Filed 12/23/02; part. pub. & mod. order 1/22/03 (see end of opn.)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

COAST PLAZA DOCTORS HOSPITAL, Plaintiff and Appellant, v. UHP HEALTHCARE, Defendant and Respondent.

B154919 (Super. Ct. No. BC257266)

APPEAL from a judgment of the Superior Court of Los Angeles County,

Susan Bryant-Deason, Judge. Reversed in part, affirmed in part.

Payne & Fears, Daniel L. Rasmussen, Thomas L. Vincent and Paul A.

Bokota for Plaintiff and Appellant.

Miller & Holguin, Deborah A. Klar, Kent A. Halkett and Stacey L. Zill for

Defendant and Respondent.

The issue in this case is whether the health care provider has a right to seek

reimbursement directly from the health care insurer for services rendered to

enrollees of the health care plan. The resolution of this question is dependent in

part on whether, under the Knox-Keene Health Care Service Plan Act of 1975

2

(Health & Saf. Code, § 1340 et seq., “Knox-Keene Act”) an insurer has no direct

obligation to reimburse the provider. We conclude that the Knox-Keene Act does

not apply to the factual circumstances here, and does not bar the provider from

seeking direct compensation on a common law breach of contract theory.

We also conclude the trial court erred in sustaining a demurrer as to the

causes of action for breach of contract by assignment and violation of Business and

Professions Code section 17200. The trial court properly sustained the demurrer

without leave as to the causes of action for breach of implied contract, breach of

contract based on third party beneficiary theory, open book account, quantum

meruit, and unjust enrichment. Because we conclude that the Knox-Keene Act

does not apply to this case, we do not address the provider’s argument about the

constitutional application of that statute.

FACTUAL AND PROCEDURAL SUMMARY

This appeal is from an order of dismissal following the sustaining of a

demurrer without leave to amend. “On appeal from a judgment dismissing an

action after sustaining a demurrer without leave to amend, the standard of review is

well settled. The reviewing court gives the complaint a reasonable interpretation,

and treats the demurrer as admitting all material facts properly pleaded.

[Citations.] The court does not, however, assume the truth of contentions,

deductions or conclusions of law. [Citation.] The judgment must be affirmed ‘if

any one of the several grounds of demurrer is well taken. [Citations.]’ [Citation.]

However, it is error for a trial court to sustain a demurrer when the plaintiff has

stated a cause of action under any possible legal theory. [Citation.] And it is an

abuse of discretion to sustain a demurrer without leave to amend if the plaintiff

shows there is a reasonable possibility any defect identified by the defendant can

3

be cured by amendment. [Citation.]” (Aubry v. Tri-City Hospital Dist. (1992) 2

Cal.4th 962, 966-967.)

We take our factual summary from the allegations of the complaint. Coast

Plaza Doctors Hospital (Coast) is a health care facility and provider, offering

emergency and other care to the general public. Coast provided emergency and

other services to patients (Patients) who were insured under health insurance

policies issued by UHP Healthcare (UHP).1 When Patients were admitted to Coast

for medical care, they executed an assignment to Coast of their rights to

reimbursement by UHP. Coast attached an exhibit to the complaint detailing the

names of the patients, the dates of treatment and the cost of treatment.

UHP was obligated under its policies to pay for the reasonable and necessary

health care expenses incurred by Patients. Coast alleged that UHP knew that

Patients living in the Norwalk area were likely to seek treatment from its facility in

that region. Coast alleged that UHP understood that health care facilities and

hospitals would provide medical care to Patients in reliance on the insurance

contract between Patients and UHP. It also alleged that “[i]n consideration for

Coast’s implied agreement to treat the Patients, Defendants implicitly agreed to

reimburse Coast for the reasonable expenses incurred by the Patients in the course

of such treatment.” According to the allegations of the complaint, Coast and UHP

acted consistent with this implied agreement. Coast claims entitlement to

reimbursement for $1,149,915.16 for treatment it provided to Patients.

Coast sued UHP, alleging causes of action for breach of contract under

Health and Safety Code section 1371 (all statutory references are to that Code

1 In its demurrer, defendant UHP describes itself as WATTSHealth Foundation Inc., doing business as UHP Healthcare. We use the designation appearing in the complaint.

4

unless otherwise indicated); breach of contract based as a third party beneficiary;

breach of contract based on assignment, open book account; quantum meruit;

violation of Business and Professions Code section 17200; unjust enrichment; and

violation of section 1371.35.

The complaint does not allege that Coast had any agreements with physician

groups, capitation contracts or other service agreements with any health

maintenance organization or intermediary organizations such as large medical

groups, independent physician organizations or limited Knox-Keene license plans.

While Coast does not specifically deny entering into such agreements with UHP,

both sides treat the matter on the assumption that it did not. That is consistent with

the complaint, and we shall review the issues on that assumption.

UHP demurred on the ground that Coast lacked standing to pursue any of the

claims. UHP also maintained that it had no responsibility to Coast for the services

provided to Patients. It denied an implied agreement to pay for the medical

services provided by Coast; that Coast was an intended third party beneficiary

under its contracts with Patients; and that Coast was an assignee of the rights of the

Patients. It contended there were no facts alleged to establish that UHP had been

unjustly enriched or that it had engaged in any unlawful, unfair or fraudulent

business practice in violation of Business and Professions Code section 17200.

Finally, it argued that there is no separate, cognizable claim for a violation of

section 1371.35 as claimed in the eighth cause of action.

In support of its demurrer, UHP asked the court to take judicial notice of

extensive materials, including a November 1998 petition to the Commissioner of

the Department of Corporations to adopt a regulation, a Department of

Corporations decision in December 1998 declining to do so, and trial court minute

orders in cases brought in the Superior Courts in San Diego, Riverside and Orange

5

Counties. We also are asked to judicially notice the first amended complaint in the

Orange County litigation.

Coast opposed the demurrer, challenging the propriety of UHP’s reliance on

the matters contained in the request for judicial notice. It also argued that its

claims were supported by section 1371 and that it had standing to bring them.

Coast argued that it had sufficiently pled each cause of action and requested leave

to amend if the demurrer was sustained, and requested the court to take judicial

notice of the Department of Managed Health Care Report of Nonroutine

Examination File No. 933 0008 dated August 7, 2001.

The trial court sustained the demurrer without leave to amend. It found “that

the gravamen of the plaintiff’s complaint seeks to enforce the provisions of the

Knox-Keene Act. The Legislature has vested jurisdiction over such enforcement

exclusively in the Department of Corporations and, therefore, leave to amend is

denied and this action is dismissed.”

The complaint was dismissed and Coast filed a notice of appeal from the

order of dismissal. There is no indication that a judgment of dismissal was

entered. The order sustaining the demurrer is not itself appealable. (Ross v. Creel

Printing & Publishing Co. (2002) 100 Cal.App.4th 736, 741, fn. 2.) We agree with

the observation of the court in Smith v. Hopland Band of Pomo Indians (2002) 95

Cal.App.4th 1, 3, footnote 1 to the effect that it fails “to understand why the clearly

established law on this point continues to be disregarded, in the interest of judicial

economy, we shall deem the order to incorporate a judgment of dismissal.”

Nevertheless, we follow common practice in deeming the appeal to be from a

judgment.

6

DISCUSSION

I

Coast’s first three causes of action are for breach of contract. As we shall

explain, we find that the first two (implied contract and third party beneficiary

contract) lack merit, but that the third, counting on assignment from Patients to

Coast, does plead a cause of action.

A

On the implied contract cause of action, UPH claims that Coast waived this

claim by failing to argue the issue in its opening brief. In its reply brief, Coast

argues that it preserved the issue. We need not resolve this issue because we

conclude, on the merits, that the court properly sustained the demurrer to the first

cause of action.

Coast describes its implied contract theory as follows: (1) Patients had valid

written health insurance policies with UPH which obligated UPH to pay for the

health care expenses incurred by Patients; (2) the policies were entered into for the

purpose of guaranteeing Patients access to medical care; (3) “Defendants

understood that said health care facilities and hospitals would provide medical care

to the Patients in reliance on the existence of the Policies”; and (4) “In

consideration for Coast’s implied agreement to treat the Patients, Defendants

implicitly agreed to reimburse Coast for the reasonable expenses incurred by the

Patients in the course of such treatment. Indeed, Coast and Defendants have

engaged in a course of conduct consistent with this implied agreement.”

“[A]n implied-in-fact contract entails an actual contract, but one manifested

in conduct rather than expressed in words. (See Silva v. Providence Hospital of

Oakland (1939) 14 Cal.2d 762, 773 [97 P.2d 798] [‘The true implied contract,

then, consists of obligations arising from a mutual agreement and intent to promise

where the agreement and promise have not been expressed in words.’]; McGough

7

v. University of San Francisco (1989) 214 Cal.App.3d 1577, 1584 [263 Cal.Rptr.

404] [‘An implied-in-fact contract is one whose existence and terms are manifested

by conduct.’]; 1 Witkin, Summary of Cal. Law [(9th ed. 1987)] Contracts, § 11,

p. 46 [‘The distinction between express and implied in fact contracts relates only to

the manifestation of assent; both types are based upon the expressed or apparent

intention of the parties.’].)” (Maglica v. Maglica (1998) 66 Cal.App.4th 442, 455-

456, fn. omitted; see also Mitsui O.S.K. Lines, Ltd. v. Dynasea Corp. (1999) 72

Cal.App.4th 208, 212.)

Coast does not adequately allege an implied in fact contract with UHP. But

in its reply brief and at oral argument, Coast argued it should be allowed to amend

the complaint to allege an implied contract based on UHP’s pattern of paying

Coast for services provided to its insureds. UHP asserted that Coast had failed to

meet the pleading standards for an amendment set out in Rakestraw v. California

Physician’s Service (2000) 81 Cal.App.4th 39, 43-44.) On remand, if it so desires,

Coast should be allowed to amend the complaint to include this theory of implied

contract based on conduct.

Coast also argues that “UHP must have impliedly agreed to reimburse

facilities such as Coast” because it issued health insurance policies and collected

premiums and, absent an implied contract between Coast and UHP “the insurance

policies/contracts would be illusory as their express purpose, reimbursement, could

never be effectuated.” There is no merit in this argument. UPH is obligated to

make payments to or on behalf of its insureds according to its policies with them.

Whatever else may be derived from that fact (a subject to which we turn next) it

does not establish an implied contract between Coast and UHP. The fact is that

there is no allegation of UHP’s objective intent to agree to pay Coast for services

rendered to UHP enrollees. The trial court properly sustained the demurrer to this

cause of action.

8

B

In its second cause of action, Coast alleges breach of contract on a third

party beneficiary theory. It claims that the health care policies issued by UHP

“were executed, in substantial part, for the direct benefit of health care facilities

and hospitals generally, and that Coast, as a member of the health care facility and

hospital community, was an intended third party beneficiary of the Policies.”

“A third-party beneficiary may enforce a contract made expressly for his or

her benefit. [Citation.] It is also true that a party not named in the contract may

qualify as a beneficiary under it where the contracting parties must have intended

to benefit the unnamed party and the agreement reflects that intent. [Citation.]

The party claiming to be a third party beneficiary bears the burden of proving that

the contracting parties actually promised the performance which the third party

beneficiary seeks. This remains largely a question of interpreting the written

contract. [Citation.]” (Sessions Payroll Management, Inc. v. Noble Construction

Co. (2000) 84 Cal.App.4th 671, 680; see also Hess v. Ford Motor Co. (2002) 27

Cal.4th 516, 524.)

Coast failed to set out the specific policy language on which it relies, or to

incorporate the standard UHP health insurance policy by reference. Because third

party beneficiary status is a matter of contract interpretation, it follows that the

contract must be set out. (See Shaolian v. Safeco Ins. Co. (1999) 71 Cal.App.4th

268, 275, citing Rupley v. Huntsman (1958) 159 Cal.App.2d 307, 312 “[the

California rule is that the intent to make a third party a beneficiary of coverage

under an insurance policy must clearly appear; the policy should be construed

against finding such an intent if there is any doubt.]”.)

Coast argues that the issue of contract interpretation need not be resolved on

demurrer and that it must be resolved at trial following discovery. We disagree.

Coast is obligated to state a factual basis for the allegation of third party

9

beneficiary status. It has not done so. The demurrer to this cause of action was

properly sustained.

C

The third cause of action is for breach of contract based on an assignment of

rights by the Patients to Coast. The standard form assignment used by Coast was

attached as an exhibit to the complaint and incorporated by reference. It is titled:

“Financial Agreement and Assignment of Insurance Benefits.” Paragraph B of the

assignment provides: “Assignment of Insurance Benefits. The undersigned

authorizes, whether he/she signs as agent or as patient, direct payment to the

hospital of any insurance benefits otherwise payable to or on behalf of the patient

for this hospitalization or for these outpatient services, including emergency

services if rendered, at a rate not to exceed the hospital’s actual charges. It is

agreed that payment to the hospital, pursuant to this authorization, by an insurance

company shall discharge said insurance company of any and all obligations under a

policy to the extent of such payment. It is understood by the undersigned that he

she is financially responsible for charges not paid pursuant to this assignment.”

(Italics added.)

UHP asserts this assignment does not create an obligation requiring that it

pay Coast. It characterizes the assignment as “nothing more than written

permission or authorization from the patient allowing Coast to bill and receive

payment directly from whatever entity is responsible for paying that patient’s

medical bills . . . .” Without citing any authority for the proposition, UHP argues:

“On its face, the form ‘assignment’ does not transfer the patients’ rights to

payment or reimbursement from [UHP] to Coast. Coast thus lacks standing to

bring this collection action as an assignee of the patients who received the medical

services at issue.”

10

“An assignment is ‘“a personal act which, while evidencing intention to

transfer, is nevertheless a fully executed act effectuating an immediate change of

ownership.”’ [Citation.]” (Office of Statewide Health Planning & Development v.

Musick, Peeler & Garrett (1999) 76 Cal.App.4th 830, 833-834.) In Recorded

Picture Company [Productions] Ltd. v. Nelson Entertainment, Inc. (1997) 53

Cal.App.4th 350, 368, the court explained: “‘To “assign” ordinarily means to

transfer title or ownership of property . . . , but an assignment, to be effective, must

include manifestation to another person by the owner of his intention to transfer the

right, without further action, to such other person or to a third person. . . . It is the

substance and not the form of a transaction which determines whether an

assignment was intended. . . . If from the entire transaction and the conduct of the

parties it clearly appears that the intent of the parties was to pass title to the

[property], then an assignment will be held to have taken place.’ (McCown v.

Spencer (1970) 8 Cal.App.3d 216, 225 [87 Cal.Rptr. 213], citations omitted.)”

The assignment incorporated into the complaint satisfies this test. It

establishes that the patient authorizes the payment of any insurance benefits

directly to Coast. This is an immediate assignment of insurance benefits. The

failure to pay the benefits to Coast under this assignment is a basis for a cause of

action for breach of contract. The trial court erred in sustaining the demurrer to

this cause of action.

II

The fourth cause of action is for open book account. Code of Civil

Procedure section 337a defines a book account as “a detailed statement which

constitutes the principal record of one or more transactions between a debtor and a

creditor arising out of a contract or some fiduciary relation, . . .” (Italics added.)

It is created by the agreement or conduct of the parties to a commercial transaction.

(H. Russell Taylor’s Fire Prevention Service, Inc. v. Coca Cola Bottling Corp.

11

(1979) 99 Cal.App.3d 711, 728.) Coast’s theory is that the implied contract it

alleged between itself and UHP, plus Coast’s account of charges for services

provided to UHP enrollees, created an open book account. Since Coast has not

adequately alleged an implied contract with UHP, there is no basis for an open

book account. The trial court properly sustained the demurrer to this cause of

action.

III

Coast’s fifth cause of action is for quantum meruit: “Coast is informed and

believes, . . . that Defendants knew or should have known that a health care

provider such as Coast was or would be providing medical services to the Patients,

and would be doing so with the expectation of payment. [¶] Coast [is] further

informed and believes, . . . that Defendants knew they would be obligated to pay

for medical services performed on the Patients.” The seventh cause of action is

based on a similar theory, unjust enrichment. In it Coast alleges that UHP received

premium payments from the Patients which it unjustly retained, rather than

reimbursing Coast for services provided to Patients.

“The classic formulation concerning the measure of recovery in quantum

meruit is found in Palmer v. Gregg [(1967)] 65 Cal.2d 657. Justice Mosk, writing

for the court, said: ‘The measure of recovery in quantum meruit is the reasonable

value of the services rendered provided they were of direct benefit to the

defendant.’ (Id. at p. 660, italics added; see also Producers Cotton Oil Co. v.

Amstar Corp. (1988) 197 Cal.App.3d 638, 659 [242 Cal.Rptr. 914].) [¶] . . . [¶]

The idea that one must be benefited by the goods and services bestowed is thus

integral to recovery in quantum meruit; hence courts have always required that the

plaintiff have bestowed some benefit on the defendant as a prerequisite to

recovery. [Citation.]” (Maglica v. Maglica (1998) 66 Cal.App.4th 442, 449-450,

italics added.)

12

Coast argues that it need only allege the performance of services or work

and labor for the UHP Patients at their request, as well as the representation to pay

the reasonable value to support its claim for quantum meruit or unjust enrichment.

The problem with the quantum meruit theory as applied to this case is that there is

no allegation of benefit conferred by Coast on UHP itself. The trial court properly

sustained the demurrer to the cause of action for quantum meruit.

“‘The right to restitution or quasi-contractual recovery is based upon unjust

enrichment. Where one obtains a benefit which he may not justly retain, he is

unjustly enriched. The quasi-contract, or contract “implied in law,” is an

obligation created by the law without regard to the intention of the parties, and is

designed to restore the aggrieved party to his former position by return of the thing

or its equivalent in money. [Citations.] [¶] However, “[t]he mere fact that a

person benefits another is not of itself sufficient to require the other to make

restitution therefor.”’ [Citation.] Thus, ‘[e]ven when a person has received a

benefit from another, he is required to make restitution “only if the circumstances

of its receipt or retention are such that, as between the two persons, it is unjust for

him to retain it.”’ (Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51 [57 Cal.Rptr.2d

687, 924 P.2d 996]; accord, First Nationwide Savings v. Perry (1992) 11

Cal.App.4th 1657, 1663 [15 Cal.Rptr.2d 173].)” (California Medical Assn. v.

Aetna U.S. Healthcare of California, Inc. (2001) 94 Cal.App.4th 151, 171, fn. 23

(Aetna).)

In Aetna, which we discuss in detail below, a health plan insurer entered into

contracts with intermediaries, who then contracted with the providers. The court

held as a matter of law, that a quasi contract action for unjust enrichment does not

lie “where, as here, express binding agreements exist and define the parties’

rights.” (Aetna, supra, 94 Cal.App.4th at pp. 172-173.) As we have discussed,

while Coast did not have an express or implied contract with UHP, it was the

13

assignee of the Patients’ direct contracts with UHP and may allege breach of

contract on that basis. Therefore, the rights of the parties to this action are defined

by the contract between UHP and the Patients. Unjust enrichment is not available

as a remedy. The trial court properly sustained the demurrer to this cause of

action.

IV

Coast’s sixth cause of action is for violation of Business and Professions

Code section 17200, the unfair competition law (UCL).2 It alleges that UHP

violated this statute by: (a) Failing to pay, underpaying, or delaying payment to

Coast in violation of section 1371 and other statutes; (b) attempting to transfer

patients at Coast to other hospitals in violation of 42 United States Code section

1395dd; and (c) attempting to transfer the Patients at Coast to other hospitals

because Coast insisted that it honor its obligations under section 1371 et seq. We

assume, as we must at the demurrer stage, that Coast has alleged conduct that

could be unlawful, unfair or fraudulent. (Congress of Cal. Seniors v. Catholic

Healthcare West (2001) 87 Cal.App.4th 491, 495.)

Section 17200 of the UCL defines “unfair competition” to “mean and

include any unlawful, unfair or fraudulent business act or practice and unfair,

deceptive, untrue or misleading advertising” and any act prohibited by section

17500. “The California Supreme Court confirmed that the test for determining a

violation of the unfair competition law is a disjunctive one; namely, a plaintiff may

show that the acts or practices at issue are either unlawful or unfair or deceptive.”

2 “Business and Professions Code section 17200 does not bear a legislatively imposed title or name, but has been referred to as the ‘unfair competition law’ or the ‘UCL.’ (Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 558, fn. 2 [71 Cal.Rptr.2d 731, 950 P.2d 1086].)” (Walker v. Countrywide Home Loans, Inc. 2002) 98 Cal.App.4th 1158, 1168, fn. 1.)

14

(Walker v. Countrywide Home Loans, Inc., supra, 98 Cal.App.4th at p. 1168, citing

Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20

Cal.4th 163, 180.)

UHP argues that to the extent Coast bases its unfair competition claim on a

violation of section 1371, it fails because that statute does not obligate UHP to pay

for the services at issue.

UPH took the position in the trial court and in its briefing here that the

Knox-Keene Act applies and precludes Coast from obtaining reimbursement from

UPH. Coast argues that this body of law does not apply here because this case

does not involve a contract between UPH and an intermediary or a contract

between Coast and an intermediary. We begin our analysis with an examination of

the regulatory scheme.

The Knox-Keene Act is “‘a comprehensive system of licensing and

regulation’ (Van de Kamp v. Gumbiner (1990) 221 Cal.App.3d 1260, 1284 [270

Cal.Rptr. 907]), formerly under the jurisdiction of the Department of Corporations

(DOC) and presently within the jurisdiction of the Department of Managed Health

Care (DMHC) [citation]. ‘All aspects of the regulation of health plans are covered,

including financial stability, organization, advertising and capability to provide

health services.’ (Van de Kamp, at p. 1284.)” (California Medical Assn. v. Aetna

U.S. Healthcare of California, Inc., supra, 94 Cal.App.4th 151, 155, fn. 3.)

Section 1371 provides that a health care service plan is to reimburse

uncontested claims no later than 30 working days after receipt, unless it is a health

maintenance organization, in which case it has 45 days to pay. It also 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.” This

15

clause has been referred to in the regulatory and case law as the “nonwaiver

clause.”

UHP relies on extensive extrinsic evidence presented to the trial court in its

request for judicial notice, and two cases interpreting section 1371 decided shortly

after Coast filed its notice of appeal. All of this material relates to whether a

provider who has a contract with an intermediary agency is entitled to

compensation directly from a health care plan insurer. The material we are asked

to judicially notice is irrelevant to the issue before us because all of it is based on

contractual relationships between a health care insurer, an intermediary, and a

provider.3 Because there is no allegation of such an arrangement in this case, we

must assume that there was none. As we have noted, that is the position taken by

both parties in their briefing.

UHP cites Aetna, supra, 94 Cal.App.4th 151. In that case, the plaintiff,

California Medical Association, Inc. (CMA), was the assignee of claims owned by

physicians and medical groups. CMA sued two health care insurers for payments

allegedly owed to physicians for services provided to enrollees in health care

service plans operated by defendants. The decision explains the typical contractual

relationships under which patient care is provided and reimbursed under the Knox-

Keene Act.

The defendant insurers entered into “Defendant-Enrollee Agreements” with

their enrollees that imposed obligations upon defendants to pay for services

rendered by physicians to enrollees. They also entered into “Defendant-

Intermediary Agreements” with various contracting entities including large

medical groups, independent practice associations and limited Knox-Keene license

3 This also disposes of Coast’s arguments that the trial court erred in relying on improper extrinsic evidence presented in the request for judicial notice.

16

plans. Under those agreements, defendants paid their agent intermediaries to

perform specific tasks on behalf of defendants, including signing up panels of

primary care and specialty physicians, processing claims and making payments to

physicians. The intermediaries then entered into agreements with physicians to

provide health services to defendants’ enrollees. To participate in the managed

care plans offered by the defendants, physicians were required to enter into

“Intermediary-Physician Agreements” or otherwise be accepted into panels of

providers established by the intermediaries. Once care was provided to an

enrollee, the physician submitted a claim to defendants through the intermediaries.

According to the CMA, the Intermediary-Physician Agreements required the

providers to “‘look solely’” to intermediaries for payment for the services the

provided to enrollees by the physicians. (Aetna, supra, 94 Cal.App.4th at pp. 156-

157.)

But due to insolvency, many intermediaries failed to pay physicians for

these services. Defendants maintained their contractual relationship with these

insolvent intermediaries, despite knowledge of their financial instability and

continued to make payments to them. Defendants denied repeated demands for

direct payment by the physicians, while still collecting premiums from their

enrollees. (Aetna, supra, 94 Cal.App.4th at p. 157.)

In Aetna, CMA argued that section 1371 imposed an obligation on the

insurer to pay for all covered medical services rendered by physicians to

defendants’ enrollees even when defendants purported to delegate such obligation

to intermediaries. It further alleged that the defendants failed to make these

payments within the time frames specified in section 1371, and that any contractual

provision purporting to waive these requirements or other portions of the statute

was unlawful. (Aetna, supra, 94 Cal.App.4th at p. 160.)

17

CMA asserted that the defendants were obligated to the physicians under the

nonwaiver clause we have quoted, despite language in the intermediary agreements

imposing the ultimate responsibility to pay the physician’s claims on the

intermediaries. The Aetna court held that the statutory nonwaiver clause “simply

means that section 1371’s time limits and other procedural requirements must be

satisfied even when health plans have delegated their payment obligations to

contracting entities under risk-shifting agreements consistent with other Knox-

Keene provisions.” (Ibid.)

The court also examined the legislative history of section 1371 and found

nothing “indicating that section 1371 was intended to impose an obligation on

health plans to pay treating physicians where the plans had no contractual

obligation to do so.” (Aetna, supra, 94 Cal.App.4th at p. 163.) Based on this

history, the court concluded that the nonwaiver clause was “intended simply to

require contracting entities such as Intermediaries to make timely compliance with

the statute’s procedures for handling claims”; CMA failed to identify anything in

the legislative history indicating that section 1371’s statutory nonwaiver clause

was intended to require health plans to pay treating physicians absent a contractual

obligation to do so. (Ibid.)

The Aetna court also noted that Department of Corporations had denied a

request by the California Medical Association that it issue a regulation to make

health plans the primary obligors for payments of claims notwithstanding

contractual provisions to the contrary. (Aetna, supra, 94 Cal.App.4th at pp. 163-

164.)

The analysis in Desert Healthcare Dist. v. PacifiCare, FHP, Inc. (2001) 94

Cal.App.4th 781 (Desert Healthcare) was similar. In that case, a hospital sued a

health care service plan for the cost of services provided to enrollees of the plan.

The insurer, Pacificare, had contracted with an intermediary, Desert Physician’s

18

Association (DPA). This was a capitation agreement for which PacifiCare paid a

flat fee per person to DPA to provide physicians and obtain hospital services for

PacifiCare’s subscribers. The intermediary, DPA, contracted with a provider,

Desert Healthcare, to obtain hospital services for PacifiCare’s subscribers. Under

this arrangement, Desert Healthcare billed DPA rather than PacifiCare for the

services it provided to PacifiCare subscribers. DPA filed for bankruptcy,

extinguishing its debt to Desert Healthcare for millions of dollars. Desert

Healthcare sued PacifiCare to recover payment for the services it rendered to

PacifiCare’s subscribers under the contract with DPA.

The court rejected Desert Healthcare’s argument that the nonwaiver clause

of section 1371 of the Knox-Keene Act required PacifiCare to bear the ultimate

responsibility for the services provided despite its capitation agreement with DPA.

(Desert Healthcare, supra, 94 Cal.App.4th at p. 786.) Like the Aetna court, it held

that whether read in isolation or as a part of the whole statute, the nonwaiver clause

did not impose an obligation on the insurer to pay the provider directly. (Id. at

p. 788.) It merely “imposes certain procedural requirements on the processing of

claims; it does not create a new, independent basis for liability.” (Ibid.) The

Desert Healthcare court also held that Desert Healthcare’s interpretation would

destroy capitation agreements allowed under other provisions of the Knox-Keene

Act. (Id. at p. 789.)

Thus, both courts concluded that the nonwaiver clause was intended to

require contracting entities to comply with the procedures for handling claims set

forth in section 1371. (Desert Healthcare, supra, 94 Cal.App.4th at p. 791.)

“[T]he intent of the Legislature in enacting section 1371 is clear: to motivate health

care service plans to require their contracting entities to comply with section 1371

by subjecting the plans to disciplinary action and penalties for the failures of

19

contracting entities. The nonwaiver clause was never intended to create an

independent basis for liability.” (Ibid, fn. omitted.)

The analyses in Aetna and Desert Healthcare were based on the existence of

risk-shifting agreements sanctioned by the Knox-Keene Act by which the health

plan insurers shifted the obligation to pay provider claims to intermediaries. As we

have discussed, there is no such arrangement in this case.

This brings us back to the specific allegations of the cause of action for

violation of the UCL. Coast alleged that UHP violated the UCL by failing to

reimburse Coast for the services provided, as required by “a statutory obligation to

compensate Coast and other health care providers under various provisions of the

law, including without limitation, California Health & Safety Code Section 1731.”

It also claims a violation of the UCL based on UHP’s alleged “attempting to

transfer the Patients at Coast to other hospitals because Coast insisted that

Defendants honor their obligations under California Health & Safety Code

section 1371, et seq.”

In reply, UHP makes a single argument in support of the demurrer to the

claim: “To the extent that Coast bases its Section 17200 claim on [UHP’s] alleged

violation of Section 1371, the claim fails because Section 1371 does not impose

upon [UHP] an obligation to pay for the services at issue” referencing its

discussion of the Aetna, supra, 94 Cal.App.4th 151 and Desert Healthcare, supra,

94 Cal.App.4th 781 cases.

In Aetna, supra, 94 Cal.App.4th 151, 169, the court said: “Although

Business and Professions Code section 17200 does not confer on private party

CMA a general power to enforce Knox-Keene, CMA may nonetheless sue to

enjoin acts made unlawful by Knox-Keene. [Citation.]” The Aetna court

concluded that there was no viable cause of action under the UCL because the

20

insurer did not violate the Knox-Keene statutory enforcement scheme since it had

no obligation to pay the provider directly. (Ibid.)

As we have discussed, the decisions in Aetna and Desert Healthcare do not

deal with the situation presented in this case. UHP’s challenge to the UCL cause

of action, as state in its papers, is entirely premised on the applicability of this

authority. Since it does not apply, UHP is left with no articulated basis to support

its demurrer to this cause of action with respect to the alleged violations of the

Knox-Keene Act.

In its discussion of the UCL cause of action, UHP also asserts that Coast has

not pled any other valid theory that would create an obligation on UHP to pay

Coast, and that, without an obligation to pay, there can be no violation of section

1371. But, as we have discussed, Coast has adequately alleged an obligation to

pay based on the assignment of the Patients’ rights under their policies with UHP

to Coast. Coast also alleged that UHP’s pattern of withholding payment

constituted a violation of the UCL. This adequately alleged an unfair business

practice within the meaning of the UCL. (See Searle v. Wyndham Internat., Inc.

(2002) 102 Cal.App.4th 1327, 1332-1333.) We therefore conclude that UHP’s

demurrer should not have been sustained on the UCL cause of action.4

Coast also predicates its claim for violation of the UCL on the Emergency

Medical Treatment and Active Labor Act (EMTALA), 42 United States Code

section 1395dd. “Congress enacted EMTALA in 1986 to address the problem of

‘dumping’ patients in need of medical care but without health insurance.

[Citations.] Though originally intended to cure the evil of dumping patients who

4 Apparently Coast has abandoned its eighth cause of action for violation of section 1371.35 of the Knox-Keene Act because it has not argued that trial court erred in sustaining the demurrer as to that cause of action.

21

could not pay for services, the rights guaranteed under EMTALA apply equally to

all individuals whether or not they are insured.” (Phillips v. Hillcrest Medical

Center (10th Cir. 2001) 244 F.3d 790, 796.) The Tenth Circuit explained the

duties of a hospital under the EMTALA: “Under EMTALA, a participating

hospital has two primary obligations. [Citation.] First, the hospital must conduct

an initial medical examination to determine whether the patient is suffering from

an emergency medical condition. [Citation.] The second obligation requires the

hospital, if an emergency medical condition exists, to stabilize the patient before

transporting him or her elsewhere. [Citation.] To ensure compliance with these

obligations, Congress created a private cause of action. [Citations.]” (Ibid.)

Coast’s argument is based on the second obligation, involving the transfer of

patients. UHP argues that transfers are authorized by the act if the patients are

stabilized, and that the cause of action is inconsistent with the statute’s plain terms.

UHP’s argument is more suited to summary judgment than a demurrer. Coast has

argued that UHP attempted to transfer patients in violation of the EMTALA. On

demurrer we must assume the truth of that allegation. (Congress of Cal. Seniors v.

Catholic Healthcare West, supra, 87 Cal.App.4th at p. 495.) This basis for the

violation of Business and Professions Code section 17200 was adequately pleaded.

V

Finally, we address arguments regarding the propriety of the litigation in

light of the extensive statutory scheme codified in the Knox-Keene Act. Coast

argues the trial court’s ruling that the Department of Corporations (now

Department of Managed Health Care) has exclusive jurisdiction to enforce the

Knox-Keene Act is unconstitutional. UHP argues that Coast has no standing to

assert a private right of action under the Knox-Keene Act and that all of Coast’s

claims are based on violations of, or obligations imposed, by that act. UHP also

asserts that we should exercise judicial restraint and abstain from allowing Coast to

22

pursue its common law remedies in deference to the Department of Managed

Health Care.

Because our review is de novo, we are not bound by the trial court’s ruling

on the exclusive jurisdiction of the Department of Managed Health Care. (Aubry v.

Tri-City Hospital Dist., supra, 2 Cal.4th at pp. 966-967.) We conclude that the

Department does not have exclusive jurisdiction, and that common law and other

statutory causes of action may be brought by Coast.

We disagree with UHP’s argument that Coast has no standing. First, it is

based on a mischaracterization of the allegations of the complaint. Not every

cause of action is based on the Knox-Keene Act. As to the cause of action for

violation of Business and Professions Code section 17200, which is, at least in

part, based on violations of Knox-Keene Act, we agree with the Aetna court that

conduct in violation of the Knox-Keene Act may be the basis for a cause of action

under Business and Professions Code section 17200. (Aetna, supra, 94

Cal.App.4th at p. 169.)

The Knox-Keene Act itself contemplates that a health care plan may be held

liable under theories based on other law. Section 1371.25 provides: “A plan, any

entity contracting with a plan, and providers are each responsible for their own acts

or omissions, and are not liable for the acts or omissions of, or the costs of

defending, others. Any provision to the contrary in a contract with providers is

void and unenforceable. Nothing in this section shall preclude a finding of liability

on the part of a plan, any entity contracting with a plan, or a provider, based on

the doctrines of equitable indemnity, comparative negligence, contribution, or

other statutory or common law bases for liability.” (Italics added.)

Coast also cites section 1371.37. That statute prohibits and defines unfair

payment patterns, which includes engaging in a demonstrable and unjust patter of

denying complete and accurate claims, and provides for sanctions to be imposed by

23

the Director of the Department of Managed Health Care. But subdivision (f) of

section 1371.37 states: “The penalties set forth in this section shall not preclude,

suspend, affect, or impact any other duty, right, responsibility, or obligation under

a statute or under a contract between a health care service plan and a provider.”

(Italics added.)

Coast has standing to pursue these causes of action and the Knox-Keene Act

is not a bar. In addition, we reject UHP’s argument that we should defer to the

Department of Managed Health Care in the area of healthcare finance. The Knox-

Keene Act itself contemplates that a provider may have a cause of action under a

statutory or common law theory, as we have discussed. Since Coast did not have a

contract with either UHP or an intermediary acting on behalf of UHP, we find no

basis to conclude that the Department had exclusive jurisdiction.

DISPOSITION

The order sustaining the demurrer is reversed as to the causes of action for

breach of contract by assignment and violation of Business and Professions Code

section 17200. Each side is to bear its own costs on appeal.

EPSTEIN, Acting P.J.

We concur:

HASTINGS, J. CURRY, J.

24

CERTIFIED FOR PARTIAL PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

COAST PLAZA DOCTORS HOSPITAL,

Plaintiff and Appellant,

v.

UHP HEALTHCARE,

Defendant and Respondent.

B154919

(Super. Ct. No. BC257266)

ORDER MODIFYING OPINION AND CERTIFYING OPINION FOR PARTIAL PUBLICATION [NO CHANGE IN JUDGMENT]

THE COURT:*

It is ordered that the opinion filed herein on December 23, 2002, be modified as

follows:

1. Delete first two paragraphs of the opinion (slip opinion, p. 2) and substitute

the following:

25

The issue in this case is whether a health care provider has a right to seek

reimbursement directly from the health care insurer for services rendered to enrollees of

the health care plan. Its resolution depends in part on whether, under the Knox-Keene

Health Care Service Plan Act of 1975 (Health & Saf. Code, § 1340 et seq., “Knox-Kleene

Act”) an insurer has a direct obligation to reimburse the provider. In the published

portion of this opinion we conclude that the Knox-Kleene Act does not apply to the

factual circumstances here, and does not bar the provider from seeking direct

compensation on a common law breach of contract theory or under the Unfair

Competition Law (Bus. & Prof. Code, § 17200).

In the unpublished portion of the opinion we conclude the trial court erred in

sustaining a demurrer as to the cause of action for breach of contract by assignment, but

correctly sustained the demurrer without leave to amend to the causes of action for breach

of implied contract, breach of contract based on third party beneficiary theory, open book

account, quantum meruit, and unjust enrichment. Because we conclude that the Knox-

Kleene Act does not apply to this case, we do not address the provider’s argument about

the constitutional application of that statute.

2. On page 6 of the slip opinion, in the third line of the first paragraph, change

the phrase “counting on” to “based upon.”

3. On page 22 of the slip opinion, in the next-to-last line on that page, change

the word “patter” to “pattern.”

There is no change in the judgment.

The opinion in the above-entitled matter filed on December 23, 2002, was not

certified for publication in the Official Reports. For good cause it now appears that the

opinion, as modified, should be partially published in the Official Reports and it is so

ordered. Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is

certified for publication with the exception of parts I, II, and III of the Discussion.

26

*EPSTEIN, J., Acting P.J. HASTINGS, J. CURRY, J.