Judge Bruce G. Iwasaki, Case Number: 25STCV03188, Date: 2025-05-11 Tentative Ruling

Tentative Ruling: The demurrer to the Complaint is sustained. The motion to strike is moot.

On February 5, 2025, hospital Plaintiffs Adventist Health System/West and White Memorial Medical Center, sued Defendants Heritage Provider Network Inc. and Regal Medical Group Inc. for underpaying for emergency medical services rendered in violation of the Knox-Keene Act. Plaintiffs seek reimbursement for underpayments made between January 2022 to January 2025 allegedly totaling $5,747,979.36. The Complaint alleges causes of action against Defendants for (1.) breach of an implied in law contract, (2.) breach of an implied in fact contract, (3.) violations of Business and Professions Code section 17200, and (4.) and quantum meruit.

On March 3, 2025, Defendants demurred to the second and third causes of action. Defendants also filed a motion to strike the request for injunctive relief in the third cause of action in the Complaint. Plaintiffs opposed the demurrer and motion to strike.

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading by raising questions of law. (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452.) The court “ ‘ “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law . . . .” ’ ” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) In applying these standards, the court liberally construes the complaint to determine whether a cause of action has been stated. (Picton v. Anderson Union High School Dist. (1996) 50 Cal.App.4th 726, 733.)

Defendants demur to the Second Cause of Action for Breach of Implied-In-Fact Contract on the grounds that Plaintiffs failed to allege facts sufficient to show mutual assent as to the payment terms of the purported contract. Defendants argue that Plaintiffs’ own allegations indicate there was never an agreement among the parties as to the payment rate for Plaintiffs’ services.

A contract may be written, oral or inferred from the parties’ conduct as an “implied-in-fact” contract. (Westside Estate Agency, Inc. v. Randall (2016) 6 Cal.App.5th 317, 328; see Civil Code, § 1621 [“An implied contract is one, the existence and terms of which are manifested by conduct”].) An implied contract must be founded upon an ascertained agreement of the parties to perform it. (Gorlach v. Sports Club Co. (2012) 209 Cal.App.4th 1497, 1507 [the “very heart” of an implied-in-fact agreement is “an intent to promise”].) Accordingly, an implied-in-fact contract “ ‘consists of obligations arising from a mutual agreement and intent to promise where the agreement and promise have not been expressed in words.’ ” (Retired Employees Assn. of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171, 1178; see Aton Center, Inc. v. United Healthcare Insurance Co. (2023) 93 Cal.App.5th 1214, 1230 [a claim for breach of an implied contract has the same elements as a claim for breach of a written contract, except that the promise is not expressed in words but is implied from conduct].)

The Complaint alleges that Plaintiffs and Defendants had an implied in fact contract wherein Defendants were obligated to pay Plaintiffs for medical services rendered. Plaintiffs provided emergency and post-stabilization services to Defendants health care plan enrollees and, in return, Plaintiffs expected payment based on implied agreements. The Complaint alleges Defendants breached these contracts by underpaying claims significantly below the reasonable and customary (R&C) charges.

“ ‘[T]he vital elements of a cause of action based on contract are mutual assent (usually accomplished through the medium of an offer and acceptance) and consideration. As to the basic elements, there is no difference between an express and implied contract. While an express contract is defined as one, the terms of which are stated in words (Civ. Code, § 1620), an implied contract is an agreement, the existence and terms of which are manifested by conduct (Civ. Code, § 1621). ... [B]oth types of contract are identical in that they require a meeting of minds or an agreement [citation]. Thus, it is evident that both the express contract and contract implied in fact are founded upon an ascertained agreement or, in other words, are consensual in nature, the substantial difference being in the mode of proof by which they are established.’ ” (Pacific Bay Recovery, Inc. v. California Physicians' Services, Inc. (2017) 12 Cal.App.5th 200, 215 [quoting Division of Labor Law Enforcement v. Transpacific Transportation Co. (1977) 69 Cal.App.3d 268, 275].)

Here, the Complaint admits that “no written contract exists between the parties, including any letters of agreement that would apply to the medical services provided by Hospital to the Patients.” (Compl., ¶ 23.) Instead, the Complaint alleges that Plaintiffs timely contacted Defendants to inform them that their enrollees were receiving emergency room care services at Plaintiffs’ hospital and “[f]or each of the Patients, Defendants either approved the care, failed to timely respond, failed to arrange for a Patient’s transfer and/or indicated that no approval was necessary.” (Compl., ¶ 25.) The Complaint goes on to alleges that “[b]y these actions, Defendants intended to communicate to [Plaintiffs], and [Plaintiffs] reasonably understood, that Defendants required [Plaintiffs] to provide and to continue providing the medically necessary services to the Patients, and that Defendants would pay for such services, including emergency an and post-stabilization/non-emergency services, at [Plaintiffs’] reasonable and customary billed charges.” (Compl., ¶ 25.)

The Complaint alleges no specific verbal communication or conduct that demonstrate consent by Defendants to pay Plaintiffs the “reasonable and customary value of their services.” Nor is there any communication that the “reasonable and customary value of their services” was even specifically communicated to Defendants. Thus, Plaintiffs’ allegations are insufficient to state a claim for an implied in fact contract. (Allied Anesthesia Medical Group, Inc. v. Inland Empire Health Plan (2022) 80 Cal.App.5th 794, 808-811 [without plaintiff communicating its usual and customary rates for services, and “that the parties agreed on that amount, no implied-in-fact contract was formed”].)

Defendants also demur to Plaintiffs’ Third Cause of Action for Unfair Business Practices (Bus. & Prof. Code, § 17200 et seq.) on the grounds that Plaintiffs have failed to state a claim because there is no standing or private right of action conferred upon a provider to challenge the legality of an insurer’s payment methodology, either by statute or case law.

The Complaint accuses Defendants of engaging in unfair business practices by failing to reimburse Plaintiffs adequately. Specifically, Plaintiffs allege Defendants failed to pay the reasonable and customary value for services rendered, violating regulatory standards including 28 Cal. Code Reg. § 1300.71(a)(3)(B) [failing to properly apply a methodology]. (Compl., ¶ 50.)

Citing NorthBay Healthcare Group - Hospital Division v. Blue Shield of California Life & Health Insurance (N.D. Cal. 2018) 342 F.Supp.3d 980, Defendants argue that these allegations fail because Plaintiffs have no private right of action to challenge Defendants’ R&C Methodology for alleged violation of the non-contracted provider reimbursement regulation, 28 C.C.R. § 1300.71(a)(3)(B).

In opposition, Plaintiffs argue that they “do not challenge the validity of Defendants’ R&C Methodology but merely seek to recover the reasonable value of the services rendered to the Members under the Knox-Keene Act and as permitted under Bell v. Blue Cross of California, 131 Cal. App. 4th 211, 217-218.

“The Knox-Keene Act ‘is “a comprehensive system of licensing and regulation” [of health care service plans] ... within the jurisdiction of the [department] ... .’ ” (Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc. (2016) 1 Cal.5th 994, 1005.) The Knox-Keene Act promotes the delivery and quality of health care to people enrolled in a health care service plan, by “(1) ‘transferring the financial risk of health care from patients to providers' in order to ‘[h]elp ... ensure the best possible health care for the public at the lowest possible cost,’ (2) imposing ‘proper regulatory procedures’ in order to ‘[e]nsur[e] the financial stability’ of the system, and (3) establishing a system that ensures health care service plan ‘subscribers and enrollees receive available and accessible health and medical services rendered in a manner providing continuity of care.’ ” (Centinela Freeman Emergency Medical Associates, supra, at p. 1005; see Health & Saf. Code, § 1342, subds. (d), (f), & (g).)

Relevant to the claims here, the Knox-Keene Act includes provisions requiring health care service plans to timely pay provider claims. (Health & Saf. Code, §§ 1371 [“[A] health care service plan ... shall reimburse claims ... as soon as practicable, but no later than 30 working days after receipt of the claim.”], 1371.35 [same].) These provisions “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.” (YDM Management Co., Inc. v. Sharp Community Medical Group, Inc. (2017) 16 Cal.App.5th 613, 625.) Pursuant to these provisions, the Department of Managed Health Care (DMHC) “has promulgated regulations concerning the reimbursement of claims for emergency and nonemergency services.” (Id. at p. 624.)

One regulation central to the allegations in the Complaint is Regulation 1300.71. Regulation 1300.71 is entitled the “ ‘Claims Settlement Practices’ ” and “is authorized by Health and Safety Code sections 1371 and 1371.35. These statutes 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.” (Pacific Bay Recovery, Inc. v. California Physicians' Services, Inc. (2017) 12 Cal.App.5th 200, 207.) That is, Regulation 1300.71 sets forth the reimbursement standards for contracting and noncontracting emergency medical providers.

“The amount of reimbursement depends upon whether the hospital and plan already have a contract in place ....” (Long Beach Memorial Medical Center v. Kaiser Foundation Health Plan, Inc. (2021) 71 Cal.App.5th 323, 329.) If the hospital and plan already have a contract, the plan must pay the “agreed upon” contractual rate. (Regulation 1300.71, subd. (a)(3)(A); see also Long Beach Memorial, at p. 329.) If the hospital and plan have not entered into a contract, the plan must pay the “reasonable and customary value for the [emergency] health care services rendered.” (Regulation 1300.71, subd. (a)(3)(B); see also Long Beach Memorial, at p. 329.)

More specifically, Regulation 1300.71, subdivision (a)(3), defines “[r]eimbursement of a [c]laim” as:

“(A) For contracted providers with a written contract, including in-network point-of-service (POS) and preferred provider organizations (PPO): the agreed upon contract rate;

(B) For contracted providers without a written contract and non-contracted providers, except those providing services described in paragraph (C) below: the 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: (i) the provider's training, qualifications, 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; and

(C) For non-emergency services provided by non-contracted providers to PPO and POS enrollees: the amount set forth in the enrollee's Evidence of Coverage.” (Reg. 1300.71, subd. (a)(3)(A)–(C).)

These six factors are commonly referred to as the “Gould factors” because Gould v. Workers’ Comp. Appeals Bd. (1992) 4 Cal. App. 4th 1059 is the source of the six factors stated in section 1300.71, subdivision (a)(3)(B) of title 28 of the California Code of Regulations. (Pacific Bay Recovery, Inc. v. California Physicians' Services, Inc. (2017) 12 Cal.App.5th 200, 211; Children's Hospital, supra, 226 Cal.App.4th at p. 1272.)

“In general, private rights of action are permitted to challenge violations of the Knox-Keene Act under the UCL and common law. See, e.g., Cal. Pac. Reg'l Med. Ctr. v. Global Excel Mgmt., Inc., No. 13-CV-00540-NC, 2013 WL 2436602, at *4 (N.D. Cal. June 4, 2013) (“two California appellate decisions have held that medical providers could bring private actions for violations of the Knox–Keene Act under the UCL and common law theories.”); Stanford Hosp. & Clinics v. Humana, Inc., No. 5:13-CV-04924-HRL, 2015 WL 5590793, at *8 (N.D. Cal. Sept. 23, 2015).” (NorthBay Healthcare Group - Hospital Division v. Blue Shield of California Life & Health Insurance (N.D. Cal. 2018) 342 F.Supp.3d 980, 986–987; Long Beach Memorial Medical Center v. Kaiser Foundation Health Plan, Inc. (2021) 71 Cal.App.5th 323, 342 [“Because a plaintiff states a claim under the unlawful prong of the unfair competition law by showing that the challenged practice violates a California “statute or regulation” [citation], a plaintiff may as a general matter state a claim under the unfair competition law for a violation of the Knox-Keene Act.”].)

But Health and Safety Code sections 1262.8 and 1371.4 do not create private rights of action. In particular, nothing in that Knox-Keene statutory scheme provides a private right of action that would support the Plaintiffs’ reimbursement action against Defendants. Though under Health and Safety Code section 1371.4, Defendants have an obligation to reimburse Plaintiffs for the care provided to the Defendants’ enrollees, nothing in that section demonstrates a legislative intent to allow Plaintiffs to sue directly under that statute to enforce the obligation. Unlike statutes that provide a private right of action, Health and Safety Code section 1371.4 does not state that the health care service plan entitled to reimbursement “has a cause or action,” or that the debtor health care service plan “is liable” for that reimbursement. (Compare Health & Saf. Code, § 1371.4 with Health & Saf. Code, § 1285, subd. (c) and Veh. Code, § 17001.)

Thus, relying on NorthBay, whether Plaintiffs can bring a claim under the UCL here turns on whether the unlawful conduct underlying this claim is a challenge to Defendants’ unlawful/unfair value determination (the reasonable reimbursements and the amount paid), or a challenge to Defendants’ specific methodology in reaching this value determination.[1]

Here, the Complaint is somewhat uncertain as the exact nature of its unlawful conduct claim. (Compl., ¶ 50.) Although Plaintiffs argue that they are not challenging the methodology (Opp., 13:20-21), the argument is belied by the allegations in the Complaint itself. Specifically, the Complaint alleges that Defendants “fail[ed] to properly apply a methodology to determine the reasonable and customary value of the emergency, inpatient, and outpatient services that considers regulatory defined factors outlined in 28 Cal. Code Reg. § 1300.71(a)(3)(B).” (Compl., ¶ 50; see also ¶ 26 [“Defendants have unilaterally and without rationale, consciously underpaid the claims, issuing payment at rates that fall well below Hospital’s reasonable and customary billed charges and well below the reasonable and customary value of the services provided by Hospital.”].)

“The court may, upon a motion made pursuant to Section 435, or at any time in its discretion, and upon terms it deems proper: (a) Strike out any irrelevant, false, or improper matter inserted in any pleading. (b) Strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.”¿(Code Civ. Proc. § 436.) “Immaterial” or “irrelevant” matters include allegations not essential to the claim, allegations neither pertinent to nor supported by an otherwise sufficient claim or a demand for judgment requesting relief not supported by the allegations of the complaint. (Code Civ. Proc. § 431.10, subds. (b)(1)-(3).)

Here, Defendants seek to strike the request for injunctive relief from the Complaint. Specifically, the third cause of action seeks to “restore to Hospital all money which Defendants acquired by means of such unfair business practices.” (Compl., ¶ 52.)

As a result of the Court’s ruling on the demurrer to the third cause of action, the motion to strike is moot.

The demurrer is sustained. The motion to strike is moot. Plaintiffs shall have leave to amend. An amended pleading shall be filed and served on or before June 2, 2025.

[1] This distinction is made clearer by the analysis in Long Beach Memorial Medical Center v. Kaiser Foundation Health Plan, Inc. (2021) 71 Cal.App.5th 323, which stated – albeit not in the context of a demurrer: “The trial court did not abuse its discretion in excluding evidence of Kaiser's internal methodology for calculating its reimbursement payments to the hospitals. We need not address whether a health plan's internal methodology is relevant in the first place because, assuming its base relevance, the trial court acted within its discretion in excluding the evidence under Evidence Code section 352 because (1) a health plan's subjective view of the value as to what it should offer for a hospital's or other medical provider's emergency medical services is of marginal relevance to the question of what the value of those services are in the market, which is a function of what price is offered and accepted (e.g., Northbay, supra, 342 F. Supp. 3d at p. 987 [what matters is “not the methodology,” but rather “the results of a value determination—the reasonable reimbursements and the amount paid”]), and (2) that marginal relevance is substantially outweighed by the dangers that a jury might give the plan's subjective view more weight than it deserves and that the jury might punish the plan for its subjective parsimoniousness.” (Ibid. at 346.)

Judge Bruce G. Iwasaki

Department 58