Judge: Peter Wilson, Case: 22-01251774, Date: 2022-07-21 Tentative Ruling
Defendant Varis, LLC (Defendant) generally demurs to the Second Cause of Action for Unfair Business Practices and the Fifth Cause of Action for Intentional Interference with Contractual Relations in the operative Complaint. The Plaintiffs are collectively referred to herein as Prime Hospitals.
For the reasons which follow, the Demurrer is sustained in part and overruled in part.
The unopposed Request for Judicial Notice (ROA 27) is granted.
A demurrer challenges the defects appearing on the face of the pleading or from other matters properly subject to judicial notice. (See Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The issue is the sufficiency of the pleading, not the truth of the facts alleged. Thus, no matter how unlikely or improbable, the allegations made must be accepted as true for the purpose of ruling on the demurrer. (See Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604.)
2nd COA for Unfair Business Practices:
Varis argues that it is not subject to Health & Safety Code §§ 1367 and 1367.02(a) because it is not a health care service plan, and therefore it cannot be liable for unfair business practices based on a violation of those provisions. ROA 25, P&A, pp. 7-8. Varis further contends that Prime Hospitals do not have standing to sue for unfair business practices because Varis’s contract with CalOptima falls within CalOptima’s discretion and Prime Hospitals may not override CalOptima’s judgment in relying on Varis’s service and advice. ROA 25, P&A, pp. 7-8. Varis also argues that the judicial abstention doctrine precludes a court ruling on this claim. ROA 25, P&A, pp. 9-12.
Prime Hospitals respond that Varis is subject to Health & Safety Code because CalOptima delegated its authority to Varis, and as its delegate, Varis must also comply with these provisions. Prime Hospitals further argues that Varis carries out its duties in a manner that is fundamentally unfair because, among other things, it does not permit proper and neutral reviews and disregards appeals as a result of its financial incentive to deny claims. ROA 33, Opp., at pp. 7-10. Prime Hospitals contends the judicial abstention doctrine does not apply because the court is not required to engage in regulatory conduct.
The Court need not at this juncture decide whether Varis is subject to the Health & Safety Code and acted unlawfully because the allegations in the Complaint are sufficient to show Varis engaged in unfair business practices.
Under the Unfair Competition Act, Bus. & Prof. Code § 17200 et seq., any unlawful, unfair or fraudulent business act or practices is deemed to be unfair competition. (Podolsky v. First Healthcare Corp. (1996) 50 Cal.App.4th 632, 647.)
Because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition—acts or practices which are unlawful, or unfair, or fraudulent. “In other words, a practice is prohibited as 'unfair' or 'deceptive' even if not 'unlawful' and vice versa.” Virtually any state, federal or local law can serve as the predicate for an action under Business and Professions Code section 17200.
The independent “unfairness” prong of the UCA is “intentionally broad, thus allowing courts maximum discretion to prohibit new schemes to defraud. [Citation.] The test of whether a business practice is unfair 'involves an examination of [that practice’s] impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer. In brief, the court must weigh the utility of the defendant’s conduct against the gravity of the harm to the alleged victim .... [Citations.]' ....” An unfair business practice occurs when the practice “‘offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.' [Citation.]”
(Podolsky v. First Healthcare Corp., supra, 50 Cal. App. 4th 632, 647, citations omitted.)
The Complaint alleges Varis is employed by CalOptima to conduct retrospective reviews “with an intent to down code the claims and recoup monies that have already been paid,” that Varis engages in the “improper practice of retroactively reclassifying DRG codes to lower severity, or to a DRG code with lower reimbursement rate” contrary to ICD-10-CM Official Guidelines for Coding and Report, § 1.A.19, that Varis “removes certain well documented diagnoses codes (ICD codes) by the treating physician, which is against the applicable standards…,” that Varis requests medical records “beyond the one-year limitation period,” that Varis “consistently denies the treating physician’s documentation and diagnosis of patient’s illness under the ruse that underlying medical records do not support the diagnosis under clinical criteria,” that Varis “improperly resequences the diagnosis or excludes the Prime Hospitals’ properly sequenced primary diagnosis code, in order to downgrade the coding…so CalOptima can pay less…and Varis can make money based on its contingency arrangement,” that this financial arrangement violates the California Department of Health Care Services’ contract with CalOptima, which prohibits Varis from being compensated based on a percentage it “saves” CalOptima from the payments CalOptima receives from the State. Complaint, ¶¶66-78, 101, 103. Prime Hospitals contend that Varis reviews the medical claims without reference to the Health Services Contracts or CalOptima’s Policies, and without any process, procedure or standards. Complaint, ¶104. Further, Prime Hospitals contend exhaustion of its administrative remedies would be futile because its appeals would have been denied regardless. Complaint, ¶¶79-84. If these allegations are true, as the Court must assume that they are, then Prime Hospitals have sufficiently alleged unfair business practices.
Contrary to Varis’s contention, CalOptima’s discretion to contract with Varis or set the standards under which Varis performs its claims review is not an issue for this motion. The Complaint alleges Varis unfairly conducts its claims review because it does so “without reference to” CalOptima’s policies as well as Prime Hospitals’ contracts and other standards. Varis has not shown that only CalOptima may enforce its standards.
Moreover, even if enforcement of its standards is within CalOptima’s discretion, the Complaint alleges Prime Hospitals do not have to exhaust administrative remedies because it would be futile and that CalOptima was advised of the litigation and has not taken any action. Complaint, ¶¶79-90. Under these circumstances, Prime Hospitals are permitted to pursue its claims against Varis. (See, e.g., Gilbane Bldg. Co. v. Superior Court (2014) 223 Cal.App.4th 1527, 1533: “Where the public agency has expended funds illegally or for an unlawful purpose and its management is in the hands of the persons accused of the wrongdoing, a taxpayer is not required to make a demand on the public agency as it would be unavailing. (Citations omitted.)”
The judicial abstention doctrine permits a trial court to “abstain from adjudicating a suit that seeks equitable remedies if ‘granting the requested relief would require a trial court to assume the functions of an administrative agency, or to interfere with the functions of an administrative agency.’ [Citations omitted.” (Arce v. Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471, 496.) A court also may abstain when the lawsuit involves determining complex economic policy best left to the Legislature or administrative agency or when “injunctive relief would be unnecessarily burdensome for the trial court to monitor and enforce given the availability of more effective means of redress.” (Ibid.)
Here, the 2nd COA seeks an injunction requiring Other Payors and Varis “to cease and desist engaging in such improper tactics.” Complaint, ¶105. These improper tactics include but are not limited to, “[f]ailing to timely respond to requests for authorization for post-stabilization services and then denying the claims on the grounds that no authorization for the post-stabilization services was obtained”, “failing to accept late claims where good cause is shown for the delay”, and “unilaterally impos[ing] time limits for the Prime Hospitals to submit information and documents … [when] the Prime Hospitals did not agree to be bound by such time limits” Complaint, ¶¶103.b and f. Whether these practices were unlawful or unfair requires the Court to perform basic judicial functions of contractual and statutory interpretation rather than regulatory action. Therefore, the Court may fashion injunctive relief that does not implicate any regulatory action or require ongoing monitoring.
Accordingly, the demurrer to the 2nd Cause of Action is OVERRULED.
5th COA for Intentional Interference with Contractual Relations:
Varis argues that because it is an agent for Prime Hospitals, it cannot be liable for intentional interference with contracts between Prime Hospitals and CalOptima as a matter of law. ROA 25, P&A, pp. 12-13. Prime Hospitals do not dispute this argument but contend that this claim is in the alternative, in the event Varis is found to be a third party, rather than an agent for CalOptima. ROA 33, Opp., pp. 15-16.
However, as Varis points out, the Complaint is not drafted as if this claim is in the alternative. Instead, the Complaint repeatedly alleges that Varis is an agent of CalOptima or employed by CalOptima. See e.g., Complaint, ¶¶12, 30, 123. See also, ¶¶120-128.
Thus, “[b]ecause the representative of a contracting party may not be held liable for the tort of interfering with its principal's contract” (Mintz v. Blue Cross of California (2009) 172 Cal. App. 4th 1594, 1607 [no cause of action for intentional interference with contract against administrator of insurance policy because it was the agent of the insurer]), the Complaint fails to state facts sufficient to constitute a cause of action for intentional interference with contractual relations against Varis.
Accordingly, the demurrer to the 5th Cause of Action is SUSTAINED, with 15 days leave to amend.
Varis is ordered to give notice.