Prime Healthcare Services - Shasta, LLC v. United Healthcare Services, Inc.

Filing 26

ORDER signed by District Judge Kimberly J. Mueller on 9/29/2017 GRANTING 11 Motion to Dismiss, with leave to amend; GRANTING the plaintiff thirty (30) calendar days to file any amended complaint. (Michel, G.)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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PRIME HEALTHCARE SERVICES –
SHASTA, LLC, a Delaware
Corporation doing business as Shasta
Regional Medical Center,

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ORDER

Plaintiff,

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No. 2:16-cv-01773-KJM-CKD

v.
UNITED HEALTHCARE SERVICES,
INC., a Minnesota Corporation licensed to
do business in California, and DOES 1
through 100, Inclusive,
Defendants.

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Plaintiff provided emergency services to defendant’s health insurance members

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and then later sued defendant under state law for allegedly scant reimbursements. Plaintiff is

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Prime Healthcare Services – Shasta, LLC (“Prime”), a non-contracted emergency services

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provider. Prime contends defendant United Healthcare Services, Inc. (“UHC”) ran a “payment

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scheme” that “intentionally and artificially deflated” the amounts it reimbursed Prime for

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emergency services, which violated UHC’s contractual duties and state law. UHC now moves to

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dismiss. Mot., ECF No. 11. Prime opposes. Opp’n, ECF No. 17. The court submitted the

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motion, ECF No. 23, and as explained below, the court GRANTS it with leave to amend.

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I.

BACKGROUND

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Prime alleges it provided “emergency services, post-stabilization services, and

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other services” to UHC’s members beginning in approximately May 2013. Compl. ¶¶ 8, 14, Ex.

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A, ECF No. 1. Although Prime billed UHC for “the reasonable value of the emergency services”

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calculated as “100% of [Prime’s] standard undiscounted rates[,]” Prime contends UHC paid less.

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Id. ¶¶ 8, 14, 16. Prime alleges UHC “intentionally and artificially deflated” the amounts it paid

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Prime for out-of-network emergency services, violating UHC’s contractual duties, the Knox-

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Keene Act and the California Insurance Code. Id. ¶¶ 8–11, 13, 18, 29.

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Prime initially sued UHC in state court, asserting causes of action for: (1) quantum

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meruit, (2) unfair competition under California Business & Professions Code section 17200,

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(3) breach of contract as a third party beneficiary, (4) breach of contract through an assignment of

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rights, and (5) breach of the covenant of good faith and fair dealing. Id. ¶¶ 19–32. UHC removed

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the case based on both diversity and federal question jurisdiction, asserting that Prime’s claims

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arise under federal law and that the Medicare Act preempts Prime’s claims. Not. Removal ¶ 1,

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ECF No. 1. UHC now moves to dismiss under Federal Rules of Civil Procedure 12(b)(1) and

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12(b)(6).

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II.

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SUBJECT MATTER JURISDICTION (RULE 12(B)(1))
UHC moves to dismiss for lack of subject matter jurisdiction under Federal Rule

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of Civil Procedure 12(b)(1). On a Rule 12(b)(1) dismissal motion, the applicable standard

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depends on the nature of the jurisdictional challenge. If the jurisdictional challenge is facial, the

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court assumes the factual allegations in the complaint are true and assesses if they establish

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jurisdiction. Williamson v. Tucker, 645 F.2d 404, 412 (5th Cir. 1981); Mortensen v. First Fed.

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Sav. & Loan Ass’n, 549 F.2d 884, 891 (3d Cir. 1977). If the challenge is factual, meaning it

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disputes the existence of subject matter jurisdiction in fact, then “no presumptive truthfulness

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attaches to plaintiff's allegations, and the existence of disputed material facts will not preclude the

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trial court from evaluating for itself the merits of jurisdictional claims.” Thornhill Publ’g Co. v.
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Gen. Tel. & Elec. Corp., 594 F.2d 730, 733 (9th Cir. 1979) (quoting Mortensen, 549 F.2d at 889).

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In a factual attack, the court may consider evidence beyond the pleadings. Ass’n of Am. Med.

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Colls. v. United States, 217 F.3d 770, 778 (9th Cir. 2000) (in assessing jurisdiction, the court may

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consider affidavits, testimony, or any other evidence properly before it).

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Here, UHC raises a factual jurisdictional challenge. Prime concedes the lack of

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jurisdiction in part, albeit for different reasons. Prime contends the court never had subject matter

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jurisdiction and should remand the matter to state court without ruling on UHC’s motion. Opp’n

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6.1 UHC contends the court has power to rule on the motion because the case involves a federal

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question, but should dismiss for lack of subject matter jurisdiction because Prime did not exhaust

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administrative exhaustion requirements. Mot. 6–14.

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Assessing jurisdiction involves a multi-step process. First, the court must

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determine if the case qualifies based on one of the two primary foundations for a federal court’s

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subject matter jurisdiction: federal question or diversity. 28 U.S.C. §§ 1331, 1332. If neither is

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present “the district court lacks subject matter jurisdiction [and] the case shall be remanded” to

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the state court. 28 U.S.C. § 1447(c). If a basis for jurisdiction is present, the first step is satisfied

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but the court is not absolved of the need to address other jurisdictional bars.

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A.

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Step One: Diversity or Federal Question Jurisdiction
District courts exercise diversity-of-citizenship jurisdiction in cases in which the

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amount in controversy exceeds $75,000 and the parties are in complete diversity. 28 U.S.C.

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§ 1332. District courts have federal question jurisdiction over “all civil actions arising under the

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Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. The complaint itself,

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rather than counterclaims or defenses, must generally contain the federal question, Vaden v.

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Discover Bank, 556 U.S. 49, 60 (2009); Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149,

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152 (1908), though a preemption defense can be an exception to this rule. See Sullivan v. First

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Affiliated Sec., Inc., 813 F.2d 1368, 1372 (9th Cir. 1987). Here, the parties agree they are diverse,

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in that Prime is a citizen of Delaware and California, and UHC is a citizen of Minnesota. Compl.

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Prime claims to have a pending motion to remand, but has filed no such motion.
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¶¶ 1–2. The amount in controversy is “no less than $1,534,445.10.” Id. ¶¶ 2–3, 8; Not. Removal

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¶ 1. The court has diversity jurisdiction.

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UHC also contends the federal Medicare Act’s preemptive influence in this case

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poses a federal question. Mot 10. But having established diversity jurisdiction, the court need

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not reach this question.

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B.

Step Two: Other Bars to Subject Matter Jurisdiction

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Establishing diversity jurisdiction is merely the starting point. The court may still

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lack subject matter jurisdiction if other jurisdictional bars apply. As here, a claim may implicate

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as a prerequisite an administrative review process that, until fully complied with, deprives the

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court of jurisdiction. See Kaiser v. Blue Cross of Cal., 347 F.3d 1107, 1111–14 (9th Cir. 2003)

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(affirming dismissal of claims under Rule 12(b)(1) based on plaintiff’s failure to exhaust

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administrative remedies). In this respect, UHC argues Prime’s claims implicate the Medicare Act

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and so Prime’s failure to exhaust the Act’s administrative exhaustion requirement warrants Rule

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12(b)(1) dismissal. Mot. 6. Prime contends its claims do not trigger the exhaustion requirement.

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Opp’n 12.

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The Medicare Act and its implementing regulations bar federal court jurisdiction

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over Medicare Act claims until the available Health and Human Service’s administrative appeals

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process concludes. Indeed, 42 U.S.C. § 405(h), made applicable to the Medicare Act by 42

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U.S.C. § 1395ii,2 provides that 42 U.S.C. § 405(g) is “the sole avenue for judicial review” for

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claims “‘arising under’ the Medicare Act.” Heckler v. Ringer, 466 U.S. 602, 614–15 (1984); see

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42 C.F.R. § 422.566(b)(1) (setting forth administrative appeal process that allows a provider to

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request an organization determination “with respect to . . . (1) Payment for…emergency services,

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poststabilization care, or urgently needed services.”); see also 42 C.F.R. § 422.582 (providing an

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42 U.S.C. § 1395(ii) provides, in relevant part, that “[n]o action . . . to recover on any
claim arising under” the Medicare laws shall be “brought under [28 U.S.C. §] 1331.” It channels
virtually all Medicare claims through this administrative review system. Shalala v. Illinois
Council on Long Term Care, Inc., 529 U.S. 1, 1 (2000) (citing 42 U.S.C. § 1395(ii)).

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avenue for the provider to seek reconsideration of the organization determination). A claim

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“arises under” the Medicare Act when “both the standing and the substantive basis” for the claim

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derives from the Medicare Act. Heckler, 466 U.S. at 615. Failure to exhaust such a claim leads

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to dismissal. See Kaiser, 347 F.3d at 1111–14 (affirming Rule 12(b)(1) dismissal based on

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Medicare provider’s failure to exhaust administrative remedies); Do Sung Uhm v. Humana, Inc.,

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620 F.3d 1134, 1144 (9th Cir. 2010) (finding no jurisdiction over contract and unjust enrichment

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claims arising under Medicare Act where plaintiff did not first exhaust grievance process).

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Here, the parties dispute the Medicare Act’s applicability. UHC argues that

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because no contract governs its emergency service payments to Prime, the Medicare Act and its

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implementing regulations dictate its payment obligations, at least for UHC’s Medicare Advantage

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(“MA”) members.3 Mot. 13; 42 C.F.R. §§ 422.214, 417.558, 422.520. Yet the complaint does

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not plead which class of members Prime serviced. See, e.g., Compl. ¶¶ 9, 11, 14. Evidence

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properly before the court shows Prime serviced at least some of UHC’s MA enrollees. See

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Gretchen Hess Decl. ¶¶ 2, 3, Ex. E, ECF No. 1-5. Prime neither rebuts this evidence nor argues it

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serviced only non-MA members. Instead, Prime argues its claims do not sufficiently intertwine

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with Medicare benefits questions to trigger the Act’s exhaustion requirement. Opp’n 8–14.

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Prime bases its argument on RenCare, Ltd. v. Humana Health Plan of Tex., Inc.,

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395 F.3d 555 (5th Cir. 2004), statutorily superseded on other grounds by 42 U.S.C. § 1395w–

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24(a)(1)(A) (2014). In RenCare, the Fifth Circuit held that because the provider’s state law

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claims were not “inextricably intertwined with a claim for Medicare benefits” they did not arise

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under the Act. Id. at 560. RenCare involved an express contract between the hospital and

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provider, which the court emphasized was “subject to very few restrictions” because the parties

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were free to negotiate their own terms. Id. at 559–60 (internal citations omitted). Accordingly,

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the RenCare court found “[t]he only interest at issue [wa]s RenCare’s interest in receiving

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payment under its contract with Humana.” Id. at 560. The court concluded Humana’s failure to

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Medicare Advantage members are part of a managed health care arrangement that
extends Medicare health coverage to the private insurance market. See
https://www.medicarehealthplans.com/advantage-plans (last visited Sept. 29, 2017).

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pay under its express contract with RenCare did not trigger the Act’s exhaustion requirement. Id.

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Prime would transform this limited holding, persuasive at best, into a blanket rule that the Act’s

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exhaustion requirement attaches only when health care enrollees’ rights are at issue, not where, as

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here, a provider’s rights are at issue. Opp’n 12, 14.

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The court disagrees. RenCare is persuasive only in the circumstance in which an

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express written agreement defines a specified rate for medical services. Compl. ¶¶ 8–9. Here, as

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noted, Prime and UHC have no express contract. The Medicare Act might dictate procedures or

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“inextricably intertwine” with Prime’s reimbursement claims, but Prime’s vague complaint

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prohibits the court from determining to what extent this may be so. The complaint’s lack of

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pertinent detail and silence with respect to any compliance with the Act’s exhaustion requirement

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warrants dismissal at this stage. The court GRANTS UHC’s Rule 12(b)(1) motion to dismiss, but

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with leave to amend if Prime can amend while complying in full with Federal Rule of Civil

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Procedure 11.

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III.

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FAILURE TO STATE A CLAIM (RULE 12(B)(6))
The complaint’s vagueness also supports dismissal under Rule 12(b)(6). See Bell

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Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A party may move to dismiss for “failure to

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state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). The court may grant

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such a motion only if the complaint lacks a “cognizable legal theory” or if its factual allegations

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do not support a cognizable legal theory. Hartmann v. Cal. Dep’t of Corr. & Rehab., 707 F.3d

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1114, 1122 (9th Cir. 2013). The court assumes the allegations are true and draws reasonable

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inferences from them. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

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A complaint need contain only a “short and plain statement of the claim showing

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the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), not “detailed factual allegations,”

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Twombly, 550 U.S. at 555. But this rule demands more than unadorned accusations; “sufficient

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factual matter” must make the claim at least plausible. Iqbal, 556 U.S. at 678. Accordingly,

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conclusory or formulaic recitations of a cause’s elements do not alone suffice. Id. (quoting

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Twombly, 550 U.S. at 555). Rule 12(b)(6) assessments are context-specific, requiring courts to

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draw on “judicial experience and common sense.” Id. at 679.
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UHC moves to dismiss each claim under Rule 12(b)(6), and Prime asks only that it
be granted leave to amend, but otherwise offers no opposition. See Opp’n 16.
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Prime’s UCL Claim (Claim Two)
To state a claim for relief under California Business and Professions Code section

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17200 (the “UCL”), Prime must allege facts tending to show UHC acted unlawfully, unfairly or

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fraudulently. See, e.g., Berryman v. Merit Prop. Mgmt., Inc., 152 Cal. App. 4th 1544, 1554

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(2007). As UHC argues, Prime has not so alleged. See Mot. 17–20.

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To succeed under the unlawful prong, a claim must show a plausible statutory
violation. See, e.g., Maystruk v. Infinity Ins. Co., 175 Cal. App. 4th 881, 886 (2009); Berryman,

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152 Cal. App. 4th at 1554–55 (granting motion to demur as to plaintiff’s UCL claim without

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leave to amend where the complaint pled no allegations to find defendants actually violated cited

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statutes). Prime claims UHC’s insufficient reimbursement for emergency services violates the

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Knox-Keene Act and the Insurance Code. Compl. ¶¶ 8, 13–14, 16–18, 20–22. But its factual

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allegations do not plausibly support these violations. The Knox-Keene Act requires hospitals to

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offer emergency care even if a patient cannot pay, requires health plans to reimburse the

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providers and delineates prompt payment rules. See Cal. Health & Saf. Code §§ 1371, 1371.35,

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1371.4. The relevant Insurance Code provisions mandate prompt reimbursement for certain

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emergency services. See Cal. Ins. Code §§ 10123.13, 10123.147, 10133(a). The problem for

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Prime, however, is its complaint does not plead what services Prime performed, when it

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performed them, when or how much UHC paid Prime or how UHC’s payments diluted statutory

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standards. Prime’s UCL claim as pled does not survive under the unlawful prong.

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Prime’s UCL claim also does not survive under the “unfair” prong because the

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complaint neither references an established public policy UHC purportedly violated nor alleges

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sufficient details to show UHC’s practice was immoral and unethical. Elias v. Hewlett-Packard

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Co., 903 F. Supp. 2d 843, 858 (N.D. Cal. 2012).

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Finally, Prime’s UCL claim does not survive under the fraudulent prong because

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Prime does not plead that UHC’s business practice will likely deceive the public. Freeman v.

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Time, Inc., 68 F.3d 285, 289 (9th Cir. 1995); Bardin v. Daimlerchrysler Corp., 136 Cal. App. 4th
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1255, 1274 (2006) (complaint failed under UCL’s fraud prong where plaintiff pled no facts

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showing how defendant’s act deceived the public).

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The court DISMISSES Prime’s UCL claim, here also with leave to amend.
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Quantum Meruit (Claim One)
As discussed above, to the extent Prime serviced UHC’s MA members, federal

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regulations determine the amount UHC owes. The regulatory requirements negate Prime’s

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contention that UHC implicitly promised to pay a “reasonable value.” See, e.g., Cal. Emergency

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Physicians Med. Grp. v. PacifiCare of Cal., 111 Cal. App. 4th 1127, 1137 (2003) (affirming

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dismissal of quantum meruit claim where legislature specified payment obligations), disapproved

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of on other grounds by Centinela Freeman Emergency Med. Assocs. v. Health Net of Cal., Inc., 1

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Cal. 5th 994 (2016). The complaint also lacks facts necessary to establish the “reasonable value”

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of Prime’s services such as service type or Prime’s normal rate. The court DISMISSES this

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claim, with leave to amend.

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C.

Breach of Contract Claims (Claims Three, Four, and Five)
Prime alleges it has no contract with UHC, yet asserts three contract-related

claims. See Compl. ¶¶ 7, 31.
First, Prime asserts rights as a third-party beneficiary to the Evidence of Coverage

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between UHC and its members. Id. ¶¶ 25–29. Under California law, “third party beneficiary

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status” depends on contract interpretation and “the contract must be set out in the pleadings.”

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Cal. Emergency Physicians, 111 Cal. App. 4th at 1138. Here, because the complaint

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insufficiently pleads contract formation, implied or otherwise, the complaint does not support a

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third-party beneficiary claim.

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Prime premises its second contract claim on UHC’s members’ assignment of their

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insurance benefit rights to Prime. Compl. ¶¶ 26–27, 31. The only language supporting this claim

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comes from the “Condition of Admissions” form that specifies the rate of “direct payment to

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[Prime] of all insurance benefits otherwise payable to or on behalf of the patient . . . including

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emergency services . . . [is] not to exceed the hospital’s actual charges.” Id. ¶ 31. Although

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Prime alleges it steps into a patient’s shoes for benefit entitlement purposes when the patient signs
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this form, the language merely shows a patient assigned his or her alleged “right” to receive direct

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payments from UHC to Prime. Id. ¶ 31. Because this assignment, even if valid, has nothing to do

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with UHC’s alleged failure to pay Prime for billed charges, this claim does not survive under

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Rule 12(b)(6).

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Without a legal hook for its two contract claims above, Prime cannot maintain its

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claim for breach of the covenant of good faith and fair dealing. Prime admits in its pleading that

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it is a non-contracted provider. Id. ¶¶ 7, 32. But “[t]he prerequisite for any action for breach of

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the implied covenant of good faith and fair dealing is the existence of a contractual relationship

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between the parties, since the covenant is an implied term in the contract.” Spencer v. DHI

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Mortg. Co., 642 F. Supp. 2d 1153, 1165 (E.D. Cal. 2009) (dismissing breach of implied covenant

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claim where parties had no contractual relationship). Although more detailed pleadings may

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establish this contractual relationship, the current complaint does not.

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The court DISMISSES Prime’s three contract-based claims, also with leave to

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amend.

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IV.

CONCLUSION

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The vagueness of Prime’s complaint supports dismissal under Federal Rules of

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Civil Procedure 12(b)(1) and 12(b)(6). The court GRANTS UHC’s motion to dismiss the

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complaint, with leave to amend. Prime must file any amended complaint within thirty (30)

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calendar days.

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This order resolves ECF No. 29.

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IT IS SO ORDERED.

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DATED: September 29, 2017.

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UNITED STATES DISTRICT JUDGE

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