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California Court Confirms that Non-Network Emergency Room Providers May Sue Health Plans That Negligently Delegate Financial Payment Responsibility to Others; but Declines to Extend the Holding to Hospital-Based Radiologists Providing Non-Emergency Care
Health Law Perspectives, May 2014
May 1, 2014

A recent California court confirmed that non-network emergency room physicians may sue an HMO for negligent delegation of the HMO’s duty to pay providers when its enrollees receive emergency care.  In Centinela Freeman Emergency Medical Associates (CFEMA) v. Health Net of California, Inc., et al. (2014) 223 Cal. App. 4th 1366, emergency room physicians who did not have a network contract with a health plan were held to have a viable case against an HMO when the HMO had delegated financial responsibility to another entity that did not pay.  The court found that a plan could be liable for negligently delegating financial responsibility to an entity that the HMO knew or should have known was financially unable to pay.  The court also recognized that the issue was not just whether the entity had been financially insolvent at the time of the HMO’s delegation, but whether the HMO should have realized that the entity subsequently had become insolvent.  

This case has significant implications for providers who do not get paid for emergency services when health plans delegate payment responsibility to entities that either cannot or will not pay what is owed.  Health plans typically have argued that the providers only recourse was to pursue payment from the delegated entity.  This case reflects that the provider may have the option to sue either the delegated entity, the health plan, or both.

Under California’s Knox-Keene Act, emergency room physicians must treat patients regardless of the patient’s ability to pay, and HMOs must reimburse providers for emergency treatment, even when the providers are not under a written contract with the HMO.  The Knox-Keene Act also allows HMOs to delegate their payment obligations to other entities. CFEMA involved a lawsuit by providers against a number of HMOs that had delegated their financial responsibility to an IPA known as La Vida.  According to the complaint, La Vida experienced financial problems, failed to reimburse physicians who provided emergency services to the HMOs’ enrollees, and ultimately ceased operating.  When La Vida's financial problems increased, the unpaid emergency physicians sought payment from the HMOs, which simply instructed the physicians to continue presenting their bills to La Vida. 

The physicians brought suit against the HMOs, alleging, among other things, negligent delegation.  The HMOs had convinced a trial court to dismiss the lawsuit at the pleading stage, but a California Court of Appeals reversed.  But the appellate court held that HMOs do have a duty to the emergency providers not to negligently delegate financial responsibility, and that this included a continuing duty to monitor the delegated entity's payment ability. 

Both the trial court and appellate court cited the duty of care factors, but reached different conclusions on how to apply those factors.  The factors cited include:  (1) the extent to which the transaction was intended to affect the plaintiffs; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant's conduct and the injury suffered; (5) the moral blame attached to the defendant's conduct; and (6) the policy of preventing future harm.  The trial court concluded that there can be no cause of action for negligence unless the alleged negligent act was intended to harm the plaintiff specifically, as opposed to a class to which the plaintiff belongs, and the trial court found no intent to harm any of the physicians specifically.  The appeals court reversed, finding critical (1) whether HMOs may delegate their reimbursement duty to any IPA regardless of the financial stability of that IPA, and (2) whether the HMOs have a duty not to delegate their reimbursement obligation to an IPA that the HMOs know, or have reason to know, is financially unable to meet that duty.  Applying the duty of care factors, the Court of Appeals held that the HMOs had a duty not to negligently delegate to entities that are financially unable to perform the HMOs’ duty to pay emergency providers.

First, CFEMA considered the extent to which the transaction was intended to affect the emergency room physicians, and found that the delegation transaction necessarily was intended to have an effect on the non-contracted emergency room physicians; it had a direct impact on whether they would receive compensation for the emergency services that they provided to the HMOs' enrollees.  In this holding, the Court of Appeals agreed with an older case that also had recognized the negligent delegation theory:  Ochs v. PacifiCare of California (2004) 115 Cal. App. 4th 782; and held that an even older case, from more than a decade ago, was incorrect to the extent that it may have held otherwise:  Desert Healthcare District v. PacifiCare FHP, Inc. (2001) 94 Cal. App. 4th 781.

CFEMA also found support in the second duty factor, which is the foreseeability of harm to the plaintiffs; the third factor, which is the degree of certainty that the plaintiff suffered injury; the fourth factor, which is the closeness of the connection between the HMOs’ conduct and the injury suffered; and the fifth factor, which is the moral blame attaching to the HMOs' conduct.  As to moral blame, the court discussed the position in which the emergency room physicians found themselves, being required to render services regardless of ability to pay, but having a legal right to be paid by the HMOs; and the position of the HMOs, which had contracted with the patients to arrange, for a price, to provide health care services, including emergency services, with the understanding that those services sometimes may end up being rendered by providers who have no written contract with the HMOs.  The CFEMA Court concluded that an HMO could not shirk its legal obligation to reimburse emergency physicians by delegating to an entity the HMO knew or had reason to know to be financially unable to meet this obligation.  This would, in effect, have resulted in the emergency physicians being forced to treat enrollees for free. 

The Court of Appeal also found support in the sixth factor, preventing future harm, which would be served by imposing a duty on HMOs not to delegate their reimbursement duty to IPAs that they know or have reason to know are financially unsound. 

At the same time, however, CFEMA considered a separate lawsuit, filed by a group of hospital-based radiologists, who sought payment from the HMOs on a similar negligent delegation theory relating to the same insolvent delegated entity.  These radiologists sought payment for both emergency and non-emergency services.  While the same theory was viable for the emergency services that these radiologists provided, the Court of Appeals found that the hospital-based radiologists did not satisfy the negligent delegation theory for the non-emergency services.  The decision found that the radiologists were compelled not by law to render non-emergency services, but rather only by their contract with the hospital.  Therefore, the hospital-based radiologists were found by the court to be in a different situation when rendering non-emergency services.

CFEMA also distinguished earlier California law that had been brought by the California Medical Association against several HMOs when another delegated entity had gone bankrupt and failed to pay physicians:  California Medical Assn. v. Aetna U.S. Healthcare of California, Inc. (2001) 94 Cal.App.4th 151.  In that older case, the physicians had entered into written contracts directly with the delegated entity, in which they had agreed to look solely to the delegated entity for payment.  By contrast, the physicians in CFEMA had no written contracts with the insolvent delegated entity.  Therefore, CFEMA rejected the attempt by the HMOs to extend the older decisions to all situations where HMOs delegated financial responsibility.

This latest California decision reflects a trend that generally has favored non-network emergency providers seeking payment, and cut back on earlier decisions that health plans have tried to use to create broad absolution from their legal duties to pay, by delegating financial responsibility without diligently making sure the delegates could perform.

For additional information or assistance, please contact Michael Houske, Glenn Solomon or Daron Tooch in Los Angeles at 310.551.8111; or the San Francisco Office at 415.875.8500; or Joseph LaMagna in San Diego at 619.744.7300.

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