and
adequacy of its network preempted state common law claims
(with respect to Medicare Advantage plan), which did not deal
with licensing or plan solvency].)
Prime attempts to avoid the inevitable consequence of its
reliance on state law standards as an element of its Medicare
Advantage claims by asserting the Secretary has issued guidance
indicating common law contract claims are not preempted.
Specifically, Prime relies on the following statements by CMS in
promulgating the regulation containing an express preemption
clause applicable to Medicare Part D plans (42 C.F.R.
§ 423.440(a)), which is substantially the same as the Medicare
Part C preemption clause: “In areas where we have neither the
expertise nor the authority to regulate, we do not believe that
State laws would be superseded or preempted. For example,
State environmental laws, laws governing private contracting
relationships, tort law, labor law, civil rights laws, and similar
areas of law would, we believe, continue in effect. . . . Rather, our
Federal standards would merely preempt the State laws in the
areas where . . . Congress intended us to regulate.” (70 Fed.Reg.
4194, 4319 (Jan. 28, 2005).)
71
Here, however, Prime acknowledged in its oppositions to
Kaiser’s motions for summary adjudication and for
reconsideration that it relies for resolution of its claims on
California law in an area also covered by Medicare Part C
standards. Indeed, for its implied-in-law contract cause of action
Prime at paragraph 189 of the first consolidated complaint
alleged the “terms of this implied-in-law contract are established
by several California statutes and regulations and certain federal
statutes and regulations”36 requiring Kaiser “to timely pay for
emergency and authorized post-stabilization medical services
ordered by a treating physician.” As discussed, those are issues
governed by Medicare Part C standards, which preempt any
otherwise applicable state law relied upon by Prime.37
Prime also quotes from an amicus curiae letter brief filed
by the United States government (including the Secretary) in a
36 The only California statutes and regulations specifically
identified as establishing the terms of the implied-in-law contract
were Health and Safety Code sections and a regulation
promulgated under the Knox-Keene Act. The only federal
statutes and regulations specifically mentioned were Medicare
Part C regulations (42 C.F.R. §§ 422.113(b)(2) and 422.214) and
EMTALA. Prime on appeal does not challenge the panel’s
conclusion that “Prime could not base its claim on EMTALA
because EMTALA does not require Kaiser to pay anything,” and
(2) “EMTALA indeed was incorporated into Part C.”
37 As for any arguments relying on any implied-in-fact
contract claim to the extent not forfeited for failure to raise in the
arbitration proceedings, they too lack merit, given Prime’s
description of the substantive basis for its claims in its summary
adjudication opposition papers.
72
federal lawsuit38 to support its argument private state law
contract claims are not preempted: “It is the Secretary’s view
that Medicare Part C statutory and regulatory standards do not
address whether [a Medicare Advantage organization’s] course of
conduct may establish an implied contract with its out-of-network
providers as to payment rates.” Resolution of that contract claim
did not depend on applying Medicare Part C standards or any
state law in an area governed by such standards. As the
Secretary expressly observed, the plaintiffs neither contended it
was the Medicare Act or federal regulations that entitled them to
more than the original Medicare rate nor brought their claims
under state laws purporting to regulate health plans; rather, the
plaintiffs argued defendants had agreed to pay them at a rate
above the original Medicare rate. The Secretary stated, “In short,
where federal regulations do not establish a governing standard,
there is no preemption.”
As for the general presumption against preemption, as
Division Two of this court stated in Roberts, supra, 2 Cal.App.5th
at page 143, “the plain language of section 1395w-26(b)(3)
[Medicare Part C’s preemption clause] plainly spells out
Congress’s intent that the standards governing Medicare
Advantage plans will displace ‘any State law or regulation’ except
for State laws regarding licensing or plan solvency.” In addition,
the legislative history of the 2003 Medicare Modernization Act
demonstrates Congress’s clear intent to broaden the scope of the
preemption clause. Stating Medicare law at the time preempted
38 The amicus curiae letter brief was filed on March 14, 2016
in the lawsuit Ohio State Chiropractic Assn. v. Humana Health
Plan Inc., United States Court of Appeals for the Sixth Circuit,
Case No. 15-3130.
73
state law or regulation only “to the extent they are inconsistent
with federal requirements imposed on M+C plans, and
specifically, relating to benefit requirements, the inclusion or
treatment of providers, and coverage determinations (including
related appeals and grievance processes),” the Conference Report
accompanying the bill explained Medicare Advantage standards
“would supersede any state law or regulation” (with the exception
of state licensure laws and state plan-solvency laws) with respect
to Medicare Advantage plans offered by Medicare Advantage
organizations. (H.R.Rep. No. 108-391, 1st Sess., pp. 1, 556
(2003).) The Conference Report continued, “The conference
agreement clarifies that the [Medicare Advantage] program is a
federal program operated under Federal rules. State laws, do
not, and should not apply, with the exception of state licensing
laws or state laws related to plan solvency. There has been some
confusion in recent court cases.” (Id. at p. 557.)
CMS has also explained that, prior to the enactment of the
2003 Medicare Modernization Act, “[t]he presumption was that a
State law was not preempted if it did not conflict with an M+C
requirement, and did not fall into one of the four specified
categories where preemption was presumed”; however, CMS
“concluded that the [2003 Medicare Modernization Act] reversed
this presumption and provided that State laws are presumed to
be preempted unless they relate to licensure or solvency.”
(70 Fed.Reg. 4194, 4319 (Jan. 28, 2005).) CMS also referred to
“Congress’ intent that the [Medicare Advantage] program, as a
Federal program, operate under Federal rules” and interpreted
the Conference Report “as making clear . . . Congress’ intent to
broaden the scope of preemption.” (Ibid.; see also 69 Fed.Reg.
46866 (Aug. 3, 2004) at p. 46880 [“Congressional intent is now
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unambiguous in prohibiting States from exercising authority over
[Medicare Advantage] plans in any area other than State
licensing laws and State laws relating to plan solvency”] and
pp. 46926-46927 [“In 2003, section 232(a) of the [2003 Medicare
Modernization Act] . . . broadened Federal preemption of State
standards to broadly apply preemption to all State law or
regulation (other than State licensing laws or State laws relating
to plan solvency)”; the 2003 Medicare Modernization Act “revision
relieves uncertainty of which State laws are preempted by
‘preempting the field’ of State laws other than State laws on
licensing and solvency”].)
With respect to Prime’s reliance on Yarick, supra,
179 Cal.App.4th at pages 1165-1166, in which the Fifth District
stated the language used in the Medicare Part C preemption
clause is “usually . . . interpreted to preempt only ‘positive state
enactments,’ that is, laws and administrative regulations, but not
the common law,” and Cotton, supra, 183 Cal.App.4th at
pages 450-451, in which the Fourth District agreed with Yarick,
to support its position the Medicare Part C preemption clause did
not displace Prime’s state common law remedies, we decline to
follow those cases for the reasons articulated in Roberts, supra,
2 Cal.App.5th at pages 145-147: Yarick’s holding that Part C’s
preemption clause reaches only positively enacted state laws and
regulations and Cotton’s holding that Part C’s preemption clause
only reaches laws specifically targeting Medicare Advantage
plans are inconsistent with, and analyses rejected by, the
Supreme Court in Riegel v. Medtronic, Inc., supra, 552 U.S. 312.
The Roberts court also discounted Yarick’s reliance on
Sprietsma v. Mercury Marine (2002) 537 U.S. 51, finding that
decision not “relevant” to the determination of the scope of
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Medicare Advantage preemption. (Roberts, supra, 2 Cal.App.5th
at pp. 145-146.) In Sprietsma the Supreme Court concluded the
language of the Federal Boat Safety Act of 1971’s express
preemption clause (which provided in part, “[A] State . . . may not
establish, continue in effect, or enforce a law or regulation
establishing a recreational vehicle or associated equipment
performance or other safety standard”) “is most naturally read as
not encompassing common-law claims.” (See Sprietsma, at
pp. 58-64.) Prime points out, although Roberts determined two of
Sprietsma’s three reasons for its holding did not apply to the
Medicare Part C preemption clause (the use of the article “a”
before “law or regulation” in the Boat Safety Act clause’s
language and the existence of a saving clause),39 the Roberts
court acknowledged the remaining basis for limiting the scope of
preemption did apply: “the concern that the word ‘regulation’
‘might’ be superfluous if the word ‘law’ were read broadly to reach
all positive and common law enactments.” (Roberts, at p. 146.)
While Roberts concluded that concern regarding the potential for
surplusage was “too thin a reed upon which to leave all common
law actions intact when doing so . . . would disrupt the efficacy of
[CMS’s] preapproval of marketing materials and plan coverage”
39 The Supreme Court explained, “[T]he article ‘a’ before ‘law
or regulation’ implies a discreteness—which is embodied in
statutes and regulations—that is not present in the common
law.” (Sprietsma v. Mercury Marine, supra, 537 U.S. at p. 63.)
The saving clause provided, “Compliance with this chapter or
standards, regulations, or orders prescribed under this chapter
does not relieve a person from liability at common law or under
State law.” (46 U.S.C. § 4311.)
76
(ibid.), Prime contends Roberts is inapposite because the
potential for interference with the efficacy of CMS’s marketing-
and-coverage preapproval is not present here.
Prime’s attempt to distinguish Roberts misses the point.
The Roberts court expressed concern about disrupting the efficacy
of CMS’s marketing-and-coverage preapproval process because,
as it had earlier explained, the “Secretary closely regulates
Medicare Advantage health plans” and Medicare Part C
regulations include provisions that the Secretary, through CMS,
“reviews each plan to ensure that it has a ‘sufficient number and
range of health care professionals and providers willing to
provide services under the terms of the plan’” and “reviews all
‘marketing material’ used by Medicare Advantage plans prior to
their use.” (Roberts, supra, 2 Cal.App.5th at pp. 140-141.)
Similarly, here, allowing Prime’s state common law claims
relating to its Medicare Advantage member services to proceed
would interfere with the Secretary’s close regulation of Medicare
Advantage health plans by displacing or diluting through state
common law principles the Medicare Part C standards that would
otherwise have governed those claims. Moreover, as our
colleagues in Division Two explained, the “canon of statutory
construction that counsels against construing words as
surplusage,” albeit “a guide for ascertaining legislative intent,”
“is not a command,” and “[w]here . . . that canon leads to a result
at odds with the otherwise clearly expressed legislative intent,
the canon necessarily yields to that intent.” (Id. at p. 146.) The
plain language of Medicare Part C’s preemption clause, as well as
its legislative history, clearly expresses Congress’s intent that
Medicare Part C standards preempt “any” state law or regulation
(except for state licensing or plan-solvency laws) with respect to
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Medicare Advantage plans. “Sprietsma’s superfluity point,”
particularly given its “tentative nature” (Uhm v. Humana, Inc.
(9th Circ. 2010) 620 F.3d 1134, 1154), must yield to that clearly
expressed Congressional intent.
In its reply brief Prime argues Kaiser is mistaken in
contending its state common law claims regarding services
provided to Medicare Advantage members would involve “wading
into the complex Medicare regulations governing [Medicare
Advantage organization] denials and standards for determining
whether emergen[cy] care was reimbursable under 42 C.F.R.
§ 422.113” because Kaiser “fought the [Department of Health and
Human Services] and Prime on this issue, and it lost,” as
indicated in Kaiser Foundation Health Plan, Inc. v. Burwell
(N.D.Cal. 2015) 147 F.Supp.3d 897 (Burwell). Stating the federal
district court in Burwell “comprehensively analyzed the Medicare
regulations and [the Department of Health and Human
Services’s] administrative interpretations of those rules” and held
both that, “under 42 C.F.R. § 422.113,” “‘the physician “must
decide” when the enrollee may be considered stabilized and that
the determination is “binding on the [Medicare Advantage]
organization,”’” Prime insists Kaiser “cannot reopen the
‘stabilization’ issue now” under principles of collateral estoppel.
Putting aside whether Prime has forfeited this issue first raised
in its reply brief, that Kaiser may be collaterally estopped from
rearguing the stabilization issue decided on the merits based on
Medicare Part C standards in Burwell does not place Prime’s
similar state common law claims outside the scope of Part C’s
express preemption clause, but rather firmly within it.
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DISPOSITION
The judgment is affirmed. Kaiser is to recover its costs on
appeal.
PERLUSS, P. J.
We concur:
SEGAL, J.
FEUER, J.
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