Salinas Valley Memorial Healthcare System v. Monterey Peninsula Horticulture, Inc. d/b/a Rocket Farms et al

Filing 29

ORDER by Magistrate Judge Howard R. Lloyd granting in part and denying in part 10 defendants' Motion to Dismiss. Amended pleading due by 6/15/2018. (hrllc2S, COURT STAFF) (Filed on 5/31/2018)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

United States District Court
Northern District of California

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SALINAS VALLEY MEMORIAL
HEALTHCARE SYSTEM,

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Plaintiff,

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v.

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MONTEREY PENINSULA
HORTICULTURE, INC. dba ROCKET
FARMS, et al.,

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Case No.5:17-cv-07076-HRL
ORDER GRANTING IN PART AND
DENYING IN PART MOTION TO
DISMISS COMPLAINT
Re: Dkt. No. 10

Defendants.

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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

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employees of defendant Monterey Peninsula Horticulture, Inc. dba Rocket Farms (“Rocket

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Farms”) and their families. As its name suggests, Rocket Farms says it is a farm in the

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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

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opposes the motion. All parties have expressly consented that all proceedings in this matter may

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be heard and finally adjudicated by the undersigned. 28 U.S.C. § 636(c); Fed. R. Civ. P. 73.

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Upon consideration of the moving and responding papers, as well as the oral arguments presented,

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the court grants the motion in part and denies it in part. Plaintiff will be given leave to amend, but

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leave is limited to those matters for which amendment is expressly permitted by this order.
BACKGROUND

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According to the complaint, Rocket Farms previously purchased a health insurance policy

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for its employees and their families through the Western Growers Association (“Association”).

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Plaintiff says that, pursuant to its contract with the Association, the Hospital was reimbursed for

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United States District Court
Northern District of California

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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

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June 30, 2017, Rocket Farms switched from the Association’s contracted health care arrangement

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to the defendant self-funded Plan, which had no network of hospitals. This change, says plaintiff,

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was made as part of a deliberate strategy by defendants to cut costs, diminish employees’ level of

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benefits, and underpay the Hospital.

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The Hospital says that, after shifting to the self-funded Plan, Rocket Farms began paying

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roughly only a third of the amounts billed for services rendered. Specifically, the complaint

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alleges that every one of the Hospital’s reimbursement claims was paid at 140% of rates the

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federal government pays under the Medicare program, which plaintiff says is “an unusually low

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level of reimbursement” from a non-government payor like Rocket Farms. (Dkt. 1, Complaint ¶

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40). Additionally, plaintiff alleges that Rocket Farms misled its own employees (and the Hospital)

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about the fact that hospital services would only be covered up to 140% of Medicare rates. Plaintiff

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further alleges that defendants improperly denied the Hospital’s numerous appeals seeking

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additional payment and aggressively threatened litigation when the Hospital asked any of its

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patients to pay the balance on any unpaid bill.

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The Hospital goes on to allege that in phone calls to verify/approve coverage for several

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Rocket Farms patients, defendants (falsely) represented to the Hospital that the Plan would cover

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70% of the patient’s medical bills, up to a certain dollar amount, after which it would cover 100%2

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--and failed to disclose that payments under the Plan would actually be capped at 140% of

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Medicare.

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Plaintiff says it learned that, as of July 1, 2017, Rocket Farms changed back to the health

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insurance arrangement under the Association. So, the Plan is no longer in force. Nevertheless,

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plaintiff contends that doesn’t excuse Rocket Farms from paying over $1.4 million for services the

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Hospital provided during the 3-year period that the Plan was in effect. To that end, it filed the

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present suit, asserting five claims for relief: (1) violation of ERISA § 502(a)(1)(B); (2) violation

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of the Affordable Care Act (ACA), Section 2707 “via ERISA § 502(a)(1)(B)”; (3) violation of the

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Lanham Act § 43(a) (unfair advertising); (4) intentional misrepresentation; and (5) negligent

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misrepresentation.

United States District Court
Northern District of California

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The central dispute is whether the Plan required payment at 140% of Medicare, and

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nothing more (as defendants contend) or whether, as plaintiff claims, the Plan terms mean that the

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Hospital is owed “reasonable and customary” payments, which the Hospital maintains are well

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above 140% of Medicare.

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Pursuant to Fed. R. Civ. P. 12(b)(6), defendants now move to dismiss the complaint,

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arguing that the Hospital has no standing to bring the ERISA and ACA claims; and that the

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complaint fails, in any event, to allege a viable claim for relief. For the reasons to be discussed,

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the court grants the motion in part and denies the motion in part.

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LEGAL STANDARD
A motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) tests

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the legal sufficiency of the claims in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir.

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2001). Dismissal is appropriate where there is no cognizable legal theory or an absence of

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sufficient facts alleged to support a cognizable legal theory. Id. (citing Balistreri v. Pacifica

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Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990)). In such a motion, all material allegations in the

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complaint must be taken as true and construed in the light most favorable to the claimant. Id.

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However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory

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statements, do not suffice.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). Moreover, “the court

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is not required to accept legal conclusions cast in the form of factual allegations if those
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conclusions cannot reasonably be drawn from the facts alleged.” Clegg v. Cult Awareness

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Network, 18 F.3d 752, 754-55 (9th Cir. 1994).

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Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the

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claim showing that the pleader is entitled to relief.” This means that the “[f]actual allegations

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must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v.

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Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L.Ed.2d 929 (2007) (citations omitted)

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However, only plausible claims for relief will survive a motion to dismiss. Iqbal, 129 S. Ct. at

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1950. A claim is plausible if its factual content permits the court to draw a reasonable inference

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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-

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United States District Court
Northern District of California

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harmed-me accusation.” Id. at 1949.

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Documents appended to the complaint or which properly are the subject of judicial notice

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may be considered along with the complaint when deciding a Fed. R. Civ. P. 12(b)(6) motion. See

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Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990);

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MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986).

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While leave to amend generally is granted liberally, the court has discretion to dismiss a

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claim without leave to amend if amendment would be futile. Rivera v. BAC Home Loans

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Servicing, L.P., 756 F. Supp.2d 1193, 1997 (N.D. Cal. 2010) (citing Dumas v. Kipp, 90 F.3d 386,

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393 (9th Cir. 1996)).
DISCUSSION

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Defendants’ Request for Judicial Notice

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A.

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Defendants’ request for judicial notice is granted as unopposed with respect to (1) certain

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summary plan documents (“SPDs”); (2) excerpts from the Federal Register; and (3) ACA

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regulations. The court also accepts plaintiff’s submission of the SPD the Hospital says is quoted

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in the complaint. Defendants’ request for judicial notice is denied as to an audit report, which is

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irrelevant to the disposition of issues presented.

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Pursuant to plaintiff’s “Statement of Recent Decision,” (Dkt. 23) the court has also

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received (without objection) a May 3, 2018 “Clarification of Final Rules” published in the Federal
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Register. (Dkt. 23).

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B.

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This claim, as articulated in plaintiff’s rather convoluted complaint, appears to be based on

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two theories. First, plaintiff contends that the Plan requires the Hospital to be paid the “reasonable

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and customary” rate for its services---a rate that plaintiff maintains is “significantly higher than

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140% of Medicare.” (Complaint ¶¶ 34, 40). The problem, according to the complaint, is that

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defendants “did not pay the Hospital at its Reasonable and Customary rates,” and instead

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consistently set payment at the fixed rate of 140% of Medicare. (Id. ¶¶ 37-39). Second, the

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complaint goes on to allege that any Plan provisions suggesting that benefits are capped at 140%

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

of Medicare are unenforceable because (1) any such terms are “buried deep” in the Plan and

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United States District Court
Northern District of California

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violate ERISA disclosure requirements; and (2) to the extent defendants had discretion to

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determine the level of payment to be made, defendants had a structural conflict of interest, in that

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they had a direct financial interest to pay as few benefits as possible. (Id. ¶¶ 215-218).

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Defendants move to dismiss, arguing that the Hospital lacks standing to pursue this claim

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because plaintiff is seeking payment beyond what is owed under the Plan. Additionally, to the

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extent the complaint also alleges violations of ERISA disclosure requirements or conflicts of

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interest, defendants argue that those are breach of fiduciary issues that the Hospital has no

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standing to assert.

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ERISA Section 502(a)(1)(B) provides that a participant or beneficiary may bring a civil

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action “to recover benefits due to him under the terms of his plan, to enforce his rights under the

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terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C.

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§ 1132(a)(1)(B). The Hospital is not a Plan participant or beneficiary. Nevertheless, providers

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may obtain derivative standing to sue by an assignment from a plan participant or beneficiary.

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Misic v. Bldg. Serv. Employees Health & Welfare Trust, 789 F.2d 1374, 1378-79 (9th Cir. 1986).

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The Hospital’s complaint alleges that pursuant to a “‘Conditions of Admission’ form executed by

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each Rocket Farms beneficiary or participant (and/or a representative of such individual), the

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Hospital is the assignee of all benefits under the Plan for each of the claims at issue in this case.”

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(Complaint ¶ 212). Thus, the Hospital says it “is entitled under ERISA to pursue all payment that
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is due to any Rocket Farms beneficiary or participant under the Plan for the medical services

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rendered to those individuals at the Hospital.” (Id. ¶ 213).

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Defendants do not challenge the allegation that the Hospital obtained valid assignments.

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Nevertheless, defendants contend that the patient assignments are limited to payment of benefits

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under the Plan---an assertion that the Hospital does not deny. As such, defendants argue that the

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Hospital lacks standing to pursue their “reasonable and customary” rate theory because defendants

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have already paid all that is due under the Plan, and hence, there is no relief that plaintiff may seek

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under the Plan.

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As previewed above, the Hospital disputes that it properly was paid according to the Plan
terms. Thus, plaintiff says that defendants’ motion does not really present an issue of standing.

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United States District Court
Northern District of California

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Nevertheless, defendants maintain that plaintiff’s theory for payment of “reasonable and

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customary” rates that are far in excess of 140% of Medicare is based on a flawed interpretation of

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the Plan’s terms.

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“To state a claim for benefits under ERISA, plan participants and beneficiaries have to

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plead facts making it plausible that a provider owes benefits under the plan.” Elizabeth L. v. Aetna

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Life Ins. Co., No. C13-02554 SC, 2014 WL 2621408, at *2 (N.D. Cal. June 12, 2014) (citing 29

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U.S.C. § 1132(a)(1)(B); Iqbal, 556 U.S. at 677). Thus, “[a] plaintiff who brings a claim for

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benefits under ERISA must identify a specific plan term that confers the benefit in question.”

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Steelman v. Prudential Ins. Co. of America, No. CIV S-06-2746 LKK/GGH, 2007 WL 1080656,

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at *7 (E.D. Cal., Apr. 4, 2007) (citation omitted). An action may be dismissed “if the plaintiff is

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not entitled to a benefit they seek under the ERISA-regulated plan.” Id. (citation omitted).

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“In interpreting an ERISA plan, the Court must apply contract principles derived from

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state law, guided by policies expressed in ERISA and other federal labor law.” Elizabeth L., 2014

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WL 2621408, at *2 (citing Richardson v. Pension Plan of Bethlehem Steel Corp., 112 F.3d 982,

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985 (9th Cir. 1997)). “In doing so, the Court must interpret the plan’s terms in an ordinary and

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popular sense, as would a person of average intelligence and experience.” Id. (citing Richardson,

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112 F.3d at 985). “In resolving disputes over ERISA plans, the Court must look first to the

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agreement’s specific language and determine the parties’ clear intent, relative to the context giving
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rise to the language’s inclusion.” Id. (citing Richardson, 112 F.3d at 985). “Finally, the Court

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must construe each provision consistently with the entire document such that no provision is

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rendered nugatory.” Id. (citing Gilliam v. Nev. Power Co., 488 F.3d 1189, 1194 (9th Cir. 2007)).

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The Hospital’s theory as to why it must be paid a “reasonable and customary” rate far

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above 140% of Medicare is based on two parts of the Plan---the Schedule of Benefits and the

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definition of “Allowable Charges.” Basically, plaintiff claims that these provisions, taken

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together, mean that the Hospital must be paid “Allowable Charges” (which include “reasonable

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and customary” charges) in an amount established by “applicable law”; and, plaintiff says that the

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applicable law in California sets “reasonable and customary” rates way above 140% of Medicare.
For the reasons to be discussed, the court agrees with defendants that the Hospital’s proffered

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United States District Court
Northern District of California

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interpretation of the Plan fails to establish a plausible claim for relief.

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

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

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(Dkt. 16 at ECF p. 18) (emphasis added). Additionally, the complaint notes that the Schedule of

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Benefits goes on to state that “Covered Charges” for “Hospital Services,” including emergency

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and inpatient care, are paid at “70% after $250 copayment (per admission) and deductible,”

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subject to three exceptions: (1) “Amounts over the Allowable Charge” will not be paid; (2)

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“Ineligible charges” will not be paid; and neither will (3) “Invalid Charges (Refer to the Claims

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Review and Validation Program section).” (Complaint ¶ 67; Dkt. 16 at ECF p. 20). The

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complaint suggests that the latter two exceptions never came up. Plaintiff alleges that defendants

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never disputed that the services rendered were medically necessary and did not identify any billing

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errors made by the Hospital. (Complaint ¶ 72).

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Focusing, then, on the definition of “Allowable Charge,” plaintiff notes that the
“Allowable Charge” definition includes language stating:
The reasonable and customary charge shall mean an amount equivalent to
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the 85th percentile of a commercially available database, or such other
cost or quality-based reimbursement methodologies as may be available and
adopted by the Plan. If there are insufficient charges submitted for a given
procedure, the Plan will determine an Allowable Charge based upon
charges made for similar services. Determination of the reasonable and
customary charge will consider the nature and severity of the condition
being treated, medical complications or unusual circumstances that
require more time, skill or experience, and the cost and quality data for
that provider.
For Covered Charges rendered by a Physician, Hospital or Ancillary
Provider in a geographic area where applicable law dictates the maximum
amount that can be billed by the rendering provider, the Allowable Charge
shall mean the amount established by applicable law for that Covered
Charges [sic].
(Dkt. 16 at ECF p. 43) (emphasis added). Plaintiff says this last quoted paragraph is key because
California “has a very well-developed body of law that governs how reasonable and customary

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United States District Court
Northern District of California

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payment should be determined in the absence of a contract between a payor and a provider.” (Dkt.

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15 Opp. at ECF p. 13).

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The problem for the Hospital is that it ignores the entire first portion of the “Allowable

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Charge” definition, which says an “Allowable Charge” is the “lesser of” four options, only one of

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which is “the reasonable and customary charge for the same treatment, service, or supply

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furnished in the same geographic area . . ..” (Dkt. 16 at ECF p. 43). The relevant portion of the

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definition states:

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

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referenced in the Schedule of Benefits confirm that the Plan must pay at a Reasonable and
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Customary level for service provided by hospitals” (Complaint ¶ 71) at a level far above 140% of

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Medicare, it fails to convince. And, while plaintiff points out that the other options for calculating

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the Allowable Charge include the Hospital’s full billed charges, that fact is of no particular import

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since no one seems to contend that plaintiff’s full billed charges would be the “lesser” of the listed

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options.

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Moreover, plaintiff has no rejoinder to defendants’ argument that ERISA generally has

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“powerful preemptive force” with respect to state laws. Cleghorn v. Blue Shield of California,

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408 F.3d 1222, 1225 (9th Cir. 2005) (observing that ERISA “expressly preempts all state laws

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‘insofar as they may now or hereafter relate to any employee benefit plan’”) (quoting 29 U.S.C. §

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1144(a)); see also Hewlett-Packard Co. v. Barnes, 571 F.2d 502, 504 (9th Cir. 1978) (holding that
“[t]he clear wording of section 514 and the relevant legislative history shows that Congress

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United States District Court
Northern District of California

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unmistakably intended ERISA to preempt a state law such as [California’s] Knox-Keene [Act] that

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directly regulates employee benefit plans.”); Vrijesh S. Tantuwaya MD, Inc. v. Anthem Blue Cross

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Life & Health Ins. Co., 169 F. Supp.3d 1058, 1072 (S.D. Cal. 2016) (concluding that a provider’s

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state law claims to recover benefits under the terms of a self-funded plan were preempted by

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ERISA).

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In defendants’ view, the Plan (properly construed) means that benefits are paid at a

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reasonable and customary rate up to 140% of Medicare, and no more. They say this is so because

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(1) the Plan provides that “Covered Charges” are determined based on the Plan’s Permitted

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Payment Levels; and (2) the Plan’s Claim Review and Validation Program, in turn, provides that

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the Plan pays hospital providers the reasonable, usual and customary charges up to the Permitted

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Payment Level of 140% of Medicare. According to defendants, proper interpretation of the Plan

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goes like this:

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Start by looking at the Medical Benefits section of the Plan, which states that “Hospital

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and Facility charges” are “evaluated under the Claim Review Program,” and that “Covered

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Charges” are determined based on “Permitted Payment Levels”:

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Medical Benefits apply when Covered Charges are incurred by a Covered
Person for care of an Injury or Sickness and while the person is covered for
these benefits under the Plan. Hospital and Facility charges will be
evaluated under the Claim Review Program, and Covered Charges will be
determined based upon the “Permitted Payment Levels.” Please refer to
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the Claim Review and Validation Program section of the Plan for additional
information about Claim Review and Permitted Payment Levels.

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(Dkt. 10-1, Ex. A at ECF p. 30; Dkt. 16 at ECF p. 29) (emphasis added). The Plan goes on to state

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that “Covered Charges are the Allowable Charges that are incurred for” a list of services and

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items, including “Hospital Care,” and which “are subject to the benefit limits, exclusions and other

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provisions of this Plan.” (Dkt. 10-1, Ex. A at ECF p. 30; Dkt. 16 at ECF p. 29).
Defendants further note that, as stated in the Medical Benefits section, “Hospital and

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Facility charges” are evaluated under the “Claim Review Program.” The Claim Review Program

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section of the Plan provides, in relevant part: “For claim determinations made in accordance with

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the Claim Review and Validation Program, the Usual and Customary fee will be the Permitted

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Payment Levels.” (Dkt. 10-1, Ex. A at ECF p. 62; Dkt. 16 at ECF p. 62). “Permitted Payment

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United States District Court
Northern District of California

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Level(s),” in turn, is defined as:

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charges for services and supplies included as Covered Expenses under the
Plan that are Medically Necessary for the care and treatment of Illness or
Injury, but only to the extent that such fees are within applicable limits
established in this Plan including, but without limitation, in the Claim
Review and Validation Program section of the Plan.

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(Dkt. 10-1, Ex. A at ECF p. 61; Dkt. 16, Ex. A at ECF p. 61). And, the Plan further provides that

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the Permitted Payment Level for charges by Hospitals is the greater of either Medicare allowable

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reimbursement plus 40% or 140% of Hospital’s costs based on Medicare rates:

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Hospitals and Affiliated Facilities. The Permitted Payment Level for
charges by Hospitals and Affiliated Facilities (collectively, “Hospital
Facilities”) shall be based upon the greater of Medicare allowable
reimbursement plus 40% or 140% of the Hospital’s costs reflected in the
Hospital’s most recent departmental cost ratio report to the Centers for
Medicare and Medicaid Services (“CMS”) and as published in the
American Hospital Directory as the “Medicare Cost Report” (the “CMS
Cost Ratio”).

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(Dkt. 10-1, Ex. A at ECF p. 63).1 Thus, defendants argue that the Plan provides that Hospital

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charges are reimbursed at up to 140% of Medicare, and no more. Further, defendants point out
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Of course, the court could be wrong, but the (seemingly) comparable provision in the SPD
provided by plaintiff says something different, i.e., it distinguishes between inpatient and
outpatient hospital services and contains different percentages (ranging from 135% to 180%) of
Medicare and also references “the amount of usual, customary and reasonable fees for the covered
services.” (Dkt. 16 at ECF p. 64). However, neither side has said anything about this apparent
difference. So, the court proceeds with the arguments that have been presented.
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that the Schedule of Benefits states, in bold italic font, that “The Covered Person may be

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balanced billed [i.e., required to pay the outstanding balance of the provider’s bill] by the Non-

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Participating Provider for any amount over the Allowable Charge.” (Dkt. 10-1, Ex. A at ECF p.

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20; Dkt. 16 at ECF p. 18). They argue that this sentence would be nugatory if the Plan was

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required to pay the Hospital’s full billed charges---because, in that circumstance, there never

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would be a balance between what the Plan paid the Hospital and the Allowable Charge.

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The complaint alleges that any Plan terms suggesting that benefits are capped at 140% of

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Medicare are unenforceable because (1) any such terms are “buried deep” in the Plan and violate

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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

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United States District Court
Northern District of California

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direct financial interest to pay as few benefits as possible. (Complaint ¶¶ 215-218). There is no

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dispute that the Hospital’s derivative standing to sue is based on what validly is assigned from

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Plan beneficiaries. Nor is there any apparent dispute that the relevant beneficiary assignments to

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the Hospital are limited to claims for payment of benefits under the Plan. As such, defendants

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contend that allegations about violating disclosure rules or about conflicts of interest essentially

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are claims for breach of fiduciary duty that plaintiff has no standing to assert. The Hospital does

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not deny that these kinds of allegations ordinarily pertain to breaches of fiduciary duty. But,

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pointing out that it has not asserted any actual claims for breach of fiduciary duty, the Hospital

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argues that it properly may pursue alleged conflicts of interest and enforce ERISA disclosure

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obligations as part and parcel of its claim to obtain payment of benefits.

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With respect to allegations about purported conflicts of interest, defendants’ motion to

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dismiss for lack of standing is granted without leave to amend. By its complaint, plaintiff

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apparently seeks a determination that defendants abused their discretion and had conflicts of

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interest that kept them from properly administering the Plan. (See, e.g., Complaint ¶ 38). That

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strikes the court as a de facto claim for breach of fiduciary duty in the guise of a claim for payment

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of benefits, and plaintiff has not cited authority even remotely suggesting that it properly may

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pursue that theory.

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The court reaches the same conclusion with respect to plaintiff’s attempt to enforce ERISA
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disclosure rules and regulations. The complaint alleges that provisions---namely, those pertaining

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to the “Claim Review and Validation Program”---should not be enforced because they are “buried

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deep” in the SPD; consist of dense, conflicting, and interlinked definitions; and do not bear any

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relation to the rest of the Plan document. In sum, the Hospital alleges that no ordinary person

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would understand that the SPD (purportedly) limits benefits for the Hospital’s service to 140% of

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Medicare. (Complaint ¶¶ 74-87). This, says plaintiff, constitutes a violation of 29 U.S.C. § 1022,

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which provides that an SPD “shall be written in a manner calculated to be understood by the

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average plan participant, and shall be sufficiently accurate and comprehensive to reasonably

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apprise such participants and beneficiaries of their rights and obligations under the plan.” 29

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U.S.C. § 1022(a); Complaint ¶ 79. Additionally, plaintiff alleges (Complaint ¶¶ 80-81) that

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United States District Court
Northern District of California

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“Claim Review and Validation Program” provisions do not comply with the regulation at 29

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C.F.R. § 2520.102-2(b) which requires that “either (1) the description or summary of the

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restrictive provision must be placed ‘in close conjunction with the description or summary of

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benefits,’ or (2) the page on which the restrictive provision is described must be ‘noted’ ‘adjacent

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to the benefit description.’” Spinedex Physical Therapy USA, Inc. v. United Healthcare of

16

Arizona, Inc., 770 F.3d 1282, 1295 (9th Cir. 2014) (quoting 29 C.F.R. § 2520.102-2(b)).

17

Although the Hospital argues that it properly may enforce ERISA’s disclosure

18

requirements here, most of the cases plaintiff primarily relies upon are inapposite in that they

19

concern suits filed by plan beneficiaries; so, there was no question about standing. Closer to the

20

mark is the Spinedex case, cited above. Spinedex concerned SPD provisions that imposed a two-

21

year time bar on benefits claims. Pursuant to those provisions, the district court held that the

22

provider’s derivative suit for payment of benefits was untimely. The Ninth Circuit reversed.

23

Specifically, it held that the provisions in question were not properly disclosed as required by 29

24

U.S.C. § 1022(b); and, the failure to properly disclose those provisions rendered them

25

unenforceable. 770 F.3d at 1295-96. Although Spinedex indicates that the provider was able to

26

avail itself of the disclosure rule in 29 U.S.C. § 1022(b), that apparently was so that the provider

27

could preserve its ability to pursue the benefits claims indisputably assigned to it by beneficiaries.

28

This court finds no basis to broadly construe Spinedex as generally conferring standing upon
12

1

providers, like the Hospital, to enforce ERISA’s disclosure requirements in derivative suits for

2

payment of benefits. Absent citation to better authority by plaintiff, the court grants defendants’

3

motion to dismiss as to ERISA’s disclosure obligations. However, the court will give plaintiff

4

leave to amend.

5

The complaint alleges that defendants’ interpretation can’t be correct because the Schedule

6

of Benefits “states only that payment is to be made at the reasonable and customary level, as

7

‘defined as an Allowable Charge.’” (Complaint ¶ 83). Further, plaintiff alleges that the Schedule

8

of Benefits “states that ‘Hospital Services’ are paid at ‘70% after $250 copayment (per admission)

9

and deductible,’ and that the only applicable limitation on such benefits is the definition of
‘Allowable Charge.’” (Id.). These allegations, however, turn on plaintiff’s interpretation of

11
United States District Court
Northern District of California

10

“Allowable Charge” as requiring payment of “reasonable and customary” rates. For the reasons

12

already discussed, that interpretation is not plausible.

13
14

Defendants’ motion to dismiss this claim is granted. Except as otherwise set out above, the
claim is dismissed with leave to amend.

15

C.

16

As an apparent alternative route to obtain payment of the Plan benefits, the Hospital seeks

17

to enforce maximum out-of-pocket (sometimes referred to as “MOOP”) requirements---primarily

18

under the Plan’s MOOP terms, but also through the ACA’s MOOP provisions. Here, plaintiff

19

refers to limits on the annual out-of-pocket expenses a patient is responsible for paying. In a

20

nutshell, the Hospital claims that defendants not only improperly failed to count all out-of-pocket

21

healthcare expenses toward the annual MOOP threshold for each patient, but also failed to honor

22

the MOOP once the threshold was met (i.e., by paying only 140% of Medicare rates, instead of

23

100% of a patient’s expenses above the threshold).

24
25
26

Claim 2: ACA Section 2707, 42 U.S.C. § 300gg-6

Defendants move to dismiss, arguing that the Hospital lacks standing to pursue this claim
and fails, in any event, to state a viable claim for relief.
1.

The Plan’s MOOP Terms

27

In this portion of the complaint, the Hospital says that the ACA’s MOOP requirement “is

28

separate and distinct from the annual MOOP limits set forth in the Plan itself, which the Hospital
13

1

seeks to enforce separate and apart from ACA’s MOOP.” (Complaint ¶ 94). Because the dispute

2

presented by this litigation is whether the Hospital properly was paid under the Plan, insofar as

3

defendants argue that the Hospital lacks standing because it seeks benefits beyond what

4

defendants have already paid (which is all defendants contend is owed), the court doesn’t find that

5

particular argument persuasive.

6
7
8
9
10

In its opposition, plaintiff seems to argue that the SPD provisions are contradictory with
respect to a patient’s MOOP. In particular, the Hospital notes that the Schedule of Benefits says:
Coinsurance will accumulate to the maximum out-of-pocket amount until
the maximum out-of-pocket amount, as shown in the Schedule of Benefits,
is reached. Then, Covered Charges incurred by a Covered Person will be
payable at 100% (except for any charges which do not accrue to the
maximum out-of-pocket amount) for the remainder of the Calendar Year.

United States District Court
Northern District of California

11

(Dkt. 16 at ECF p. 19). And, plaintiff says that a similar statement appears in the Schedule of

12

Benefits table: “The Plan will pay the designated percentage of Covered Charges until out-of-

13

pocket amounts are reached, at which time the Plan will pay 100% of the remainder of Covered

14

Charges for the rest of the Calendar Year unless stated otherwise.” (Id. at 20). The Hospital

15

emphasizes that the Schedule of Benefits table goes on to indicate that “Covered Charges” include

16

“Hospital Services” such as “Room and Board,” “Intensive Care Unit,” and “Emergency Room

17

Services.” (Id.). The Hospital argues that these provisions necessarily mean that, for

18

approximately 50-100 Rocket Farms patients whose MOOP thresholds allegedly were reached, the

19

Plan requires defendants to pay 100% of the amounts over the threshold.

20

Defendants point out that the Plan expressly does not cover “Excess Charges,” meaning

21

“[t]he part of an expense for care and treatment of an Injury or Sickness that is in excess of the

22

Allowable Charge.” (Dkt. 10-1, Ex. A at ECF p. 49; Dkt. 16 at ECF p. 49). Defendants further

23

argue that this exclusion is entirely consistent with the Schedule of Benefits table, which says that

24

“Amounts over the Allowable Charge” “do not apply toward the out-of-pocket maximum and are

25

never paid at 100%.” (Id. at ECF p. 22). Plaintiff argues, in its opposition brief, that this carve-

26

out for amounts over the Allowable Charge does nothing to modify the statement immediately

27

above it about payment of 100% of out-of-pocket expenses over the MOOP threshold---at least

28

not without contradicting it entirely. Presumably, plaintiff refers here to language in the Schedule
14

1

of Benefits stating:

2

The Plan will pay the designated percentage of Covered Charges until the
maximum out-of-pocket amounts are reached, at which time the Plan will
pay 100% of the remainder of Covered Charges for the rest of the Calendar
Year unless stated otherwise.

3
4

(Dkt. 10-1, Ex. A at ECF p. 22; Dkt. 16 at ECF p. 20). However, defendants note that the Plan
5
6
7

states that “Covered Charges are the Allowable Charges that are incurred for” a list of services and
items, including “Hospital Care,” and which “are subject to the benefit limits, exclusions and other
provisions of this Plan.” (Dkt. 10-1, Ex. A at ECF p. 30; Dkt. 16 at ECF p. 29). Plaintiff retorts

8
that the terms relied upon by defendants are not adequately disclosed in violation of the disclosure
9
rule under 29 U.S.C. § 1022. But, for the reasons discussed above, the court is not convinced that
10

plaintiff has standing to pursue that theory. Insofar as it is based on the Plan’s MOOP terms, this

11
United States District Court
Northern District of California

claim is dismissed, with leave to amend.
12
2.

13

The ACA’s MOOP Limitation

ACA Section 2707(b) limits the out-of-pocket (MOOP) expenses that a health plan can
14

impose on a patient in a plan year: “A group health plan shall ensure that any annual cost-sharing

15
imposed under the plan does not exceed the limitations provided for under [42 U.S.C. §
16
17
18
19

18022(c)(1)].”). 42 U.S.C. § 300gg-6(b). And, § 18022(c)(1) says that “[t]he cost-sharing
incurred under a health plan . . . shall not exceed the dollar amounts in effect” for a given plan
year. Id. § 18022(c)(1). According to the complaint’s allegations: The ACA’s MOOP
requirement applies to expenditures for essential health benefits (EHBs);2 and, while self-funded

20
plans are not required to offer EHBs, the defendant Plan allegedly was designed to cover EHBs.
21
22
23

Thus, plaintiff says that the ACA’s MOOP provisions require the Plan “to provide substantial
coverage for those EHBs, and to limit plan members’ annual out-of-pocket expenditures for such
EHBs.” (Complaint ¶¶ 97, 101).

24
25
2

26
27
28

Plaintiff refers here to the ten categories of EHBs listed in 42 U.S.C. § 18022(b)(1), i.e.,
ambulatory patient services; emergency services; hospitalization; maternity and newborn care;
mental health and substance abuse use disorder services, including behavioral health treatment;
prescription drugs; rehabilitative and habilitative services and devices; laboratory services;
preventive wellness services and chronic disease management; and pediatric services, including
oral and vision care.
15

1

According to the Hospital, defendants essentially ignored the ACA’s cost-sharing

2

limitations by paying only a small portion of the Hospital’s bills (i.e., 140% of Medicare) and by

3

failing to count the Hospital’s charges toward each patient’s MOOP threshold, thus leaving Plan

4

beneficiaries to pay the considerable balance of the charges. (Complaint ¶¶ 90, 91, 93). Plaintiff

5

claims that because the Plan had no network of hospitals, the ACA required that “the entire unpaid

6

balance on each reimbursement claim---the so-called ‘balance bill’---must count towards

7

satisfying the MOOP . . ..” (Id. ¶ 92). In other words, once a patient’s cost-sharing limit has been

8

met, the Hospital says that the ACA requires defendants to “pay 100% of the patient’s eligible

9

healthcare expenses above the threshold for the remainder of the calendar year.” (Id. ¶ 93).

10

Defendants argue that plaintiff lacks standing to assert claims for alleged ACA violations.

United States District Court
Northern District of California

11

Plaintiff maintains that it can bring an ACA claim, via ERISA--which may explain why the

12

complaint styles this claim as one for violation of the “ACA Section 2707(b) via ERISA Section

13

502(a)(1)(B).” Here, plaintiff alleges that, as stated in 29 U.S.C. § 1185d, ERISA incorporated

14

certain provisions of the Public Health Service Act (as amended by the ACA), including the

15

ACA’s MOOP provision. (Complaint ¶ 225). Defendants do not convincingly refute that

16

allegation.

17

Nonetheless, defendants argue that the claim should be dismissed because the ACA’s

18

MOOP requirements (1) do not apply to self-funded plans like the Plan; and (2) do not apply

19

anyway, because the ACA expressly excludes “non-network providers” from the statute’s cost-

20

sharing requirements.

21

The court is unpersuaded by defendants’ argument that the ACA MOOP requirements

22

don’t apply to self-funded plans like the Plan. As discussed above, the ACA imposes its cost-

23

sharing limitation on “group health plan[s].” 42 U.S.C. § 300gg-6(b). The ACA goes on to define

24

the term “group health plan” as:

25
26
27
28

an employee welfare benefit plan (as defined in section 3(1) of the
Employee Retirement Income Security Act of 1974) to the extent that the
plan provides medical care (as defined in paragraph (2)) and including
items and services paid for as medical care) to employees or their
dependents (as defined under the terms of the plan) directly or through
insurance, reimbursement, or otherwise.”
16

1

Id. § 300gg-91(a)(1). “Medical care,” in turn, is broadly defined as:

2

amounts paid for--

3

(A) the diagnosis, cure, mitigation, treatment, or prevention of disease, or
amounts paid for the purpose of affecting any structure or function of
the body,

4
5
6
7

(B) amounts paid for transportation primarily for and essential to medical
care referred to in subparagraph (A), and
(C) amounts paid for insurance covering medical care referred to in
subparagraphs (A) and (B).

8
9
10

United States District Court
Northern District of California

11
12
13
14

Id. § 300gg-91(2)(A)-(C). And, relevant to the discussion here, ERISA section 3(1) defines the
terms “employee welfare benefit plan” and “welfare plan” as:
any plan, fund, or program which was heretofore or is hereafter established
or maintained by an employer or by an employee organization, or by both,
to the extent that such plan, fund, or program was established or is
maintained for the purpose of providing for its participants or their
beneficiaries, through the purchase of insurance or otherwise, (A)
medical, surgical, or hospital care or benefits, or benefits in the event of
sickness, accident, disability, death or unemployment . . ..

15

29 U.S.C. § 1002(1). The court is satisfied that “group health plan” as used in the ACA’s MOOP

16

provision applies to the Plan. Defendants have not convincingly demonstrated that definitions for

17

the different term “health plan,” as defined elsewhere in the ACA, govern.

18

Even so, defendants argue that this claim is subject to dismissal because the ACA’s cost-

19

sharing requirements expressly exclude balance bills from non-network providers. They point out

20

that the ACA provides:

21

(A) In general

22

The term “cost-sharing” includes--

23

(i) deductibles, coinsurance, copayments, or similar charges; and

24
25

(ii) any other expenditure required of an insured individual which is a
qualified medical expense (within the meaning of section 223(d)(2) of Title
26) with respect to essential health benefits covered under the plan.

26

(B) Exceptions

27

Such term does not include premiums, balance billing amounts for nonnetwork providers, or spending for non-covered services.

28

17

1

42 U.S.C. § 18022(c)(3) (emphasis added). The key dispute here is whether the cost-sharing

2

exception under § 18022(c)(3)(B) for “non-network providers” applies to the Hospital.

3

Defendants say yes, pointing out that the Plan had a network of providers, and the Hospital was

4

not in that network. So, defendants argue that logically, the Hospital was a “non-network

5

provider” with respect to the Plan. Plaintiff, on the other hand, argues that the exception does not

6

apply because the Plan has no network of hospitals at all---ergo, plaintiff contends, there can be no

7

such thing as an “in-network hospital” or a “non-network hospital.” In plaintiffs’ view, the “non-

8

network providers” exception only applies to group health plans that actually have a network of

9

providers that can provide the hospital services covered by the Plan. (Complaint ¶ 175).
Defendants point out that in a similar case filed by the Hospital, a court in this district

10

United States District Court
Northern District of California

11

rejected the very argument that plaintiff presents here. Indeed, in Salinas Valley Mem’l

12

Healthcare Sys. v. Envirotech Molded Products, Inc., Judge Koh concluded that under the plain

13

language of the statute, plaintiff’s interpretation of the term “non-network provider” was

14

unpersuasive:

15

The Court does not find Plaintiff's position to be the most reasonable
interpretation of “non-network provider” as used in § 18022(c)(3)(B).
Under a plain reading of those words, a hospital is a “non-network
provider” in relation to a health plan if (1) the health plan has a network of
providers; and (2) the hospital is not one of those providers. Under this
straightforward reading, Plaintiff would qualify as a “non-network
provider.”
In contrast, Plaintiff's interpretation of “non-network
provider” adds another requirement. In Plaintiff's view, a hospital is a
“non-network provider” in relation to a health plan only if (1) the health
plan has a network of providers; (2) the hospital is not one of those
providers; and (3) health plan beneficiaries have an in-network option for
obtaining the services that the hospital provides. Thus, under Plaintiff's
construction of § 18022(c)(3)(B), because none of Defendants’ in-network
providers offered the hospital and emergency services that Plaintiff
provided to the Patient, Plaintiff cannot be considered a “non-network
provider”---even though Defendants had a network of providers and
Plaintiff was not part of that network.

16
17
18
19
20
21
22
23
24
25

No. 17-CV-03887-LHK, 2017 WL 5172389, at *4 (N.D. Cal., Nov. 8, 2017) (emphasis added).

26

Apparently, the only support plaintiff cited for its interpretation of “non-network provider” was a

27

citation to the regulation at 45 C.F.R. § 156.130. Judge Koh was not persuaded by that argument

28

either:
18

1

. . . . Plaintiff points specifically to 45 C.F.R. § 156.130(c), which states as follows:

2

(c) Special rule for network plans. In the case of a plan using a
network of providers, cost-sharing paid by, or on behalf of, an
enrollee for benefits provided outside of such network is not
required to count toward the annual limitation on cost sharing (as
defined in paragraph(a) of this section).

3
4

Plaintiff argues that “[t]he wording of this regulation strongly suggests that,
in order for ‘network providers’ and ‘non-network providers’ to be
meaningful categories, the health plan at issue must use a network of
providers.” Pl. Opp. at 9.

5
6
7

However, Plaintiff has not alleged that Defendants did not use a network of
providers. Instead, Plaintiff has alleged that there were no in-network
providers of emergency services and hospital care. See Compl. ¶ 33.
Further, Plaintiff concedes that self-insured plans, like Defendant Plan, are
not required to offer any particular essential health services or set of health
services. Pl. Opp. at 5–6. Thus, given that self-insured plans are not
required to cover any particular essential health services, it appears
inconsistent that self-insured plans would be required to include providers
of any particular essential health services in their networks. Thus, the Court
is not persuaded by Plaintiff's argument regarding 45 C.F.R. § 156.130(c).

8
9
10

United States District Court
Northern District of California

11
12
13

Id.
In response, the Hospital hastens to point out that although Judge Koh found the

14
15

defendants’ interpretation of § 18022 to be more consistent with the plain language of the statute,

16

she also “acknowledge[d] that self-insured plans, like Defendant Plan, can circumvent 42 U.S.C. §

17

18022(c)(1)’s cost-sharing limitations by excluding providers of expensive services---such as

18

hospital and emergency services---from their networks,” noting that such conduct “would be

19

inconsistent with the spirit of the statutory scheme.” Id. Nevertheless, Judge Koh’s ultimate

20

conclusion is what it is---and this court is inclined to agree with it, unless plaintiff has something

21

more that will persuade its interpretation of § 18022 is at least plausible.3
Noting that Judge Koh granted the Hospital leave to amend in her case, plaintiff says that

22
23

its amended pleading included additional details, which are also in the complaint now pending

24

before this court. Those additional details allege that by paying for all Hospital services at 140%

25

of Medicare, defendants engaged in improper “reference pricing” with respect to the Hospital’s

26
3

27
28

In a sur-reply, plaintiff also asks this court to consider other circumstances in the Envirotech
matter. However, in resolving the present motion, the undersigned cannot be guided by what the
Envirotech court reportedly discussed in a subsequent case management conference or what the
defendants in that case did or did not do in addressing the claims asserted against them.
19

1

services. The upshot, says plaintiff, is that the “non-network providers” exception to cost-sharing

2

in § 18022(c)(3) doesn’t apply. Plaintiff’s allegations here are very convoluted and require some

3

unpacking.

4

According to the complaint: In a “reference pricing” model, a plan sets a “reference price”

5

for a certain procedure, such as a knee replacement. This price is disclosed to plan members in

6

advance and is designed to incentivize members to look for the best price for the procedure.

7

(Complaint ¶ 143). The complaint goes on to allege, by way of an example, if a plan sets a

8

reference price of $30,000 for a knee replacement, and a patient obtains service from a provider

9

that accepts the $30,000 price (or less) as payment in full, then the patient pays nothing. (Id. ¶
144). By contrast, if a patient goes to a provider that charges $45,000 for the service, then the plan

11
United States District Court
Northern District of California

10

pays $30,000 (after the patient’s deductible or copayment), and the patient is liable for the

12

remaining $15,000. (Id. ¶ 145). The complaint further alleges that the concept of “reference

13

pricing” typically applies to hospital services, but does not make sense for emergency or inpatient

14

care---because in a medical emergency, a patient typically cannot choose what hospital to go to.

15

(Id. ¶¶ 148, 152).

16

Plaintiff says that throughout the self-funded period, defendants imposed an improper

17

“reference price” (i.e., 140% of Medicare) for the Hospital’s services across the board. Here, the

18

Hospital alleges that one of defendants’ consultants would issue a “Report and Recommendation”

19

for a “Reference Based Pricing Review” for each of the Hospital’s claims. (Complaint ¶¶ 154-

20

155). This, according to the complaint, was done without any effort by defendants to set specific

21

reference prices for individual procedures at levels that any hospital in geographic area was

22

willing to accept. Moreover, the 140% Medicare “reference price” allegedly was “largely”

23

applied to bills for emergency and inpatient care. (Id. ¶ 157).

24

In this way, the Hospital claims that defendants violated written guidance (i.e., FAQs)

25

provided by the Departments of Labor, Treasury, and Health and Human Services, which are the

26

agencies tasked with implementing the ACA. (Complaint ¶ 161). Specifically, the complaint says

27

that agency FAQs issued in May 2014 and October 2014, in relevant part:

28



expressed concern that a reference pricing structure “may be a subterfuge for the
20

1

imposition of otherwise prohibited limitations on coverage, without ensuring access

2

to quality care and an adequate network of providers”;


3

expressly prohibited a reference pricing structure from being used “as a subterfuge
for otherwise prohibited limitations on coverage”; and

4
5



made reference pricing inapplicable to emergency services; but

6



nonetheless indicated that a reference pricing structure that treated providers who

7

accepted the reference amount “as the only in-network providers” would not run

8

afoul of the ACA’s MOOP requirement, “provided the plan uses a reasonable

9

method to ensure that it provides adequate access to quality providers.”

10

(Id. ¶¶ 163, 166).
The complaint goes on to allege that by failing to have a network that included any

United States District Court
Northern District of California

11
12

hospitals, defendants used a reference pricing structure for hospital services as a subterfuge,

13

without ensuring that plan members had reasonable access to quality providers. (Complaint ¶

14

176). The consequence, says plaintiff, is spelled out in another agency FAQ issued on April 20,

15

2016:

16
17
18
19
20
21
22
23
24
25

Q7: If a non-grandfathered large group market or self-insured group health
plan as a pricing structure in which the plan pays a fixed amount
(sometimes called a reference price) for a particular procedure, but the plan
does not ensure that participants have adequate access to quality
providers that will accept the reference price as payment in full, is the
plan required to count an individual’s out-of-pocket expenses for
providers who do not accept the reference price toward the individual's
MOOP limit?
Yes. The Departments’ previous guidance explained that, for purposes of
PHS Act section 2707(b), a plan that utilizes a reference-based pricing
design (or similar network design) may treat those providers that accept the
reference-based price as the only in network providers and not count an
individual’s out-of-pocket expenses for services rendered by other providers
towards the MOOP limit only if the plan is using a reasonable method to
ensure adequate access to quality providers at the reference price. A plan
that merely establishes a reference price without using a reasonable
method to ensure adequate access to quality providers at the reference
price will not be considered to have established a network for purposes
of PHS Act section 2707(b). . . .

26

(Complaint ¶ 174). So, back to the basic issue: Does the ACA’s cost-sharing exception for “non-

27

network providers” apply to the Hospital? The Hospital says no, contending that the above-quoted

28

FAQ makes it “crystal clear” that if a plan is going to have a reference price (i.e., 140% of
21

1

Medicare) for hospital services, then it has to have a network of hospitals, or at least one that

2

includes hospitals (i.e., providers who accept the reference price (or less) as full payment)---if not,

3

then the ACA’s MOOP requirement is triggered.

4

Defendants reiterate that the Plan had a network of providers; the Hospital was not in it;

5

and hence, under the plain language of the cost-sharing exception for “non-network providers,”

6

plaintiff clearly was a “non-network provider” under 42 U.S.C. § 18022(c)(1)(3). However, they

7

do not squarely address the complaint’s allegations about plaintiff’s reference price theory.

8

Indeed, they don’t say much about it at all, except that it’s confusing. And, their passing

9

comments about network adequacy standards are not developed enough to be convincing here.
The court does not find the Hospital’s reference price theory to be “crystal clear,” as plaintiff

11
United States District Court
Northern District of California

10

contends. And, it remains to be seen whether plaintiff will actually prevail on that theory. But, on

12

this record, the court is unprepared to find that plaintiff’s reference price theory is completely

13

implausible, as a matter of law.

14

Even if the ACA’s MOOP requirement is triggered, defendants argue that this claim must

15

still be dismissed because (1) defendants fully complied with the ACA’s MOOP requirements; and

16

(2) plaintiff has offered no legal support for the essential claim that a patient’s “balance bill” is

17

part of either the EHBs or the MOOP. These arguments fail to convince.

18

Pointing to excerpts from the Federal Register, defendants contend that in paying the

19

Hospital 140% of Medicare, they have fully complied with the ACA’s MOOP requirement. Those

20

excerpts concern the so-called “Greatest of Three” regulation, which provides, in relevant part:

21

b. Out-of-Networking Cost-Sharing Requirements

22

*****

23

27

[O]ut-of-network providers may bill patients for the difference between the
providers’ billed charges and the amount collected from the plan or issuer
and the amount collected from the patient in the form of a copayment or
coinsurance amount (referred to as balance billing). Section 1302(c)(3)(B)
of the Affordable Care Act excludes such balance billing amounts from the
definition of cost sharing …Because the statute neither requires plans or
issuers to cover balance billing amounts, nor prohibits balance billing,
even where the protections in the statute apply, patients may still be
subject to balance billing. …

28

[T]he Department determined it necessary that a reasonable amount be paid

24
25
26

22

before a patient becomes responsible for a balance billing amount.
Therefore … a plan or issuer must pay a reasonable amount for emergency
services by some objective standard. Specifically, a plan or issuer satisfies
the copayment or coinsurance limitations in the statute if it provides
benefits for out-of-network emergency services (prior to imposing innetwork cost sharing) in an amount at least equal to the greatest of: (1)
The median amount negotiated with in-network providers for the
emergency services; (2) the amount for the emergency service calculated
using the same method the plan generally uses to determine payments for
out-of-network services (such as the usual, customary, and reasonable
amount); or (3) the amount that would be paid under Medicare for the
emergency service (minimum payment standards).

1
2
3
4
5
6
7

(Dkt. 10-1, Ex. B) (emphasis added). Defendants maintain that this means (1) payment by plans at

8

100% of Medicare is appropriate for non-contracted providers; and (2) if provider bills the patient

9

for amounts exceeding 100% of Medicare, then the patient can be liable under the ACA without
any concern as to whether the MOOP has been reached. And, because they paid the Hospital

11
United States District Court
Northern District of California

10

140% of Medicare (i.e., an “objective standard”), defendants contend that they satisfy the ACA’s

12

MOOP requirements anyway. However, plaintiff points out that, as reflected in a May 3, 2018

13

agency “Clarification of Final Rules” in the Federal Register, the quoted regulation sets the

14

minimum that plans are required to pay for out-of-network emergency services. (Dkt. 23 at 9).

15

More to the point, plaintiff correctly notes that the plain text of the regulation requires payment of

16

the “greatest” of the three listed amounts. The Hospital maintains that the second option for

17

payment of “the usual, customary, and reasonable amount” is far greater than 140% of Medicare.

18

Thus, this court is not convinced that simply paying for the Hospital’s services according to an

19

“objective standard” is sufficient to bring defendants in compliance with the ACA, as they seem to

20

claim.

21

Nevertheless, defendants maintain that this claim must be dismissed because plaintiff has

22

offered no legal support for the essential claim that a patient’s “balance bill” is part of either the

23

EHBs or the MOOP. The specific focus of defendants’ concern seems to be that the Hospital

24

might be claiming that defendants are required to pay a patient’s balance bill, including for

25

services that are not covered by the Plan. Here, defendants seize upon allegations that “balance

26

bills are a form of cost-sharing because patients themselves are financially responsible for all

27

amounts that the Plan does not pay.” (Complaint ¶ 120) (emphasis added). Now focusing on

28

what the ACA’s cost-sharing definition includes, defendants point out that the ACA says that a
23

1

patient’s “cost chare” includes the “deductible, coinsurance, copayments or similar charges.” 42

2

U.S.C. § 18022(c)(3). Defendants argue that nowhere does the ACA say that a patient’s “‘cost

3

share’ is that portion of a provider’s charges that are not covered by the insurance policy or self-

4

funded plan.” (Dkt. 17, Reply at ECF p. 15) (emphasis added).

5

Although the court has noted more than once that the complaint’s allegations are very

6

dense, the court finds no basis for defendants’ concern that the complaint seeks payment for

7

services that were not covered by the Plan. As discussed above, the complaint alleges that once a

8

patient’s cost-sharing limit has been met, the Hospital says that the ACA requires defendants to

9

“pay 100% of the patient’s eligible healthcare expenses above the threshold for the remainder of
the calendar year.” (Complaint ¶ 93) (emphasis added). Additionally, the claim appears to be

11
United States District Court
Northern District of California

10

premised on EHBs, which the Plan allegedly was designed to cover, even though it was not

12

required to do so. (Complaint ¶¶ 99-100). The Hospital alleges that the medical services it

13

provided to Rocket Farms patients during the self-funded period---including emergency care and

14

inpatient services---“are among the most important categories of EHBs.” (Id. ¶ 99). And,

15

“because the Plan [allegedly] paid at such an inadequate level,” the opposition brief seems to

16

confirm that plaintiff’s position is that “the Plan must ‘pick up’ the balance for covered medical

17

services above and beyond the [MOOP] threshold.” (Opp. at ECF p. 16) (emphasis added).

18

Based on the foregoing, this claim is dismissed with leave to amend as to plaintiff’s theory

19

re the Plan’s MOOP terms. However, defendants’ motion to dismiss this claim based on the

20

ACA’s MOOP provisions is denied.

21

D.

22

This claim alleges that while the Plan was in effect, Rocket Farms reassured its employees

Claim 3: False Advertising, Lanham Act, Section 43(b)

23

that the medical care provided by the Hospital was completely covered by the Plan and that they

24

should continue going to the Hospital’s emergency room for services, whether or not it was an

25

emergency. Rocket Farms allegedly knew these representations were false---specifically, that the

26

Hospital’s emergency services were no longer covered at an adequate level and that the Plan was

27

set up in a way that would not fairly compensate the Hospital. Plaintiff says that Rocket Farms’

28

alleged false statements resulted in “dramatic overutilization of the Hospital’s emergency
24

1

services,” whereby the Hospital was forced to (1) use emergency room resources to treat every

2

Rocket Farms patient that showed up, even if there was no emergency; and (2) accept “an

3

extremely low level of payment, which Rocket Farms and the Plan refused to reconsider despite

4

hundreds of requests.” And, by switching to an out-of-network arrangement, plaintiff says that

5

Rocket Farms made it impossible for its employees to seek more cost-effective outpatient care

6

from the Hospital’s clinics or urgent care centers. (Complaint ¶¶ 59-62, 229-240). The complaint

7

further alleges that plaintiff “was economically harmed” and that Rocket Farms’ alleged conduct

8

“made it more difficult for the Hospital to compete in the marketplace for healthcare services.”

9

(Id. ¶¶ 61, 236). The Hospital seeks trebled damages, plus disgorgement of Rocket Farms’ “illgotten gains from improperly shifting its employees’ healthcare costs onto the Hospital during the

11
United States District Court
Northern District of California

10

Self-Funded Period,” as well as an injunction prohibiting Rocket Farms from repeating its

12

allegedly unlawful behavior. (Id. ¶¶ 238-239).
Defendants’ motion to dismiss presents two issues. First, the parties disagree whether the

13
14

Hospital has pled sufficient facts establishing that it falls within the “zone of interest” protected by

15

the Lanham Act, as described in Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct.

16

1377 (2014).4 Second, even if the Hospital properly may assert a claim, defendants contend that

17

the claim sounds in fraud and therefore must (but fails to) meet the heightened pleading standard

18

under Fed. R. Civ. P. 9(b). Plaintiff points out that, although district courts are split on the issue

19

(and that it is not aware of pertinent Ninth Circuit authority), a number of courts have held that the

20

heightened Rule 9(b) pleading standard does not apply to Lanham Act claims. Because the court

21

agrees with defendants on the first issue, it does not reach the second.
The Lanham Act “creates two distinct bases of liability: false association, [15 U.S.C.] §

22
23

1125(a)(1)(A), and false advertising, [15 U.S.C.] § 1125(a)(1)(B).” Lexmark Int’l, Inc., 134 S. Ct.

24

at 1384. Although a plaintiff need not be a direct competitor of the defendant in order to bring a

25
26
27
28

4

Although defendants describe the issue as one of “prudential standing,” the Supreme Court has
clarified that the term is a “misnomer’ as applied to the zone-of-interests analysis, which asks
whether ‘this particular class of persons ha[s] a right to sue under this substantive statute.’”
Lexmark, 134 S. Ct. at 1387 (quoting Ass’n of Battery Recyclers, Inc. v. EPA, 716 F.3d 667, 67576 (D.C. Cir. 2013)).
25

1

Lanham Act claim, “a statutory cause of action extends only to plaintiffs whose interests fall

2

within the zone of interests protected by the law invoked.” Id. at 1388. “To invoke the Lanham

3

Act’s cause of action for false advertising, a plaintiff must plead (and ultimately prove) an injury

4

to a commercial interest in sales or business reputation proximately caused by the defendant’s

5

misrepresentations.” Id. at 1395. Thus, Lexmark held “that a plaintiff suing under § 1125(a)

6

ordinarily must show economic or reputational injury flowing directly from the deception wrought

7

by the defendant’s advertising; and that that occurs when deception of consumers causes them to

8

withhold trade from the plaintiff.” Id. at 1391.

9

The complaint contains no facts demonstrating that plaintiff suffered injury in sales or
reputation as a result of patients declining to seek treatment from the Hospital. Indeed, the

11
United States District Court
Northern District of California

10

allegations suggest that patients continued to flock to the Hospital for healthcare as a result of

12

Rocket Farms’ alleged conduct. In its opposition, plaintiff asserts for the first time that it suffered

13

reputational harm because “the Plan’s low level of payments led the Hospital to bill the patients

14

for the balance” and because “patients who were caught in the middle of this payment dispute may

15

no longer want to come to the Hospital in the future.” (Dkt. 15, Opp. at ECF p. 27). Additionally,

16

plaintiff suggests that the Hospital “was impaired in its ability to receive and treat other patients

17

who had health insurance that would pay far better than the Plan; instead it had to accept a low and

18

unacceptable level of payment for Rocket Farms’ own members.” (Id.). Putting aside that these

19

assertions appear nowhere in the complaint, they do not save plaintiff’s claim anyway. To begin,

20

the complaint alleges that the Hospital is “obligated, by law, to treat all individuals who present at

21

its emergency room” (Complaint ¶ 235); and, the Hospital’s speculation as to what patients may or

22

may not do with respect to seeking treatment in the future is just that---speculation. Moreover,

23

plaintiff’s assertions, like the complaint’s allegations, indicate that the Hospital’s alleged

24

economic injury stems, not from Rocket Farms’ alleged misrepresentations, but from plaintiff

25

having “to accept an extremely low level of payment” under the Plan. (Complaint ¶ 235).

26

Accordingly, the complaint does not allege facts demonstrating that the Hospital falls

27

within the “zone of interest” protected by the Lanham Act’s false advertising provisions, and

28

plaintiff has not convincingly demonstrated that the deficient allegations may be remedied on
26

1

amendment. Defendants’ motion to dismiss this claim therefore is granted, without leave to

2

amend.

3

E.

4

These claims are based on the same underlying facts: The complaint alleges that, in phone

Claims 4 and 5: Intentional and Negligent Misrepresentation

5

calls to verify/approve coverage for several Rocket Farms patients, defendants (falsely)

6

represented to the Hospital that the Plan would cover 70% of the patient’s medical bills, up to

7

$21,666, after which it would cover 100%---and failed to disclose that payments under the Plan

8

would actually be capped at 140% of Medicare. Additionally, plaintiff alleges that defendants

9

affirmatively represented to the Hospital that the Plan had a maximum out-of-pocket limit of
$6,350 for each claim, but failed to disclose any limitation or exclusion that (reportedly) applied to

11
United States District Court
Northern District of California

10

the Plan’s MOOP. Plaintiff says that it relied to its detriment on these alleged misrepresentations

12

and that the Plan did not pay as promised, instead paying only about a third of the total expense

13

for each patient’s treatment. (Complaint ¶¶ 193-210, 241-257).
Defendants argue that these claims fail to satisfy the heightened pleading standard for

14
15

fraud claims under Fed. R. Civ. P. 9(b).5 “In alleging fraud or mistake, a party must state with

16

particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). However,

17

“[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”

18

Id. “A pleading is sufficient under rule 9(b) if it identifies the circumstances constituting fraud so

19

that a defendant can prepare an adequate answer from the allegations. While statements of the

20

time, place and nature of the alleged fraudulent activities are sufficient, mere conclusory

21

allegations of fraud are insufficient.” Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540

22

(9th Cir. 1989). “To comply with Rule 9(b), allegations of fraud must be specific enough to give

23

defendants notice of the particular misconduct which is alleged to constitute the fraud charged so

24

that they can defend against the charge and not just deny that they have done anything wrong.”

25

Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001) (internal quotations and citation

26
5

27
28

Defendants originally argued that these claims were preempted by ERISA. However, at oral
argument, defendants confirmed that they are no longer pursuing that argument. See Envirotech
Molded Products., 2017 WL 5172389 at *5-6 (concluding that ERISA did not preempt plaintiff’s
claims for negligent and intentional misrepresentation).
27

1
2

omitted).
The Hospital’s complaint identifies the specific patients (by initials), the nature of the

3

services provided, the month and year when the authorization phone calls were made, and what

4

defendants’ representatives allegedly told the Hospital staff, i.e., that the Plan covered 70% of the

5

patient’s medical bills up to a certain amount (the dollar amounts are specified for each patient),

6

after which it would cover 100%. These allegations state a plausible claim for relief and are

7

sufficient to put defendants on notice as to the nature of the alleged fraud such that they can

8

defend against the charge. Defendants’ motion to dismiss Claims 4 and 5 is denied.
ORDER

9
10

United States District Court
Northern District of California

11

Based on the foregoing, defendant’s motion to dismiss the complaint is granted in part and
denied in part:


12

Claim 1 (ERISA § 502(a)(1)(B)) is dismissed, with leave to amend only as
specified above;

13


14

Claim 2 (ACA Section 2707 “via ERISA § 502(a)(1)(B)) is dismissed with respect

15

to the Plan’s MOOP terms, with leave to amend. However, defendants’ motion to

16

dismiss this claim based on the ACA’s MOOP provisions is denied.


17

amend.

18


19

22
23
24

The motion to dismiss Claims 4 and 5 (intentional and negligent misrepresentation)
is denied.

20
21

Claim 3 (Lanham Act § 43(a) (unfair advertising) is dismissed without leave to

If plaintiff chooses to amend its complaint, the amended pleading must be filed by June
15, 2018.
SO ORDERED.
Dated: May 31, 2018

25
26
HOWARD R. LLOYD
United States Magistrate Judge

27
28
28