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Hambrick v. Healthcare Partners Medical Group, Inc.

California Court of Appeals, Second District, Seventh Division

June 1, 2015

COREY HAMBRICK, Plaintiff and Appellant, HEALTHCARE PARTNERS MEDICAL GROUP, INC. et al., Defendants and Respondents.

APPEAL from a judgment of the Superior Court of Los Angeles County, No. BC492767 William F. Highberger, Judge.

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McMurray Henriks, Yana G. Henriks and Randy H. McMurray for Plaintiff and Appellant.

McDermott Will & Emery, Terese A. Mosher Beluris and Gregory R. Jones for Defendants and Respondents.


FEUER, J.[*]


Plaintiff Corey Hambrick (Hambrick) brought this class action alleging causes of action for violation of the unfair competition law (UCL; Bus. & Prof. Code, § 17200 et seq.), common law fraudulent concealment, and violation of the false advertising law (FAL; id., § 17500) against defendants Healthcare Partners Medical Group, Inc. (MGI), Healthcare Partners, LLC (HCP-LLC) and DaVita Healthcare Partners, Inc. (DVHCP) (collectively HCP or the HCP defendants).[1] The premise underlying all of Hambrick’s claims is that although HCP does not fall within the literal definition of a “health care service plan”[2] as defined in Health and Safety Code section 1345, subdivision (f)(1), [3] due to the level of risk it assumed, HCP operated as a health care service plan without obtaining the license required by the Knox-Keene Health Care Service Plan Act of 1975[4] (Knox-Keene Act; § 1340 et seq.), and without meeting the regulatory mandates required of health care service plans.

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The trial court, relying on the doctrine of judicial abstention, sustained without leave to amend the demurrers filed by the HCP defendants and entered a judgment of dismissal. Hambrick appeals from the judgment, which includes an order awarding the HCP defendants costs.

Hambrick argues on appeal that HCP was required to have a license under the Knox-Keene Act because it accepted a level of “global risk” that transforms it from a medical “risk-bearing organization” under section 1375.4 to a “health care service plan” under section 1345. However, neither the Knox-Keene Act nor the regulations adopted by the Department of Managed Health Care (DMHC) defines the level of risk that would cause a medical entity like HCP to become a de facto health care service plan. We find that this determination of an acceptable risk level is a regulatory decision involving complex economic policy considerations that should be made by DMHC, the regulatory agency tasked with interpreting and enforcing the Knox-Keene Act.

We therefore conclude that the trial court acted within its discretion in invoking the abstention doctrine as to the statutory causes of action but not as to the common law cause of action for fraudulent concealment. However, we find that Hambrick failed to plead a claim for fraudulent concealment, and that she has failed to demonstrate how she could amend the operative complaint to cure the defect. We affirm the judgment of dismissal, including the order awarding costs.


A. The First Amended Complaint

On January 25, 2013 Hambrick, on behalf of herself and others similarly situated, filed a first amended class action complaint for damages and equitable relief against the HCP defendants.[6] Hambrick alleges that MGI is a professional medical corporation and HCP-LLC is a wholly owned subsidiary

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or affiliate of DVHCP, a Delaware corporation. MGI and HCP-LLC “operated in such a way as to make their individual identities indistinguishable, and are therefore the mere alter egos of one another.”

As alleged, HCP operated as a health care service plan for nearly a decade without obtaining the license required by the Knox-Keene Act. Hambrick paid her medical premiums to a health care service plan other than HCP. However, HCP assumed the financial risk and responsibility for Hambrick’s “institutional care” (hospital care)[7] and other health care services (e.g., physicians), and it paid for her care through contracts with health care service plans and other third parties. By assuming the financial risk for Hambrick’s hospital care without a license, HCP purported to relieve Hambrick’s health care service plan, which is legally responsible for her care, of any financial responsibility for her care.

HCP directed Hambrick’s hospital care, limiting her access to hospital care to only those hospitals with which HCP contracted, and prohibiting her from accessing “better” hospitals that contracted with her health care service plan. In addition, HCP directed Hambrick’s specialty care “to physicians who practice at the hospitals with which HCP contracts” and “away from better physicians who practice at hospitals with which HCP does not contract in order to avoid paying for high quality care.” Hambrick alleges that she was entitled to use the better hospitals and physicians who contracted with the health care service plan to which she paid her premiums.

Hambrick further alleges that HCP purposefully limited her access to care for the purpose of maximizing profits as a result of its “assumption of institutional financial risk without the required State license.” By doing this, HCP “avoided a near decade of regulatory scrutiny of its operations, avoided paying the regulatory fees assessed by DMHC to all licensees, and avoided the numerous specific, consumer-protection mandates in the Knox-Keene Act such as the requirement to provide timely access to medically necessary care.” In addition, HCP “reaped extraordinary profits in the billions of dollars by delaying and denying access to medically necessary care to its members.”

Up until October 2012, Hambrick was an employee of MGI, and she was a patient of MGI from 2011 to 2012. While employed by MGI, Hambrick acquired personal knowledge that HCP “was paying claims for institutional/hospital care for claims for which HCP had assumed the responsibility for payment.” MGI’s physicians served as Hambrick’s primary care

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physicians (PCPs). She alleges that her “assigned PCPs failed to adequately diagnose or treat the source of [her] injury.”[8] She was referred to at least two specialists with HCP’s “network of contracted or employed staff physicians, ” each of whom “failed to accurately diagnose or treat [her] injuries.”

In January, March and July 2012, Hambrick complained to MGI “that she was receiving inferior care from her assigned physicians, and protested both the quality of her care and the delays in accessing primary and specialist care.” Hambrick alleges that HCP “delayed her access to care because [HCP] had assumed risk for hospital charges, even though they did not have the required State license that would allow them to assume the risk for such institutional care.” In addition, she alleges “that the desire to avoid a hospital claim affected the decisions made by HCP which restricted Hambrick’s access to high quality specialists who practiced at hospitals with whom HCP did not contract.”

Hambrick alleges further that HCP’s “desire to avoid paying hospital claims it had agreed to become responsible for, caused HCP to deny Hambrick[] access to qualified specialists and physicians who could accurately diagnose and treat her, because those physicians might admit Hambrick to HCP’s non-preferred hospitals. Hambrick ultimately was forced to purchase her own insurance and to seek care outside of [MGI] in order to timely access care.”

Hambrick defines the purported class as “[a]ll patients for whom HCP assumed financial responsibility for the institutional care of, or directed the institutional care of” and “[a]ll HCP patients treated by HCP while HCP is or was controlled or owned by non-physician shareholders.”

In the first cause of action for violation of the UCL, Hambrick alleges that HCP violated numerous statutory provisions, including those in the Knox-Keene Act, and that HCP’s actions constituted fraudulent and unfair business practices under the UCL. Hambrick alleges that HCP profited by ignoring the requirements of California law, including the requirements for financial reserves applicable to health care service plans. Hambrick also alleges that HCP profited by denying access to care and providing inferior care. Hambrick seeks disgorgement of “ill-gotten gains” and “an injunction prohibiting [HCP] from violating California law.”

The second cause of action for fraud and “concealment” alleges that “Plaintiffs and [the HCP defendants] were in a relationship of trust, ” and that the HCP defendants had a duty “to disclose to their patients all material

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information a reasonable patient would want to know before consenting to treatment.” The HCP defendants concealed that they had illegally assumed financial responsibility for hospital care and that this would affect the physicians and hospitals to which HCP would direct plaintiffs. HCP further concealed that it was not licensed as a health care service plan or hospital, “and therefore was not lawfully permitted to accept hospital risk or direct hospital care, and that Plaintiffs would not be afforded all the protections afforded to consumers by a Knox-Keene licensed entity.”

The complaint further alleges that plaintiffs “reasonably relied upon [the HCP defendants] to seek their fully informed consent, and to treat them consistent with good professional practice and medical standards.” Hambrick alleges that she was injured because she received deficient care from the physicians and hospitals to which she was referred instead of the physicians and hospitals that contracted with the health care service plans to which she paid her premiums. She alleges as damages “physical injuries, emotional injuries, loss of income, future medical expenses, [and] co-pays or co-insurance payments to the hospitals.” Hambrick also seeks punitive damages against HCP pursuant to Civil Code section 3294.

Hambrick’s third cause of action is for violation of the FAL. She alleges that the HCP defendants “advertise, including through their website, that they are committed to the guiding principle of coordinated care, ” that the services provided by HCP “are ‘patient centered, ’” and that HCP “will always strive for the highest quality outcomes.” HCP concealed its unlicensed status, the financial arrangements by which it was obligated to pay for Hambrick’s care, and the fact that “Plaintiffs would not be afforded the other consumer protections provided by the Knox-Keene Act.”

Contrary to its representations, HCP “did not provide to Plaintiffs coordinated care intended to achieve the highest quality outcomes. Instead, [the HCP defendants] managed their patients’ and Plaintiffs’ care in a manner designed to delay or deny physician, specialist and hospital care necessary to properly diagnose and treat Plaintiffs’ conditions.” The HCP defendants’ advertisement and representations were made with knowledge that they “had assumed full financial risk without a Knox-Keene license and without the financial reserves required of licensed health plans.” Hambrick alleges that HCP made the representations with the intent to induce patients and health plan members to use HCP for their services, and that HCP knew it was misleading them. Hambrick alleges as damages the premiums paid to HCP, co-pays, deductibles, and co-insurance payments paid to HCP.

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In her third cause of action, Hambrick seeks to “disgorge [the HCP defendants] of all unjust gains, ” including “all capitation[9] paid to [the HCP defendants], and all co-pays, deductibles and co-insurance payments paid to [the HCP defendants]” and for injunctive relief, including to “enjoin [the HCP defendants] from their misleading advertising.”

B. Demurrers

On March 20, 2013 MGI filed a demurrer to the first amended complaint and a motion to strike. MGI also sought a protective order staying discovery. MGI demurred on the grounds that Hambrick failed to state facts sufficient to state a cause of action (Code Civ. Proc., § 430.10, subd. (e)) and that the court lacked jurisdiction (id., § 430.10, subd. (a)). In its points and authorities, MGI argued that the doctrine of judicial abstention required dismissal of all claims or, in the alternative, the court should invoke the doctrine of primary jurisdiction to allow the DMHC to make a licensing decision.

MGI also argued that each cause of action failed to state a claim. MGI challenged the fraudulent concealment cause of action on the ground Hambrick failed to plead a duty to disclose, justifiable reliance, causation and recoverable damages. Finally, MGI argued that plaintiffs lacked standing to bring a cause of action for false advertising on the basis that they had not alleged that they saw MGI’s advertising or relied on it in selecting MGI’s physicians.

On April 12, 2013 HCP-LLC and DVHCP filed a separate demurrer raising the same issues raised by MGI in its demurrer. In their demurrer, HCP-LLC and DVHCP also argued that the claims against them should be dismissed because Hambrick failed adequately to plead any alleged wrongdoing or secondary liability on their part. HCP-LLC and DVHCP also sought a protective order.

Hambrick opposed both demurrers, as well as MGI’s motion to strike. In her opposition to the demurrers, Hambrick acknowledged that “not... all capitated medical groups accepting professional risk are health plans, ” but argued that HCP’s “direct or indirect acceptance of hospital capitation constitutes unlicensed health plan operation” and is a “per se violation of the Knox-Keene Act.”

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C. Trial Court’s Ruling

On June 21, 2013 the trial court sustained MGI’s demurrer without leave to amend as to all three causes of action, adopting in its entirety its previously issued tentative decision. Addressing MGI’s request that it invoke the doctrine of judicial abstention, the trial court observed:

“Consumer cases involving challenges to the conduct of health care plans, health care insurers and health care providers, commonly brought as class action claims under [the UCL], have presented the judicial abstention issue in many different factual contexts. The trial court rulings and appellate rulings thereon do not present a tidy pattern with an easily ascertainable test for when judicial abstention should or should not be applied. This, in its own way, would appear to demonstrate why there are a range of reasonable rulings which can be made in a given factual and legal context to either abstain or not abstain according to the trial court’s best evaluation of (a) the complexity of the issue(s) presented, (b) its/their overlap with issues committed to the primary jurisdiction of the regulatory authority and (c) the possibility that inconsistent directions will be given to the regulated entity if the [c]ourt acts in tandem with the authorized regulator’s continuing exercise of its power to direct specific conduct.

“The class action case here is pled under Business [and] Professions Code [sections] 17200 and 17500 and as a common law claim for fraud, but common-law fraud claims, as such, hardly ever qualify for class treatment. The real nub of the case, therefore, is the equitable UCL claim and [FAL] claim pled on behalf of a putative class. The [c]ourt finds in the exercise of its discretion after reviewing the argument of all parties that this is a suitable case for the application of judicial abstention. Each cause of action requires the [c]ourt to decide whether or not [MGI] is a health plan that was required to have been licensed under the [Knox-Keene Act]. To determine whether or not [MGI] is or is not in compliance with health maintenance organization licensing laws requires a detailed analysis of complex corporate structures, of risk allocation via service provider ‘cap[it]ation’ contracts of the cost of providing medical care, and many related factual and legal issues.”

After a consideration of applicable case law and authorities cited by plaintiffs, the trial court was “not persuaded that it should allow this case to proceed in this forum.” It therefore sustained MGI’s demurrer without leave to amend. The court did not reach MGI’s argument that plaintiffs failed to state facts sufficient to state their causes of action.

As to the demurrer filed by HCP-LLC and DVHCP, the trial court noted that “[e]ach of the three causes of action as against each of these two

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co-defendants... would require the [c]ourt to deal with the same licensing issue presented by the direct claim of plaintiffs against [MGI]. Thus for the same reasons that abstention will be applied as to the claims against [MGI], the [c]ourt determines that it is prudent to abstain as to the interrelated claims against these two parties.”

In light of its ruling on the demurrers, the trial court declared MGI’s motion to strike, as well as the motions for a protective order staying discovery, to be moot.

On July 19, 2013 the trial court entered judgment in favor of the HCP defendants, awarded them costs, and dismissed the action with prejudice. Thereafter, the HCP defendants filed a memorandum of costs. Hambrick moved to tax costs, arguing that the HCP defendants were not prevailing parties in light of the trial court’s decision to abstain and that the HCP defendants failed to itemize their costs. The HCP defendants then filed a restated memorandum of costs. The trial court denied the motion to tax costs.

This timely appeal by Hambrick from the judgment of dismissal, including its award of costs, followed.


A. Overview of the Knox-Keene Act

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