In Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc., (Nov. 14, 2016, S218497) ___Cal. 5th [2016 Cal. LEXIS 9282] (hereinafter “Centinela“) the California Supreme Court was asked to determine whether a HMO health plan (“HMO”) which contractually delegated the responsibility for payment of emergency services for its plan beneficiaries to an individual practice association (“IPA”) which ultimately went out of business could be sued by emergency department physicians who were left unpaid. The California Supreme Court held that the HMO’s could be sued under two theories, (1) the negligent delegation of financial responsibility for emergency services by an HMO to an IPA which the HMO “knew or should have known was financially unsound” and (2) the negligent failure by the HMO to reassume the delegated responsibility to make payment when it knew there was “no reasonable expectation” that the IPA could make payments to the physicians.
In Centinela, plaintiffs were physician partnerships which provided emergency services at hospitals. The emergency room physicians are required by state and federal law to provide emergency services regardless of a patient’s ability to pay. Cal. Health & Saf. Code, § 1317, subds. (a), (b); 42 U.S.C. § 1395dd (b), (h). After providing such emergency services, physicians typically seek reimbursement from third party payers such as HMO’s who are statutorily obligated to pay for such services for their plan beneficiaries. Conversely, HMO’s are also permitted by statute to contract with other parties, like an IPA, to assume the responsibility to make such payments. Critically, in this case the emergency department physicians are simply third parties to the contract between the IPA and the HMO. Normally, parties to a contract have no duty to manage their financial affairs to prevent economic loss to third parties. Indeed, Plaintiff’s complaint was dismissed in the superior court after a demurrer was filed on the basis that the HMO’s had no duty to the emergency physicians when they contracted with the IPA.
Applying the six part test set forth in Biakanja v. Irving, 49 Cal.2d 647 (1958) (Biakanja), both the appellate court and the California Supreme Court held the HMO did have a duty to the plaintiffs because: (1) the transaction was intended to affect the Plaintiff – it shifted the responsibility to make payment to Plaintiffs to the IPA; (2) harm was foreseeable because the HMO had reason to believe that the IPA would not make payments to the physicians; (3) plaintiffs were actually harmed when the IPA failed to make payments and went out of business; (4) there was a close connection to the harm because the delegation transferred the risk of the IPA’s insolvency to the physicians; (5) the HMO were morally blameworthy for intentionally exposing the emergency physicians to loss (whereas the physician were NOT blameworthy because they were forced to provide emergency services to all patients); and (6) apportioning a duty will promote the policy of preventing future harm to the emergency providers by incentivizing the HMO’s to avoid such harm.
Nonetheless, after recognizing a duty of care when a HMO delegates the responsibility to make payments, the Supreme Court limited the duty of care by the HMO to reassume financial responsibility for such payments. An extensive regulatory and statutory scheme already exists in California to control risk bearing organizations (“RBO”) who have been delegated payment obligations, by among other things, requiring that HMO’s monitor that their RBO’s comply with solvency standards and correct any deficiencies through corrective action plans. Therefore, a HMO who actively participates in the regulatory scheme has no duty to immediately reassume the delegated responsibility at the first sign of financial distress. Rather, the HMO has such a duty only when it has no “reasonable expectation that its delegated RBO will be able to reimburse” emergency service claims.
If you have any questions regarding the foregoing, please contact Ronald Hodges or one of the other Shulman Bastian Friedman & Bui LLP attorneys at 949-340-3400.