Prime Healthcare Servs. v. Humana Ins. Co.

298 F.Supp.3d 1316

PRIME HEALTHCARE SERVS., et al.

v.HUMANA INS. CO.

Case No. EDCV 16–1097–VAP (JEMx)

United States District Court, C.D. California.

Signed March 21, 2018

Andrew H. Selesnick, Christopher Dacus, Damaris Lynnette Medina, Oren Bitan, Buchalter APC, Los Angeles, CA, A. Joel Richlin, John Oliver Liu, John E. Nuelle, Troy Allyn Schell, Prime Healthcare Services Inc, Ontario, CA, for Plaintiff.

Jennifer S. Romano, Crowell and Moring LLP, Los Angeles, CA, Samrah R. Mahmoud, Daniel M. Glassman, Crowell and Moring LLP, Irvine, CA, for Defendant.

Proceedings: MINUTE ORDER GRANTING DEFENDANT'S MOTION TO DISMISS FOURTH AMENDED COMPLAINT (DOC. NO. 83), GRANTING PLAINTIFFS' MOTION FOR LEAVE TO FILE SUR–REPLY (DOC. NO. 86), AND VACATING APRIL 16, 2018 HEARING ON PLAINTIFFS' MOTION (IN CHAMBERS)

Present: The Honorable Virginia A. Phillips, Chief United States District Judge

Defendant Humana Insurance Company ("Defendant" or "Humana") has filed a Motion to Dismiss the Plaintiffs Prime Healthcare Services, Inc. et al.'s¹ ("Plaintiffs") Fourth Amended Complaint ("4AC"). (Doc. No. 83.) Plaintiffs filed their Opposition on February 26, 2018 (Doc. No. 84) and Defendant filed its Reply on March 5, 2018 (Doc. No. 85).

On March 14, 2018, Plaintiffs filed a Motion for Leave to File a Sur–Reply to Defendants' Reply. (Doc. No. 86.)

The Court determined Defendants' Motion to be appropriate for resolution without oral argument pursuant to Local Rule 7–15 and vacated the hearing originally set for March 19, 2018. (Doc. No. 87.) After considering all papers filed in support of and in opposition to Defendant's Motion, the Court rules as follows.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. THE MEDICARE ACT

The Medicare Act (hereinafter, the "Act" or "Medicare") was enacted in 1965 as a federal health insurance program primarily benefitting those 65 years of age and older. See 42 U.S.C. §§ 1395 et seq. Courts in this district have noted that the Act has been described as "among the most completely impenetrable texts within human experience," requiring "dense reading of the most tortuous kind." See Prime Healthcare Huntington Beach, LLC v. SCAN Health Plan, 210 F.Supp.3d 1225, 1227 (C.D. Cal. Sept. 27, 2016) (citing Rehab. Ass'n of Virginia, Inc. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994) ).

This case concerns Part C of the Medicare Act, enacted in 1997 and creating the Medicare Advantage ("MA") program. 42 U.S.C. §§ 1395w–21 – 29. Under Part C, Medicare enrollees can receive Medicare benefits through private organizations called Medicare Advantage Organizations (individually "MAO," or collectively "MAOs") instead of the government. Id. The government pays MAOs monthly fees in exchange for assuming the risk of providing covered services to enrollees. 42 U.S.C. § 1395w–23. The amount that MAOs receive per enrollee is based on contracts with the Centers for Medicare and Medicaid Services ("CMS"), an agency within the Department of Health and Human Services. SCAN Health, 210 F.Supp.3d at 1226–27 (citing 42 U.S.C. § 1395w–27 ).

MAOs contract with certain health care providers to provide Medicare services. SCAN Health, 210 F.Supp.3d at 1226–27 (citing 42 U.S.C. § 1395w–22(d)(1) ). MAOs also must provide coverage for emergency services without regard to the emergency care provider's contractual relationship with the MAO, however. Id. MAOs reimburse non-contracting providers who provide these emergency services based on rates set by the Medicare Act and related regulations. SCAN Health, 210 F.Supp.3d at 1227–28. Payment amounts due to a non-contracted emergency provider are limited to what "the provider would collect if the beneficiary were enrolled in original Medicare." 42 C.F.R. § 422.214(a). Conversely, contracting providers, who enter into signed agreements with MAOs, may "establish[ ] payment amounts for services furnished to a beneficiary enrolled in an MA coordinated care plan, an MSA plan, or an MA private fee-for-service plan" even above the Medicare cap. See 42 C.F.R. § 422.214. 42 U.S.C. § 405(h), made applicable to the Medicare Act by 42 U.S.C. § 1395ii, provides that 42 U.S.C. § 405(g) is "the sole avenue for judicial review" for claims " ‘arising under’ the Medicare Act." Heckler v. Ringer, 466 U.S. 602, 614–15, 104 S.Ct. 2013, 80 L.Ed.2d 622 (1984).

In 2003, Congress amended Part C's preemption provision to read as follows:

The standards established under this part shall supersede any State law or regulation (other than State licensing laws or State laws relating to plan solvency) with respect to MA plans which are offered by MA organizations under this part.

Do Sung Uhm v. Humana, Inc., 620 F.3d 1134, 1148 (9th Cir. 2010) (quoting 42 U.S.C. § 1395w–26(b)(3) ). "The Conference Report accompanying the Act explains that ... Congress intended to broaden the preemptive effects of the Medicare statutory regime." Id. (citing H.R. Rep. No. 108–491, at 447 (2003) (Conf. Rep.) ).

B. FACTUAL BACKGROUND

Plaintiff Prime Healthcare Services, Inc. owns and operates hospitals throughout the country, including the 17 plaintiff-hospitals in this case. (4AC ¶¶ 4–20.) Defendant is a health insurance company and a MAO. (Id. ¶¶ 22, 28–19.)

Plaintiffs and Defendant entered into a series of Letters of Agreement (individually "LOA," and collectively "LOAs")² under which Plaintiffs agreed to provide hospital services to Defendant's Medicare Advantage health plan members ("MA Members"). (Id. ¶ 29.)

Plaintiffs maintain that from January 1, 2012 through February 29, 2016, Defendant underpaid and failed to pay for emergency and other health care services that Plaintiffs provided to Defendants' commercial health plan members ("CP Members") and MA health plan members. (Id. ¶¶ 1, 32.) Plaintiffs allege Defendant achieved such underpayment by unilaterally, systematically altering codes related to the medical services for which Plaintiffs had billed Defendant, and replacing those codes with codes pertaining to lower-cost services or procedures ("downcoding"). (Id. ) Such billing manipulation allegedly resulted in reduction of payments for the actual services provided by Plaintiffs to Defendant's CP Members and MA Members. (Id. ¶¶ 1, 33) Plaintiffs further allege that Defendant "failed to properly pay Plaintiffs for the inpatient services rendered to Defendants' health plan members at the appropriate inpatient rates" and that "Defendants were improperly recouping their payments for Plaintiffs' services in breach of the aforementioned contracts. (Id. ¶¶ 1, 35.)

As a result of the alleged billing manipulations, Plaintiffs contend that they have been damaged in an amount not less than $75,000, exclusive of interest. (Id. ¶ 37.)

C. PROCEDURAL HISTORY

Plaintiffs initiated this action on May 25, 2016 (Doc. No. 1) and filed the First Amended Complaint ("FAC") on August 32, 2016 (Doc. No. 19). The FAC contains the following six claims: (1) breach of written contract; (2) breach of oral contract; (3) breach of implied-in-fact contract; (4) breach of implied covenant of good faith and fair dealing; (5) negligent misrepresentation; and (6) violation of California Unfair Competition Law ("UCL"), Bus. & Prof. Code § 17200. (FAC at 9–14.) On September 14, 2016, Defendant filed its Motion to Dismiss the FAC (Doc. No. 22), which the Court granted on November 4, 2016 (Doc. No. 30).

Plaintiff filed their Second Amended Complaint ("SAC") on November 18, 2016, re-alleging the same claims as those contained in the FAC. (Doc. No. 31.) On December 2, 2016, Defendants filed a Motion to Dismiss the SAC, which the Court granted on January 27, 2017 (Doc. No. 43). In its Order, the Court, the Hon. Beverly Reid O'Connell presiding, found that Plaintiffs' MA claims arose under the Medicare Act, and that the Court could only exercise jurisdiction over the MA claims if Plaintiffs adequately pleaded exhaustion of the Medicare Act's requirements. (Doc. No. 43 at 10–11.)

Plaintiff filed their Third Amended Complaint ("TAC") on February 13, 2017, re-alleging the following claims: (1) breach of oral contract; (2) breach of implied-in-fact contract; (3) negligent misrepresentation; and (4) violation of the UCL. (Doc. No. 45.) On February 27, 2017, Defendant moved to dismiss the negligent misrepresentation claim in the TAC, which the Court granted on April 7, 2017 (Doc. No. 50).

On December 18, 2018, the parties filed a Stipulation for Leave to File a Fourth Amended Complaint. (Doc. No. 78.) In the Stipulation, Plaintiffs indicated that new evidence demonstrates their claims are not subject to an exhaustion requirement under Medicare laws or regulations. (Id. at 2.) The Court approved the Stipulation on January 10, 2018, and as a result, the 4AC was deemed filed as of January 8, 2018. (Doc. No. 81.) Plaintiffs add the allegation that they "have appealed the claims and either exhausted their administrative remedies (if any), or Defendants have refused to act on appeals, making the process futile" (4AC ¶ 35), and assert the following claims in the 4AC: (1) breach of written contract; (2) breach of oral contract; (3) breach of implied-in-fact contract; (4) breach of the covenant of good faith and fair dealing; and (5) violation of the UCL. (Id. at 12–16.)

II. LEGAL STANDARD

Federal Rule of Civil Procedure 12(b)(6) allows a party to bring a motion to dismiss for failure to state a claim upon which relief can be granted. Rule 12(b)(6) is read along with Rule 8(a), which requires a short, plain statement upon which a pleading shows entitlement to relief. Fed. R. Civ. P. 8(a)(2) ; Bell Atl. Corp. v Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). When evaluating a Rule 12(b)(6) motion, a court must accept all material allegations in the complaint—as well as any reasonable inferences to be drawn from them—as true and construe them in the light most favorable to the non-moving party. See Doe v. United States, 419 F.3d 1058, 1062 (9th Cir. 2005). "The court need not accept as true, however,...