Salinas Valley Mem'l Healthcare Sys. v. Monterey Peninsula Horticulture, Inc.

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

Case No.5:17-cv-07076-HRL

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

May 31, 2018

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS COMPLAINT

Re: Dkt. No. 10

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 thoseconclusions 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 FederalRegister. (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...