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Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc.

California Court of Appeals, Second District, Third Division

April 2, 2014

CENTINELA FREEMAN EMERGENCY MEDICAL ASSOCIATES et al., Plaintiffs and Appellants,
v.
HEALTH NET OF CALIFORNIA, INC., et al., Defendants and Respondents.

[REVIEW GRANTED BY CAL. SUPREME COURT]

APPEAL from a judgment of the Superior Court of Los Angeles County No. BC449056, John Shepard Wiley, Jr., Judge.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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COUNSEL

Michelman & Robinson, Andrew H. Selesnick , Robin James and Jason O. Cheuk for Plaintiffs and Appellants.

Francisco J. Silva, Long X. Do and Michelle Rubalcava for California Medical Association, California Hospital Association, California Orthopaedic Association, California Radiological Society and California Society of Pathologists as Amici Curiae on behalf of Plaintiffs and Appellants.

Astrid G. Meghrigian for California Chapter of the American College of Emergency Physicians as Amicus Curiae on behalf of Plaintiffs and Appellants.

Reed Smith, Margaret M. Grignon, Kurt C. Peterson, Kenneth N. Smersfelt and Zareh A. Jaltorossian for Defendant and Respondent Blue Cross of California doing business as Anthem Blue Cross.

Crowell & Moring, William A. Helvestine, Ethan P. Schulman and Damian D. Capozzola for Defendant and Respondent Health Net of California, Inc.

Crowell & Moring and Jennifer S. Romano for Defendant and Respondent Pacificare of California doing business as Secure Horizons Health Plan of America.

Manatt, Phelps & Phillips, Gregory N. Pimstone, Joanna S. McCallum and Jeffrey J. Maurer for Defendant and Respondent California Physicians’ Service doing business as Blue Shield of California.

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Heranandez Schaedel & Associates, Gonzales Saggio & Harlan, Don A. Hernandez and Jamie L. Lopez for SCAN Health Plan.

Gibson, Dunn & Crutcher, Kirk A. Patrick and Heather L. Richardson for Defendant and Respondent Aetna Health of California.

DLA Piper, William P. Donovan, Jr. and Matthew D. Caplan for Defendant and Respondent Cigna HealthCare of California, Inc.

Barger & Wolen, John M. LeBlanc and Sandra I. Weishart for California Association of Health Plans as Amicus Curiae on behalf of Defendants and Respondents.

OPINION

CROSKEY, J.

The law imposes a duty on emergency room physicians to treat patients regardless of their ability to pay. When those patients are enrollees in health care service plans (HMO’s), [1] the law imposes an obligation on the HMO’s to reimburse the physicians for emergency treatment provided to the enrollees, even when the physicians were not under contract to the HMO’s. HMO’s sometimes delegate their health care obligations to independent practice associations (IPA’s); HMO’s are statutorily permitted to delegate to IPA’s their obligation to reimburse emergency physicians. In this case, the HMO’s delegated responsibility for some of their enrollees to an IPA;[2] the delegation included the duty to reimburse emergency physicians. At some point, the IPA began experiencing financial problems and, after a number of years, ultimately ceased operating as a going concern. As the IPA’s financial problems increased, it failed to reimburse physicians who had provided emergency services to its enrollees. The unpaid emergency physicians sought payment from the HMO’s, which simply instructed the physicians to continue presenting their bills to the IPA, even though it was clear that the IPA would not be able to pay those bills. As they were required to do by law, the physicians continued to render emergency services to enrollees in the IPA; and, unfortunately, the IPA continued to fail to provide payment for those services.

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The physicians brought suit against the HMO’s, alleging a cause of action for, among other things, negligent delegation. The HMO’s successfully demurred to the complaint, and the physicians appeal. We hold that where: (1) a physician is obligated by statute to provide emergency care to a patient who is enrolled in both an HMO and an IPA with whom the physician has no contractual relationship; (2) the physician provides emergency care to the patient; (3) the HMO, which has a statutory duty to reimburse the physician, chose to delegate that duty to an IPA it knew, or had reason to know, would be unable to fulfill the delegated obligation; and (4) the IPA fails to make the necessary reimbursement, the resulting loss should be borne by the HMO and not the physician. In short, we hold that the HMO has a duty not to delegate its obligation to reimburse emergency physicians to an IPA it knows or has reason to know will be unable to pay. This duty is a continuing one, and thus will also be breached by an HMO’s failure to act when it learns, after an initial delegation, that its delegatee is no longer able to fulfill its obligations. As the physicians have alleged sufficient facts to reflect the existence of a claim for a negligent delegation by the HMO’s in this case, and/or a negligent failure to timely reassume a delegated obligation, we will reverse the judgment and remand the matter for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Parties

As this case was resolved on demurrer, we consider the facts as pleaded by the emergency physicians and all reasonable inferences arising therefrom. This appellate matter arises out of two separate, but related, cases. Both cases arose out of the failure of three related IPA’s, known collectively by the parties as “La Vida.”[3] La Vida was alleged to have contracted with a number of HMO’s, known, collectively, as “the HMO’s” or “the plans.”[4]

The plaintiffs are two different groups of physicians. In one case, the plaintiffs are several partnerships of emergency room physicians working at

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several hospitals.[5] In the other case, the plaintiff is a medical group of radiologists, [6] who also allegedly perform medical services on an emergency basis. None of the plaintiff physician groups are alleged to have contracted with La Vida or any of the HMO’s.[7] As a result, our reference in this opinion to “plaintiffs” is limited to the physicians who have performed emergency room medical services and emergency radiological services for enrollees of the defendant HMO’s and who do not have any contractual relationship with such HMO’s or La Vida. Our references to “emergency physicians” refer, in general, to physicians who provide emergency services to enrollees in HMO’s and IPA’s with whom the physicians have no contractual relationship.[8]

2. Law Governing HMO’s and IPA’s

In order to understand plaintiffs’ allegations, a brief review of the law governing HMO’s and IPA’s is helpful. HMO’s are governed by the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act). (Health & Saf. Code, § 1340; Van de Kamp v. Gumbiner (1990) 221 Cal.App.3d 1260, 1269 [270 Cal.Rptr. 907].) While the Knox Keene Act had many goals, two of them identified by the Legislature were: (1) “[h]elping to ensure the best possible health care for the public at the lowest possible cost by transferring the financial risk of health care from patients to providers” (Health & Saf. Code, § 1342, subd. (d)); and (2) “[e]nsuring the financial stability [of HMO’s] by means of proper regulatory procedures.” (Health & Saf. Code, § 1342, subd. (f).) As to the former, HMO’s are required to provide basic health care services to their enrollees. (Health & Saf. Code, § 1367, subd. (i).) This requirement includes emergency health care services. (Health & Saf. Code, § 1345, subd. (b)(6).) As to the latter legislative goal, HMO’s must

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prove to the Department of Managed Health Care (Department) that they are financially sound. (Health & Saf. Code, § 1375.1, subd. (a)(1).)

An HMO may contract with an IPA, which is considered a type of “risk bearing organization.” (Health & Saf. Code, § 1375.4, subd. (g)(1).) The IPA is a group of physicians that contracts with an HMO to provide services for the plan’s enrollees, for which it receives compensation on a capitated or fixed payment basis. (Ibid.) As a risk bearing organization, the IPA is also statutorily responsible for processing and paying claims made by physicians for services rendered by those physicians that are covered under the payments made by the plan to the IPA. (Id., subd. (g)(1)(C).)

As HMO’s which contract with IPA’s are, basically, transferring responsibility for some or all of their enrollees to the IPA’s, the IPA’s are subject to certain financial condition requirements. Indeed, in determining whether an HMO is financially sound, the Department is to consider the “financial soundness of the plan’s arrangements for health care services” and its agreements with providers. (Health & Saf. Code, § 1375.1, subd. (b)(1); see id., subd. (b)(3).) Moreover, the Knox-Keene Act imposes specific requirements on any contract between an HMO and an IPA, including a contractual provision requiring the IPA to provide regular financial information to the HMO to “assist the [HMO] in maintaining the financial viability of its arrangements for the provision of health care services.... ” (Health & Saf. Code, § 1375.4, subd. (a)(1).) The Department has also promulgated regulations requiring the IPA to make direct financial reports to the Department. (Cal. Code Regs., tit. 28, § 1300.75.4.2.)

There are minimal financial criteria which every IPA must meet on a regular basis. (Health & Saf. Code, § 1375.4, subd. (b)(1)(A).) Should the IPA fail to meet those requirements, the IPA and the HMO’s with which it contracts should agree to a “corrective action plan, ” approved by the Department, [9] designed to bring the IPA back into compliance. (Health & Saf. Code, § 1375.4, subd. (b)(4).)

When an HMO’s contract with its IPA requires the IPA to pay claims, regulations impose certain conditions on the contract. Among other things, the contract must require the IPA to submit to the plan a quarterly claims payment performance report 30 days after the close of each quarter, disclosing its compliance status with relevant statutes.

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(Cal. Code Regs., tit. 28, § 1300.71, subd. (e)(3)(i).) The IPA’s quarterly report shall include records of each physician dispute the IPA received, and the disposition of each dispute. (Id., subd. (e)(3)(ii).) Finally, the contract shall include a provision “authorizing the plan to assume responsibility for the processing and timely reimbursement of provider claims in the event that the [IPA] fails to timely and accurately reimburse its claims.” (Id., subd. (e)(6).) The regulation further indicates that the plan’s “obligation to assume responsibility for the processing and timely reimbursement of... claims may be altered to the extent that the [IPA] has established an approved corrective action plan.... ”[10](§ 1300.71, subd. (e)(6).)

3. Law Governing Emergency Medical Services and Reimbursement Therefor

Under state and federal law, emergency services and care “shall be provided to any person requesting the services or care” at any hospital with appropriate facilities and qualified personnel. (Health & Saf. Code, § 1317, subd. (a); see 42 U.S.C. § 1395dd(b).) Such services and care are to be provided without regard to the patient’s “insurance status, economic status [or] ability to pay.” (Health & Saf. Code, § 1317, subd. (b).) Indeed, the emergency services and care shall be provided without first questioning the patient as to insurance or ability to pay. (Health & Saf. Code, § 1317, subd. (d); 42 U.S.C. § 1395dd(h).)

As the Knox-Keene Act requires emergency services and care to be provided without questioning the patient as to insurance or ability to pay, the Act also requires that, when emergency services have been provided to plan enrollees, the HMO or its IPA “shall reimburse” the physicians.[11] (Health & Saf. Code, § 1371.4, subd. (b).) That section also provides that “[a] health care service plan may delegate the responsibilities enumerated in this section to the plan’s contracting medical providers.”[12] (Health & Saf. Code, § 1371.4, subd. (e).)

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4. Allegations of the Complaints

We now turn to the allegations of the two complaints. Plaintiffs allege that, pursuant to their statutory duties, they provided services and care on an emergency basis to La Vida enrollees. Plaintiffs allege that they provided emergency services to La Vida enrollees in the HMO’s, although plaintiffs were not parties to any provider agreement with either La Vida or the HMO’s. After plaintiffs provided emergency services to La Vida enrollees, they sought reimbursement from La Vida.

According to the allegations of the complaints, however, La Vida was unable to pay. It is unclear at what point La Vida became financially unsound. Plaintiffs allege, however, that at the time the HMO’s delegated their responsibilities to La Vida and throughout the duration of those contracts, the HMO’s “knew or should have known of La Vida’s insolvency based on [1] financial reports submitted periodically by La Vida, [2] notice directly from La Vida and indirectly from Plaintiffs and other health care providers, and [3] the inadequate amounts of their own capitation payments to La Vida.” Nonetheless, the HMO’s “delegated and continued delegating their payment obligations to La Vida.”[13]

Plaintiffs allege that “[r]ather than helping to resolve the growing number of Plaintiffs’ unpaid claims, the [HMO’s] instead advised Plaintiffs to continue submitting claims directly to La Vida and continued their insufficient capitation payments, despite lacking any reasonable expectation that Plaintiffs’ claims would be properly reimbursed and the mountain of evidence to the contrary.” This allegedly continued until mid 2010, when the HMO’s ultimately terminated their contracts with La Vida. Thereafter, La Vida went out of business.

As against the HMO’s, [14] plaintiffs alleged causes of action for negligence, unfair competition, quantum meruit, open book account, and services rendered. Both groups of plaintiffs were represented by the same counsel, and the two complaints were virtually identical.[15] The cases were deemed related.

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5. The Demurrers

The HMO’s demurred to the complaints, arguing that the delegation of their statutory obligation to compensate emergency physicians for emergency services was both statutorily-permitted and absolute. That is, once the plans had permissibly delegated the obligation to La Vida, [16] the emergency physicians had no recourse to the HMO’s for payments La Vida was unable to make. As to negligence, the plans argued that no duty arose for them to protect the financial interests of the third-party plaintiffs under the seminal case of Biakanja v. Irving (1958) 49 Cal.2d 647 [320 P.2d 16] (Biakanja).[17] Additionally, the HMO’s argued that, to the extent the complaints sought equitable relief for unfair competition, the court should abstain from resolving the claim, as it involved complex issues of economic health care policy better determined by the Legislature and the Department.

The HMO’s also represented that, from 2007 through 2009, La Vida was subject to a Department-approved corrective action plan.[18] The HMO’s argued that, while La Vida was subject to the corrective action plan, the

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HMO’s could not have terminated their delegation contracts with La Vida, “which is what Plaintiffs claim the [HMO’s] should have done.”[19] As we shall discuss, however, plaintiffs do not argue that the plans should have terminated their delegation contracts with La Vida in their entirety; they alleged only that the plans should have reassumed the responsibility to reimburse them for emergency services rendered.

In opposition to the demurrer, plaintiffs again argued that the HMO’s “delegated their own payment responsibilities to IPA[’]s that the [p]lans knew were financially insolvent. Despite being informed on an ongoing basis that claims were not being paid and the IPA[’]s were unlikely to ever pay them, the [HMO’s] continued to delegate as long as they possibly could.”

6. Ruling, Judgment and Appeal

The trial court sustained the demurrers without leave to amend. The trial court concluded that the Knox-Keene Act permits delegation, and there is no

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liability for the delegator if the delegatee fails to pay. As the delegation was permissible, all causes of action based on La Vida’s failure to pay (unfair competition, quantum meruit, open book account, and services rendered) fail. As to the negligence cause of action, the court concluded that Biakanja bars relief. Specifically, the trial court concluded that there can be no cause of action for negligence unless the alleged negligent act was intended to harm plaintiff specifically, as opposed to a class to which plaintiff happens to belong. Here, the trial court found no intent to harm plaintiffs specifically. The court found that this fact alone required sustaining the demurrer, regardless of the remaining Biakanja factors, although it noted that the other factors weighed against recognizing a duty. In the course of its discussion, the court noted that plaintiffs “have not alleged any facts to suggest the insolvency of [La Vida] was foreseeable to the health plans at the time the health plans delegated their payment obligations to [La Vida].”[20]

Judgment was entered in favor of the HMO’s. The plaintiffs filed timely notices of appeal. We consolidated the cases on appeal.[21]

ISSUES ON APPEAL

The main issue on appeal is whether a cause of action exists, on behalf of emergency physicians, against HMO’s, for the negligent delegation of the obligation to reimburse the emergency physicians, when the HMO’s have delegated their duty to an IPA they knew or had reason to know was financially unable to satisfy it. After resolving this question in the affirmative, we then address the related question of whether the cause of action necessarily includes a negligent failure to reassume the reimbursement obligation, once the HMO’s know or should know that the delegatee is unable to execute the duty delegated to it. We answer this question in the affirmative as well. We reject the HMO’s argument that we should abstain from resolving this dispute.

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DISCUSSION

1. Standard of Review

“In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.’ [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff. [Citation.]” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58].)

2. Existing Authority

As noted above, the main issue on appeal is whether a cause of action exists for negligent delegation of an HMO’s statutory obligation to reimburse emergency physicians. In addressing this question, we are not writing on a clean slate. Two courts have addressed the question directly, reaching contradictory results. (Compare California Emergency Physicians Medical Group v. PacifiCare of California (2003) 111 Cal.App.4th 1127, 1135-1136 [4 Cal.Rptr.3d 583] (CEP) [finding no negligence cause of action] with Ochs v. PacifiCare of California (2004) 115 Cal.App.4th 782, 796-797 [9 Cal.Rptr.3d 734] (Ochs) [finding such a cause of action exists].) We will ultimately conclude that Ochs is the better reasoned of the two opinions, and follow it. As these cases are best understood in context of the development of the law, we must begin with two cases predating CEP and Ochs.

a. Cases Involving Physicians Who Had Contracted With the IPA

Unfortunately, La Vida is not the first IPA to fail, leaving physicians unpaid. The first cases involving physicians seeking compensation from an

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HMO for services rendered to enrollees in IPA’s for which the IPA’s were unable to pay, involved physicians who had directly contracted with the IPA’s. The first such case was California Medical Assn. v. Aetna U.S. Healthcare of California, Inc. (2001) 94 Cal.App.4th 151 [114 Cal.Rptr.2d 109] (California Medical). In that case, the plaintiff physicians[22] argued that, in order to have access to the majority of insured patients in the state, it was necessary to participate in HMO’s. In order to participate in the defendant HMO, the plaintiff physicians were required to enter into agreements with the IPA’s.[23] When the IPA’s were unable to pay “due to their actual or imminent insolvency" (California Medical, supra, 94 Cal.App.4th at p. 157), the physicians brought suit against the HMO.

The physicians relied on Health and Safety Code section 1371, which provides that a plan must reimburse a physician’s claim within a certain number of days. The statute further provides, “The obligation of the plan to comply with this section shall not be deemed to be waived when the plan requires its medical groups, independent practice associations, or other contracting entities to pay claims for covered services." (Ibid.) The physicians argued that this provision required the HMO to make timely payment when its IPA’s failed to do so. In California Medical, supra, 94 Cal.App.4th at page 161, Division One of the Fourth Appellate District disagreed. Construing the non waiver clause in the context of the full statute, the entire Knox-Keene Act, and legislative history, the court concluded that the clause simply provided that the procedural requirements of Health and Safety Code section 1371 apply to an HMO’s delegatees as well as the HMO itself. (California Medical, supra, 94 Cal.App.4th at pp. 161-163.)

A similar factual situation arose later that same year, before Division Two of the Fourth Appellate District, in Desert Healthcare Dist. v. PacifiCare FHP, Inc. (2001) 94 Cal.App.4th 781 [114 Cal.Rptr.2d 623] (Desert Healthcare). In Desert Healthcare, the plaintiff physician group had directly contracted with the IPA, and the group was unpaid when the IPA failed. (Id. at p. 785.) The physician group brought suit against the HMO, alleging a cause of action for negligence. Specifically, it sought to pursue a cause of action for: (1) negligent failure to ensure the financial stability of the IPA; (2) negligence per se for violating Health and Safety Code section 1371; and (3) negligence arising from the special relationship between the plaintiff physician group and the HMO. (Desert Healthcare, supra, 94 Cal.App.4th at p. 785.) The court concluded there was no duty to ensure the financial stability of the IPA. Specifically, the Desert Healthcare court looked to the Biakanja factors. The first such factor is “the extent to which the transaction was intended to affect

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the plaintiff.” (Biakanja, supra, 49 Cal.2d at p. 650.) The Desert Healthcare court found that this factor could not be met, stating, “The conduct alleged to have been negligent must have been intended to affect that particular plaintiff, rather than just a class of persons to whom the plaintiff happens to belong. [Citation.] The failure to show a particularized effect precludes a finding of a special relationship giving rise to a duty, because, to the extent the plaintiff was merely affected in the same way as other members of the plaintiff class, the case is nothing more than a traditional products liability or negligence case in which economic damages are not available. [Citation.] The most that [plaintiffs] can show is that [the HMO]’s transaction with [the IPA] was intended to affect any hospitals that were unfortunate enough to contract with [the IPA], thus precluding a finding of duty.” (Desert Healthcare, supra, 94 Cal.App.4th at p. 792.)

The Desert Healthcare court went on to state that, even if other Biakanja factors weighed in favor of finding a duty, it would not find a duty due to policy reasons. (Desert Healthcare, supra, 94 Cal.App.4th at p. 792.) The court explained that recognition of a duty to manage one’s business affairs so as to prevent purely economic loss to third parties in their financial transactions is the exception, not the rule, in negligence law. In particular, the court stated, when plaintiffs are sophisticated, knowledgeable entities, they should be encouraged to rely on their own prudence, diligence, and contracting power, as well as other informational tools. (Id. at pp. 792-793.) As the plaintiff was “a large corporate entity well versed in the intricacies of the health care financing system, ” it was “more than capable of protecting itself through diligence and prudence, and by exercising its own considerable contracting power.” (Id. at p. 793.)

Before addressing CEP and Ochs, we emphasize the fundamental distinction between the two cases just discussed and the instant case. In California Medical and Desert Healthcare, the plaintiffs had voluntarily contracted with the IPA; in the instant case, plaintiffs had not contracted with La Vida or any of the HMO’s. While the plaintiff in Desert Healthcare could have “protect[ed] itself through diligence and prudence, and by exercising its own considerable contracting power" (Desert Healthcare, supra, 94 Cal.App.4th at p. 793), plaintiffs in the instant case were required by statute to provide emergency services and care to La Vida enrollees, and had no means to protect themselves from La Vida’s insolvency. As we shall discuss, we find this distinction critical.

b. CEP Extends Desert HealthCare to Emergency Physicians

In 2003, Division One of the Fourth Appellate District was presented with the case of emergency physicians who had not contracted with the IPA. When

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the IPA (which ultimately went bankrupt) failed to reimburse the plaintiff emergency physician group for emergency services provided to its enrollees, the emergency physician group sued the HMO which had delegated responsibility for the enrollees to the IPA. (CEP, supra, 111 Cal.App.4th at pp. 1129-1130.)

This case concerned not section 1371 of the Health and Safety Code, but rather section 1371.4, which specifically provides that the plans must reimburse the emergency physicians. As discussed above, that section also provides that “[a] health care service plan may delegate the responsibilities enumerated in this section to the plan’s contracting medical providers.” [24] (Health & Saf. Code, § 1371.4, subd. (e).) The CEP court concluded, based on its reading of the statutory language and legislative history, that the Legislature’s use of the word “delegate” was intended to mean the duty was fully delegable and that, if a health plan delegated its statutory duty, it retained no liability. (CEP, supra, 111 Cal.App.4th at pp. 1132-1133.)

The CEP plaintiff had alleged a cause of action for negligence, based on an alleged duty to use due care so as not to cause harm to plaintiff’s financial interests. The court found there was no such duty, relying on the Desert Healthcare court’s analysis of the Biakanja factors. (CEP, supra, 111 Cal.App.4th at pp. 1135-1136.) The court acknowledged that the factual scenario was somewhat different as the CEP plaintiff had not contracted with the intermediary, but nonetheless concluded that Desert Healthcare’s analysis of the first Biakanja factor applied. The CEP court stated that, “the most [the plaintiff] can show is that [the HMO’s] contract with [the IPA] was intended to affect any emergency services provider whom [the IPA] had an obligation to pay.” (Id. at p. 1136.) This was insufficient, in the view of the CEP court, to establish that the HMO’s conduct was directed toward the plaintiff. (Ibid.) Moreover, the CEP court stated that, even if the other Biakanja factors applied, it would not find a duty existed, because such a

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duty would be contrary to the absolute right to delegate found in Health and Safety Code section 1371.4, subdivision (e).[25] (CEP, supra, 111 Cal.App.4th at p. 1136.)

c. Ochs Takes a Different Position

In 2004, Division Six of the Second Appellate District[26] addressed the same factual scenario as in CEP, [27] but reached the opposite result. The plaintiff emergency physician had not contracted with the IPA or the defendant HMO. When the IPA failed, the plaintiff emergency physician sought compensation from the HMO, alleging causes of action for, among other things, a statutory violation of Health and Safety Code section 1371.4, and negligence.

On appeal from an order sustaining the HMO’s demurrer without leave to amend, the Ochs court agreed with CEP that the language and legislative history of Health and Safety Code section 1371.4 compel the conclusion that the duty to pay emergency physicians is delegable, and that the delegating HMO retains no liability. Thus, no cause of action existed against the HMO for violating Health and Safety Code section 1371.4.[28] (Ochs, supra, 115 Cal.App.4th at pp. 789-793.)

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On appeal, the emergency physician argued that he could allege that the HMO knew or should have known that the IPA was insolvent, at the time it contracted with the IPA. The court concluded that the plaintiff should be granted leave to amend to plead a negligence cause of action based on this fact. (Ochs, supra, 115 Cal.App.4th at pp. 796 797.) The court enumerated the Biakanja factors and concluded that they could support the existence of a duty. (Id. at p. 797.) The court specifically disagreed with CEP and Desert Healthcare to the extent that those cases held that, when economic damages are sought, the conduct must have been intended to affect the specific plaintiff, rather than persons of the class to which the plaintiff belongs. Instead, the Ochs court stated, “it is well established that liability for negligent conduct may be imposed when a duty is owed to the plaintiff or to a class of which the plaintiff is a member. [Citation.]” (Id. at pp. 797-798.)

d. Balance Billing is Prohibited

In Ochs, the plaintiff had also sought a declaration that if the IPA and the HMO did not pay the plaintiff emergency physician’s bills, the plaintiff could bill the patients directly. The Ochs court rejected the argument based on misjoinder of the defendants. (Ochs, supra, 115 Cal.App.4th at p. 796.) However, it noted, in dicta, that it appeared that the emergency physician may, in fact, have a remedy against the individual patients, who would then have a remedy against the HMO with whom they had contracted. (Ibid.)

This analysis was based on Health and Safety Code section 1379, a statute which prohibits a physician who has contracted with a plan from billing the patient for any sums owed by the plan (a practice known as “balance billing.”) As the statute clearly applies to physicians who have contracted with HMO’s, the Ochs court took the position that emergency physicians who have not contracted with HMO’s are not barred from balance billing. (Ochs, supra, 115 Cal.App.4th at p. 796.) Five years after Ochs, however, the Supreme Court rejected this interpretation, concluding that emergency physicians may not balance bill patients, even if they had not contracted with the plans. (Prospect Medical Group, Inc. v. Northridge Emergency Medical Group (2009) 45 Cal.4th 497 [87 Cal.Rptr.3d 299, 198 P.3d 86] (Prospect).)

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Prospect is important to our analysis for both what it did decide and what it did not decide. In Prospect, there was no issue of an insolvent IPA; indeed, for the purposes of its discussion, the Supreme Court used the term “HMO’s” to refer to both the HMO’s and their delegatee organizations. In that context, the court concluded that balance billing was inappropriate. Interpreting the Knox-Keene Act as a whole, the court concluded “that billing disputes over emergency medical care must be resolved solely between the emergency room doctors, who are entitled to a reasonable payment for their services, and the HMO, which is obligated to make that payment. A patient who is a member of an HMO may not be injected into the dispute. Emergency room doctors may not bill the patient for the disputed amount.” (Prospect, supra, 45 Cal.4th at p. 502.) The court stated in a footnote, however, that its holding was limited to the situation before it, “billing the patient for emergency services when the doctors have recourse against the patient’s HMO. We express no opinion regarding the situation when no such recourse is available; for example, if the HMO is unable to pay or disputes coverage.” (Id. at p. 507, fn. 5.)

As Prospect was not concerned with an insolvent IPA, and, in fact, considered IPA’s and HMO’s the same for the purposes of its analysis, it did not expressly resolve the issue of whether an emergency physician can balance bill a patient when the IPA is insolvent and the HMO refuses to pay. However, language in the opinion suggests that the court would not permit balance billing in that situation either. Specifically, the court rejected the Ochs dicta suggesting balance billing may be possible, explaining that Health and Safety Code “[s]ection 1371.4, subdivision (b), does not say that patients must pay the emergency room doctors and then turn to their HMO’s for reimbursement. Rather it states that the ‘health care service plan... shall reimburse providers for emergency services and care provided to its enrollees.... ’ This language does not authorize the roundabout route of the doctor collecting from the patient, who must then collect from the HMO. Rather, it mandates that the HMO pay the doctor directly. It does not involve the patient in the payment process at all." (Prospect, supra, 45 Cal.4th at p. 509.) This strongly suggests that the Supreme Court would not permit an emergency physician, unpaid by an insolvent IPA, to balance bill the patient, who would then have a remedy against the HMO. “[U]nder the Knox-Keene Act, HMO members are not liable to pay for emergency care.” (Id. at p. 510.) Emergency physicians should instead resolve their disputes directly with the HMO’s.[29] (45 Cal.4th at p. 508.)

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3. A Cause of Action Exists for Negligent Delegation

Given the agreement of CEP and Ochs on the issue, it is too late in the day to argue that emergency physicians have a direct cause of action against HMO’s under Health and Safety Code section 1371.4 when the IPA’s fail to reimburse the emergency physicians for services provided to their enrollees. Indeed, plaintiffs in this case do not expressly allege such a cause of action. Instead, they argue, pursuant to Ochs, that they have a cause of action against defendant HMO’s for negligent delegation of the Health and Safety Code section 1371.4 duty. In other words, it is clear that the HMO’s have a duty under Health and Safety Code section 1371.4, subdivision (b) to reimburse plaintiffs for emergency services provided to the HMO’s enrollees. It is also clear that under Health and Safety Code section 1371.4, subdivision (e), the HMO’s may delegate that duty to their “contracting medical providers” (e.g., IPA’s). The critical question raised by this case is (1) whether HMO’s may delegate their reimbursement duty to any IPA, regardless of the financial stability of that IPA, or (2) whether the HMO’s have a duty not to delegate their Health and Safety Code section 1371.4 reimbursement obligation to an IPA that the HMO’s know, or have reason to know, is financially unable to meet that duty.

The parties agree that the resolution of this question is governed by Biakanja and its progeny. The law imposes no liability for alleged wrongdoing unless the defendant owed a duty to the plaintiff to avoid the asserted wrongdoing. “Whether such a duty existed is a question of law and depends on a judicial weighing of the policy considerations for and against the imposition of liability under the circumstances.” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 342 [134 Cal.Rptr. 375, 556 P.2d 737].) "Privity of contract is no longer necessary to recognition of a duty in the business context and public policy may dictate the existence of a duty to third parties.” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 58 [77 Cal.Rptr.2d 709, 960 P.2d 513].) "Even when only injury to prospective economic advantage is claimed, recovery is not foreclosed. Where a special relationship exists between the parties, a plaintiff may recover for loss of expected economic advantage through the negligent performance of a contract although the parties were not in contractual privity.” (J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 804 [157 Cal.Rptr. 407, 598 P.2d 60].)

The factors to be considered in determining the existence of a duty, as set forth in Biakanja, include: (1) the extent to which the transaction was intended to affect the plaintiffs; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of

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the connection between the defendant’s conduct and the injury suffered; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm. (Biakanja, supra, 49 Cal.2d at p. 650.) Later cases have considered additional factors, including whether extending liability would impose an undue burden on the defendant’s profession. (Giacometti v. Aulla, LLC (2010) 187 Cal.App.4th 1133, 1137 [114 Cal.Rptr.3d 724].) We consider each of these factors.

a. The Transaction Was Intended to Affect Plaintiffs

First, we consider the extent to which the transaction was intended to affect plaintiffs. The HMO’s had a statutory duty of reimbursement to emergency physicians; by means of the transaction in question, they delegated that duty, allegedly to an IPA they knew or had reason to know was unable to fulfill that duty. The delegation transaction was necessarily intended to have an effect on plaintiffs; it had a direct impact on whether they would receive compensation for the emergency services that they provided to the HMO’s enrollees.

In this case, the trial court, in reliance on Desert Healthcare, concluded that the transaction was not intended to affect plaintiffs, as the factor could only be found true if the conduct was intended to affect the particular plaintiff physicians, rather than a class of persons to which plaintiffs happen to belong. The law is not so absolute. Our Supreme Court “has repeatedly eschewed overly rigid common law formulations of duty in favor of allowing compensation for foreseeable injuries caused by a defendant’s want of ordinary care.” (J’Aire Corp. v. Gregory, supra, 24 Cal.3d at p. 805.) Liability may be imposed when there is a duty of care owed by the defendant to the plaintiff or to a class of which the plaintiff is a member. (Ott v. Alfa-Laval Agri, Inc. (1995) 31 Cal.App.4th 1439 [37 Cal.Rptr.2d 790].) Such a duty can arise from statute or contract, the nature of the defendant’s activity, the relationship between the parties, or even the interdependent nature of human society. (Id. at p. 1449; J’Aire Corp. v. Gregory, supra, 24 Cal.3d at p. 803.)

We agree that the standard formulation, requiring a duty to be owed to the plaintiff specifically, rather than a class to which the plaintiff belongs, is sufficient in the usual case, in which the plaintiff and defendant are strangers to one another. (See e.g., Ott v. Alfa-Laval Agri, Inc., supra, 31 Cal.App.4th at pp. 1455-1456 [plaintiffs simply purchased defendant’s product]; cf. Quelimane Co. v. Stewart Title Guaranty Co., supra, 19 Cal.4th at p. 58 [plaintiffs wanted defendants to sell title insurance for properties plaintiffs sought to sell].) This matter, however, is not the usual case. Defendant HMO’s owed a statutory duty to emergency physicians; it is their allegedly negligent delegation of that duty which is at issue. The existence of the

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HMO' statutory duty owed to the entire class of emergency physicians who provide emergency services and care to the plans’ enrollees justifies the conclusion that the plans’ conduct was intended to affect plaintiffs, even though they were part of a class.

b. The Harm to Plaintiffs Was Foreseeable

The second factor is the foreseeability of harm to plaintiffs. It is alleged that defendant HMO’s knew or should have known of La Vida’s financial difficulties at the time of the initial delegations. Indeed, plaintiffs further allege that the HMO’s “knew or should have known that their neglect of La Vida’s financial shortcomings would result in the failure of Plaintiffs to receive reasonable reimbursement for their covered services.” If proven, this would establish the second factor.[30]

c. It Is Certain That Plaintiffs Were Injured

The third Biakanja factor is the degree of certainty that plaintiff suffered injury. Had the HMO’s delegated their Health and Safety Code section 1371.4 reimbursement duty to a financially stable IPA, or had not delegated it at all, plaintiffs would have been reimbursed in a reasonable amount for the emergency services they provided defendants’ enrollees. Thus, plaintiffs were injured by defendants’ allegedly negligent delegation.

d. There Is a Close Connection Between the Allegedly Negligent Delegation and the Harm Suffered

The fourth factor is the closeness of the connection between defendants’ conduct and the injury suffered. While it can be said that La Vida’s failure was the direct cause of plaintiffs not being reimbursed, La Vida’s failure would have had no impact on them (as they had not contracted with La Vida), had defendant HMO’s not delegated their statutory reimbursement duty to La Vida. Plaintiffs allege that the HMO’s knew or had reason to know of La

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Vida’s financial difficulties at the time of the delegation; thus, there is a close connection between the delegation of the statutory reimbursement duty to a financially troubled IPA and the result that the plaintiffs were not reimbursed.

e. Substantial Moral Blame Attaches to Defendants’ Alleged Conduct

The fifth factor is the moral blame attaching to defendants’ conduct. Here, we necessarily consider and emphasize the unique position in which plaintiffs find themselves. They are required by law to provide emergency services to all patients in need, regardless of ability to pay. Emergency physicians cannot pick and choose their patients, but must simply treat all emergency patients. The law then imposes a duty on the HMO’s – those entities which had contracted with the patients and agreed, for receipt of a premium, to provide them with basic medical care, including emergency services – to reimburse the emergency physicians for the emergency services provided to their enrollees. In other words, the HMO’s had contracted with the patients to provide them, for a price, with health care services, including emergency services, with the understanding that those services may be provided by physicians whom the HMO’s would be required to reimburse even though there was no contractual relationship between the HMO’s and the emergency physicians involved.

There is no bar to a plan transferring a portion of its received premiums for an enrollee to an IPA in the form of capitation payments, and transferring responsibility for that enrollee’s medical care to the IPA. But when the plan, as was alleged in this case, transfers its obligations to an IPA it knows, or has reason to know, will be financially unable to fulfill its obligations, the result is that the emergency physicians will be forced (by statute) to continue providing emergency services to the IPA’s enrollees, with no possibility of receiving their (statutorily mandated) reimbursement.

We cannot sanction such a result. “ ‘The prompt and appropriate reimbursement of emergency providers ensures the continued financial viability of California’s health care delivery system.’ ” (Bell v. Blue Cross of California, supra, 131 Cal.App.4th at p. 218.) The burden of providing services to the poor cannot be accomplished at the expense of one particular group of people. (Cunningham v. Superior Court (1986) 177 Cal.App.3d 336, 348 [222 Cal.Rptr. 854] [court’s attempt to compel an attorney to work pro bono denies attorney equal protection of the law].) Forcing emergency physicians to work for free would be unconscionable. (Bell v. Blue Cross of California, supra, 131 Cal.App.4th at p. 220.)

HMO’s which would shirk their statutory obligation to reimburse emergency physicians by delegating that obligation to an IPA they know or have

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reason to know is financially unable to meet that obligation would, in effect, have the emergency physicians treat their enrollees for free. This is morally blameworthy.[31]

f. Future Harm Would Be Prevented by Imposing Liability for Negligent Delegation

The sixth factor is the policy of preventing future harm. Imposing a duty on HMO’s to not delegate their reimbursement duty to IPA’s they know, or have reason to know, are financially unsound would protect emergency physicians from future economic harm they cannot otherwise avoid.

g. No Undue Burden Would Be Imposed on HMO’s

In addition to the original six Biakanja factors, we also consider policy issues, such as whether extending liability would impose an undue burden on the defendants’ profession. We do not believe that imposing liability for negligent delegation would impose an undue burden on HMO’s. Initially, an HMO liable for negligent delegation would only be forced to reimburse the physicians the amount for which the HMO would have been statutorily-liable to pay had the HMO made no delegation of that obligation. In other words, the obligation to reimburse emergency physicians was originally imposed on the HMO; we are simply holding that if the HMO intends to delegate that responsibility to another, it must delegate it to an entity which it reasonably believes can meet it. If the HMO cannot delegate non-negligently, it should not delegate at all. If it does, it should do so at its own risk and not place that burden on the non contracting emergency physicians who are legally unable to protect themselves.[32]

Moreover, as a practical matter, liability for negligent delegation will not impose additional burdens on HMO’s to research the financial status of their

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delegatee IPA’s. As we have discussed, HMO’s are already required to prove their own financial soundness to the Department, and part of the Department’s inquiry in that regard involves a review of the HMO’s contracts with its IPA’s. (Health & Saf. Code, § 1375.1, subd. (b)(1) & (3).) Thus, an HMO should already be well aware of the financial soundness of the IPA’s with which it contracts, and should avoid contracting with IPA’s whose financial condition is questionable.

h. Conclusion on Negligent Delegation

As each of the Biakanja factors weighs in favor of finding a cause of action for negligent delegation, and policy considerations weigh in favor of such a result as well, we agree with the Ochs court and conclude that a cause of action for negligent delegation exists in favor of emergency physicians who allege an HMO, with whom they have no contractual relationship, negligently delegated its Health and Safety Code section 1371.4 duty to an IPA it knew or had reason to know was financially unsound.

Our conclusion is not barred by Health and Safety Code section 1371.4, subdivision (e).[33] We agree that HMO’s are permitted to delegate their reimbursement duty to IPA’s, and an emergency physician, as a general rule, has no recourse against the HMO if the IPA fails to meet its obligation. However, when the HMO is alleged to have negligently delegated the obligation, the emergency physician has a cause of action.[34]

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i. The Result Is Different for Non-Emergency Services

We emphasize again that our conclusion applies only to non-contracting physicians who have provided emergency services, as mandated by statute, to patients enrolled in the IPA and HMO. The Biakanja factors compel a different result with respect to non-emergency services. Consider the non-emergency services provided by the radiology plaintiff. The radiology physicians seek reimbursement for services provided on a non-emergency basis, which they were contractually required to provide by their hospital employer. As already noted, we recognize that the first Biakanja factor—whether the transaction was intended to affect the plaintiff—is, as a general rule, not satisfied when the defendant’s conduct was intended to affect a class of persons to which the plaintiff belongs, rather than the particular plaintiff. However, the element can be satisfied when the defendant owes a statutory duty to the class in which the plaintiff is a member, and the alleged negligence relates to the satisfaction (in this case, the delegation) of that duty. Here, when considering non-emergency radiological services, the HMO’s have no statutory duty to reimburse radiology plaintiff for such services. Thus, the normal formulation of the rule applies, and radiology physicians cannot show that the HMO’s delegation of the reimbursement obligation was intended to affect them. The first Biakanja factor could not be satisfied by radiology plaintiff with respect to non-emergency services.

The analysis of the fifth Biakanja factor – the moral blame attaching to defendants’ conduct – also does not support radiology physicians’ claim for reimbursement for non emergency services. Radiology physicians are not compelled by any statute to provide non-emergency treatment to enrollees in a financially unsound IPA; if they are required to do so by contract with their hospital, entry into that contract was their choice. While there is moral blame attached to HMO’s who would shirk their obligation to compensate emergency physicians and thereby force emergency physicians to work for free, due to their statutory obligations, no such blame attaches to HMO’s when the radiologists may be forced to perform non emergency services for free due to the radiologists’ own contractual obligation to do so. They have voluntarily accepted the risk of non-payment for their services.

Finally, we are concerned with the burden which would be placed on the HMO’s if we found a duty running to radiology physicians to not delegate to

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a financially unsound IPA. While radiology physicians had no contract with the HMO’s or IPA, and thus are admittedly not a preferred provider of the HMO’s or IPA, they are seeking compensation for services provided in a nonemergency context which they were contractually committed to perform. There is no statutory duty compelling them to provide such services and, as far as the HMO’s and IPA are concerned, those services are provided as volunteers.[35] If a physician chooses to contract with an IPA, the physician has effectively chosen to accept the risk of that IPA’s failure. When a physician chooses to voluntarily provide services to an IPA enrollee, the result should be the same. If we find a duty in either of such circumstances, physicians would be encouraged to provide non-emergency services to patients when the physicians have no contractual relationship with the HMO or IPA, which could undermine the entire HMO system as we know it.

4. The HMO’s Duty Not to Negligently Delegate Is a Continuing One

As the physicians have alleged that the HMO’s were negligent in their initial delegation decision, and we have concluded a cause of action exists for negligent delegation, the HMO’s demurrers should not have been sustained. However, as the parties have briefed the issue, we also discuss whether the duty of the HMO’s is a continuing one.

Preliminarily, we note the difficulty in determining at this stage of the litigation, as a matter of law, the difference between a negligent delegation and a negligent failure to de-delegate. If, for example, a plan’s contract with an IPA was renewed annually, is each renewal to be considered a new delegation? When an HMO adds a new enrollee, and that enrollee’s risk is assigned to the IPA, is the delegation of the obligation to pay reimbursement for services rendered to that enrollee a new delegation? When an emergency physician treats a patient, is the obligation to pay for that particular treatment newly delegated at the time the obligation arises? The record before us does not include any of the delegation contracts, and we therefore cannot determine whether any particular decision occurring after the initial contract between the HMO and the IPA is a new delegation or simply a failure to reassume the delegated obligation or to “de delegate.”

In any event, it is clear to this court that the factors which compel us to find a cause of action for negligent delegation also mandate our conclusion that the duty to not delegate to an IPA which the HMO knows, or has reason to know, to be financially unsound is a continuing one, and a cause of action therefore exists for the failure to promptly reassume the obligation when an

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HMO knows or has reason to know that the IPA to which it has made an initial delegation is now financially unable to meet the delegated duty.[36]

Consideration of the seven factors discussed above, when the HMO is alleged to have known or had reason to know that the IPA is financially unsound and is not, in fact, fulfilling its duty to reimburse emergency physicians, is largely the same: (1) the transaction is still intended to affect the emergency physicians; (2) the foreseeability of harm, if the IPA has already begun to fail to perform, is even stronger; (3) the emergency physicians will clearly have suffered injury; (4) the closeness of the connection between the failure to reassume the obligation to pay and the injury is the same; (5) the moral blame attaching to the HMO’s conduct is the same or greater;[37] (6) the policy of preventing future harm is the same; and (7) no additional burden is imposed on the HMO’s, as the statutes and regulations require the IPA’s to regularly report on their financial condition and claims payment performance to the HMO’s. (Health & Saf. Code, § 1375.4, subd. (a)(1); Cal. Code Regs., tit. 28, § 1300.71, subd. (e)(3).) As the factors are the same, the result is the same, and plaintiffs may pursue a cause of action for negligent failure to reassume this previously delegated obligation.[38]

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5. The Abstention Defense is Inapplicable

Before the trial court, the HMO’s argued that the doctrine of abstention should apply to the cause of action for unfair competition. On appeal, the HMO’s extend this argument to all causes of action, arguing that the courts should abstain from resolving even a dispute over the existence of a negligence cause of action.

There are various theories underlying the application of judicial abstention. “Courts may abstain when the lawsuit involves determining complex economic policy, which is best handled by the Legislature or an administrative agency. [Citation.]” (Alvarado v. Selma Convalescent Hospital (2007) 153 Cal.App.4th 1292, 1298 [64 Cal.Rptr.3d 250].) Abstention may also be appropriate “when 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.” (Ibid.) However, judicial abstention applies only in cases of equity. (Shuts v. Covenant Holdco LLC (2012) 208 Cal.App.4th 609, 625 [145 Cal.Rptr.3d 709]; Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1362 [137 Cal.Rptr.3d 293].) As the bulk of plaintiffs’ complaint sounds in negligence and seeks damages, judicial abstention is simply not applicable. In any event, this is not an appropriate case for abstention. We do not here involve the courts in complex issues of economic or health care policy, nor do we interfere with the administrative jurisdiction of the Department. We simply conclude that when an HMO negligently delegates its statutory duty to reimburse emergency physicians to an IPA it knows or has reason to know is unable to fulfill that duty, or negligently continues its delegation once it knows or has reason to know that the IPA is unable to do so, the HMO may be liable to the emergency physicians.[39]

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DISPOSITION

The judgment is reversed, and the matter remanded to the trial court with directions to conduct further proceedings consistent with this opinion. Plaintiffs shall recover their costs on appeal.

Klein, P. J., and Aldrich, J., concurred.


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