Health plans have no tort duty to avoid underpaying hospitals for emergency services

Long Beach Memorial Medical Center v. Kaiser Foundation Health Plan, Inc. (Nov. 4, 2021, B304183) __ Cal.App.5th __ [2021 WL 5118888]

Under the Knox-Keene Act, healthcare service plans must reimburse hospitals for emergency medical services to their enrollees based on either an agreed-upon contractual rate or the “reasonable and customary value” of the services. Several hospitals that no longer had contracts with Kaiser provided emergency services to over 3500 Kaiser enrollees and billed Kaiser at their full rate for those services. Kaiser used an internal methodology to calculate the reasonable value of the services, and reimbursed the hospitals for 53.2 percent of the billed charges. The hospitals sued Kaiser for breach of contract, recovery in quantum meruit, the tort of intentionally violating the Knox-Keene duty to pay the reasonable value of emergency services, and violating the unfair competition law (UCL) by underpaying the required reimbursement. The trial court dismissed the hospitals’ intentional tort and unfair competition claims, and a jury found that Kaiser had paid the hospitals the reasonable value of the emergency services. The hospitals appealed.

The Court of Appeal affirmed. The court declined to recognize a new tort duty on the part of health plans to avoid reimbursing less than the “reasonable and customary” value of emergency services.  The court reasoned that the social benefit of recognizing such a tort duty would be slight, since the quantum meruit remedy adequately addressed any inadequate reimbursement problem, while the social costs of recognizing the tort duty would be “staggering.” The court explained that tort liability for pure economic harms are the exception, not the rule, since economic relationships are generally governed by contracts and comprehensive statutory and regulatory schemes, as here.  Recognizing a tort duty would create a strong incentive for health plans to overcompensate healthcare providers, which conflicts with the Knox-Keene Act’s avowed purpose of ensuring health care at the lowest possible cost.  Moreover,because health plan payments are always intentional, healthcare providers would have a strong incentive to file intentional tort claims seeking punitive damages in every case, which would likely add an unnecessary and potentially burdensome volume of litigation.  The court held that the hospitals’ requested injunctive relief under the UCL (to enjoin Kaiser from violating Knox-Keene by underpaying for emergency medical services in the future) is legally unavailable, and that restitution under the UCL would duplicate any quantum meruit award.

Finally, the court held that the trial court did not err in instructing the jury that the reasonable value of emergency medical services is the price that a “hypothetical willing buyer” would pay a “hypothetical willing seller.” The court explained that, “[n]ot only is it legally appropriate to key ‘reasonable value’ to the price fixed by a willing ‘hypothetical buyer’ and willing ‘hypothetical seller’ in a ‘hypothetical transaction,’ but it is affirmatively helpful because it emphasizes another pertinent legal principle—namely, that the parties’ prior actual transactions are not dipositive.”  Because “some market transactions will more closely resemble the transactions at issue in the case before the jury, and some will bear less resemblance,” the jury must have “the ability to give greater weight to the former and less weight to the latter in fixing what a hypothetical buyer and seller would pay for the specific services at issue in that case.” 

The bulletin describing this appellate decision was originally prepared for the California Society for Healthcare Attorneys (CSHA) by H. Thomas Watson and Peder K. Batalden, Horvitz & Levy LLP, and is republished with permission.

For more information regarding this bulletin, please contact H. Thomas Watson, Horvitz & Levy LLP, at 818-995-0800 or htwatson@horvitzlevy.com.