Breach of Contract

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Breach of Contract     Breach of Fiduciary Duties     Unfair Business Practices

Administrative Process, Tolling, Delayed Accrual

Breach of Contract

Contract Terms Are Not Clear: The Contract Says that the “Allowable Amount” for In-Plan Will Be the Same as the “Allowable Amount” Out-of-Plan

CalPERS and Anthem greatly reduced “Allowable Amount,” unreasonably low reimbursement, inadequate disclosure, and other acts or omissions breaches the contract(s).

The three-part definition of “Allowable Amount” does not clearly provide for the reimbursements that are substantially lower than appropriate usual, customary, or reasonable (UCR) amounts.[1]

Issues About Contract Terms. In this case, the examples in the EOC/contract demonstrate that the calculation of the “Allowable Amount” will result in an identical “Allowable Amount” for in- network or “out-of-network” medical services. See Exhibits 24-26, 28, 41-53 and examples above at paragraphs 1 – 150

The contract terms about the parity of the “Allowable Amount” are express and clear.

Both CalPERS and Anthem fail to disclose that the single biggest detriment involved in buying a PPO plan and then “going out-of-network” is the greatly reduced calculation of the “Allowable Amount.”

Instead, the contracts purport to indicate the major difference in going “out-of-network” was that the deductible is raised to 40 percent from 20 percent. The increase in deductible is a clearly drafted provision. The clear and patent increase in the copay from 20 percent to 40 percent is sufficiently large and clear to indicate that increased copay is the only cost of going out-of-network.

No information is provided about a changed or reduced “Allowable Amount” for out-of-network medical services.

Participants are entitled to clear examples and clear disclosure. Participants are entitled to expect similarly clear language and “appropriate” examples concerning the lowering of Allowable Amounts too.

Instead, CalPERS and Anthem provide utterly misleading and erroneous examples about the most important variable involved: the calculation of the “Allowable Amount.”

Under the EOC’s terms, each of these subparts of the “Allowable Amount” definition should provide a similar or identical “Allowable Amount.” There is no disclosure that one part of the Definition would provide a significantly reduced calculation of the “Allowable Amount.”

The third subpart of the “Allowable Amount” definition if not interpreted consistent with the first two subparts is so vague, unilateral, and self-serving, and so lacking in benchmarking or other guidance, that it fails to give notice and is not an agreed upon term in the EOC. Allowing the third subpart to provide unreasonably low and arbitrary reimbursement rates would override the UCR standards and render the EOC an illusory contract.

At a minimum, but without limitation, the third subpart cannot stand without incorporating objective standards consistent with appropriate industry standards. The third subpart must be administered consistent with a reasonableness rule so that by its own terms it does not produce arbitrary or capricious results.

Indeed, a reimbursement rate that is not based on value of the service relative to the value of other services, market considerations, and provider charge patterns, the agreed upon rate, and other usual, customary, and reasonable rates could not be “appropriate.”



Breach of Contract

CalPERS and Anthem breached their contractual duties to Heinz and other proposed class members, including under the plan documents, as CalPERS and/or Anthem failed to pay or cause Anthem to calculate “Allowable Amounts” that are usual reasonable and customary, including that were the same or similar for PPO as for non-PPO providers.

Heinz and the class performed all aspects of their duties.

Heinz and the class prove (1) the existence of PPO contract, (2) Plaintiff’s performed all their required terms of the PPO contract when they submitted the claims for reimbursement and the claims were accepted for reimbursement, albeit at an improperly low rate, (3) CalPERS’ and Anthem’s breach of the PPO contract by providing inappropriately low reimbursement, including that is inconsistent with the terms of the EOC and (4) that CalPERS’ and Anthem’s improperly reduced reimbursement and “Allowable Amounts” caused resulting damage to the Plaintiff and the class members. (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.)

Heinz has shown that CalPERS’ and Anthem’s breach caused the Plaintiff’s damage. (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1352.)

Heinz (and the class) has proven he (and the class) has performed all conditions on its part or that it when he submitted the claims to Anthem and Anthem accepted the claims, albeit for improperly low reimbursements, and then Heinz individually and on behalf of a class challenged the reimbursement in both Anthem’s and CalPERS’ administrative process, to a final conclusion. Only one class representative needs to exhaust the administrative process. All of the class members also have or will have presented claims to Anthem and/or CalPERS and had the claims accepted, however Anthem and/or CalPERS paid each class member based on a reduced “Allowable Amount” and paid a reduced reimbursement rate. Heinz has shown that after the claims are presented to CalPERS and Anthem, then CalPERS and Anthem’s duty to perform the reasonable reimbursement under the contract occurred, yet CalPERS and Anthem breached their duty by failing to pay proper reimbursements. Heinz and the class’s claims have occurred or accrued with the presentation of the claims to Anthem and CalPERS and all other events conditioned on the reimbursement, have transpired. (Consolidated World Investments, Inc., v. Lido Preferred Ltd. (1992) 9 Cal.App.4th 373, 380.)

CalPERS’ and Anthem’s wrongful, i.e., the unjustified or unexcused, failure to perform a contract is a breach. The nonperformance is not legally justified, and not excused.

Heinz and the class will prove all of the following:

  1. That each Plaintiff and CalPERS and Anthem entered into a contract;
  2. That each Plaintiff did all, or substantially all, of the significant things that the contract required him/her/it to do;
  3. That each Plaintiff submitted a valid claim for reimbursement that CalPERS and/or Anthem accepted and reimbursed, albeit at a reduced rate;
  4. That CalPERS and Anthem failed to do something that the contract required when CalPERS and Anthem failed to reimburse properly and failed to calculate the “Allowable Amount” at the correct rate;
  5. That CalPERS and Anthem did something that the contract prohibited him/her/it from doing when they failed to provide reimbursement at the reasonable rates, including failing to provide reimbursement and “Allowable Amounts” at the rates reflected in the examples in the EOC;
  6. That each Plaintiff was harmed; and
  7. That CalPERS’ and Anthem’s breach of contract was a substantial factor in causing each Plaintiff’s harm.
  8. Health Plans, Insurance Contracts, Breach of Contract

While health plans and insurance contracts have special features, they are still contracts governed by the ordinary rules of contract interpretation. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; Van Ness v. Blue Cross of California, supra, 87 Cal.App.4th at p. 372.) “The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. [Citation.] If contractual language is clear and explicit, it governs. [Citation.] On the other hand, ‘[i]f the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.’ [Citations.] This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer but, rather, ‘the objectively reasonable expectations of the insured.’ [Citation.] Only if this rule does not resolve the ambiguity do we then resolve it against the insurer. [Citation.] In summary, a court that is faced with an argument for coverage based on assertedly ambiguous policy language must first attempt to determine whether coverage is consistent with the insured’s objectively reasonable expectations. In so doing, the court must interpret the language in context, with regard to its intended function in the policy. [Citation.] This is because ‘language in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract.‘ [Citations.]” (Bank of the West v. Superior Court, supra, at 1264-1265, emphasis in original.)

The “objectively reasonable expectations” of insureds means interpretation in the sense that an insurance company could reasonably believe an insured, as a layperson, not an expert, would understand the terms, and not the subjective beliefs of either the insurance company or a particular insured. If these first two steps are both necessary and do not resolve interpretation of the meaning of the terms, the terms are deemed ambiguous and, as between alternative reasonable meanings, must be construed against the insurer (draftsman) and in favor of the insured. Finally, even if the terms are unambiguous, if the effect of the terms is to limit or exclude coverage, the terms are reviewed under a strict scrutiny standard and must be set forth clearly and conspicuously in the contract in order to be enforceable. (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 667; La Jolla Beach and Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 38; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 821-822; Civil Code §§163816391654; Ponder v. Blue Cross of Southern California (1983) 145 Cal.App.3d 709, 718.)

The same rules applicable to insurance contracts are applicable to interpretation of health service plans, even if health service plans are technically different than insurance policies in terms of regulatory authority, the former being regulated by the Department of Insurance and the latter being regulated formerly by the Department of Corporations and now by the new Department of Managed Care. (Warren-Guthrie v. Health Net (2000) 84 Cal. App. 4th 804, 814 [California courts construe health plans “as they would an insurance policy…. As such, they are interpreted in the first instance by the rules of construction applicable to contracts.”]; Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 3 (fn 1), 13 [for purposes of discerning the duties and obligations under insurance contracts and health service plans there is no legal distinction between the two; any doubts respecting coverage must be resolved in favor of the insured or subscriber].[2]

The rule requiring interpretation of health service plan contracts in favor of coverage applies even if the plan was negotiated on a group basis and is not determined to be a contract of adhesion. See Sarchett v. Blue Shield of California, supra at 3, fn.1, 13, fn. 14.

EOC cannot limit expected coverage. An evidence of coverage or summary of benefits cannot diminish a contract benefit. The law specifically governing health service plans provides that an evidence of coverage cannot be used to reduce or unfavorably limit a contract benefit of a plan member.

An “evidence of coverage” includes any certificate, agreement, contract, brochure, or letter of entitlement issued to a subscriber or enrollee setting forth coverage to which the subscriber or enrollee is entitled. (Health & Safety Code §1345(d).)

In other words, the wording of an evidence of coverage can favorably expand coverage for a subscriber or plan member, but not restrict it. (See also Bareno v. Employers Life Ins. Co. of Wausau (1972) 7 Cal.3d 875, 881-82 [insurer bound by broader coverage in evidence of coverage].)

Where two constructions[3] of the insurance policy are deemed reasonable, that which is more favorable to the insured is to be adopted. (Schilk v. Benefit Trust Life Insurance Company (1969) 273 Cal.App.2d 302, citing Tavares v. Glen Falls Ins. Co. (1956) 143 Cal.App.2d 755, 761 [that insurance clause which affords the most protection to the insured will control and be given effect]; Frenzer v. Mutual Ben. H. & A. Assn. (1938) 27 Cal.App.2d 406, 415-416.)

Nowhere in any of the promotional material, the forms, or the contract does it state that CalPERS or Anthem are affirmatively renouncing the customary reimbursement standards such as UCR in favor of a much less favorable one to the insureds. Exhibits 46-53, 55. Moreover, subpart 3 of the “Allowable Amount” definition is so vague and purports to confer so much discretion that it cannot be permitted to survive unless reasonableness and reasonable particular terms are read into the provision as a matter of law.[4]

The contra-insurer rule is supported by public policy strongly articulated by the California Supreme Court; it is incumbent upon the insurer-draftsman to write policies or plans with precision and administer them so as to avoid confusion; insurers and health service plans cannot look to the court to rescue them from their own uncertain terminology. (Bareno v. Employers Life Ins. Co. of Wausau, supra at 875; see also Humphrey v. Equitable Life Assur. Soc., supra at 534 [insurer who drafts the insuring instrument in language it selects cannot thereafter complain that it does not express the intention of the parties].) Even if it is assumed, arguendo, that such an alternative meaning does not add to or contradict the plain meaning of the terms of the deductible provisions in the policy, but rather is a reasonable alternative, it would be an alternative meaning suggested by the insurer-draftsman of the form contract that is less favorable to the insured.

Again, to the extent that the third subpart of the “Allowable Amount” definition provides grounds for the much lower and unreasonable reimbursements via greatly reducing the “Allowable Amount” (and there does not appear to be any other ground for the much lower reimbursement), then the third subpart (or other relevant part of the contract) violates public policy, and must be voided or interpreted in a manner that provides reasonable reimbursements to participants.

Materiality of insurer misrepresentations to policyholder. Misrepresentations by the insurer to the policyholder are deemed material (hence, a defense to enforcement of the contract) “if they would have substantially influenced the selection process by person choosing the plan.” (Engalla v. Permanente Med. Group, Inc., supra, 15 C4th at 977-978, 64 CR2d at 860.)

CalPERS represented that it was offering PPO insurance, the EOC in fact represented that the “Allowable Amount” was the same for in plan as out of plan members, etc.

All of these representations are material.

Limits on amount of benefits. Health insurance policies often impose limits on the amount the insurer will pay for any single covered benefit.

When the exclusionary terms in the contract are clear, conspicuous, and unambiguous, then the contract can effect exclusions. To avoid any uncertainty as to what is “reasonable and necessary,” insurers may modify their policies to include clear and conspicuous exclusions for particular types of treatment or illnesses. (Example: “This insurance does not cover … any drug, treatment, procedure, or therapy not previously approved by the Federal Drug Administration.”) (See McLaughlin v. Connecticut Gen. Life Ins. Co., supra, 565 F.Supp. at 437.)

As some examples: (1) some health insurance policies contain schedules showing a fixed or maximum amount payable for each medical treatment, hospital service, etc. (2) Others obligate the insurer to pay all or a percentage of “reasonable and necessary” or “usual and customary” expenses (see below). (3) Still others express a formula for determining benefits. Such formulas are valid if reasonably clear. (See Van Ness v. Blue Cross of Calif. (2001) 87 CA4th 364, 375, 104 CR2d 511, 518, fn. 4—for services rendered by “non-network” medical provider, benefits limited to 70% of a “limited fee schedule” derived by multiplying the “relative value schedule” unit value for the service by the appropriate unit allowance for the particular service area; formula sufficiently clear.)

In this case, there were no clear, patent, or unambiguous exclusionary terms concerning the reduced “Allowable Amount.” At best, the terms were misrepresented and unclear.

Definitions Excluding Coverage and Exclusion Are Interpreted Against InsurerAs with other exclusions and limitations, definitions that create exclusions are strictly construed against the insurer and in favor of the insured. But if the exclusion is plain, clear and conspicuous, it will be given effect. (Mogil v. California Physicians Corp., supra, 218 CA3d at 1036.)

Insurance Contracts, Exclusions Must Be Clear

Finally, even if the terms are unambiguous, if the effect of the terms is to limit or exclude coverage, the terms are reviewed under a strict scrutiny standard and must be set forth clearly and conspicuously in the contract in order to be enforceable. (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 667; La Jolla Beach and Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 38; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 821-822; Civil Code §§163816391654; Ponder v. Blue Cross of Southern California (1983) 145 Cal.App.3d 709, 718.)

“Usual, customary and reasonable” UCR case law in Quantum Meruit Context. There are few California cases dealing with “usual, customary, and reasonable” rates outside the quantum meruit context.

In Children’s Hospital Central California v. Blue Cross of California (2014), the court referred to the Department of Managed Health Care (DMHC) that has set the standards for minimum reimbursement, including reasonable and customary value in section 1300.71(a)(3)(B). Children’s Hospital Central California v. Blue Cross of California (2014) 226 Cal.App.4th 1260, 1267–68.

In the quantum meruit case law, the doctors are suing the health insurer for providing (typically) emergency services as out-of-network providers. No contract exists between the doctors and the health plan. No contract terms apply.

Recently the Second District referred to Children’s Hospital but found that other data than historical records of medical services actually paid can be used to determine the usual, customary, and reasonable rate. See Goel v. Regal Medical Group, Inc. (Cal. Ct. App., May 23, 2017, No. B267012) 2017 WL 2242981, at *5.

The Second District ruled that the holding in Children’s Hospital did not limit the evidence relevant to the reasonable value of medical services to any single factor, but rather confirmed that, consistent with the law on quantum meruit, any evidence bearing upon the “reasonable market value” of such services is relevant. (Ibid.)

Generally, courts are likely to side with insureds as to what fees are “usual and customary” in order not to interfere with the insureds’ access to physicians of their choice. Nor are courts likely to sympathize with insurer objections to the amount of fees after an insured has already incurred the debt without notice from the insurance company as to what lesser amounts would be accepted as “usual, customary, and reasonable.”


[1] CalPERS and Anthem relied on Orthopedic Specialists in the administrative process. It is not on point and irrelevant. In Orthopedics Specialists, the out of network doctors directly sought UCR recovery from CalPERS. The doctors were not in privity of contract with CalPERS or Anthem. No fiduciary duties applied. The court ruled in contradictory dicta about the contract terms (which could not apply as it held that there was no contract) that “just because an NPP believes that the EOC’s provisions are unfair does not mean the provisions can be ignored or that they are unenforceable. The contract says what it says.” (Orthopedic Specialists, supra, at 648.)

[2] In addition, see Washington Physicians’ Service Assn. v. Gregoire, 147 F.3d 1039, 1045-1046 (9th Cir. 1998), cert. denied 525 U.S. 1141, 119 S.Ct. 1033 (1999), holding that health service plans are indistinguishable from insurance policies for purposes of ERISA preemption analysis under ERISA’s insurance savings clause applicable to the business of insurance. Likewise, California Civil Code §3428, in its legislative findings and declaration of intent, states that health care service plans are engaged in the business of insurance as that term is used under the McCarran-Ferguson Act even though California, for regulatory purposes, has chosen to regulate insurers and health care service plans under different regulatory agencies.

[3] If a plan term is capable of two constructions, both reasonable, it is ambiguous. (La Jolla Beach and Tennis Club, etc., supra at 38.) The general rule is that if coverage is available under any reasonable interpretation of an ambiguous clause of an insurance policy or plan, the insurer cannot escape its obligation to provide benefits. (20th Century Insurance Co. v. Liberty Mutual Ins. Co., 965 F.2d 747, 751 (9th Cir. 1992, citing with approval Ponder v. Blue Cross of Southern California, supra at 718 [a policy term that would operate as a limitation on, or exclusion of, a benefit is subject to strict scrutiny], and Employers’ Reinsurance Corp. v. Phoenix Insurance Co. (1986) 186 Cal.App.3d 545, 554; Chamberlin v. Smith (1977) 72 Cal.App.3d 835, 844-45.)

[4] Indeed, if it is allowed to remain part of the EOC without sufficient standards and benchmarks, the contract itself may be treated as void ab initio, for vagueness and lack of performance standards such that there is no authority for providing any reimbursement other than using the standards providing for adequate reimbursement such as UCR. See supra.