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Salinas Valley Memorial Healthcare System v. Monterey Peninsula Horticulture, Inc.

United States District Court, N.D. California, San Jose Division

May 31, 2018

SALINAS VALLEY MEMORIAL HEALTHCARE SYSTEM, Plaintiff,
v.
MONTEREY PENINSULA HORTICULTURE, INC. dba ROCKET FARMS, et al., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS COMPLAINT RE: DKT. NO. 10

          HOWARD R. LLOYD UNITED STATES MAGISTRATE JUDGE.

         Plaintiff Salinas Valley Memorial Healthcare System (“Hospital”) says it is a public hospital district and health system in Monterey County. It sues to recover over $1.4 million it claims defendants owe for alleged underpaid healthcare services that the Hospital provided to the employees of defendant Monterey Peninsula Horticulture, Inc. dba Rocket Farms (“Rocket Farms”) and their families. As its name suggests, Rocket Farms says it is a farm in the agricultural business. Defendant Monterey Peninsula Horticulture, Inc./Steven Roberts Original Desserts, LLC Employee Benefit Plan (“Plan”) is a (now terminated) self-funded ERISA benefits plan.

         Pursuant to Fed.R.Civ.P. 12(b)(6), defendants move to dismiss the complaint. Plaintiff opposes the motion. All parties have expressly consented that all proceedings in this matter may be heard and finally adjudicated by the undersigned. 28 U.S.C. § 636(c); Fed.R.Civ.P. 73. Upon consideration of the moving and responding papers, as well as the oral arguments presented, the court grants the motion in part and denies it in part. Plaintiff will be given leave to amend, but leave is limited to those matters for which amendment is expressly permitted by this order.

         BACKGROUND

         According to the complaint, Rocket Farms previously purchased a health insurance policy for its employees and their families through the Western Growers Association (“Association”). Plaintiff says that, pursuant to its contract with the Association, the Hospital was reimbursed for 83% of its bills for inpatient care and 82% of its bills for outpatient care.

         The complaint goes on to allege that beginning on July 1, 2014 and continuing through June 30, 2017, Rocket Farms switched from the Association's contracted health care arrangement to the defendant self-funded Plan, which had no network of hospitals. This change, says plaintiff, was made as part of a deliberate strategy by defendants to cut costs, diminish employees' level of benefits, and underpay the Hospital.

         The Hospital says that, after shifting to the self-funded Plan, Rocket Farms began paying roughly only a third of the amounts billed for services rendered. Specifically, the complaint alleges that every one of the Hospital's reimbursement claims was paid at 140% of rates the federal government pays under the Medicare program, which plaintiff says is “an unusually low level of reimbursement” from a non-government payor like Rocket Farms. (Dkt. 1, Complaint ¶ 40). Additionally, plaintiff alleges that Rocket Farms misled its own employees (and the Hospital) about the fact that hospital services would only be covered up to 140% of Medicare rates. Plaintiff further alleges that defendants improperly denied the Hospital's numerous appeals seeking additional payment and aggressively threatened litigation when the Hospital asked any of its patients to pay the balance on any unpaid bill.

         The Hospital goes on to allege that in phone calls to verify/approve coverage for several Rocket Farms patients, defendants (falsely) represented to the Hospital that the Plan would cover 70% of the patient's medical bills, up to a certain dollar amount, after which it would cover 100%- --and failed to disclose that payments under the Plan would actually be capped at 140% of Medicare. Plaintiff says it learned that, as of July 1, 2017, Rocket Farms changed back to the health insurance arrangement under the Association. So, the Plan is no longer in force. Nevertheless, plaintiff contends that doesn't excuse Rocket Farms from paying over $1.4 million for services the Hospital provided during the 3-year period that the Plan was in effect. To that end, it filed the present suit, asserting five claims for relief: (1) violation of ERISA § 502(a)(1)(B); (2) violation of the Affordable Care Act (ACA), Section 2707 “via ERISA § 502(a)(1)(B)”; (3) violation of the Lanham Act § 43(a) (unfair advertising); (4) intentional misrepresentation; and (5) negligent misrepresentation.

         The central dispute is whether the Plan required payment at 140% of Medicare, and nothing more (as defendants contend) or whether, as plaintiff claims, the Plan terms mean that the Hospital is owed “reasonable and customary” payments, which the Hospital maintains are well above 140% of Medicare.

         Pursuant to Fed.R.Civ.P. 12(b)(6), defendants now move to dismiss the complaint, arguing that the Hospital has no standing to bring the ERISA and ACA claims; and that the complaint fails, in any event, to allege a viable claim for relief. For the reasons to be discussed, the court grants the motion in part and denies the motion in part.

         LEGAL STANDARD

         A motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6) tests the legal sufficiency of the claims in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is appropriate where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory. Id. (citing Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990)). In such a motion, all material allegations in the complaint must be taken as true and construed in the light most favorable to the claimant. Id. However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). Moreover, “the court is not required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot reasonably be drawn from the facts alleged.” Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994).

         Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” This means that the “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citations omitted) However, only plausible claims for relief will survive a motion to dismiss. Iqbal, 129 S.Ct. at 1950. A claim is plausible if its factual content permits the court to draw a reasonable inference that the defendant is liable for the alleged misconduct. Id. A plaintiff does not have to provide detailed facts, but the pleading must include “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. at 1949.

         Documents appended to the complaint or which properly are the subject of judicial notice may be considered along with the complaint when deciding a Fed.R.Civ.P. 12(b)(6) motion. See Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990); MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986).

         While leave to amend generally is granted liberally, the court has discretion to dismiss a claim without leave to amend if amendment would be futile. Rivera v. BAC Home Loans Servicing, L.P., 756 F.Supp.2d 1193, 1997 (N.D. Cal. 2010) (citing Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996)).

         DISCUSSION

         A. Defendants' Request for Judicial Notice

         Defendants' request for judicial notice is granted as unopposed with respect to (1) certain summary plan documents (“SPDs”); (2) excerpts from the Federal Register; and (3) ACA regulations. The court also accepts plaintiff's submission of the SPD the Hospital says is quoted in the complaint. Defendants' request for judicial notice is denied as to an audit report, which is irrelevant to the disposition of issues presented.

         Pursuant to plaintiff's “Statement of Recent Decision, ” (Dkt. 23) the court has also received (without objection) a May 3, 2018 “Clarification of Final Rules” published in the Federal Register. (Dkt. 23).

         B. Claim 1: ERISA Section 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B)

         This claim, as articulated in plaintiff's rather convoluted complaint, appears to be based on two theories. First, plaintiff contends that the Plan requires the Hospital to be paid the “reasonable and customary” rate for its services---a rate that plaintiff maintains is “significantly higher than 140% of Medicare.” (Complaint ¶¶ 34, 40). The problem, according to the complaint, is that defendants “did not pay the Hospital at its Reasonable and Customary rates, ” and instead consistently set payment at the fixed rate of 140% of Medicare. (Id. ¶¶ 37-39). Second, the complaint goes on to allege that any Plan provisions suggesting that benefits are capped at 140% of Medicare are unenforceable because (1) any such terms are “buried deep” in the Plan and violate ERISA disclosure requirements; and (2) to the extent defendants had discretion to determine the level of payment to be made, defendants had a structural conflict of interest, in that they had a direct financial interest to pay as few benefits as possible. (Id. ¶¶ 215-218).

         Defendants move to dismiss, arguing that the Hospital lacks standing to pursue this claim because plaintiff is seeking payment beyond what is owed under the Plan. Additionally, to the extent the complaint also alleges violations of ERISA disclosure requirements or conflicts of interest, defendants argue that those are breach of fiduciary issues that the Hospital has no standing to assert.

         ERISA Section 502(a)(1)(B) provides that a participant or beneficiary may bring a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B). The Hospital is not a Plan participant or beneficiary. Nevertheless, providers may obtain derivative standing to sue by an assignment from a plan participant or beneficiary. Misic v. Bldg. Serv. Employees Health & Welfare Trust, 789 F.2d 1374, 1378-79 (9th Cir. 1986). The Hospital's complaint alleges that pursuant to a “‘Conditions of Admission' form executed by each Rocket Farms beneficiary or participant (and/or a representative of such individual), the Hospital is the assignee of all benefits under the Plan for each of the claims at issue in this case.” (Complaint ¶ 212). Thus, the Hospital says it “is entitled under ERISA to pursue all payment that is due to any Rocket Farms beneficiary or participant under the Plan for the medical services rendered to those individuals at the Hospital.” (Id. ¶ 213).

         Defendants do not challenge the allegation that the Hospital obtained valid assignments. Nevertheless, defendants contend that the patient assignments are limited to payment of benefits under the Plan---an assertion that the Hospital does not deny. As such, defendants argue that the Hospital lacks standing to pursue their “reasonable and customary” rate theory because defendants have already paid all that is due under the Plan, and hence, there is no relief that plaintiff may seek under the Plan.

         As previewed above, the Hospital disputes that it properly was paid according to the Plan terms. Thus, plaintiff says that defendants' motion does not really present an issue of standing. Nevertheless, defendants maintain that plaintiff's theory for payment of “reasonable and customary” rates that are far in excess of 140% of Medicare is based on a flawed interpretation of the Plan's terms.

         “To state a claim for benefits under ERISA, plan participants and beneficiaries have to plead facts making it plausible that a provider owes benefits under the plan.” Elizabeth L. v. Aetna Life Ins. Co., No. C13-02554 SC, 2014 WL 2621408, at *2 (N.D. Cal. June 12, 2014) (citing 29 U.S.C. § 1132(a)(1)(B); Iqbal, 556 U.S. at 677). Thus, “[a] plaintiff who brings a claim for benefits under ERISA must identify a specific plan term that confers the benefit in question.” Steelman v. Prudential Ins. Co. of America, No. CIV S-06-2746 LKK/GGH, 2007 WL 1080656, at *7 (E.D. Cal., Apr. 4, 2007) (citation omitted). An action may be dismissed “if the plaintiff is not entitled to a benefit they seek under the ERISA-regulated plan.” Id. (citation omitted).

         “In interpreting an ERISA plan, the Court must apply contract principles derived from state law, guided by policies expressed in ERISA and other federal labor law.” Elizabeth L., 2014 WL 2621408, at *2 (citing Richardson v. Pension Plan of Bethlehem Steel Corp., 112 F.3d 982, 985 (9th Cir. 1997)). “In doing so, the Court must interpret the plan's terms in an ordinary and popular sense, as would a person of average intelligence and experience.” Id. (citing Richardson, 112 F.3d at 985). “In resolving disputes over ERISA plans, the Court must look first to the agreement's specific language and determine the parties' clear intent, relative to the context giving rise to the language's inclusion.” Id. (citing Richardson, 112 F.3d at 985). “Finally, the Court must construe each provision consistently with the entire document such that no provision is rendered nugatory.” Id. (citing Gilliam v. Nev. Power Co., 488 F.3d 1189, 1194 (9th Cir. 2007)).

         The Hospital's theory as to why it must be paid a “reasonable and customary” rate far above 140% of Medicare is based on two parts of the Plan---the Schedule of Benefits and the definition of “Allowable Charges.” Basically, plaintiff claims that these provisions, taken together, mean that the Hospital must be paid “Allowable Charges” (which include “reasonable and customary” charges) in an amount established by “applicable law”; and, plaintiff says that the applicable law in California sets “reasonable and customary” rates way above 140% of Medicare. For the reasons to be discussed, the court agrees with defendants that the Hospital's proffered interpretation of the Plan fails to establish a plausible claim for relief.

         The complaint points out that the Plan's Schedule of Benefits provides, in relevant part:

All benefits described in this Schedule are subject to the exclusions and limitations described more fully herein including, but not limited to, the Plan Administrator's determination that: care and treatment is Medically Necessary; that charges are reasonable and customary (as defined as an Allowable Charge); that services, supplies and care are not Experimental and/or Investigational. The meanings of these capitalized terms are in the Defined Terms section of this document.

(Dkt. 16 at ECF p. 18) (emphasis added). Additionally, the complaint notes that the Schedule of Benefits goes on to state that “Covered Charges” for “Hospital Services, ” including emergency and inpatient care, are paid at “70% after $250 copayment (per admission) and deductible, ” subject to three exceptions: (1) “Amounts over the Allowable Charge” will not be paid; (2) “Ineligible charges” will not be paid; and neither will (3) “Invalid Charges (Refer to the Claims Review and Validation Program section).” (Complaint ¶ 67; Dkt. 16 at ECF p. 20). The complaint suggests that the latter two exceptions never came up. Plaintiff alleges that defendants never disputed that the services rendered were medically necessary and did not identify any billing errors made by the Hospital. (Complaint ¶ 72).

         Focusing, then, on the definition of “Allowable Charge, ” plaintiff notes that the “Allowable Charge” definition includes language stating:

The reasonable and customary charge shall mean an amount equivalent to the 85th percentile of a commercially available database, or such other cost or quality-based reimbursement methodologies as may be available and adopted by the Plan. If there are insufficient charges submitted for a given procedure, the Plan will determine an Allowable Charge based upon charges made for similar services. Determination of the reasonable and customary charge will consider the nature and severity of the condition being treated, medical complications or unusual circumstances that require more time, skill or experience, and the cost and quality data for that provider.
For Covered Charges rendered by a Physician, Hospital or Ancillary Provider in a geographic area where applicable law dictates the maximum amount that can be billed by the rendering provider, the Allowable Charge shall mean the amount established by applicable law for that Covered Charges [sic].

(Dkt. 16 at ECF p. 43) (emphasis added). Plaintiff says this last quoted paragraph is key because California “has a very well-developed body of law that governs how reasonable and customary payment should be determined in the absence of a contract between a payor and a provider.” (Dkt. 15 Opp. at ECF p. 13).

         The problem for the Hospital is that it ignores the entire first portion of the “Allowable Charge” definition, which says an “Allowable Charge” is the “lesser of” four options, only one of which is “the reasonable and customary charge for the same treatment, service, or supply furnished in the same geographic area . . ..” (Dkt. 16 at ECF p. 43). The relevant portion of the definition states:

Allowable Charge means the charge for a treatment, service, or supply that is the lesser of: (i) the charge made by the provider that furnished the care, service, or supply; (ii) the negotiated amount established by a provider network arrangement or other discounting or negotiation arrangement; (iii) the reasonable and customary charge for the same treatment, service, or supply furnished in the same geographic area by a provider of like service as further described below; or (iv) an amount equivalent to the following:
• For specialty drugs, the lesser of average wholesale price (AWP) minus 10% or the amount set by the Plan's prescription drug service vendor;
• For inpatient or outpatient facility claims, an amount equivalent to 200% of the Medicare equivalent allowable.

(Id.) (emphasis added). Thus, to the extent that plaintiff contends that “all of the definitions referenced in the Schedule of Benefits confirm that the Plan must pay at a Reasonable and Customary level for service provided by hospitals” (Complaint ¶ 71) at a level far above 140% of Medicare, it fails to convince. And, while plaintiff points out that the other options for calculating the Allowable Charge include the Hospital's full billed charges, that fact is of no particular import since no one seems to contend that plaintiff's full billed charges would be the “lesser” of the listed options.

         Moreover, plaintiff has no rejoinder to defendants' argument that ERISA generally has “powerful preemptive force” with respect to state laws. Cleghorn v. Blue Shield of California, 408 F.3d 1222, 1225 (9th Cir. 2005) (observing that ERISA “expressly preempts all state laws ‘insofar as they may now or hereafter relate to any employee benefit plan'”) (quoting 29 U.S.C. § 1144(a)); see also Hewlett-Packard Co. v. Barnes, 571 F.2d 502, 504 (9th Cir. 1978) (holding that “[t]he clear wording of section 514 and the relevant legislative history shows that Congress unmistakably intended ERISA to preempt a state law such as [California's] Knox-Keene [Act] that directly regulates employee benefit plans.”); Vrijesh S. Tantuwaya MD, Inc. v. Anthem Blue Cross Life & Health Ins. Co., 169 F.Supp.3d 1058, 1072 (S.D. Cal. 2016) (concluding that a provider's state law claims to recover benefits under the terms of a self-funded plan were preempted by ERISA).

         In defendants' view, the Plan (properly construed) means that benefits are paid at a reasonable and customary rate up to 140% of Medicare, and no more. They say this is so because (1) the Plan provides that “Covered Charges” are determined based on the Plan's Permitted Payment Levels; and (2) the Plan's Claim Review and Validation Program, in turn, provides that the Plan pays hospital providers the reasonable, usual and customary charges up to the Permitted Payment Level of 140% of Medicare. According to defendants, proper interpretation of the Plan goes like this:

         Start by looking at the Medical Benefits section of the Plan, which states that “Hospital and Facility charges” are “evaluated under the Claim Review Program, ” and that “Covered ...


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