Superior Court of California

County of Los Angeles

Department 78

PRIME HEALTHCARE SERVICES ALVARADO, LLC, et al.

LOCAL INITIATIVE HEALTH CARE AUTHORITY OF LOS ANGELES COUNTY DBA L.A. CARE HEALTH PLAN.

DEFENDANT L.A.CARE’S MOTION FOR JUDGMENT ON THE PLEADINGS 

Defendant LA Care’s motion for judgment on the pleadings is GRANTED as to the third, fifth and sixth causes of action.

Defendant LA Care’s motion for judgment on the pleadings is GRANTED as to the fourth cause of action without leave to amend.

Defendant LA Care’s motion for judgment on the pleadings is DENIED as to the seventh and eight causes of action without leave to amend.

Moving party to provide notice.

FACTUAL BACKGROUND

 This is an action for breach of implied-in-law and implied-in-fact contract, open account, third party beneficiary claims, breach of the covenant of good faith and fair dealing, and declaratory judgment arising from a dispute over payment for medical treatment Plaintiffs performed on Defendant’s insured members.

PROCEDURAL HISTORY

Plaintiffs Prime Healthcare Services Inc. Alvarado, Garden Grove, Huntington Beach, North Vista, Anaheim, Eat Valley, Glendora, and Montclair, Desert Valley Hospital, LLC, and East Valley Glendora Hospital, LLC filed their Complaint against Defendant Local Initiative Health Care Authority of Los Angeles County (“LA Care”) on May 6, 2021.

On October 17, 2022, Defendant filed the instant motion for judgment on the pleadings.

On October 28, 2022, Plaintiffs filed their opposition.

On November 3, 2022, Defendant filed its reply.

DISCUSSION

Defendant moves for Judgment on the Pleadings as to the third, fourth, fifth, sixth, seventh, and eighth causes of action. Defendant withdrew its motion as to the first, second, ninth, and tenth causes of action.

A defendant may move for judgment on the pleadings when the “complaint does not state facts sufficient to constitute a cause of action against that defendant.” (Code Civ. Proc., section 438(b)(1) and (c)(1)(B)(ii).)

“A motion for judgment on the pleadings performs the same function as a general demurrer, and hence attacks only defects disclosed on the face of the pleadings or by matters that can be judicially noticed. Presentation of extrinsic evidence is therefore not proper on a motion for judgment on the pleadings.” (Cloud v. Northrop Grumman Corp. (1998) 67 Cal.App.4th 995, 999 (Citations Omitted).) The standard for ruling on a motion for judgment on the pleadings is essentially the same as that applicable to a general demurrer, that is, under the state of the pleadings, together with matters that may be judicially noticed, it appears that a party is entitled to judgment as a matter of law. (Bezirdjian v. O'Reilly (2010) 183 Cal.App.4th 316, 321-322 (citing Schabarum v. California Legislature (1998) 60 Cal.App.4th 1205, 1216).)

“No motion may be made pursuant to this section if a pretrial conference order has been entered pursuant to Section 575, or within 30 days of the date the action is initially set for trial, whichever is later, unless the court otherwise permits.” 

Third Cause of Action – Breach of Implied in Fact Contract (Inpatient Services)

Defendant moves for judgment on the pleadings on the grounds that the Complaint fails to state a cause of action for breach of implied-in-fact contract because Plaintiffs did not and cannot allege mutual consent as to a payment rate, an essential contractual term.

With respect to the other basis for the motion as to this cause of action, it is foreclosed by the decision in County of Santa Clara v. Superior Court of Santa Clara (2023) 14 Cal.5th 1034 where the Supreme Court held that the immunity provisions of the Government Claims Act are directed toward tort claims and not liability based on contract.

The elements of a claim for breach of contract are: “(1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal. 4th 811, 821.) In addition, the complaint must demonstrate damages proximately caused by the breach. (St. Paul Ins. v. American Dynasty (2002) 101 Cal.App.4th 1038, 1060.) 

“An implied-in-fact contract is one, the existence and terms of which are manifested by conduct (Civ. Code, section 1621).” (Chandler v. Roach (1957) 156 Cal.App.2d 435, 439.) Both types of contracts are identical in that they require a meeting of minds or an agreement. (Allied Anesthesia Medical Group, Inc. v. Inland Empire Health Plan (2022) 80 Cal.App.5th 794, 808.) 

“Contract formation requires mutual consent, which cannot exist unless the parties agree upon the same thing in the same sense.” (Bustamante v. Intuit, Inc. (2006) 141 Cal.App.4th 199, 208.) Mutual assent is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts and not their unexpressed intentions or understandings. (Id at p.208.)

Here, Defendant argues that Plaintiffs do not and cannot allege mutual consent as to a payment rate. 

The Complaint alleges that Plaintiffs are all hospital facilities affiliated with the Prime Healthcare hospital system. (Compl., ¶13.) From 2017 to present, Prime has and continues to provide emergency services, post-stabilization services, and other services to LA Care commercially insured patients. (Compl., ¶21.) When Prime hospitals provided care to LA Care patients, they billed LA Care for the reasonable value of the services provided at their standard undiscounted rates. (Compl., ¶21.) LA Care failed to pay the billed charges, breaching its obligations to Prime. (Compl., ¶21.)

LA Care and Prime entered into implied-in-fact contracts through their course of conduct for the services that were authorized by LA Care or for which LA Care indicated no authorization was needed. (Compl., ¶43.) When a non-contracted hospital requests authorization to provide care to a patient, the law and industry standard prohibit LA Care from requiring authorization for emergency services. (Compl., ¶44.) However, for post-stabilization services, the law and custom in the healthcare industry is to create implied-in-fact contracts. (Compl., ¶44.) Providers request authorization from the plans at the time of admission and the plans either grant authorization or state that no authorization is needed to get paid. (Compl., ¶44.) LA Care and Prime completed this process during the relevant period. (Compl., ¶44.) When Prime requested authorization to provide services to an LA Care patient, LA Care either authorized Prime to provide services for most if not all of the inpatient days required or responded that no authorization was needed for Prime to provide services. (Compl., ¶45.) 

If LA Care authorized services, LA Care sometimes authorized additional days of services or retroactively authorized services. (Compl. ¶¶46-47.) LA Care sometimes authorized or did not require authorization for follow up care at Prime hospitals. (Compl., ¶48.) Whenever LA Care authorized services or did not require authorization, LA Care knew Prime’s full billed charges and routinely received bills from Prime detailing those charges. (Compl., ¶49.) Having chosen not to arrange for transfer of patients to in-network hospitals, authorized services, or confirming no authorization was required, LA Care agreed to pay Prime at the full billed charges for commercially insured members. (Compl., ¶49.)

Defendant contends that Pacific Bay Recovery, Inc. v. Cal. Physicians’ Servs., Inc. (2017) 12 Cal. App. 5th 200, 215-16 and Allied Anesthesia Med. Grp., Inc. v. Inland Empire Health Plan (2022)  80 Cal. App. 5th 794, 809 support the granting of the motion as to this cause of action. 

As Defendant sees it, Plaintiffs allege that L.A. Care has consistently paid less than the full amount of the billed charges for Prime’s services. (Compl. ¶¶ 21, 22, 30, 31, 40, 51.) Yet Plaintiffs allege that they should have been paid full billed charges. (Compl..¶ 21, 51). These allegations, according to Defendant, eliminate any suggestion that the parties mutually consented to payment rate, an essential term of an implied contract.

Plaintiffs, on the other hand, contend that Prime adequately pled mutual consent by alleging that LA Care agreed to pay Prime’s full billed charges during communications concerning Prime’s services and not just through the authorization process. Specifically, Prime alleges that “L.A. Care agreed to pay Prime Hospitals at the full billed charges for commercially insured members.” (Compl. at ¶ 49.) Prime further alleges that L.A. Care knew Prime’s charges before they were incurred because “L.A. Care had routinely received bills from Prime Hospitals that detailed those charges and the charges for Prime Hospitals in California were publicly available on California’s OSHPD’s website.” (Id.)

Plaintiffs rely on paragraph 49 of the complaint.  The paragraph reads as follows in its entirety.

When L.A. Care authorized services, or said that no authorization was needed, L.A.Care knew Prime Hospitals’ full billed charges. L.A. Care had routinely received bills from Prime Hospitals that detailed those charges and the charges for Prime Hospitals in California were

publicly available on California’s OSHPD’s website. Having chosen not to arrange for transfer of patients to in-network hospitals and having authorized services or confirmed that no authorization was needed, L.A. Care agreed to pay Prime Hospitals at the full billed charges for commercially insured members.

Defendant has the better of this argument as to the allegations in the Complaint.  Plaintiffs do not allege facts demonstrating that there was an actual meeting of the minds as to the price to be paid either through an express agreement to pay the fully billed amounts or through a course of conduct where Defendant did in fact pay the fully billed amounts. Indeed, the crux of cause of action appears to be that Defendant did not pay Plaintiffs the fully billed amounts.

Plaintiffs further contend that Defendant misconstrues Pacific Bay Recovery, Inc. v. Cal. Physicians’ Servs., Inc. (2017) 12 Cal. App. 5th 200 and Allied Anesthesia Med. Grp., Inc. v. Inland Empire Health Plan (2022)  80 Cal. App. 5th 794. Plaintiffs note that these cases indicate that  plans and providers can agree to rates when their course of conduct reflects a mutual understanding of expected reimbursement.

Plaintiffs’ statement as to the cases is true. The problem is that Plaintiffs have not alleged a course of conduct reflecting a mutual understanding regarding reimbursement. To the contrary, Plaintiffs have alleged a course of conduct indicating that there was no agreement between the two sides regarding the amount to be reimbursed.

The Court understands the third cause of action, as pled, to apply to LA Care commercially insured members only. 

Plaintiffs’ opposition contains the following statement which the Court finds confusing: “to the extent the third cause of action reaches Medi-Cal claims, the parties [sic] agreement on rates is based on L.A. Care’s complying with the mandatory obligation it previously argued existed.” (Opposition at pg.15.)

At hearing on the motion, the Court wishes the parties to address: (1) whether the third cause of action covers LA Care Medi-Cal members; (2) if so, does that impact the analysis of the motion and if so, how; and (3) leave to amend.

Fourth Cause of Action – Open Account

Plaintiff indicates in their opposition that they intend to dismiss this cause of action without prejudice rendering the motion moot as to this cause of action. (Opposition at pg.6, ftn.1.)  The Court does not see any dismissal in the record and Plaintiffs have not opposed the motion with respect to this cause of action.

Therefore, the motion is granted as to this cause of action without leave to amend. 

Fifth Cause of Action – Breach of Contract  (Third Party Beneficiary)

Defendant moves for judgment on the pleadings as to the fifth cause of action on the grounds that Plaintiffs are only incidental beneficiaries of a contractual agreement to pay for an enrollee’s medical care.

In order for a plaintiff to allege breach of contract as a third party beneficiary, the plaintiff must plead a contract that was made expressly for their benefit. (See Martin v. Bridgeport Community Association, Inc. (2009) 173 Cal.App.4th 1024, 1034.) “‘The test in deciding whether a contract inures to the benefit of a third person is whether an intent to so benefit the third person appears from the terms of the agreement . . . .’” (Id. (quoting Schonfeld v. City of Vellejo (1975) 50 Cal.App.3d 401, 420.) “The fact that a third party is incidentally named in the contract, or that the contract, if carried out according to its terms, would inure to his benefit, is not sufficient to entitle him to enforce it.” (Id.) “Reading the agreement as a whole in light of the circumstances under which it was made, the terms of the agreement must clearly manifest an intent to make the obligation inure to the benefit of the third party.” (Id.) 

In an action based on a written contract, a plaintiff may plead the legal effect of the contract rather than its precise language. (Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 198–199.) Generally, a health care service provider’s agreement to pay for medical care is intended to benefit the enrollees, not treating physicians with whom there is no contractual relationship. (Ochs v. PacifiCare of California (2004) 115 Cal.App.4th 782, 795.)

Here, the Complaint alleges that Defendant entered into written contracts with its commercially insured members titled “Evidence of Coverage” (“EOC”) that generally required Defendant to pay non-contracted providers for health care services provided to its commercially insured members based on a percentage of a provider’s reasonable charge. (Compl., ¶60.) The EOC contained provisions for Defendant to reimburse non-contracted providers such as Plaintiffs directly. (Compl., ¶61.) Members were only responsible for the charges not covered by Defendant. (Compl., ¶61.)

The facts alleged in the Complaint show that the EOC contained provisions which would inure to Plaintiffs’ benefit because Defendant was required to pay Plaintiffs and other non-contracted providers for services rendered to Defendant’s insured members. However, the EOC is generally intended to benefit the insured members receiving services from the non-contracted providers. The amount and manner in which Plaintiffs and other non-contracted providers were to be paid is only incidental to Defendant’s agreement to pay for its insured members’ medical care. The Complaint thus fails to allege facts that would support a third-party beneficiary theory. The motion for judgment on the pleadings is granted as to this cause of action.

The parties should be prepared to address the issue of leave to amend at the hearing.

Sixth Cause of Action – Breach of the Covenant of Good Faith and Fair Dealing

Defendant moves for judgment on the pleadings as to the sixth cause of action for the same reasons as the fifth cause of action.

The elements for breach of the implied covenant of good faith and fair dealing are: (1) existence of a contract between plaintiff and defendant; (2) plaintiff performed his contractual obligations or was excused from performing them; (3) the conditions requiring defendant’s performance had occurred; (4) the defendant unfairly interfered with the plaintiff’s right to receive the benefits of the contract; and (5) the plaintiff was harmed by the defendant’s conduct. (Merced Irr. Dist. V. County of Mariposa (E.D. Cal. 2013) 941 F.Supp.2d 1237, 1280 (discussing California law).) Allegations must demonstrate defendant’s conduct for failure or refusal to discharge contractual responsibilities was a conscious and deliberate act, not an honest mistake, bad judgment or negligence. (Id.) “‘[T]he implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract.’” (Ragland v. U.S. Bank Nat. Assn. (2012) 209 Cal.App.4th 182, 206 (quoting Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1094).) 

 

“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” (Hicks v. E.T. Legg & Associates (2001) 89 Cal.App.4th 496, 508.) “[T]he scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract.” (Id. at 509.) “The covenant of good faith and fair dealing . . . exists . . . to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made.” (Guz v. Bechtel National Inc. (2000) 24 Cal.4th 317, 349.)  

“A ‘breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself’ and it has been held that ‘[b]ad faith implies unfair dealing rather than mistaken judgment . . . .’” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1394 (quoting Congleton v. National Union Fire Insurance Co. (1987) 189 Cal.App.3d 51, 59).) 

A plaintiff’s allegations of breach of the covenant of good faith that do not go beyond a statement of a mere contract breach may be disregarded as superfluous. (See Bionghi v. Metropolitan Water District (1999) 70 Cal.App.4th 1358, 1370.) 

Here, the Complaint alleges that there was an implied-in-law contract between the parties where Defendant was obligated to pay Plaintiff for emergency services and post-emergency inpatient services rendered to Defendant’s members. (Compl., ¶¶27, 37.) Defendant collected higher payments for covering the health care needed by its members based on a promise to reimburse non-contracted providers for services according to the reasonable rates for these services. (Compl., ¶66.) However, Defendant failed to reimburse Plaintiffs for these reasonable and customary rates as expressed in billed charges presented to Defendant. (Compl., ¶66.) 

The Complaint alleges that Defendant failed to reimburse Plaintiffs for the reasonable and customary rates as expressed in Plaintiffs’ billed charges. However, this factual allegation merely shows that Defendant breached the implied-in-law contracts between itself and Plaintiff. Although the Complaint alleges that Defendant charged its insured members premiums based upon rates of reimbursement to Plaintiffs in excess of what Defendant actually paid to Plaintiffs, this allegation constitutes a potential breach of a contract/good faith and fair dealing cause of action as Defendant’s insured members, not Plaintiffs. There are no facts alleged in the Complaint showing Defendant unfairly frustrated Plaintiffs’ ability to benefit under a contract with Defendant other than the breach already described in the first and second causes of action. The motion for judgment on the pleadings is granted on this ground.

The parties should be prepared to address the issue of leave to amend at the hearing.

Seventh and Eighth Causes of Action – Declaratory Judgment

Defendant moves for judgment on the pleadings as to the seventh and eighth causes of action for declaratory judgment on the grounds that they are derivative of the third cause of action for breach of implied-in-fact contract. 

To state a cause of action for declaratory relief, the plaintiff must plead the following elements: (1) person interested under a written instrument or a contract; or (2) a declaration of his or her rights or duties (a) with respect to another or (b) in respect to, in over or upon property; and (3) an actual controversy.  (Code Civ. Proc. § 1060; Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 605-06; Bennett v. Hibernia Bank (1956) 47 Cal.2d 540, 549.)  “For declaratory relief, the party must show it has either suffered or is about to suffer an injury of ‘sufficient magnitude reasonably to assure that all of the relevant facts and issues will be adequately presented.”  (Stonehouse Homes v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 542.)  “[A]vailability of another form of relief that is adequate will usually justify refusal to grant declaratory relief’ but “[t]he refusal to exercise the power is within the court’s legal discretion. . . .”  (Cal. Ins. Guar. Ass’n v. Superior Court (1991) 231 Cal.App.3d 1617, 1624; Pellegrini v. Weiss (2008) 165 Cal.App.4th 515, 529 (“The question whether declaratory relief is appropriate in a given case is addressed to the trial court’s discretion.”); General of America Ins. Co. v. Lilly (1968) 258 Cal.App.2d 465, 470-471 (an action in declaratory relief will not lie where the issue to be determined is the same as that in a pending action at law between the same parties).) An action for declaratory relief does not survive if it is wholly derivative of another failed cause of action. (Ochs v. PacifiCare of California (2004) 115 Cal.App.4th 782, 794.)

Here, the seventh and eighth causes of action state that a current dispute exists between Plaintiffs and Defendant concerning the amount Defendant is obligated to pay for hospital services rendered to Defendant’s insured members. (Compl., ¶¶70, 76.) The seventh cause of action is based on the allegation that Defendant’s methodology fails to adequately take into account the six-factor test for non-contracted provider reimbursement as set forth in Title 28 of the California Code of Regulations, section 1300.71(a)(3). (Compl., ¶71.) Defendant will continue to rely on inadequate methodology to pay for services rendered by Plaintiffs. (Compl., ¶73.) The eighth cause of action is based on the allegation that Defendant’s payment obligation that was defined by Plaintiff’s billed charges. (Compl., ¶77.)

Defendant argues that both the seventh and eighth cause of action are wholly derivative of failed causes of action for breach of contract. Defendant also argues that the seventh and eighth causes of action only concern past wrongs. 

The seventh cause of action is derivative of alleged violations of Code of Regulations, section 1300.71(a)(3). The seventh cause of action is therefore not derivative of the third cause of action. Additionally, the seventh of action allege that the dispute over the amount Defendant must pay is ongoing and will continue to arise in the future. Thus, the Complaint sufficiently alleges that Plaintiffs will suffer future wrongs. The motion for judgment on the pleadings is denied as to the seventh cause of action.

The eighth cause of action is wholly derivative of the breach of contract claims. Although the Court granted Defendant’s motion as to the third cause of action for breach of implied-in-fact, Defendant withdrew its motion as to the second cause of action for breach of implied-in-law contract. The second cause of action also alleges that there is an ongoing dispute over Defendant’s payment obligations and that Plaintiff’s billed charges are the reasonable and customary rates. (Compl., ¶29.) The eighth cause of action is based on the same facts. Because the eighth cause of action is also derived from the second cause of action for breach of implied-in-law contract, it is not wholly derivative of a failed cause of action. The motion for judgment on the pleadings is denied as to the eighth cause of action.

DATED:  August 17, 2023

______________________________

                                                                      Hon. Jill Feeney

                                                                      Judge of the Superior Court