As a matter of public policy, hospitals and emergency physicians are required to treat any patient who walks through the door, regardless of ability to pay. In turn, health maintenance organizations are obligated to reimburse the providers for an enrollee's care. HMOs frequently contract with independent practice associations, delegating, among other duties, their reimbursement responsibilities. This arrangement has worked out well for the HMOs, who always get their premium payments from patients, with relative immunity. However, it has not always worked out so well for the providers (hospitals, trauma surgeons and emergency physicians), especially when the IPAs experience serious financial trouble that renders them unable to pay.
Historically, when an HMO delegated its responsibility for emergency physician reimbursement to an IPA, the HMO took the position that it was washing its hands of any reimbursement responsibility. That changed late last month, however, in a groundbreaking decision by the California Court of Appeal which reversed and remanded the trial court's holding that HMOs are immune to payment obligations once they delegate them to IPAs. This ruling, Centinela Freeman Emergency Medical Associates et al. v. Health Net of California et al., is certain to benefit hospitals, emergency care physicians and other providers.
The genesis of this case began when many of California's largest HMOs contracted with La Vida Medical Group, an IPA based in Southern California, on a capitated basis. La Vida subsequently began experiencing serious financial problems and was hit with a corrective action plan by the California Department of Managed Health Care. By 2007, frustrated, unpaid emergency physicians began voicing their concerns and sending letters to HMOs about La Vida's financial distress, but they were told by the HMOs to continue billing La Vida. Despite obligations to its 120,000 patients and 1,400 providers, La Vida abruptly closed its doors in 2009. At the time of the closing, the IPA's CEO commented, "La Vida doesn't even have enough funds to buy a stamp."
Because the California Supreme Court established in Prospect Medical Group, Inc. v. Northridge Emergency Medical Group that emergency care providers are not legally allowed to "balance bill" plan member patients for the balance of the providers' fees, the emergency providers had no recourse.
In 2010, a group of emergency physicians and radiologists (plaintiffs) sued nearly all of California's largest HMOs, arguing that if the HMOs negligently delegated their emergency service responsibilities to an IPA, the HMOs should be financially responsible. Plaintiffs argued that they had no contract with the IPA, and that because the HMOs knew, or should have known, that the IPA was in financial distress, they had a duty to act. The Defendant HMOs, however, argued that once they established contracts with the IPA delegating their reimbursement obligations, they could not be held liable. The trial court agreed with the HMOs and dismissed the case.
The plaintiffs appealed, and on Feb.19, 2014, The California Court of Appeal, in a published decision, reversed and remanded this ruling. After an analysis of prior case law, and carefully taking policy considerations into account, the Court concluded that when no contract exists between an emergency medical provider and an IPA, and the HMO that contracted with the IPA knew (or should have known) of its inability to pay, the HMO is financially responsible for reimbursing the emergency physicians.
The California Court of Appeal made the right call. An HMO is perfectly within its rights to delegate financial responsibilities to an IPA, but this right is not absolute — it cannot immunize itself from any recourse for financial reimbursement. Further, HMOs are supposed to receive updated reports from IPAs regarding their financial viability and obligations to the emergency providers, which do not cease merely as a result of establishing a contract.
The court saw the harm as foreseeable, stating that the HMOs "knew or should have known that their neglect of La Vid'’s financial shortcomings would result in the failure of plaintiffs to receive reasonable reimbursement for their covered services." The court went on to call the HMOs' conduct "morally blameworthy" and stated in a footnote that the HMOs' response to the physicians' concerns — instructing them to continue submitting claims to La Vida — demonstrated "a certain degree of callousness."
This decision is likely to be impactful in the way that HMOs approach their relationships with IPAs: HMOs will most likely keep a much closer eye on IPAs' financial compliance. A noteworthy recent example is the Inland Empire's McKinley Medical Group — an IPA that just declared bankruptcy. In light of Centinela, non-contracted physicians, hospitals and emergency providers may be able to recoup what in all likelihood would have been lost monies before this important decision.
Emergency providers are urged to alert HMOs at any sign of financial distress by the IPAs, which in turn will likely be more cautious, eager to stay fully compliant, and likely to reimburse in a more conscientious manner. For emergency medical providers who are under contract with an IPA, Centinela highlights that it is in their best interest to terminate these contracts in order to have recourse should the IPA become insolvent. Otherwise, the providers will be bound to the terms of the contract they entered into with the IPA.
This is a big win for providers. Most hospitals have close, long-term relationships with emergency care providers, who now will have greater recovery options at the first signs of an IPA's financial distress.
Andrew Selesnick is a partner in the law firm of Michelman & Robinson, LLP and chair of the firm's Health Care Group. M&R represented plaintiffs in Centinela Freeman Emergency Medical Assocs. v. Health Net. Mr. Selesnick can be reached at aselesnick@mrllp.com.