Judge: Michael E. Whitaker, Case: 23SMCV04430, Date: 2024-01-03 Tentative Ruling

Case Number: 23SMCV04430    Hearing Date: March 12, 2024    Dept: 207

TENTATIVE RULING

MOTIONS

This case stems from a dispute over Defendants’ alleged failure to pay “non-contracted” or “out-of-network” Plaintiffs for psychological and/or psychiatric care, treatment, and services provided to patients insured by Defendants.

Plaintiffs Marks House LLC/Hillcrest Teen Treatment Center; Bailard House LLC/Beachside/Malibu Teen Center; and The Meadowglade (“Plaintiffs”) have brought nine causes of action in the First Amended Complaint (“FAC”) against Defendants Cigna Health & Life insurance Company and Cigna Healthcare of California (“Defendants”) for: (1) Recovery for Services Rendered; (2) Open Book Account; (3) Quantum Meruit; (4) Breach of Implied Contract; (5) Breach of Oral Contract; (6) Promissory Estoppel; (7) Intentional Misrepresentation of Material Facts; (8) Negligent Misrepresentation of Material Facts; and (9) Unfair Business Practices.

Defendants demur to all nine causes of action on the grounds that they fail to state facts sufficient to constitute a cause of action pursuant to Code of Civil Procedure section 430.10, subdivision (e).  Defendants also move to strike portions of the FAC.  Plaintiffs oppose both motions and Defendants reply.

REQUEST FOR JUDICIAL NOTICE

            Defendants request judicial notice of The Cigna Group’s December 31, 2022 Form 10-K and Exhibit 21, filed with the Securities and Exchange Commission (“SEC”) and publicly available on the SEC’s website. 

Official notices, statements, and certificates made by a federal government agency (like the SEC) are properly the subject of judicial notice as documents reflecting official acts of a state’s executive department, pursuant to Evidence Code section 452, subdivision (c).  (See generally Friends of Shingle Springs Interchange, Inc. v. County of El Dorado (2011) 200 Cal.App.4th 1470, 1483–1484.)  However, “materials prepared by private parties and merely on file with the state [or federal] agencies” may not be properly judicially noticed as an official act of a legislative, executive, or judicial department of the United States or any state of the United States.  (People v. Thacker (1985) 175 Cal.App.3d 594, 598.)

            Nonetheless, Defendants request judicial notice of the SEC filing as “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy” pursuant to Evidence Code section 452, subdivision (h).  In Apple Inc. v. Superior Court, the appellate court explained that judicial notice of the existence of Apple’s filing with the SEC was proper under subdivision (h), and while the truth of the composition of the board members listed at the time of that filing could be factually disputed, the opposing party had not disputed the accuracy of the statement, and therefore the Court took judicial notice both of the existence of the document and the truth of the board composition listed therein.  (Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 242.)

            Similarly here, Plaintiffs have not opposed Defendants’ request for judicial notice or otherwise challenged the validity of the statement contained therein that “Our domestic subsidiaries sell most of their products and services to sponsors of employee benefit plans that are governed by ERISA.”  (RJN Ex. A at p. 24.)  Therefore the Court takes judicial notice of the existence of this filing and of the quoted statement.

ANALYSIS

1.      DEMURRER

“It is black letter law that a demurrer tests the legal sufficiency of the allegations in a complaint.”  (Lewis v. Safeway, Inc. (2015) 235 Cal.App.4th 385, 388.)  In testing the sufficiency of a cause of action, a court accepts “[a]s true all material facts properly pled and matters which may be judicially noticed but disregard contentions, deductions or conclusions of fact or law.  [A court also gives] the complaint a reasonable interpretation, reading it as a whole and its parts in their context.”  (290 Division (EAT), LLC v. City & County of San Francisco (2022) 86 Cal.App.5th 439, 450 [cleaned up]; Hacker v. Homeward Residential, Inc. (2018) 26 Cal.App.5th 270, 280 [“in considering the merits of a demurrer, however, “the facts alleged in the pleading are deemed to be true, however improbable they may be”].)

Further, in ruling on a demurrer, a court must “liberally construe” the allegations of the complaint “with a view to substantial justice between the parties.”  (See Code Civ. Proc., § 452.)  “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant.”  (Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228, 1238.)  

In summary, “[d]etermining whether the complaint is sufficient as against the demurrer on the ground that it does not state facts sufficient to constitute a cause of action, the rule is that if one consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated, or may be intermingled with a statement of other facts irrelevant to the cause of action shown, or although the plaintiff may demand relief to which he is not entitled under the facts alleged.”  (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

A.    FAILURE TO STATE A CAUSE OF ACTION

Defendants argue (1) Plaintiffs fail to state a claim because most of Cigna’s plans are governed by ERISA, which preempts Plaintiffs’ state law claims; and (2) Plaintiffs fail to plead the essential elements of each of their claims.

                                                                    i.            ERISA Preemption

Defendants rely primarily on their request for judicial notice to support their argument that the insurance claims at issue are preempted by ERISA.  As a threshold matter, that document establishes only that “domestic subsidiaries” of “The Cigna Group” “sell most of their products and services to sponsors of employee benefit plans that are governed by ERISA.”  It does not demonstrate that the defendants to this action – Cigna Health & Life Insurance Company and/or Cigna Healthcare of California are part of “The Cigna Group” or that most of Defendants’ plans are governed by ERISA.  In fact, neither “Cigna Health & Life Insurance Company” nor “Cigna Healthcare of California” are mentioned anywhere in that document.

But even if it were established that this document pertains to Defendants in this action, it does not establish that any of the patient claims at issue in this case are governed or preempted by ERISA, much less that all of them are. 

Therefore, ERISA preemption is not a basis to sustain the demurrer at this stage of the litigation. 

                                                                  ii.            First Cause of Action for Services Rendered and Third Cause of Action for Quantum Meruit

“The requisite elements of quantum meruit are (1) the plaintiff acted pursuant to an explicit or implicit request for the services by the defendant, and (2) the services conferred a benefit on the defendant.”  (Port Medical Wellness, Inc. v. Connecticut General Life Insurance Company (2018) 24 Cal.App.5th 153, 180.)

The elements for “services rendered” are “the services performed, an oral promise to compensate by will, the failure to perform the promise, the reasonable value of the services, and failure to pay.”  (Toney v. Security First Nat. Bank of Los Angeles (1951) 108 Cal.App.2d 161, 167.)

Defendants contend that both of these causes of action fail because Plaintiffs fail to allege that Defendants made any “request for services.”  The FAC alleges as follows:

56. At all relevant times, prior to rendering services to the Patients, Plaintiffs contacted Defendants, and each of them, to obtain permission, authorization and consent to render care to the Patients, to obtain verification of coverage, and to obtain Defendants’ commitment, agreement and assent that they would provide payment, coverage and indemnification for the psychological and psychiatric services and procedures to be rendered to the patients by Plaintiffs at the lesser of their published reimbursement rates or of Plaintiffs’ usual, customary and reasonable rates. On each such occasion and for each Patient, Defendants authorized, pre-certified and consented to Plaintiffs’ provision of psychological and psychiatric services and procedures, either orally or in writing, at the facilities operated and owned by Plaintiffs and committed to pay, reimburse, indemnify, cover or otherwise provide insurance benefits and payments, either orally or in writing, to Plaintiffs at the lesser of their published reimbursement rates or at Plaintiffs’ usual, customary and reasonable charges.

(FAC ¶ 56.)  Defendants contend that these prior authorization phone calls do not, as a matter of law, constitute a “request” for services, but Defendants cite only nonbinding federal district court cases in support.

            Therefore, the Court overrules Defendants’ demurrer to the first and third causes of action.

                                                                iii.            Second Cause of Action for Open Book Account

The term “book account” means a detailed statement which constitutes the principal record of one or more transactions between a debtor and a creditor arising out of a contract or some fiduciary relation, and shows the debits and credits in connection therewith, and against whom and in favor of whom entries are made, is entered in the regular course of business as conducted by such creditor or fiduciary, and is kept in a reasonably permanent form and manner and is (1) in a bound book, or (2) on a sheet or sheets fastened in a book or to backing but detachable therefrom, or (3) on a card or cards of a permanent character, or is kept in any other reasonably permanent form and manner.

(Code Civ. Proc., § 337a, subd. (a).)

            “A book account is ‘open’ where a balance remains due on the account.”  (Eloquence Corporation v. Home Consignment Center (2020) 49 Cal.App.5th 655, 664–665.)  However, “[t]he mere recording in a book of transactions or the incidental keeping of accounts under an express contract does not of itself create a book account.”  (Id. at p. 666.)  

            Defendants contend that the alleged open book account, attached as Exhibit A to the FAC is the mere recording of transactions, and does not constitute a true open book account.  Defendants’ argument raises a factual dispute concerning the alleged open book account that cannot be resolved on the face of the pleadings.

            As such, the Court overrules Defendants’ demurrer to the second cause of action for open book account.

                                                                iv.            Contract-Based Causes of Action

“To prevail on a cause of action for breach of contract, the plaintiff must prove (1) the contract, (2) the plaintiff's performance of the contract or excuse for nonperformance, (3) the defendant's breach, and (4) the resulting damage to the plaintiff.”  (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.) 

“The elements of a promissory estoppel claim are (1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.”  (Jones v. Wachovia Bank (2014) 230 Cal.App.4th 935, 945.)

Defendants argue that Plaintiff’s fourth, fifth, and sixth causes of action for breach of implied contract, breach of oral contract, and promissory estoppel, respectively (“contract-based causes of action”) fail because (1) reimbursements for non-emergency services are governed by the evidence of coverage; (2) pre-authorization verification phone calls, like those alleged, cannot form the basis of a contract or promissory estoppel claim; and (3) Plaintiffs do not allege the material terms of the alleged contracts/promises.

Reimbursements Governed by EOCs

California Code of Regulations, title 28, section 1300.71, subdivision (a)(3)(C) provides that the enrollee’s evidence of coverage dictates reimbursements “[f]or non-emergency services provided by non-contracted providers[.]”  (Accord Orthopedic Specialists of Southern California v. Public Employees' Retirement System (2014) 228 Cal.App.4th 644, 648.)

However, the FAC does not allege that the services provided were non-emergency.  Instead, the FAC merely alleges Defendants provided “psychological and/or psychiatric care, treatment, and services” with no mention of whether those services included emergency or non-emergency care.

Moreover, to the extent Plaintiffs have alleged breach of contract causes of action, they would not be “non-contracted providers.”  To the extent a valid and enforceable contract exists between the parties, Defendants would presumably be held to the terms of any such agreement.  The Department of Managed Health Care has explained, “‘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’ and that, to the extent providers wish to pursue other common law or statutory remedies, they may seek redress in the courts.”  (Children's Hospital Central California v. Blue Cross of California (2014) 226 Cal.App.4th 1260, 1273.)

Defendants cite to Pacific Bay Recovery, Inc. v. California Physicians’ Services, Inc. (2012) 12 Cal.App.5th 200, 215-217 (hereafter Pacific Bay), where the appellate court affirmed the trial court’s sustaining of the demurrer to an implied contract cause of action on the basis that Defendant’s reimbursement of only six of the thirty-one treatment days demonstrates there was no meeting of the minds with respect to an implied contract, and Plaintiff had not pleaded “specific facts” demonstrating otherwise. 

The Court notes that while a plaintiff must plead the essential terms of a contract, there is otherwise no heightened pleading standard requiring “specific facts” for breach of contract causes of action.  Here, with respect to the essential terms of the alleged contract, Plaintiffs allege:

75. At all times relevant hereto, for each individual Patient, representatives of Plaintiffs contacted Defendants to verify that each patient was insured, covered or otherwise had rights of indemnification and insurance through Defendant, and prior to the rendition of treatment for each Patient, were advised by representatives of Defendants that the Patients were insured, covered and eligible for coverage under their respective plans or policies for the services to be rendered by Plaintiffs at Plaintiffs’ facilities; were specifically authorized to provide the course of treatment and care recommended, and that Plaintiffs would be paid for their provision of the care and/or treatment rendered by Plaintiffs by Defendants at the lesser of either Plaintiffs’ usual, customary and reasonable rates, or, conversely, at the published rates that Defendants had stated they would pay in accordance with California law and in accordance with the well-established business practice, custom, habit and routine of insurers, including Defendants, of paying such usual, customary and reasonable rates or the rates Defendants had published and stated they would pay non-participating providers or out-of-network providers for services rendered to their insureds, members and subscribers.

76. Pursuant to the authorizations previously received, Defendants, and each of them, entered into oral contracts with Plaintiffs’ to pay Plaintiffs for the the [sic] psychological and psychiatric services and procedures provided to Defendants’ Patients at the lesser of Plaintiffs’ usual, customary, and reasonable rate for services provided or the published rates Defendants stated they would pay to nonparticipating providers or out-of-network providers for services rendered to their insureds, members and subscribers.

(FAC ¶¶ 75-76.)

Moreover, as an explanation for the discrepancy between the reimbursement terms of the implied contract and what Defendants actually paid, Plaintiffs allege that Defendants rely on “flawed databases” to underpay out-of-network reimbursements, and that reliance on these “flawed databases” have been the subject of investigations by both Congress and the New York Attorney General.  (FAC ¶ 45.)

Thus, neither the EOCs nor Pacific Bay precludes Plaintiff’s contract-based causes of action. Whether the parties actually had an oral or implied contract is a factual question to be determined at later stages of the litigation. 

Preauthorization Phone Calls

Defendants next argue that those pre-authorization verification phone calls cannot, as a matter of law, constitute the basis for a contract or promissory estoppel claim.  However, Defendants primarily cite nonbinding federal district court cases in support.  The only California case cited is Pacific Bay, discussed above.  With regard to estoppel, the Pacific Bay opinion indicates only the following: “We need not address the estoppel claim because it was raised for the first time in the reply brief.  That said, Pacific Bay has not stated a cause of action for estoppel because it has not alleged a promise clear and unambiguous in its terms.”  (Pacific Bay, supra, 12 Cal.App.5th at p. 216, fn. 6 [cleaned up].)

Because Defendants have provided no binding authority supporting the proposition that preauthorization verification phone calls cannot, as a matter of law, form the basis of a contract or promissory estoppel cause of action the Court declines to sustain the demurrer on this basis.

Material Terms of the Contract

As discussed above, Plaintiffs adequately plead the material terms of the alleged contract.  Defendants argue, however, that because Plaintiffs also plead allegations that Defendants also failed to pay consistent with the terms of the patients’ insurance policies and certificates, that the terms of the alleged contract are unclear.  The Court disagrees that the allegations that Defendants failed to pay for services in accordance with the patients’ insurance policies and certificates somehow undermines the allegations that Defendants also failed to reimburse Plaintiffs in accordance with their promises and agreements with Plaintiffs.  In any event, at this stage of the litigation, Plaintiffs are permitted to “plead in the alternative and make inconsistent allegations.”  (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1388.)

Defendants also argue that the alleged promise/agreement to reimburse Plaintiffs the lesser of Defendants’ “usual, customary, and reasonable rates” or Defendants’ published rates is too vague to withstand demurrer.  In support, Defendants cite to Banner Entm’t, Inc. v. Super Ct. (1998) 62 Cal.App.4th 348, 359 (hereinafter Banner) and Children’s Hosp. Central California v. Blue Cross of California (2014) 226 Cal. App. 4th 1260, 1273-76 (hereinafter Children’s Hosp.)

Banner, which analyzed the validity of a purported agreement to arbitrate, merely stands for the general proposition that there must be a meeting of the minds and mutual assent to form a contract.  Children’s Hosp. stands for the general proposition that what the “reasonable and customary” reimbursement value is depends on analyzing several Gould factors.  But neither case stands for the proposition that a promise or agreement to pay based on the reasonable or customary value for services is too indefinite to withstand demurrer.

Therefore, the Court overrules Defendants’ demurrers to the fourth, fifth, and sixth causes of action for breach of implied contract, breach of oral contract, and promissory estoppel, respectively.

                                                                  v.            Seventh and Eighth Causes of Action – Intentional & Negligent Misrepresentation

The elements for fraudulent misrepresentation are “(1) the defendant represented to the plaintiff that an important fact was true; (2) that representation was false; (3) the defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth; (4) the defendant intended that the plaintiff rely on the representation; (5) the plaintiff reasonably relied on the representation; (6) the plaintiff was harmed; and (7) the plaintiff's reliance on the defendant's representation was a substantial factor in causing that harm to the plaintiff.”  (Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 605–606.) 

“The essential elements of a count for negligent misrepresentation are the same [as intentional misrepresentation] except that it does not require knowledge of falsity but instead requires a misrepresentation of fact by a person who has no reasonable grounds for believing it to be true.”  (Chapman v. Skype Inc. (2013) 220 Cal.App.4th 217, 230-231 (hereafter Chapman).)  Like intentional misrepresentation, causes of action for negligent misrepresentation sound in fraud, and must also, therefore, be pleaded with particularity.  (Ibid.) 

Defendants demur to the seventh and eighth causes of action for intentional and negligent misrepresentation on the grounds that (1) the economic loss doctrine bars Plaintiff’s fraud claims; and (2) Plaintiffs fail to plead the fraud-based causes of action with requisite particularity.

Economic Loss Doctrine

Defendants argue that the economic loss doctrine bars Plaintiffs’ fraud-based claims.  In support, Defendants cite to Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 922 (hereinafter Sheen); Erlich v. Menezes (1999) 21 Cal.4th 543, 551 (hereinafter Erlich); and Food Safety Net Services v. Eco Safe Systems USA, Inc. (2012) 209 Cal.App.4th 1118, 1130 (hereinafter Food Safety.)

In Sheen, the appellate court explained the economic loss doctrine “bars recovery in negligence for pure economic losses when such claims would disrupt the parties’ private ordering, render contracts less reliable as a means of organizing commercial relationships, and stifle the development of contract law.”  (Sheen, supra,12 Cal. 5th at p. 915.)  In other words, the mere “negligent breach of a contract” is insufficient to create a duty in tort.  (Erlich, supra, 21 Cal.4th at p. 552.)

Here, Plaintiffs do not allege a mere negligent breach of contract.  Rather, Plaintiffs allege Defendants either knowingly or negligently made fraudulent misrepresentations to Plaintiffs in the course of their contract negotiations.  Thus, Plaintiffs allege “tortious conduct independent of a breach of the contract itself, that is, violation of some independent duty arising from tort law.”  (Food Safety, supra, 209 Cal.App.4th at p. 1130.)

In Food Safety, the appellate court held that the economic loss doctrine barred the misrepresentation claims because the plaintiff failed to raise a triable issue of fact on summary judgment that “defendant did not intend to honor its contractual promises when they were made” and “something more than nonperformance is required to prove the defendant’s intent not to perform his promise.”  (Food Safety, supra, 209 Cal.App.4th at p. 1131.)  “Because Eco Safe’s [evidentiary] showing bore only on Food Safety’s actual performance under the contract, it does not demonstrate fraudulent inducement.”  (Id. at pp. 1131-1132.)  Food Safety does not stand for the proposition that a fraudulent misrepresentation claim cannot coexist with a breach of contract claim.

Therefore, the economic loss doctrine does not bar Plaintiffs’ misrepresentation claims at this stage of the litigation.

Particularity

“In California, fraud must be pled specifically; general and conclusory allegations do not suffice.”  (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.)  “This particularity requirement necessitates pleading facts which show how, when, where, to whom, and by what means the representations were tendered.”  (Ibid.)  Causes of action for negligent misrepresentation sound in fraud, and must also, therefore, be pleaded with particularity.  (Chapman, supra, 220 Cal.App.4th at pp. 230-231.) 

“One of the purposes of the specificity requirement is notice to the defendant, to furnish the defendant with certain definite charges which can be intelligently met.”  (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384.)  As such, less specificity is required “when it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy[.]”  (Ibid.)  “Even under the strict rules of common law pleading, one of the canons was that less particularity is required when the facts lie more in the knowledge of the opposite party.”  (Ibid.)

Here, Plaintiffs allege:

99. At all times relevant hereto, for each individual Patient, representatives of Plaintiffs contacted Defendants to verify that each patient was insured, covered or otherwise had rights of indemnification and insurance through Defendant, and, prior to the rendition of any treatment of the Patient, Plaintiffs were advised by representatives of Defendants through conversations between Plaintiffs and Defendants that the Patients were insured, covered and eligible for coverage under their respective Plans or Policies for the services to be rendered by Plaintiffs at Plaintiffs’ facilities; that Plaintiffs were authorized to render such treatment and care; and that Plaintiffs would be paid for their provision of the care and/or treatment rendered by Plaintiffs by Defendants at the lesser of either Plaintiffs’ usual, customary and reasonable rates, or, conversely, at the rates published by Defendants that Defendants had stated they would pay in accordance with California law and in accordance with the well-established business practice, custom, habit and routine of insurers, including Defendants, of paying usual, customary and reasonable rates or the rates published by Defendants that they stated they would pay to non-participating providers or out-of-network providers for services rendered to their insureds, members and subscribers.

100. A true and correct copy of Defendants’ published description of their methodology for reimbursing of out-of-network providers is attached hereto as Exhibit “B” and is incorporated herein by this reference.

101. At no time prior to the provision of services to the Patients by Plaintiffs, during conversations between Plaintiffs and Defendants, did Defendants advise Plaintiffs that the Patients’ policies or certificates of insurance were subject to any exclusions, limitations or qualifications, which might result in denial of coverage to the Patients, nor were Plaintiffs offered copies of the applicable policies or certificates of insurance coverage applicable to the Patients by Defendants or made privy to the specific terms, conditions, exclusions and qualifications of those policies or certificates. At all relevant times, Plaintiffs were led to believe that they would be paid an agreed-upon portion or percentage of their total billed charges, which charges correlated with the lesser of Plaintiffs’ usual, customary, and reasonable rate for services provided or the published rates Defendants stated they would pay to non-participating providers or out-of-network providers.

102. Plaintiffs provided psychological and psychiatric care, treatment, and/or procedures to the Patients. Defendants’ billing rates for almost all of the patients that Plaintiffs treat are based on a “MRC II” Option . As those rates are not set by Medicare, the MRC I Option of FAIR Health’s 80th Percentile of out of network billing is the appropriate rate. The remaining rates are at MRC I Option in any event.

103. At all times relevant hereto, the care, treatment and/or procedures provided by Plaintiffs to Defendants’ insureds were pre-authorized by the Defendants, and Defendants represented and warranted that they would reimburse Plaintiffs for the treatment and services provided at the FAIR Health, Inc. 80th Percentile billing level.

104. Three types of service were carried out, as follows:

(d) Intensive Out Patient (IOP) – Three hours of care generally.

(e) Partial Hospitalization (PHP) – Generally six hours of care; and

(f) Residential Care (RTC) – Ongoing treatment.

105. The FAIR Health 80th percentile rates for the codes associated with each of these treatment types is as follows:

(a) IOP – H0015 - $1,845 and S9480 - $1,599

(b) PHP – H0035 - $2,559 and S0201 - $3,202

(c) RTC – H0018 - $4,365 and H2013 - $3,132

106. The average amount paid by Defendants for these CPT codes is as follows:

(a) IOP H0015 - $551.23 and S9480 - $244.49

(b) PHP H0035 - $$512.11 and S0201 - $532.74

(c) RTC – H0018 - $2695.35 and H2013 - $1899.20

107. Based on the foregoing, Defendants have deliberately and systematically underpaid the Plaintiffs according to their own, published reimbursement rates by an amount according to proof at time of trial but which Plaintiffs are informed and believe and based upon such information and belief allege should have been One Million Eight Hundred Thirty-Two Thousand and Forty-One Dollars and Ninety-Eight Cents ($1,832,041.98), plus interest from the last date of service thereon.

108. In agreeing to provide the necessary, pre-authorized treatment to Defendants’ insureds, Plaintiffs relied upon Defendants’ representations that they would pay for such services at FAIR Health’s 80th Percentile of out of network billing level, as set forth in their publications regarding reimbursement rates for out-of-network providers.

109. Defendants’ representations regarding their reimbursement rate policies were false, and were known by Defendants to be false at the time they were made, and were made with the intent to induce Plaintiffs into providing the services which were, in fact, rendered to Defendants’ insureds, all to Plaintiffs’ detriment.

110. It was only after such services had been provided did the Plaintiffs discover that Defendants had not, and never had, any intention of actually paying for the services provided at the rates that they had claimed they would pay, and in fact intended to only pay substantially reduced rates that had been privately and unilaterally set by Defendants without Plaintiffs’ knowledge or consent.

111. At the time that Plaintiffs agreed to provide care and treatment for Defendants’ insureds, Plaintiffs were unaware of the true facts, and had no reasonable way of discovering those facts, which were solely in possession of Defendants. Had Plaintiffs known the true facts at the time that they agreed to provide the medically-necessary psychological and psychiatric care and treatment sought by Defendants’ insureds, they would not have agreed to accept those Patients for treatment.

112. As a direct, proximate result of these false, intentional and deliberate misrepresentations, Plaintiffs have been damaged in an amount according to proof at the time of trial, but which they are informed and believe and based upon such information and belief allege are not less than not less than One Million Eight Hundred Thirty-Two Thousand and Forty-One Dollars and Ninety-Eight Cents ($1,832,041.98), plus statutory interest thereon from the last day of service.

(FAC ¶¶ 99 -112.)

In addition, Plaintiffs allege:

44. Plaintiffs are informed and believe and based upon such information and belief allege that Defendants relied upon and utilized a flawed database to make pricing determinations for the claims submitted by the Plaintiffs on behalf of the Patients, and utilized that flawed database as a primary source of data upon which it based its pricing determinations, even though Defendants knew that the data cannot and should not be used for that purpose. Defendants were fully aware that its database was not properly designed to determine usual, customary and reasonable reimbursement amounts.

45. Plaintiffs are further informed and believe and thereon allege that Defendants’ system(s) for paying out-of-network claims is flawed, that Defendants improperly manipulate the data in their systems to underpay out-of-network medical provider claims, and that Defendants’ systems and methods for calculating such rates violate California law. Defendants have used flawed databases and systems to unilaterally determine what amounts they pay medical providers and have colluded with other insurers to artificially underpay, decrease, limit, and minimize the reimbursement rates paid for services rendered by non-contracted, out-of-network providers. The issue of health care plans’ utilization of flawed databases has been investigated by the U.S. Congress and the New York Attorney General, and has been the source of numerous lawsuits and class action suits filed in connection with the databases utilized.

46. Plaintiffs are informed and believe that there are a number of inherent flaws in Defendants’ database(s), which make such databases invalid and inappropriate for setting usual, customary and reasonable rates. Among other flaws, Defendants’ databases:

(a) Do not determine the numbers or types of providers in any geographic area;

(b) Do not determine the actual types of procedures performed within a geographic area;

(c) Collect charge data which is not representative of the actual number of procedures performed within a geographic area;

(d) Do not collect sufficient data to enable its users to determine whether the data reflects the charges of providers with any particular degree of expertise or specialization;

(e) Do not collect sufficient provider-specific data to enable its users to determine whether the charges are from one provider, from several providers, or from only a minority subset of the providers in a geographic area;

(f) Fail to compare providers of the same or similar training and experience level and, instead, combine and average all provider charges by procedure code without separating the charges of Plaintiffs and non-Plaintiffs;

(g) Do not collect Patient-specific information such as age or medical history or condition;

(h) Do not ascertain the most common charge for the same service or comparable service or supply;

(i) Do not determine the place of service or type of facility;

(j) Do not collect sufficient data to enable it or its users to determine an appropriate medical market for comparing like charges;

(k) Combining zip codes inappropriately, and use zip codes instead of appropriate medical markets;

(l) Fail to compare procedures that use the same or similar resources (and other costs) to the provider but, rather, indiscriminately combine all provider charges by procedure code without regard to such factors;

(m) Fail to compare procedures of the same or similar complexity by, among other things, failing to record or account for CPT code modifiers;

(n) Do not use appropriate statistical methodology;

(o) Do not properly consider charging protocols and billing practices generally accepted by the medical community or specialty groups;

(p) Do not properly consider medical costs in setting geographic areas;

(q) Lack quality controls, such as basic auditing, to ensure the validity, completeness, representativeness, and authenticity of the data;

(r) Is subject to pre-editing by data contributors;

(s) Report charges that are systematically skewed downward;

(t) Use relative values and conversion factors to derive inappropriate “usual, customary and reasonable” amounts;

(u) Use a methodology that does not comply with Defendants’ contractual definition of usual, customary and reasonable; and

(v) Purport to be confidential and/or proprietary, which prevents access to and/or scrutiny of the data by members or their employers.

47. These and other flaws render Defendants’ use of their data systems invalid and unlawful for determining usual, customary and reasonable rates. By systematically and typically making usual, customary, and reasonable rate determinations without compliant and valid data to substantiate its determinations, Defendants have breached their obligations to reimburse Plaintiffs for out-of-network services, to the extent that Defendants have been unwilling to reimburse Plaintiffs at the eightieth (80%) percentile of FAIR Health’s published out of network rate as they represented. Accordingly, all past usual, customary, and reasonable rate determinations based on Defendants’ data system should be overturned.

48. Defendants used other improper pricing methods to reduce reimbursement to out-of-network providers. Accordingly, Defendants violated, and continue to violate, their legal obligations to Plaintiffs to pay usual, customary and reasonable rates of reimbursement for services rendered to the Patients, insureds, subscribers, and members.

[…]

51. At all relevant times, Defendants harmed Plaintiffs by making improper usual, customary, and reasonable rate and pricing determinations that reduced the lawful reimbursement amounts for out-of-network providers without valid or scientifically-compliant data to support such determinations. Defendants further harmed the Plaintiffs by misapplying in-network policies to out-of-network provider claims, and then by delaying payments to out-of-network providers under the pretext of negotiation. As a result of these actions, the Plaintiffs have been financially harmed and forced to exhaust significant time and resources appealing Defendants’ unlawful determinations through a process deliberately designed to impede, deny, and delay out-of-network physician providers such as Plaintiffs from obtaining their rightful reimbursement.

52. Plaintiffs are informed and believe and based upon such information and belief allege that Defendants used and continue to use flawed database data, among other things, to understate the true market rates of medical care performed by out-of-network providers. The improper use of this data has caused both Patients and out-of-network providers including Plaintiffs to experience significant losses. Patients are harmed because payors like Defendants are not reimbursing out-of-network services at appropriate levels, which results in out-of-network providers increasingly being forced to bill their Patients for amounts charged, which exceed the amounts Defendants cover. Out-of-network providers like Plaintiffs are harmed because they are not always able to collect these balances from Patients and are forced to take a loss for their services. Moreover, because out-of-network providers are often unaware of the scheme that results in payors such as Defendants failing to pay the lesser of their published reimbursement rates or appropriate usual, customary and reasonable rates, they are either powerless to appeal any such improper determinations or their efforts to appeal these determinations are futile.

53. Defendants’ Explanation of Benefit (“EOB”) statements are often uninformative, false, and misleading regarding “usual, customary, and reasonable” rates. This ambiguity has resulted in the inconsistent application of purported “usual, customary and reasonable” rates to deny Plaintiffs and other similarly situated non-contracted providers lawful reimbursement. Usual, customary, and reasonable rates should be applied consistently by Defendants, but instead are improperly and selectively used to deny or diminish lawful reimbursement otherwise due to Plaintiffs and other out-of-network providers.

54. The EOB and remittance advices Plaintiffs receive from Defendants often state that their billed charges purportedly exceed the usual, customary, and reasonable rate for the geographic area where the services were performed. However, nowhere on the EOB statements, remittance advices, or elsewhere in any other correspondence sent to the Plaintiffs do Defendants discuss or identify how they actually calculate usual, customary, and reasonable rates. The EOB statements do not even specify whether database data or some other methodology was used in these calculations. Instead, the EOB statements plainly state that the rates have been determined by Defendants. Since their methods for calculating usual, customary, and reasonable rates are improperly shrouded in a veil of secrecy, Defendants are able to derive improper rates using faulty data and apply them to out-of-network providers such as the Plaintiffs, all to the Plaintiffs’ damage.

(FAC ¶¶ 44-48; 51-54.)  And as a result,

37. Rather than simply pay Plaintiffs the lesser of their published reimbursement or rates or usual, customary, and reasonable rates, Defendants instead routinely and deliberately reimbursed Plaintiffs' claims at rates well below their published rates or usual, customary, and reasonable levels, forcing Plaintiffs to exhaust time and energy by first identifying and then appealing the improperly reimbursed claims.

38. Defendants have failed and refused, and continue to fail and refuse to pay reasonably adequate monies, benefits, or insurance proceeds to the Plaintiffs for the medically necessary and pre-authorized services, care, treatment, and/or procedures rendered to the Patients by the Plaintiffs, and/or have substantially underpaid benefits for such services at inappropriate and unreasonably low rates, using illegal and/or flawed databases and systems to calculate reimbursement for non-contracted providers and have failed and refused to pay the claims at the lesser of their published reimbursement rates or Plaintiffs’ usual, customary, and reasonable rates.

[…]

40. The rates paid by Defendants were not usual, customary or reasonable, and were instead arbitrary, capricious and inexplicable. Further, Defendants have never explained how they calculated, justified, or rationalized their pricing and rate schedule for non-contracted, out-of-network providers such as the Plaintiffs other than by means of their published rates, which are far higher than the rates actually paid.

41. Moreover, the rates paid to the Plaintiffs by Defendants for the exact same procedures, treatments or services were paid at different rates during the same year. At other times, Plaintiffs were paid at rates below what they would have been paid had they been a preferred or in-network provider, even though such volume-discounted rates are significantly lower than the lesser of their published reimbursement rates or usual, reasonable, and customary rates as required by California law.

(FAC ¶¶ 37-38; 40-41.)

            As such, Plaintiffs have pleaded specific facts about Defendants’ alleged misrepresentations, Defendants’ knowledge of falsity, Plaintiffs’ reliance, causation, and damages. 

Although Plaintiffs do not allege the precise who and when for each specific preauthorization/verification phone call, Plaintiffs have provided a 23-page spreadsheet of claims at issue, indicating the date of service and claim ID for each claim, shielding identifying patient information from the public record, but offering to supply that information to Defendants upon request.  (FAC at p. 5, fn. 1 and Ex. A.)  Thus, under the circumstances, the Court finds that Plaintiffs have pleaded their fraud claims with sufficient particularity to put Defendants on notice of the specific facts underlying the fraud claims.

Moreover, although some of the allegations are based “on information and belief,” the FAC pleads facts underlying that belief – namely, the investigations by Congress and the New York Attorney General, the large discrepancies between the published rates and rates actually paid, and the inconsistencies among payments for the same procedures during similar timeframes.

            Therefore, the Court overrules Defendants’ demurrer to the seventh and eighth causes of action for intentional and negligent misrepresentation.

                                                                vi.            Ninth Cause of Action – Unfair Business Practices

California prohibits “any unlawful, unfair or fraudulent business act or practice[.]”  (Bus. & Prof. Code, §§ 17200 et seq.)

Defendants argue that Plaintiffs fail to allege any unfair, unlawful, or fraudulent conduct to support their unfair business practices claim and that Plaintiffs fail to allege the public is likely to be deceived. 

Because the Court overrules Defendants’ demurrers to the fraud causes of action, the Court similarly finds Defendants have sufficiently pleaded fraudulent conduct to support their Unfair Business Practices cause of action.

As for likelihood of deception, Plaintiffs have adequately alleged that by publishing rates that are substantially higher than Defendants actually reimburse out-of-network providers, and assuring providers by phone that they will be compensated for the medical care they provide, both out-of-network providers and patients are likely to be deceived as to Defendants’ coverage and reimbursement of care by out-of-network providers.

Therefore, the Court overrules Defendants’ demurrer to the ninth cause of action.

2.      MOTION TO STRIKE

Any party, within the time allowed to respond to a pleading, may serve and file a motion to strike the whole pleading or any part thereof.  (Code Civ. Proc., § 435, subd. (b)(1); Cal. Rules of Court, rule 3.1322, subd. (b).)  On a motion to strike, the court may: (1) strike out any irrelevant, false, or improper matter inserted in any pleading; or (2) strike out all or any part of any pleading not drawn or filed in conformity with the laws of California, a court rule, or an order of the court.  (Code Civ. Proc., § 436, subd. (a)-(b); Stafford v. Shultz (1954) 42 Cal.2d 767, 782.) 

Plaintiffs move to strike the following from the FAC:

1.      Paragraph 36, as follows: “At all relevant times, Plaintiffs expected to be reimbursed by Defendants at the lesser of either Defendants’ published reimbursement rates or the then-current usual, customary, and reasonable rate, which is defined by California law as follows: A ‘usual’ chary is the amount that is most consistently charged by an individual physician for a given service. A ‘customary’ charge is the amount that falls within a specified range of usual charges for a given service billed by most Plaintiffs with similar training and experience within a given geographical area. A ‘reasonable’ charge is a charge that meets the Usual and Customary criteria, or is otherwise reasonable in light of the complexity of treatment of the particular case. Under a UCR Program, the payment is the lowest of the actual billed charge, the physician's usual charge or the area customary charges for any given covered service.”

2.      Paragraph B of Plaintiffs’ Prayer for Relief, Page 37:16, as follows: “For punitive and exemplary damages according to proof in an amount sufficient to deter such conduct in the future.”

3.      Paragraph 113, as follows: “The foregoing acts of Defendants, and each of them, were willful, wanton and malicious, and made with the knowledge and intent that Plaintiffs would suffer damages as a result of their mistaken reliance upon Defendants’ intentional misrepresentations, and as a result Plaintiffs are entitled to an award of punitive and exemplary damages.”

4.      Paragraph 126, as follows: “Plaintiffs allege that injunctive relief is necessary and appropriate to prohibit the Defendants from continuing to conduct themselves in this manner and to mandate it to honor its obligations to its creditors as a matter of the corporate policy and general business practice of each Defendant.”

5.      Paragraph 129, as follows: “Plaintiffs are entitled to attorney fees pursuant to the provisions of Code of Civil Procedure 1021.5.”

Paragraphs 36 & 129

Defendants move to strike paragraph 36 on the basis that it appears to be a copy/paste from another case, including another company’s definitions and attributing them to California law, when in fact no such definitions are provided by California law.  Defendants also move to strike Plaintiffs’ request for attorneys’ fees in Paragraph 129 on the basis that California’s Unfair Competition Law (“UCL”) does not authorize the award of attorneys’ fees.

In Opposition, Plaintiffs have indicated they do not oppose Defendants’ request to strike these paragraphs.  As such, the Court strikes the requested passages from Paragraphs 36 and 129 from the FAC.

The Court also notes that, although not specifically requested by Defendants, paragraph C of the Prayer for Relief seeks a judgment “For Plaintiffs’ reasonable attorney fees pursuant to the provisions of Code of Civil Procedure §1021.5.”  Because Plaintiffs do not oppose “the request for Attorney Costs and Fees being stricken” (Opp. at p. 5) the Court similarly strikes paragraph C from the Prayer for Relief as it is now irrelevant.  (Code Civ. Proc., § 436, subd. (a) [“The court may, […] 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.”]) 

Paragraph 126 – Injunctive Relief

Defendants move to strike Plaintiff’s request for injunctive relief because (1) Plaintiffs do not allege an inadequate remedy at law; and (2) Plaintiffs do not adequately plead a UCL claim to warrant injunctive relief.  Plaintiffs do not address Defendants’ request to strike paragraph 126 from the Complaint in their Opposition.

The Court notes that although paragraph 126 refers to injunctive relief, Plaintiffs’ prayer for relief does not include a request for injunctive relief.

Therefore, the Court similarly grants Defendants’ unopposed request to strike paragraph 126 from the FAC.

Punitive Damages

In ruling on a motion to strike punitive damages, “judges read allegations of a pleading subject to a motion to strike as a whole, all parts in their context, and assume their truth.”  (Clauson v. Superior Court (1998) 67 Cal.App.4th 1253, 1255.)  To state a prima facie claim for punitive damages, a plaintiff must allege the elements set forth in the punitive damages statute, Civil Code section 3294.  (College Hosp., Inc. v. Superior Court (1994) 8 Cal.4th 704, 721.)  Per Civil Code section 3294, a plaintiff must allege that the defendant has been guilty of oppression, fraud, or malice.  (Civ. Code, § 3294, subd. (a).)   As set forth in the Civil Code,

(1) “Malice” means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.  (2) “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.  (3) “Fraud” means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.

(Civ. Code, § 3294, subd. (c)(1)-(3), emphasis added.) 

Further, a plaintiff must assert facts with specificity to support a conclusion that a defendant acted with oppression, fraud or malice.  To wit, there is a heightened pleading requirement regarding a claim for punitive damages.  (See Smith v. Superior Court (1992) 10 Cal.App.4th 1033, 1041-1042.)  “When nondeliberate injury is charged, allegations that the defendant’s conduct was wrongful, willful, wanton, reckless or unlawful do not support a claim for exemplary damages; such allegations do not charge malice.  When a defendant must produce evidence in defense of an exemplary damage claim, fairness demands that he receive adequate notice of the kind of conduct charged against him.” (G. D. Searle & Co. v. Superior Court (1975) 49 Cal.App.3d 22, 29 [cleaned up].)  In Anschutz Entertainment Group, Inc. v. Snepp, the Court of Appeal noted that the plaintiffs’ assertions related to their claim for punitive damages were “insufficient to meet the specific pleading requirement.”  (Anschutz Entertainment Group, Inc. v. Snepp (2009) 171 Cal.App.4th 598, 643 [plaintiffs alleged “the conduct of Defendants was intentional, and done willfully, maliciously, with ill will towards Plaintiffs, and with conscious disregard for Plaintiff's rights. Plaintiff's injuries were exacerbated by the malicious conduct of Defendants. Defendants' conduct justifies an award of exemplary and punitive damages”]; see also Grieves v. Superior Court (1984) 157 Cal.App.3d 159, 166 [“The mere allegation an intentional tort was committed is not sufficient to warrant an award of punitive damages.  Not only must there be circumstances of oppression, fraud, or malice, but facts must be alleged in the pleading to support such a claim”].) 

Moreover, “the imposition of punitive damages upon a corporation is based upon its own fault.  It is not imposed vicariously by virtue of the fault of others.”  (City Products Corp. v. Globe Indemnity Co. (1979) 88 Cal.App.3d 31, 36.)  “Corporations are legal entities which do not have minds capable of recklessness, wickedness, or intent to injure or deceive.  An award of punitive damages against a corporation therefore must rest on the malice of the corporation’s employees.  But the law does not impute every employee’s malice to the corporation.  Instead, the punitive damages statute requires proof of malice among corporate leaders:  the officers, directors, or managing agents.”  (Cruz v. Home Base (2000) 83 Cal.App.4th 160, 167 [cleaned up].) 

Here, as discussed above, Plaintiffs have adequately pleaded their fraud-based causes of action.  Moreover, the allegations that each time Plaintiffs called, which occurred prior to providing services for each patient on the 23-page spreadsheet, they were told they would be paid in accordance with the lesser of Defendants’ published rates or the reasonable and customary rate, yet Plaintiffs received inconsistent payments that were drastically below Defendants’ published rates, suggests Defendants’ corporate policy is behind the alleged fraudulent conduct.

Therefore, the Court denies Defendants’ request to strike references to and requests for punitive damages alleged in paragraph 113 of the Complaint and paragraph B of the Prayer for Relief.

3.      LEAVE TO AMEND

A plaintiff has the burden of showing in what manner the complaint could be amended and how the amendment would change the legal effect of the complaint, i.e., state a cause of action. (See The Inland Oversight Committee v City of San Bernardino (2018) 27 Cal.App.5th 771, 779; PGA West Residential Assn., Inc. v Hulven Int'l, Inc. (2017) 14 Cal.App.5th 156, 189.) A plaintiff must not only state the legal basis for the amendment, but also the factual allegations sufficient to state a cause of action or claim. (See PGA West Residential Assn., Inc. v Hulven Int'l, Inc., supra, 14 Cal.App.5th at p. 189.) Moreover, a plaintiff does not meet his or her burden by merely stating in the opposition to a demurrer or motion to strike that “if the Court finds the operative complaint deficient, plaintiff respectfully requests leave to amend.” (See Major Clients Agency v Diemer (1998) 67 Cal.App.4th 1116, 1133; Graham v Bank of America (2014) 226 Cal.App.4th 594, 618 [asserting an abstract right to amend does not satisfy the burden].)

Here, Plaintiffs do not oppose Defendants’ request to strike paragraphs 36, 126, and 129 from the FAC, and did not address whether leave should be granted if these requests to strike are granted.    

CONCLUSION AND ORDER

For the reasons stated, the Court overrules Defendants’ Demurrers to the FAC in their entirety. 

Further, the Court grants in part and denies in part Defendants’ Motion to Strike.  The Court strikes paragraphs 36, 126, and 129 of the FAC and Paragraph C of the Prayer for Relief in their entirety, without leave to amend.  The Court denies Defendants’ motion to strike in all other respects. 

Further, the Court orders Defendants to file an Answer to the FAC on or before March 29, 2024. 

Defendants shall provide notice of the Court’s ruling and file a proof of service regarding the same. 

DATED:  March 12, 2024                                                      ___________________________

                                                                                          Michael E. Whitaker

                                                                                          Judge of the Superior Court