UPHELD by Calif. Supreme Court, 5/3/2001


Cite as 99 C.D.O.S. 6675

GEORGE McCALL et al., Plaintiffs and Appellants,
v.
PACIFICARE OF CALIFORNIA, INC. et al., Defendants and Respondents.
No. G024030
In the Court of Appeal of the State of California
Fourth Appellate District
Division Three
(Super. Ct. No. 788545)

Appeal from a judgment of the Superior Court of California, County of Orange, Thierry P. Colaw, Judge. Reversed.

COUNSEL

Houck & Balisok, Russell S. Balisok, Steven C. Wilheim and Carol S. Jimenez for Plaintiffs and Appellants.

Michael Schuster, Gill Deford and Herbert Semmel, American Association of Retired Persons as Amicus Curiae on behalf of Plaintiffs and Appellants.

Konowiecki & Rank, Jon N. Manzanares, Keith A. Weaver, Jeffrey D. Olster, Rosato & Samuels, Cary S. Samuels, Ellen Kamon and Pamela Sirkin Hemer, Barkus & Clark, Edward A. Stumpp, for Defendants and Respondents.
Filed August 17, 1999

CERTIFIED FOR PARTIAL PUBLICATION [FOOTNOTE *]

This is an action for negligence, intentional and negligent infliction of emotional distress, unfair business practices and fraud, brought by George and Barbara McCall against George's health maintenance organization, Pacificare of California, Inc., its physician provider group, Greater Newport Physicians, Inc. (GNP), and George's primary care physician, Dr. Lakshmi Shukla.

The McCalls appeal from a judgment sustaining a demurrer without leave to amend, arguing the trial judge wrongly found all their claims arose under the Medicare Act, 42 United States Code section 1395 et seq., which authorizes judicial review only in the federal district courts after exhaustion of administrative remedies. They also contend the judge misread Health and Safety Code section 1371.25 when he ruled a physician provider group is not vicariously liable for the conduct of one of its members. We conclude the claims are not within the federal statue and vicarious liability exists. The emotional distress cause of action was demurrable on other grounds, but leave to amend should have been granted.

At the time George McCall (McCall) enrolled in Pacificare, he was suffering from progressive lung disease. The gravamen of his complaint is that, to save money, Pacificare, GNP and Shukla, repeatedly refused to refer him to a specialist for a lung transplant, or provide other needed care, and ultimately forced him to leave the plan to get on the list for a transplant. During that time his condition worsened, and he is now unable to walk progressive lung disease.

McCall alleges Pacificare, GNP and Shukla were negligent in failing to provide care, as a result of which his condition worsened, he incurred additional medical expenses which will continue. He alleges their conduct was willful and warrants punitive damages. There is a cause of action for intentional infliction of emotional distress, and one for unfair business practices in violation of Business and Professions Code section 17200.

McCall alleges fraud in four separate causes of action. He claims:
(1) Pacificare made misrepresentations in state and federal applications to operate as a health maintenance organization (HMO), which created a foreseeable risk of harm to him as an enrollee;
(2) Pacificare made misrepresentations to him in its marketing materials;
(3) GNP made misrepresentations to induce Pacificare to select it as a provider, creating a foreseeable risk of harm to him as an enrollee; and
(4) Pacificare, GNP and Shukla concealed from him their failure to adequately insulate medical decisions from financial ones, which caused them to deny him care for their own financial gain.
Barbara McCall alleges a single cause of action for negligent infliction of emotional distress by Pacificare and GNP, asserting they knew or should have known their failure to provide a lung transplant would cause her severe emotional distress as she watched her husband suffering while his health failed.

The trial judge determined all causes of action arose under the Medicare Act, relying on Redmond v. Secure Horizons, Pacificare, Inc. (1997) 60 Cal.App.4th 96, and further ruled GNP was not vicariously liable for Shukla's conduct. Judgment was entered dismissing the complaint against Pacificare and GNP.[FOOTNOTE 1]

The McCalls argue their tort claims do not arise under the Medicare Act and were properly brought in state court, while Pacificare and GNP argue all are Medicare claims cognizable only in federal court. We conclude the complaint falls somewhere in between. Since the Medicare and non-Medicare claims are interwoven throughout the various causes of action, the demurrer was proper but the McCalls should have been given leave to amend.

I

The Medicare Act, 42 United States Code section 1395 et seq., is a part of the Social Security Act that creates a federally subsidized health insurance program administered by the Secretary of Health and Human Services (Secretary).
Part A provides insurance for the cost of hospital and related post-hospital expenses, but reimbursement is authorized only for services found reasonable and necessary for the diagnosis or treatment of illness or injury. (42 U.S.C., 1395y(a)(1).) The Secretary is authorized to determine by regulation what claims are covered by the act (42 U.S.C., 1395ff(a)), and the regulations provide that a final decision is not rendered on a claim until it is pursued through a multi-level review process.

Judicial review is available as provided in 42 United States Code section 405(g), a provision found in a different part of the Social Security Act but incorporated into the Medicare Act. (42 U.S.C., 1395ff(b).) Section 405(g) provides that a final decision may be reviewed by a civil action which "shall" be brought in the appropriate United States District Court. Thus, the question is whether the McCalls' claims arose under the Medicare Act. If so, they were required to first exhaust their administrative remedies and could thereafter only seek judicial review in federal court.

Consideration of when a claim arises under the Medicare Act must begin with the seminal decision of Heckler v. Ringer (1984) 466 U. S. 602, which held the substance of the claim controls. In Heckler, four individuals sought a declaration that the Secretary was legally obliged to authorize or reimburse them for surgery not covered under Medicare regulations. They also requested an injunction to compel payment and to bar the Secretary from requiring them to exhaust their administrative remedies. Three of the four plaintiffs had undergone surgery and filed administrative claims for reimbursement, but had not received a final decision. The fourth had not had surgery and sought authorization for the procedure. All contended their constitutional rights were violated by requiring them to go through a multi-layered administrative review process and asserted the Secretary was legal Heckler, supra, 466 U.S. at pp. 609-611.)

The Heckler court held claims arising under the Medicare Act "include any claims in which 'both the standing and the substantive basis for the presentation'of the claims" was the Medicare Act. (Heckler, supra, 466 U.S. at p. 615.) As applied to the individuals seeking reimbursement for surgery, the court found their claims arose under the act. That they sought only declaratory and injunctive relief was of no import, for "[f]ollowing the declaration which respondents seek from the Secretary - that [their] surgery is a covered service - only essentially ministerial details will remain before respondents would receive reimbursement." ( Ibid.)

As for the individual awaiting surgery, the court held his claim too arose under the act, because he was seeking to establish a right to future payments should he decided to go ahead with surgery. "The claim for future benefits must be construed as a 'claim arising under'the Medicare Act because any other construction would allow claimants substantially to undercut Congress's carefully crafted scheme for administering the Medicare Act." (Heckler, supra, 466 U.S. at p. 621.)

Redmond v. Secure Horizons, Pacificare, Inc., supra, 60 Cal.App.4th 96 (Redmond), was, like Heckler, a reimbursement case. Redmond, an HMO subscriber, requested reimbursement for surgery. The HMO first turned her down but later paid the claim. Redmond alleged the HMO knew the claim was covered but nonetheless initially denied it and then delayed reimbursement. She sued for breach of contract, breach of the implied covenant of good faith and fair dealing, and intentional and negligent infliction of emotional harm, claiming loss of use of the money, emotional suffering and attorney fees. (Id. at p. 99.) The court characterized Redmond's claim as one for benefits under the Medicare Act and held it had no jurisdiction. It reasoned that "while plaintiff's causes of action are not actually a claim for benefits . . . her causes of action are 'inextricably intertwined'with a claim that she was entitled to the reimbursement she received. . . . [T]he alleged wrongfulness of defendant's conduct depends on whether plaintiff was entitled to payment of her claim. The fact that defendant ultimately paid her claim does not necessarily establish that plaintiff was entitled to such payment." (Redmond, supra, 60 Cal.App.4th. at p. 102.)

We agree with the outcome in Redmond but find the case distinguishable. The essence of Redmond's claim was a denial of benefits, albeit for delayed reimbursement rather than the cost of medical care. Just as couching a reimbursement claim as one for declaratory or injunctive relief did not alter that basic fact in Heckler, we think the Redmond court properly held that couching a reimbursement claim as one for breach of contract is no more availing.

However, this is a different case. The McCalls'action is not in substance a claim for reimbursement of benefits, even though some of damages sought fall into that category (past and future medical expenses.) We cannot agree with Redmond's suggestion that all claims which depend upon entitlement to benefits arise under the Medicare Act. As noted by amicus curiae The American Association of Retired Persons, this goes too far in implying that any problem over health care covered by the Medicare insurance program is so related to a benefit claim that it may only proceed via the administrative process. We therefore turn to federal cases that consider the proper forum in which to adjudicate non-reimbursement claims against health care providers.

Where a state law claim is brought against an HMO, even if the claim is based on a denial of Medicare benefits, federal courts distinguish Heckler and allow the action to proceed in state court.

(Ardary v. Aetna Health Plans of California, Inc. (9th Cir. 1996) 98 F.3d 496, certiorari denied 520 U. S. 1251 [wrongful death action for negligence, intentional and negligent infliction of emotional distress, misrepresentation and professional negligence];
Plocica v. Nylcare of Texas, Inc. (N.D. Tex.) 43 F.Supp.2d 658 [wrongful death action for negligence];
Winkler v. Interim Services, Inc. (M.D. Tenn. 1999) 36 F.Supp.2d 1026 [action for refusal to provide care in order to save money, alleging breach of contract, infliction of emotional harm and negligence along with federal and state statutory claims];
Wartenberg v. Aetna U. S. Healthcare, Inc. (E.D.N.Y. 1998) 2 F.Supp.2d 273 [wrongful death action for negligence];
Berman v. Abington Radiology Associates, Inc. (E.D. Pa. Aug. 14, 1997) (docket no. Civ. A. 97-3208) 1997 WL 534804 [negligence].)

Ardary v. Aetna Health Plans of California, Inc., supra, 98 F.3d 496 (Ardary) is the leading case. Cynthia Ardary died at a rural hospital after her HMO refused to authorize an airlift to a larger institution with intensive care facilities. Ardary's heirs brought a wrongful death action against the HMO for negligence, emotional distress, misrepresentation and professional negligence. Although the complaint did not seek recovery of Medicare benefits, the Ardarys conceded their claims were "predicated on" the HMO's failure to authorize the airlift. (Ardary, supra, 98 F.3d at pp. 497-498.) The action was initially filed in state court and removed to federal court by the HMO, where the district judge granted its motion to dismiss for failure to exhaust administrative remedies. (Ardary, supra, 98 F.3d at p. 498.)

The Ninth Circuit held the Ardarys'claims did not arise under the Medicare Act and remanded the case to state court. It found Heckler inapplicable, reasoning the claims were based on state law and did not seek reimbursement for Medicare covered benefits, hence neither the standing nor substance was based on the Medicare Act. The court also noted Cynthia's death could not be remedied by the retroactive authorization of, or payment for, the airlift, so for this additional reason the action could not be considered one for reimbursement of benefits. (Ardary, supra, 98 F.3d at p. 500.) The court was reluctant to find state law preempted by the Medicare Act absent a clear Congressional intent, and found nothing in the legislative history of the act that suggested it was designed to abolish all state remedies for torts committed by a Medicare provider. (Id. at p. 501.)

We agree with Ardary that state law claims which do not seek reimbursement for Medicare benefits do not arise under the Medicare Act, and are actionable in state court. The McCalls'complaint cannot be characterized as one for reimbursement of benefits simply because the damages sought include past and future medical expenses incurred because McCall was denied a lung transplant. Those damages are not recoverable in a state action,[FOOTNOTE 2] but their inclusion in the complaint does not transmogrify the action into one for reimbursement and deprive the state court of jurisdiction.

The negligence alleged is failure to recommend or provide needed care. Apart from medical expenses, McCall seeks compensation for his worsened condition, and there is no suggestion this is covered by Medicare. The fraud causes of action do not involve claims for benefits, nor do the emotional suffering allegations that Pacificare and GNP's conduct was outrageous and beyond what is socially acceptable in causing McCall and his wife emotional suffering and anguish. And it is a stretch too far to say an unfair business practices claim for violation of state law arises under the Medicare Act. Admittedly all of these causes of action are predicated on Pacificare and GNP's failure to provide benefits. But here we find Ardary more persuasive than Redmond, and we share the former's concern that "removal of the right to sue the private Medicare provider for its torts would result in an inequitable and substantial dilution of the rights of patients." (Ardary, supra, 98 F.3d at p. 501.) So leave to file an amended complaint should have been granted.

II

McCall argues the trial judge was mistaken in concluding a physician provider group is not vicariously liable for the negligence of one of its members, and we agree. Health and Safety Code section 1371.25 [FOOTNOTE 3] does not shield GNP from vicarious liability for Shukla's negligence. It is intended only to prohibit an HMO such as Pacificare from demanding indemnity for its own misconduct.

Section 1371.25, enacted in 1995, provides in full as follows:
"A plan, any entity contracting with a plan, and providers are each responsible for their own acts or omissions, and are not liable for the acts or omissions of, or the costs of defending, others.
Any provision to the contrary in a contract with providers is void and unenforceable.
Nothing in this section shall preclude a finding of liability on the part of a plan, any entity contracting with a plan, or a provider, based on the doctrines of equitable indemnity, comparative negligence, contribution, or other statutory or common law bases for liability."

As defined in section 1371.25, Pacificare is a plan [FOOTNOTE 4] and GNP is a provider. [FOOTNOTE 5] We construe the first two sentences of section 1371.25 to prohibit plans from demanding indemnity against their own acts or omissions in contracts with their providers. The third sentence reaffirms that plans, contractors and providers - like GNP - remain liable under common law doctrines such as vicarious liability. The legislative history of section 1371.25 shows the Legislature was concerned about plans that required providers to hold them harmless from liability where the plan denied services to a patient, but wanted to reaffirm that plans were not liable for provider negligence or vice-versa.

The Senate Insurance Committee report states "[s]ome plan contracts with providers propose provisions to hold plans harmless from liability in cases where the plan has denied services and the patient has suffered harm. A[ssembly] B[ill No.] 1840 [later codified as section 1371.25] is intended to outlaw such provisions and to ensure that plans are held responsible for the results of their medical decisions. . . . [P]lans are not responsible for liability arising from provider negligence or malpractice."

Likewise, a Senate Judiciary Committee report provides "[t]he sponsors contend that the health plans should be responsible for adverse results of their actions in the same manner as providers are liable for their negligence. [ ] This provision addresses an issue raised at a recent special hearing of this committee on managed health care. Complaints were raised by various health care providers . . . that some managed care provider contracts contained 'hold harmless'clauses which operated to shift from the plan to the provider any liability arising out of the provision of care under the plan, even if the actions of the plan (e.g., denial of treatment) contributed to the injury. . . . [T]his ameliorative legislation [] specif[ies] that health plans are not responsible for liability arising from provider negligence or malpractice just as providers are not liable for the negligence of the health plan."

GNP tries to turn the statute to its advantage by arguing it is a plan but we don't buy it. McCall alleges GNP is a corporation in the business of providing medical care to patients employees, and Shukla is an officer, director and employee of GNP. This places GNP within the statutory definition of a provider. (Ante, fn. 5.) The trial judge should have overruled the demurrer to McCall's claim GNP was vicariously negligent for Shukla's negligence.

III...........................
DISPOSITION

The judgment is reversed.
BEDSWORTH, J.
WE CONCUR: SILLS, P. J., and RYLAARSDAM, J.

::::::::::::::::::::::::::::: FOOTNOTE(S):::::::::::::::::::::::::::::

FN*. Pursuant to California Rules of Court, rule 976(b) and 976.1, this opinion is certified for publication with the exception of part III.

FN1. Apparently Shukla did not file a demurrer, and the judgment dismissed the action against Pacificare and GNP but not Shukla.

FN2. McCall was covered by Medicare, he was entitled to benefits, and he cannot avoid the administrative exhaustion requirement and the limitation to judicial review of benefit claims in the federal courts by joining such claims with state law tort claims.
Elimination of the medical expenses from this action should pose no difficulty. McCall states in his brief that after he was disenrolled from Pacificare, GNP referred him for a lung transplant evaluation, he was approved, and is awaiting a donor. McCall asserts in general terms Medicare "will pay for it," and argues he therefore has no reason to seek reimbursement in this action. We agree.

FN3. All further statutory references are to the Health and Safety Code.

FN4. Section 1345, subdivision (q) states a "plan" refers to health care service plans, and section 1345, subdivision (f)(1) provides the latter includes "[a]ny person who undertakes to arrange for the provision of health care services to subscribers or enrollees . . . in return for a prepaid or periodic charge paid by or on behalf of the subscribers or enrollees." A corporation is included within the definition of "person" ( 1345, subd. (j)), and it is alleged Pacificare is a California corporation.

FN5. Section 1345, subdivision (i) states a provider includes "any . . . organization . . . or other person . . . licensed by the state to deliver or furnish health care services." As noted in footnote 4, this includes a corporation, and it is alleged GNP is a corporation in the business of providing medical care to patients.