Judge Mitchell L. Beckloff, Case 21STCP03725 2023-03-08 Tentative Ruling

Judge: Mitchell L. Beckloff, Case: 21STCP03725, Date: 2023-03-08 Tentative Ruling

This dispute concerns the constitutionality and enforceability of Health and Safety Code section 1342.2, subdivision (d) [Subdivision (d)]. Petitioner, California Association of Health Plans, seeks a “writ of mandamus and/or prohibition directing” Respondent, the California Department of Managed Health Care,[1] and the California Attorney General (AG) “to refrain from enforcing” Subdivision (d). (Pet., Prayer ¶ A.) In addition, Petitioner seeks a judicial declaration Subdivision (d) is “void and unenforceable.” (Pet., Prayer ¶ B.) Petitioner also requests a judicial declaration its members “have no obligation to comply” with Health and Safety Code section 1342.2 “with respect to any acts or omissions occurring prior to January 1, 2022.” (Pet., Prayer ¶ B.)

America’s Physician Group (APG), an intervening party, also separately opposes the petition.

Sustained: Objections 8, 12 (as to the content of the writing only), 20, 22 and 23 only.

Generally, effective January 1, 2022, Health and Safety Code section 1342.2 requires the costs for COVID-19 diagnostic and screening testing (and related services) to be paid by health care plans, not health care providers.[3] Health and Safety Code section 1390 sets forth criminal penalties for any person who willfully violates Health and Safety Code section 1342.2’s provisions. Subdivision (d) provides:

“This section shall apply retroactively beginning from the Governor’s declared State of Emergency related to the SARS-CoV-2 (COVID-19) pandemic on March 4, 2020. Notwithstanding Section 1390, this subdivision does not create criminal liability for transactions that occurred before January 1, 2022.”

Petitioner alleges Respondent and the AG cannot enforce Subdivision (d) and require its member health care plans to pay the costs for services provided by health care providers for COVID-19 diagnostic and screening testing before January 1, 2022. (Pet., ¶¶ 1, 95-97, 99-100, 102-103, and Prayer at ¶ A through C.) Petitioner contends none of its 44-member health care plans should be required to pay health plan providers for the “COVID-19 diagnostic and screening testing and health care services related to diagnostic and screening testing” that was provided to health care service plan consumers (i.e., enrollees) between March 4, 2020 and January 1, 2022. (Pet., ¶¶ 1, 5. 95-103.) Petitioner’s challenge “is limited to the retroactive application of [Subdivision (d)] to acts and omissions occurring prior to the statute’s January 1, 2022 effective date, where such retroactive effect creates obligations that were not imposed at the time by then-existing law or contractual arrangements.” (Pet., ¶ 3.) Petitioner contends Subdivision (d)’s application to acts and omissions occurring before Health and Safety Code section 1342.2’s effective date violates various provisions of the California Constitution. (Pet., ¶¶ 3, 79, 85-86, 90-91, 94.)

On November 30, 2021, the court granted Petitioner’s ex parte application to bifurcate trial in this proceeding.

In the first phase of the bifurcated trial, the court considered whether Subdivision (d)’s retroactivity provision and Health and Safety Code 1390’s criminal penalties violated the Ex Post Facto Clause of the California Constitution. (Cal. Const., Art. 1, § 9.) The court found against Petitioner.

Phase II of this proceeding concerns Petitioner’s remaining challenges to Subdivision (d).

On June 10, 2022, the court granted APG’s motion to intervene in this proceeding.

Petitioner seeks relief from the court pursuant to Code of Civil Procedure section 1085—an order directing Respondent to refrain from enforcing Subdivision (d) on the basis Subdivision (d) is unconstitutional. (Opening Brief 25:17-22.)

Ordinary mandate under Code of Civil Procedure section 1085 is generally used to review an agency’s ministerial acts, quasi-legislative acts and quasi-judicial decisions which do not meet the requirements for review under Code of Civil Procedure section 1094.5. (Bunnett v. Regents of University of California (1995) 35 Cal.App.4th 843, 848; Carrancho v. California Air Resources Board (2003) 111 Cal.App.4th 1255, 1264-1265.)

“may be issued by any court to any . . . board . . . to compel the performance of an act which the law specially enjoins, as a duty resulting from an office, trust, or station, or to compel the admission of a party to the use and enjoyment of a right or office to which the party is entitled, and from which the party is unlawfully precluded by such inferior tribunal, corporation, board, or person.” (Code Civ. Proc., § 1085, subd. (a).)

“To obtain a writ of mandate under Code of Civil Procedure section 1085, the petitioner has the burden of proving a clear, present, and usually ministerial duty on the part of the respondent, and a clear, present, and beneficial right in the petitioner for the performance of that duty.” (Marquez v. State Dept. of Health Care Services (2015) 240 Cal.App.4th 87, 103.)

Traditional mandate under Code of Civil Procedure section 1085 is the appropriate vehicle to challenge the constitutionality or validity of statutes or other official acts. (See Jolicoeur v. Mihaly (1971) 5 Cal.3d 565, 570, fn. 2 [noting mandate is appropriate remedy for compelling public official to act in accordance with law and challenging constitutionality or validity of statute].)

“The constitutionality of a statute is a question of law . . . .” (Vergara v. State of California (2016) 246 Cal.App.4th 619, 642.) However, “[i]t is well established . . . . that as a general rule statutes are presumed to be constitutional.” (Property Reserve, Inc. v. Superior Court (2016) 1 Cal.5th 151, 192.) “When the Legislature has enacted a statute with constitutional constraints in mind there is a strong presumption in favor of the Legislature's interpretation of a provision of the Constitution.” (Ibid. [Cleaned up.])

“ ‘[A]ll presumptions and intendments favor the validity of a statute and mere doubt does not afford sufficient reason for a judicial declaration of invalidity. Statutes must be upheld unless their unconstitutionality clearly, positively, and unmistakably appears.’ [Citations.] If the validity of the measure is ‘fairly debatable,’ it must be sustained. [Citations.]” (Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 814-815; Hellinger v. Farmers Group, Inc. (2001) 91 Cal.App.4th 1049, 1061-1062.)

Petitioner argues Subdivision (d) is facially unconstitutional as it retroactively impairs capitated contracts[4] between its members and health care providers where such contracts delegate some or all COVID-19 diagnostic and screening testing responsibility to health care providers (Delegating Contracts).[5] Petitioner argues “Subdivision (d) on its face invalidates the agreed delegation of COVID-19 testing responsibility that is inherent in every Delegating Contract.” (Opening Brief 15:8-9.)

Petitioner’s argument turns on two provisions within Health and Safety Code section 1342: subdivision (a)(6) and Subdivision (d).

“A health care service plan shall not delegate the financial risk to a contracted provider for the cost of enrollee services provided under this section unless the parties have negotiated and agreed upon a new provision of the parties’ contract pursuant to Section 1375.7.”

Petitioner argues the statutory provisions facially and retroactively impair an entire class of contracts: Delegating Contracts in effect between March 4, 2020 and December 31, 2021. That is, Petitioner argues under the law, Delegating Contracts may not be enforced under Health and Safety Code section 1342.2 because health care providers may not be financially responsible for all or some of COVID-19 diagnostic and screening testing.

Respondent asserts Petitioner’s challenge to Subdivision (d) as facially unconstitutional fails. Respondent notes Petitioner concedes the statute may be constitutionally applied under certain circumstances. Accordingly, Petitioner’s facial challenge—by its own position—is flawed and meritless.

“The standard for a facial constitutional challenge to a statute is exacting.” (Today's Fresh Start, Inc. v. Los Angeles County Office of Education (2013) 57 Cal.4th 197, 218.)

“A facial challenge to the constitutional validity of a statute or ordinance considers only the text of the measure itself, not its application to the particular circumstances of an individual. [Citation.] ‘ “To support a determination of facial unconstitutionality, voiding the statute as a whole, [a challenger] cannot prevail by suggesting that in some future hypothetical situation constitutional problems may possibly arise as to the particular application of the statute. . . . Rather, [a challenger] must demonstrate that the act's provisions inevitably pose a present total and fatal conflict with applicable constitutional prohibitions.’ ” [Citations.]” (Tobe v. City of Santa Ana (1995) 9 Cal.4th 1069, 1084.)

Under “the strictest requirement for establishing facial unconstitutionality,” the challenger must demonstrate “the statute ‘inevitably pose[s] a present total and fatal conflict with applicable constitutional prohibitions.’ ” (Guardianship of Ann S. (2009) 45 Cal.4th 1110, 1126.) “In short, a facial challenge must be rejected unless no set of circumstances exists in which the statute can be constitutionally applied.” (People v. Hsu (2000) 82 Cal.App.4th 976, 982.)

Petitioner relies on a more modern trend adopting a more lenient standard over the well-established and long-standing law on facial unconstitutionality. Petitioner cites Alliance for Responsible Planning v. Taylor (2021) 63 Cal.App.5th 1072, 1084 wherein the Court explained: “For a facial challenge to succeed, the plaintiff must demonstrate the challenged portion will result in legally impermissible outcomes in the generality or great majority of cases, the minimum showing we have required for a facial challenge to the constitutionality of a

statute. . . . [W]e may not uphold the law simply because in some hypothetical situation it might lead to a permissible result.” (Ibid. [Emphasis added.]) Our Supreme Court has also acknowledged it has “sometimes applied [the] more lenient standard, asking whether the statute is unconstitutional ‘in the generality or great majority of cases.’ ” (Gerawan Farming, Inc. v. Agricultural Labor Relations Bd. (2017) 3 Cal.5th 1118, 1138.)

No matter which standard this court uses in consideration of Petitioner’s facial challenge to Health and Safety Code section 1342.2—the strict standard or more lenient one—the result is the same. Petitioner’s facial challenge fails.

Petitioner concedes Health and Safety Code section 1342.2 applies to all health care service plan contracts with health care providers. Petitioner recognizes, however, only Delegating Contracts are impaired by Subdivision (d).[6] In fact, Petitioner notes its members may have capitated contracts that are not substantially impaired by the law because the parties “specifically negotiated” a rate for COVID-19 testing prior to the public emergency.[7] (Health & Saf. Code, § 1342.2, subd. (a)(3)(A).) (Opening Brief 13 n. 4.) That such contracts may exist undermines a facial challenge to the statute under the strict standard because “a facial challenge must be rejected unless no set of circumstances exists in which the statute can be constitutionally applied.” (People v. Hsu, supra, 82 Cal.App.4th at 982.)

To suggest it may mount a facial challenge to Subdivision (d) even where Petitioner concedes there are circumstances where contracts are not impaired by Subdivision (d), Petitioner argues the court need only consider its facial challenge in the context of contracts Subdivision (d) does impair—Delegating Contracts. (City of Los Angeles v. Patel (2015) 576 U.S. 409, 418. [“[W]hen assessing whether a statute meets this [facial challenge] standard, the Court has considered only applications of the statute in which it actually authorizes or prohibits conduct.”]) (Reply 20:27-21:2.) “The proper focus of constitutional inquiry is the group for whom the law is a restriction, not the group for whom the law is irrelevant.” (Tom v. City and County of San Francisco (2004) 120 Cal.App.4th 674, 680.)

Petitioner contends its facial challenge here is to capitated contracts where COVID-19 diagnostic and screening testing were not specifically negotiated. Under such circumstances, Subdivision (d) and Health and Safety Code section 1342.2, subdivision (a)(6) impairs capitated contracts because such contracts are, in Petitioner’s view, Delegating Contracts where providers must shoulder the responsibility for the cost of COVID-19 diagnostic and screening testing. According to Petitioner, that some portions of Health and Safety Code section 1342.2 may be constitutional is of no consequence to its facial challenge. (Reply 21:7-8.) Petitioner asserts, “If the rule were otherwise, facially unconstitutional laws could easily be shielded from review.” (Reply 21:12-13.)

Even assuming Petitioner is correct and this court may use the modern, more lenient standard promoted by Petitioner for its facial challenge to Subdivision (d), the evidence Petitioner submits does not demonstrate “legally impermissible outcomes in the generality or great majority of cases . . . .” (Alliance for Responsible Planning v. Taylor (2021) 63 Cal.App.5th at 1084.) That is, Petitioner has demonstrated only five contracts (as exemplars) may have legally impermissible outcomes under Subdivision (d). Such a limited showing given the number of its health plan members and the number of contracting health care providers, as an evidentiary matter, precludes a finding of impermissible outcomes in a great majority of cases.

On the evidence provided, the court is inclined to find Petitioner has not brought a proper facial challenge to Subdivision (d) in the context of its members Delegating Contracts (or capitated contracts where COVID-19 services had not been specifically negotiated). As the court views it, whether the provision is unconstitutional turns on the specific language contained in the individually negotiated contracts. Nonetheless, the court addresses the substantive merits of Petitioner’s claim.

Petitioner argues the Subdivision (d) violates the Contract Clause of the California Constitution.

A “law impairing the obligation of contracts may not be passed.” (Cal. Const., art. I, § 9.) Thus, the Constitution limits the power of a state to modify its own contracts as well as contracts between other parties. (Cuenca v. Cohen (2017) 8 Cal.App.5th 200, 228.)

Notwithstanding this language, “[i]t is now axiomatic that the contract clauses of the federal and state constitutions . . . are not to be read literally. [Citation.] Although containing facially absolute language, the proscription of ‘any’ impairment contained in the contract clauses must be interpreted to accommodate the inherent police power of the state to safeguard vital interests of its residents.” (Hermosa Beach Stop Oil Coalition v. City of Hermosa Beach (2001) 86 Cal.App.4th 534, 554.)

Thus, “not all impairments of contract are unconstitutional.” (Board of Administration v. Wilson (1997) 52 Cal.App.4th 1109, 1131.) A party asserting a contract clause claim has the burden of “mak[ing] out a clear case, free from all reasonable ambiguity” of a constitutional violation. (Floyd v. Blanding (1879) 54 Cal. 41, 43.)

To determine the constitutionality of a statute in the context of a Contract Clause challenge, the court considers the nature and extent of any contractual obligation and the scope of the Legislature’s power to modify such an obligation by considering (1) whether a valid contractual relationship exists that relates to the matter that is the subject of the law at issue; (2) whether the law operates to substantially impair that contractual relationship; (3) whether, in the case of impairment, there is a significant and legitimate public purpose behind the law; and (4) whether the law is a reasonable and necessary means to achieve that purpose. (Id. at 553-555.)

A challenged law substantially impairs a contract if it extinguishes a contract, renders the contract invalid, or significantly alters the material terms of the contract. (Marin Assn. of Public Employees v. Marin County Employees' Retirement Assn. (2016) 2 Cal.App.5th 674, 703. [“Lastly, is the impairment substantial, meaning was a substantial right secured by the contract extinguished, made invalid, or significantly altered?”]; Allied Structural Steel Co. v. Spannaus (1978) 438 U.S. 234, 245; Energy Reserves Group, Inc. v. Kansas Power and Light Co. (1983) 459 U.S. 400, 411. [“[S]tate regulation that restricts a party to gains it reasonably expected from the contract does not necessarily constitute a substantial impairment.”]; see also Southern California Gas Co. v. City of Santa Ana (9th Cir. 2003) 336 F.3d 885, 890. [“When assessing substantial impairment, we need not resolve the ‘question of valuation’ in terms of dollars if an important financial provision is impaired.”])

Petitioner contends the state’s exercise of its police power through Subdivision (d) is unconstitutional because of the impacts to its members’ contractual relationships. Petitioner argues Subdivision (d) operates to substantially impair its members’ contracts with health care providers because the law shifts the allocation of costs for COVID-19 diagnostic and screening testing in capitated contracts from health care providers to health care plans.

According to Petitioner, Subdivision (d) causes an immediate, permanent loss of a critical contract term relied upon by its members when negotiating capitated contracts. Further, Petitioner’s members did not expect the cost-shifting term in the capitated contracts as related to COVID-19 diagnostic and screening testing would be impaired. (Davidson Decl., ¶ 5; Hessler Decl., ¶ 7; Beley Decl. ¶¶ 4–5; Barnes Decl., ¶ 3.) Petitioner reports APG’s own evidence indicates the risk shifting provisions of capitated contracts are “heavily negotiated” and are “a critical component” of them. (Shelton Decl., ¶ 5.)

The court recognizes significant impairment in this context focuses on the contractual obligation and the materiality of any impaired terms. Significant impairment does not necessarily require a quantified financial impact. (Southern California Gas Co. v. City of Santa Ana, supra, 336 F.3d at 890.)

Despite having only five exemplars of capitated contracts before it, the court recognizes the importance of cost allocation terms between Petitioner’s members and health care providers in those contracts. Nonetheless, the court cannot find Subdivision (d) substantially impairs Petitioner’s members’ capitated contracts.

First, Subdivision (d) does not affect any terms in the capitated contracts. The effect of Subdivision (d) is to find (and essentially declare) the parties to the capitated contracts did not negotiate costs related to diagnostic and screening testing for a single disease—COVID-19—leading to an unprecedented global pandemic. Subdivision (d) precludes health care plans from asserting such services were included in negotiations concluded prior to the pandemic. (See Health & Saf. Code, § 1342.2, subd. (a)(6).) All other terms in the capitated contracts are unaffected. Moreover, as for diagnostic and screening testing, nothing precludes the parties from renegotiating the cost allocation for services provided prior to January 1, 2022. (Ibid.)

Further, Subdivision (d) recognizes Petitioner’s members and health care providers did not negotiate cost allocation for this single disease. Petitioner acknowledges it would be “nearly impossible” to have negotiated terms related to COVID-19 based on its sudden onset. (Opening Brief 13 n. 4.) Thus, there can be no argument Petitioner’s members (or health care providers) negotiated with knowledge of the costs of COVID-19 diagnostic and screening testing and knowingly allocated such risk to health care providers. Petitioner provides no capitated contract where the parties specifically bargained for and allocated responsibility for COVID-19 diagnostic and screening testing costs to health care providers. Petitioner instead argues COVID-19 diagnostic and screening testing is included in the capitated contracts’ general definition of testing.[8]

While Petitioner argues its members presumed and intended the use of broad language such as “testing” to cover the circumstances here—the onset of an unprecedented global pandemic of a new disease—the argument informs on the degree of impairment to capitated contracts.[9] That is, such circumstances inform about the extent of the parties’ reasonable expectations of the benefits and burdens resulting from their negotiated capitated contracts.

The court acknowledges the allocation of cost responsibilities in capitated contracts is a material contract term. Even assuming the costs of COVID-19 diagnostic and screening testing could be interpreted as within the general definition provisions of certain capitated contracts, the unexpected costs from an unprecedented global pandemic from a new disease are not costs that were reasonably accounted for or considered by either party. Accordingly, to the extent Subdivision (d) constitutes an impairment, there is no suggestion the impairment affects a reasonably expected and negotiated cost shifting obligation. (See United Firefighters of Los Angeles City v. City of Los Angeles (1989) 210 Cal.App.3d 1095, 1109. [“On the other hand, state regulation that restricts a party to gains it reasonably expected from the contract does not necessarily constitute a substantial impairment.”])

Context is also important in the analysis of Petitioner’s challenge. Petitioner’s members and health care providers have negotiated contracts in the managed health care field—a highly regulated industry. Health care plans in California do not operate as a matter of right. Instead, they are required to comply with the many requirements of the Knox-Keene Act. (APG Opposition 9:5-10:19.)

“The Knox-Keene Act is a comprehensive system of licensing and regulation under the jurisdiction of” Respondent. (Prospect Medical Group, Inc. v. Northridge Emergency Medical Group (2009) 45 Cal. 4th 497, 504.) “All aspects of the regulation of health plans are covered, including financial stability, organization, advertising and capability to provide health services. Under the Knox-Keene Act . . . [Respondent] has broad authority to protect and promote the public interest in health plans.” (Van de Kamp v. Gumbiner (1990) 221 Cal. App. 3d 1260, 1284; Health & Saf. Code, § 1341.) “Health care service plans must be licensed by [Respondent] in order to operate in California.” (Hambrick v. Healthcare Partners Medical Group, Inc. (2015) 238 Cal.App.4th 124, 140 [citing Health & Saf. Code, § 1349.4].)

As noted by Respondent, the reasonable expectations of the parties are diminished or minimized where they have negotiated contracts in a highly regulated industry. (20th Century Ins. Co. v. Superior Court (2001) 90 Cal.App.4th 1247, 1269. [“Whether the state actively regulates the industry at issue frames the parties' reasonable expectations and minimizes any potential statutory impairment.”] See also Calfarm Ins. Co. v. Deukmejian, supra, 48 Cal.3d at 830. [“Insurance, moreover, is a highly regulated industry, and one in which further regulation can reasonably be anticipated.”])

Based on the foregoing, the court finds Petitioner’s contract clause challenge to Subdivision (d) fails. The court finds Petitioner has not met its burden of demonstrating Subdivision (d) substantially impairs capitated contracts where the parties thereto have not specifically negotiated cost allocation for COVID-19 diagnostic and screening testing.

Even assuming, however, Petitioner did demonstrate substantial impairment to its members’ contracts, “a substantial impairment may be constitutional if it is ‘reasonable and necessary to serve an important public purpose.’ ” (Valdes v. Cory (1983) 139 Cal.App.3d 773.) A legitimate public purpose may overcome a substantial impairment. “The requirement of a legitimate public purpose guarantees that the State is exercising its police power, rather than providing a benefit to special interests.” (United Firefighters of Los Angeles City v. City of Los Angeles, supra, 210 Cal.App.3d at 1109-1110.)

Petitioner asserts Subdivision (d)’s retroactive nature is not “reasonable and necessary to serve [the] important public purpose” of encouraging individuals to participate in diagnostic and screening testing for COVID-19.

There can be no reasonable argument Health and Safety Code section 1342.2—including Subdivision (d)—is a legitimate exercise of the state’s police powers. The Legislature enacted the statute as a public health measure in response to the COVID-19 global pandemic. (Resp.’s RJN Ex. 1.) It is beyond controversy the Legislature’s desire to combat COVID-19 in this state is an important public purpose.

“Once a legitimate public purpose has been identified, the next inquiry is whether the adjustment of ‘the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purpose justifying [the legislation's] adoption.’ (Hall v. Butte Home Health, Inc. (1997) 60 Cal.App.4th 308, 321 [citing Energy Reserves Group, Inc. v. Kansas Power and Light Co., supra, 459 U.S. at 410].)

“Despite the customary deference courts give to social and economic legislation, laws altering the rights and obligations of contracting parties must be reasonable and necessary for the public purpose for which they were enacted.” (Interstate Marina Development Co. v. County of Los Angeles (1984) 155 Cal.App.3d 435, 445; Allied Structural Steel Co. v. Spannaus, supra, 438 U.S. at 244; Energy Reserves v. Kansas Power & Light (1983) 459 U.S. 400, 412-413.) Additionally, “complete deference to a legislative assessment of reasonableness and necessity is not appropriate [when] the State's self-interest is at stake.” (Valdes v. Cory, supra, 139 Cal.App.3d at 790; United Firefighters of Los Angeles City v. City of Los Angeles, supra, 210 Cal.App.3d at 1110.)

The parties dispute the degree of deference to which the Legislature is entitled when considering whether the alleged alteration of the contractual rights at issue here are “reasonable and necessary for the public purpose for which they were enacted.” (Interstate Marina Development Co. v. County of Los Angeles, supra, 155 Cal.App.3d at 445.)

Petitioner argues some of its members have capitated contracts with State providers. (Davidson Decl. ¶ 19 [“Based on my review of data, including information about the total number of COVID-19 testing claims Health Net has received from providers, I have determined that the total amount providers have billed (i.e., the total amount in claims/encounter data) for COVID-19 testing administered before January 1, 2022, which SB 510 purports to transfer from capitated providers to Health Net, is approximately $116 million, of which $3 million is attributable to state agencies.”] [Emphasis added.]; Barnes Decl., ¶ 6. [“Some of the providers who entered capitated agreements with Blue Shield for the 2020-2021 time period are state agencies.”]) Therefore, according to Petitioner, given the state’s interest at stake, whether Subdivision (d) is “reasonable and necessary for the public purpose” requires greater scrutiny and less deference.

The court disagrees. Petitioner provides no exemplar of a capitated contract involving the state or a state agency. Petitioner makes no showing a contract between any of its members and the state would be impaired (i.e., impacted) by Subdivision (d). Moreover, Health and Safety Code section 1342.2 does not target or specially treat public contracts. That the state or its agencies may have contracts with Petitioner’s members appears incidental. Given the facts, the court finds more rigorous scrutiny of whether Subdivision (d) is “reasonable and necessary for the public purpose” is unwarranted here.[10]

“Both the California and United States Supreme Courts have identified factors which may warrant legislative impairment of vested contract rights on the grounds of necessity: ‘(1) the enactment serves to protect basic interests of society, (2) there is an emergency justification for the enactment, (3) the enactment is appropriate for the emergency, and (4) the enactment is designed as a temporary measure, during which time the vested contract rights are not lost but merely deferred for a brief period, . . . .’ [Citations.]” (Valdes v. Cory, supra, 139 Cal.App.3d at 790-791.)

The Legislature codified its purpose—making COVID-19 diagnostic and screening testing free to encourage (that is, not discourage) such testing by consumers. The Legislature stated:

“To ensure that health care service plans and health insurers do not impose cost sharing or prior authorization requirements that might discourage individuals from seeking and receiving testing and vaccinations for a pandemic condition, it is the intent of the Legislature in enacting this act to require coverage for testing costs without cost sharing or prior authorization . . . .” (SB 510, § 1; see also Health & Saf. Code, § 1342.2, subd. (a).)

Petitioner argues Subdivision (d)’s retroactivity provision is unrelated to encouraging testing:

“ . . . citizens are not ‘discouraged’ (SB 510, § 1) from [getting] tested because the prospective aspects of SB 510 make the tests free and prohibit prior authorization barriers. Nothing in the statute or legislative history suggests that forcing health plans (rather than providers) to retroactively pay for testing has any impact on no ‘discourag[ing] the public from getting tested. SB 510 cannot reach backward in time and increase the number of tests administered before January 1, 2022.” (Opening Brief 23:10-15.)[11]

Respondent argues the retroactivity imposed by Subdivision (d) is reasonable and necessary to the state’s legitimate purpose of ensuring and encouraging COVID-19 diagnostic and screening testing. Respondent relies on the legislative history of the statute, the statute’s “gap filler” role created after this court invalidated an emergency regulation as well as the legislative history of the Health Care Providers’ Bill of Rights, codified in Health and Safety Code section 1375.7, to support its position. Respondent notes the financial health of the managed care system is promoted and relatedly provides access to health care services where health care plans and health care providers negotiate and allocate cost sharing of disclosed risks.

Through the statute, the Legislature acted to combat COVID-19 and its community spread by ensuring access to and encouragement for COVID-19 diagnostic and screening testing for consumers. (Resp.’s RJN Ex. 1, p. 4, ¶ 3. [“Being able to widely test individuals for COVID-19, regardless of symptoms, is critical in slowing the spread of COVID-19.”]) The Legislature intended, in part, to ensure free testing for the public. The Legislature also sought to protect access to COVID-19 diagnostic and screening testing by ensuring the overall financial stability of the healthcare system. Specifically, the legislative history notes the statute “is necessary to ensure the standards that have been in place since July 2020 are maintained in California as it related to COVID-19 testing and vaccination and to ensure that it is applied in future health emergencies so patients can receive care that need in a timely fashion and with no out-of-pocket costs.” (Resp.’s RJN, Ex. 2, pp. 11-12, ¶ 3.)

The court disagrees with Petitioner’s position the Health Care Providers’ Bill of Rights is irrelevant to legislative purpose. Appropriate cost allocation of disclosed risks between health care plans and health care providers is relevant where the Legislature has recognized that health care providers “should be compensated fairly and that the Provider Bill of Rights provision of the Knox Keene Act should be followed by health plans for this public health emergency.” (Resp.’s RJN Ex. 2, ¶ 3 p. 12 [APG comments within legislative history].)

In fact, the legislative history for the Health Care Providers’ Bill of Rights informs on legislative intent here; the history demonstrates a correlation between fair and reasonable contracts between health care plans and health care providers and access to quality care. (Resp.’s RJN Ex. 5, p. 4 [“[E]xisting law does not define what constitutes a fair and reasonable contract. Many in the health care community argue there is an imbalance in negotiating power between providers and health care plans that have resulted in provider contracts that do not meet the fair and reasonable standard in existing law. Unreasonable contracts can diminish access to quality care.”] (Emphasis added.) See also Resp.’s RJN, Ex. 6.)

(1) Because of the nature and cost of certain medical items, the financial risk of these items is better retained by the health care service plan than by a health care service provider.

(2) Allowing a health care service provider to take the financial risk for the items described in this section only if the provider specifically requests in writing to assume that risk, will assist in maintaining patient access to health care service providers.” (Health & Saf. Code, § 1375.8)

Petitioner characterizes the claim Subdivision (d) promotes the financial health of the managed healthcare system as well as access to services (including COVID-19 diagnostic and screening testing services) as a post-hoc rationalization. The court disagrees. Although the Legislature’s stated purpose was to ensure free access to testing, necessarily included within that purpose is the need for security—and financial stability—of the healthcare system to ensure ongoing access to services.

Subdivision (d) is an important safeguard to the stability of the managed healthcare system. The provision is critical to maintaining consumer access to care because it prevents the unexpected transfer of money to health plans, provides compensation to “financially stressed” providers, and furthers the Legislature’s recognized interest in leveling the playing field between health care plans and health care providers in contract negotiations. (Resp.’s Opposition 26:11-15; see also Parker Decl., Ex. 2, 6:3-7:15 [concern about COVID-19’s impact and financial stress on entire system].)

Based on the foregoing, the court finds any substantial impairment to Petitioner’s members’ contracts based on Subdivision (d) is overcome by the Legislature’s purpose in enacting the provision. The court finds Subdivision (d) is reasonable and necessary to an important public purpose.[12]

Petitioner also contends Subdivision (d) violates its members’ substantive due process rights by depriving them of vested rights to property (money) without sufficient justification.

“Vested rights, of course, may be impaired ‘with due process of law’ under many circumstances. The state's inherent sovereign power includes the so called ‘police power’ right to interfere with vested property rights whenever reasonably necessary to the protection of the health, safety, morals, and general well being of the people.” (20th Century Ins. Co. v. Superior Court (2001) 90 Cal.App.4th 1247, 1273.)

“In determining whether a retroactive law contravenes the due process clause, [courts] consider such factors as the significance of the state interest served by the law, the importance of the retroactive application of the law to the effectuation of that interest, the extent of reliance upon the former law, the legitimacy of that reliance, the extent of actions taken on the basis of that reliance, and the extent to which the retroactive application of the new law would disrupt those actions.” (In re Marriage of Bouquet (1976) 16 Cal.3d 583, 592.)

The parties’ arguments concerning the Due Process Clause are substantially similar to those made as to the Contract Clause.

Petitioner contends Subdivision (d) violates the Due Process Clause because it nullifies its members’ vested rights in their negotiated capitated contracts. Petitioner reasons the public benefits of ensuring ongoing cost-free COVID-19 diagnostic and screening testing for consumers could be realized without legislating the allocation for costs for testing already provided.

Respondent contends Subdivision (d) advances the state’s interests by remunerating providers for past services so those providers can afford to continue to offer future COVID-19 diagnostic and screening testing. Specifically, Respondent argues Subdivision (d) is akin to “price control” or “rate regulation.” “Price-control regulations like Subdivision (d) are unconstitutional only when they are ‘arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt . . .’ (Resp.’s Opposition 25:8-11 [quoting 20th Century Ins. Co. v. Garamendi, supra, 8 Cal.4th at 291].) “A ‘legitimate and rational goal of price or rate regulation is the protection of consumer welfare.’ ” (Id. at 292.)

Based on the reasons discussed earlier related to the Contract Clause, Petitioner’s substantive due process argument fails. As discussed, the court finds there is reasonable connection between encouraging/ensuring access to COVID-19 diagnostic and screening testing for consumers in the future and shifting unnegotiated responsibility for past costs from providers to health care plans. Access to such testing constitutes a legitimate and important public purpose. Retroactive application furthers that important state interest.

In a brief argument, Petitioner contends Subdivision (d) violates the Takings Clause of the California Constitution.

The Takings Clause, contained in Article I, Section 19 of the California Constitution,

provides that “[p]rivate property may be taken or damaged for public use only when just compensation . . . has first been paid to . . . the owner.” (Cal. Const., art. I, § 19.)

“Two types of “takings” are assured just compensation: (1) categorical or per se takings, which arise when the government physically occupies property or deprives its owner of all viable uses of the property [citation]; and (2) regulatory takings, which arise when government regulation of a property's use sufficiently impairs its value [citation].” (McClain v. Sav-On Drugs (2017) 9 Cal.App.5th 684, 703.)

“Regulatory takings challenges outside these two categories, i.e., those that do not involve a physical invasion or that leave the property owner with some economically beneficial use of the property, are governed by the ‘essentially ad hoc, factual inquiries’ set forth in Penn Central Transp. Co. v. New York City (1978) 438 U.S. 104 . . . .” (Shaw v. County of Santa Cruz (2008) 170 Cal.App.4th 229, 261.)

The Penn Central Transportation Company v. City of New York factors aim to “identify regulatory actions that are functionally equivalent to the classic taking in which the government directly appropriates private property or ousts the owner from his domain. Accordingly, each of these tests focuses directly upon the severity of the burden that government imposes upon private property rights.” (Lingle v. Chevron U.S.A. Inc. (2005) 544 U.S. 528, 539.) “[T]he Penn Central inquiry turns in large part, albeit not exclusively, upon the magnitude of a regulation's economic impact and the degree to which it interferes with legitimate property interests.” (Id. at 540.)

Petitioner’s entire argument about the Takings Clause (in its Opening Brief) is as follows:

“Subdivision (d) expressly and facially takes away health plans’ preexisting contract rights. See supra, Section V. California courts and other courts hold that contract rights constitute property rights for purposes of the Takings Clause. Thus, Subdivision (d) has taken health plans’ property, meaning that the California government is required to pay just compensation for such taking. Because Subdivision (d) does not provide for just compensation, it violates the Takings Clause.” (Opening Brief 25:10-15.)

Petitioner’s argument is insufficiently developed to mount a challenge to Subdivision (d) under the Takings Clause. As noted by Respondent, Petitioner does not discuss any of the relevant factors enunciated in Penn Central Transportation Company v. City of New York. Petitioner’s response avoids a regulatory analysis suggesting Subdivision (d) is a direct taking and unconstitutional under either analysis.

“The United States Supreme Court has defined a facial takings claim as an ‘uphill battle’ and ‘difficult’ to demonstrate.” (Action Apartment Assn. v. City of Santa Monica (2008) 166 Cal.App.4th 456, 468.) The party asserting a facial takings claim must demonstrate the governmental action constitutes a taking. (Ibid.)

Petitioner has failed to meet its burden of demonstrating Subdivision (d) operates as a taking of its property.

Petitioner requests if the court determines it cannot adjudicate Petitioner’s claim as a facial challenge, it “should make ‘as applied’ findings for the contracts in evidence.” (Reply 30:1-10.)

First, any “as applied” challenge is beyond the scope of the petition. The petition does not reveal Petitioner is asserting an as applied challenge. In fact, the petition does not identify any particular contract to which an as applied challenge would apply.

Second, there has been no notice to Respondent or APG of the contracts at issue for an as-applied challenge until—at best—service of Petitioner’s Opening Brief.[13] Such late notice deprives Respondent and APG of any opportunity to conduct discovery about an as applied challenge to the late-identified contracts.[14]

Petitioner’s newly raised “claim” is inappropriate for review based on the procedural posture of the proceeding.[15]

An association has standing only if its members have standing in their own right, and “neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.” (Association for Los Angeles Deputy Sheriffs v. Macias (2021) 63 Cal.App.5th 1007, 1020.) The purpose of associational standing is to promote “administrative convenience and efficiency.” (United Farmers Agent Assn., Inc. v. Farmers Group, Inc. (2019) 32 Cal.App.5th 478, 488.)

As the court has determined Petitioner’s claims fail on the merits, it need not discuss whether Petitioner has organizational standing—the issue is moot.

[1] Petitioner has also named Mary Watanabe in her official capacity as acting director of California Department of Managed Health Care as a Respondent.

[2] Given the lengthy passages to which objections have been made, Fibreboard Paper Products Corp. v. East Bay Union of Machinists, Local 1304, Steelworkers of America, AFL-CIO (1964) 227 Cal.App.2d 675, 712 is relevant here. Where there is both objectionable and unobjectionable material proffered, a general objection is insufficient to preclude admission of the material and an objection in such circumstances is properly overruled.

[3] Health and Safety Code section 1342, subdivision (a) provides: “Notwithstanding any other law, a health care service plan contract that covers medical, surgical, and hospital benefits, excluding a specialized health care service plan contract, shall cover the costs for COVID-19 diagnostic and screening testing and health care services related to diagnostic and screening testing approved or granted emergency use authorization by the federal Food and Drug Administration for COVID-19, regardless of whether the services are provided by an in-network or out-of-network provider. Coverage required by this section shall not be subject to copayment, coinsurance, deductible, or any other form of cost sharing. Services related to COVID-19 diagnostic and screening testing include, but are not limited to, hospital or health care provider office visits for the purposes of receiving testing, products related to testing, the administration of testing, and items and services furnished to an enrollee as part of testing. Services related to COVID-19 diagnostic and screening testing do not include bonus payments for the use of specialized equipment or expedited processing.”

[4] Petitioner explains a capitated contract is one where “health plans contract with provider groups that agree to take some of the risk that the health plans would otherwise have borne.” (Opening Brief 7:24-25.) In capitated contracts, a health plan pays a provider “a negotiated ‘per-member-per-month’ flat monthly amount, in exchange for [a health care provider] taking financial responsibility to provide specified ‘capitated’ services, without regard to the amount of such services actually provided.” (Opening Brief 8:3-5.)

[5] Petitioner’s argument necessarily presumes contracts were negotiated for COVID-19 related services before March 2020 and the unprecedented global pandemic. Respondent and APG dispute there was any such pre-COVID-19 negotiation.

[6] Respondent contends Health and Safety Code section 1342.2 can be applied to capitated contracts when Subdivision (d) does not substantially impair the contractual relationship or in other circumstances where any alleged impairment does not rise to a constitutional violation. (Opposition 12:7-9.) Petitioner argues the statute “impairs every contract that is a Delegating Contract, it does so substantially, and it does so without justification.” (Reply 20:18-19.)

[7] Petitioner notes, however, this “circumstance [is] nearly impossible to exist due to the short time between the emergence of the virus and the emergency.” (Opening Brief 13 n. 4.)

[8] Many capitated contracts in effect from January 2020 through December 31, 2021 allocated costs for laboratory, pathology, or diagnostic testing services to health care providers. (Adams Decl., ¶ 21.) Whether COVID-19 diagnostic and screening testing would fall within a broad and non-specific testing delegation in all cases is an inappropriate advisory opinion without a challenge to any specific terms in any specific contract. In fact, APG contends Petitioner’s reliance on common dictionary definitions of certain contract terms (“laboratory testing,” “diagnostic testing,” or “pathology”)—instead of how those terms are understood in the health care industry—results in Petitioner’s failure to carry its burden of showing Subdivision (d) impairs any terms within capitated contracts. (APG Opposition 18:2-4, fn. 10.)

[9] To the extent Petitioner asserts some capitated contracts specifically shift diagnostic and screening testing costs related to a pandemic to health care providers, Petitioner undermines its comprehensive facial challenge here; the particular terms of a capitated contract are necessary to determine the nature of any impairment. At least one capitated contract contained a provision related to a pandemic. (See Davidson Decl., ¶ 9, Ex. 3. [“Notably, however, in the event of a pandemic (¶ 6.01), the [risk-bearing organization] may ‘elect to suspend any Capitated Provider’s financial risk for Covered Services by providing written notice to [Health Net] that the Capitated Provider shall cease to be at financial risk for Covered Services effective the first day of the month in which the notice is sent’ (¶ 6.02).” (Id. (pp. 3-34 to 3-36).

[10] The court’s findings and the result herein would likely be the same no matter the deference afforded the Legislature. Even where “complete deference” is absent, deference is still provided. The court is called upon to perform a “careful examination” of the nature and purpose of the legislation. (See Hermosa Beach Stop Oil Coalition v. City of Hermosa Beach, supra, 86 Cal.App.4th 534, 569-570; Allied Structural Steel Co. v. Spannaus, supra, 438 U.S. as 245.) The court has conducted the required careful examination herein.

[11] Petitioner has demonstrated a fondness for the court’s remark in its order granting a preliminary injunction that the “[a]llocation of costs between health care plans and health care providers for services provided in the past does not appear to relate to ensuring cost-free testing for consumers on an ongoing basis.” As the parties know, the court is not bound by its order on a preliminary injunction.

[12] “Legislation adjusting the rights and responsibilities of contracting parties must be upon reasonable conditions and of a character appropriate to the public purpose justifying its adoption.” (United States Trust Co. v. New Jersey (1977) 431 U.S. 1, 22.) “The extent of impairment is certainly a relevant factor in determining its reasonableness.” (Id. at 27.) Thus, the court’s finding of limited impairment necessarily informs on the reasonableness of Subdivision (d).

[13] Petitioner identifies the contracts that may be adjudicated in an as applied challenge as

(1) the Blue Shield contract at Barnes Decl., Ex. 2, (2) the Health Net contract at Davidson Decl., Ex. 2, (3) the Anthem contract at Beley Decl., Ex. 2, and (4) the Cigna contract at Demonteverde Decl., Ex. 2. (Reply 30, fn. 23.)

[14] In fact, Petitioner identified the contracts after Respondent and APG filed their opposition briefs.

[15] Further, Respondent persuasively asserts an as-applied challenge would fail because Petitioner has not joined the parties to the specific contracts. Petitioner argues APG may virtually represent the interests of the contracting parties. Petitioner’s legal authority appears inapposite as it does not address individual distinct contracts. (See Retired Chicago Police Ass'n v. City of Chicago (7th Cir. 1993) 7 F.3d 584, 603.)