Filed 11/14/16




      IN THE SUPREME COURT OF CALIFORNIA


CENTINELA FREEMAN EMERGENCY )
MEDICAL ASSOCIATES et al.,                )
                                          )
              Plaintiffs and Appellants,  )
                                          )                       S218497
              v.                          )
                                          )                 Ct.App. 2/3 B238867
HEALTH NET OF CALIFORNIA,                 )
INC., et al.,                             )
                                          )                 Los Angeles County
              Defendants and Respondents. )               Super. Ct. No. BC449046
____________________________________)
CENTINELA RADIOLOGY                       )
MEDICAL GROUP,                            )
                                          )
              Plaintiff and Appellant,    )
                                          )
              v.                          )
                                          )
                                          )
HEALTH NET OF CALIFORNIA,                 )
INC., et al.,                             )
                                          )                 Los Angeles County
              Defendants and Respondents. )               Super. Ct. No. BC415203
____________________________________)


        Both state and federal law require any licensed hospital that has appropriate
facilities and qualified personnel to provide emergency medical services or care
regardless of a patient‟s ability to pay. (Health & Saf. Code, § 1317, subds. (a),




                                          1
(b);1 42 U.S.C. § 1395dd (b), (h).) If the patient is an enrollee in a health care
service plan,2 the plan is required by statute to reimburse the emergency service
provider for necessary emergency medical services and care. (§ 1371.4,
subd. (b).) Plans are permitted, however, to delegate this financial responsibility
to their contracting medical providers. (§ 1371.4, subd. (e), hereafter
section 1371.4(e).)
       In this case, each defendant health care service plan (hereafter Health Plan)
delegated its emergency services financial responsibility to its contracting medical
providers, three individual practice associations (IPAs).3 Allegedly, these three
IPAs failed to comply with multiple state financial solvency requirements
beginning in 2007, and continuing through each quarter for the following four
years, resulting in their failure to reimburse the plaintiff noncontracting service
providers for the emergency care that they provided to enrollees of defendant
Health Plans. The noncontracting emergency service providers allege that at the
time of delegation and throughout the duration of the delegation contracts between
the Health Plans and the IPAs, the Health Plans knew or should have known that
these IPAs were insolvent. The providers further claim that under the

1     All further statutory references are to the Health and Safety Code unless
otherwise indicated.
2      Health care service plans are defined in section 1345, subdivision (f). They
are commonly known as health maintenance organizations or HMOs. (Watanabe
v. California Physicians’ Service (2008) 169 Cal.App.4th 56, 59, fn. 3.)

3       “Section 1373, subdivision (h)(6), defines an individual practice association
by reference to title 42 United States Code section 300e-1(5), which provides as
relevant: „The term “individual practice association” means a . . . legal entity
which has entered into a services arrangement (or arrangements) with persons who
are licensed to practice medicine.‟ ” (Prospect Medical Group, Inc. v. Northridge
Emergency Medical Group (2009) 45 Cal.4th 497, 502, fn. 3 (Prospect Medical).)




                                           2
circumstances, the Health Plans lacked any reasonable expectation that the IPAs
would reimburse their emergency service claims. Rather than helping to resolve
the growing number of their unpaid claims, the noncontracting emergency service
providers allege, the Health Plans simply advised them to continue submitting
their claims to the insolvent IPAs. The IPAs eventually went out of business.
Plaintiff providers then brought actions seeking reimbursement from the Health
Plans.
         We granted review to consider whether a health care service plan‟s
delegation of its financial responsibility to an IPA or other contracting medical
provider group pursuant to section 1371.4(e) relieves it of any obligation to pay
providers‟ claims for covered emergency services and care or if, as plaintiffs
contend, a health care service plan has a common law tort duty to noncontracting
emergency service providers to act reasonably in making an initial delegation and
a continuing tort duty to protect such noncontracting providers from financial
harm resulting from any subsequent insolvency of its delegate.4 We conclude that
a health care service plan may be liable to noncontracting emergency service
providers for negligently delegating its financial responsibility to an IPA or other
contracting medical provider group that it knew or should have known would not
be able to pay for emergency service and care provided to the health plan‟s
enrollees. We further conclude that a health care service plan has a narrow


4       In addition to the briefs of the parties, we have received a number of amicus
curiae briefs. The California chapter of the American College of Emergency
Physicians and the California Medical Association have filed briefs in support of
plaintiffs. Counsel for the California Association of Health Plans and CAPG
(formerly known as the California Association of Physicians Groups) have filed
briefs in support of defendants. We requested and received an amicus curiae brief
from the California Department of Managed Health Care.




                                          3
continuing common law tort duty to protect noncontracting emergency service
providers once it makes an initial delegation of its financial responsibility.
Specifically, a health care service plan may be liable to noncontracting emergency
service providers for negligently continuing or renewing a delegation contract with
an IPA when it knows or should know that there can be no reasonable expectation
that its delegate will be able to reimburse noncontracting emergency service
providers for their covered claims.
       A brief summary of the factual and procedural background of this matter
and a general overview of the statutory and regulatory backdrop provides context
for the parties‟ contentions and our conclusions.
                  I. FACTUAL AND PROCEDURAL BACKGROUND
       The consolidated appeal in this matter involved two related actions. In the
Centinela Freeman action, four California partnerships of emergency room
physicians (hereafter Centinela Freeman), sued various health care service plans
and three IPAs (known collectively as La Vida) to which the plans delegated their
financial responsibilities to pay emergency service claims.5 In the Centinela

5       Plaintiffs in the Centinela Freeman action are Centinela Freeman
Emergency Medical Associates, Sherman Oaks Emergency Medical Associates,
Valley Presbyterian Emergency Medical Associates, and Westside Emergency
Medical Associates.
        Defendant Health Plans in the Centinela Freeman action are Health Net of
California, Inc., Blue Cross of California, PacifiCare of California, California
Physicians‟ Service, Cigna Healthcare of California, Inc., Care 1st Health Plan,
and Aetna Health of California, Inc.
        As the Court of Appeal recognized, “[t]he precise names of the three La
Vida entities are unclear. They were named as: (1) La Vida Medical Group &
IPA, doing business as La Vida Prairie Medical Group; (2) La Vida Multispecialty
Medical Centers, Inc.; and (3) Prairie Medical Group, Inc. However, when the
first La Vida entity answered the initial complaint, it indicated its actual name was
La Vida Medical Group, Inc.”




                                           4
Radiology action, Centinela Radiology Medical Group (hereafter Centinela
Radiology), a partnership of radiologists who provided emergency and
nonemergency radiology services to enrollees of various health care service plans,
filed a nearly identical complaint against the three La Vida IPAs and the same
plans sued in the Centinela Freeman action.6
       According to both complaints, none of the plaintiff medical groups
contracted with La Vida or any of the Health Plans for the provision of services,
but each had provided covered emergency services and care to the Health Plans‟
enrollees who were assigned to La Vida. Plaintiffs alleged that they sought
reimbursement for their services and care from La Vida because defendant Health
Plans had delegated their responsibility to pay covered claims to La Vida, but La
Vida either did not pay or did not fully pay their claims.
       As relevant here, both complaints set forth a negligence cause of action
alleging that the Health Plans are responsible for payment of plaintiffs‟ claims,
despite their delegation of financial responsibility to La Vida, because at the time
of the Health Plans‟ delegation to La Vida and throughout the duration of those


6      Centinela Radiology‟s complaint initially did not include California
Physicians‟ Service as a defendant. Although not entirely clear from the record, it
appears that California Physicians‟ Service may have been added by amendment,
as well as an additional health plan, SCAN Health Plan.
       Centinela Radiology‟s complaint sought reimbursement from the Health
Plans for services provided on both an emergency and nonemergency basis. On
appeal, however, the Court of Appeal observed that Centinela Radiology appeared
to focus solely on the emergency services provided by its members and the court
expressly limited its opinion to plaintiffs‟ negligence claims for a failure to pay for
compulsory services provided on an emergency basis. Likewise, our grant of
review, and therefore our conclusions, are limited to a health care service plan‟s
duty of care to noncontracting emergency service providers who provide, under
statutory compulsion, emergency care to the plans‟ enrollees.




                                          5
delegation contracts, the Health Plans “knew or should have known” of La Vida‟s
insolvency and yet the Health Plans negligently delegated and continued to
delegate their payment obligations to La Vida.7 According to the complaints, the
three La Vida IPAs failed to comply with multiple state financial solvency
requirements beginning in 2007, and continuing through each quarter for the next
four years, resulting in their failure to pay the plaintiff noncontracting service
providers for the emergency care that they provided to enrollees of defendant
Health Plans during this time. The complaints alleged that instead of “helping to
resolve” the increasing number of unpaid claims by emergency providers, the
Health Plans advised plaintiffs to continue submitting claims directly to La Vida
and continued their insufficient capitation payments8 to La Vida, despite the

7      The complaints also allege causes of action for quantum meruit, unfair
competition, open book account, and services rendered. Only plaintiffs‟
negligence cause of action is at issue before us. As noted, plaintiffs allege in their
negligence cause of action that the Health Plans knew or should have known “at
the time” of delegation and “throughout the duration” of the contracts of La Vida‟s
insolvency and inability to pay. The complaints do not clearly allege when La
Vida became insolvent and unable to pay emergency service claims, although it is
alleged that starting in 2007 La Vida failed to comply with multiple state financial
solvency requirements. The complaints do not clearly allege when the Health
Plans first entered into their delegation contracts with the three La Vida entities.
But from the quoted language, and contrary to the assertion of the Health Plans, it
appears plaintiffs have alleged a cause of action for negligence on both a theory of
negligent initial delegation and a theory of negligent continuation of delegation.
We consider both theories.
8      Capitation payments are made in connection with a risk-sharing
arrangement between a health plan and a contracting medical provider under
which the provider receives compensation on a “capitated basis.” “ „[C]apitated
basis‟ ” is defined by regulation to mean “fixed per member per month payment or
percentage of premium payment wherein the provider assumes the full risk for the
cost of contracted services without regard to the type, value or frequency of
services provided.” (Cal. Code Regs., tit. 28, § 1300.76, subd. (d).)




                                           6
absence of any reasonable expectation that La Vida would reimburse plaintiffs.
The Health Plans, it was alleged, knew La Vida was in financial trouble through
their receipt of financial reports and other information, including an advisement in
October 2009 that La Vida‟s lender had filed a petition for relief under the
bankruptcy laws and had withdrawn $4 million dollars from La Vida‟s account,
and that La Vida was unable to obtain funding from capital markets. The
complaints alleged that defendant Health Plans waited until May and June 2010,
years after La Vida began openly demonstrating financial instability, to finally
discontinue their capitation payments to La Vida and terminate their delegation
contracts. La Vida went out of business shortly thereafter.
       The Health Plans demurred to the complaints. They contended that once
they delegated to La Vida their statutory obligation to reimburse emergency care
providers for emergency services, as permitted by section 1371.4(e), plaintiffs had
no recourse against them for payments that La Vida was unable to make. As to
plaintiffs‟ negligence cause of action, the Health Plans argued that under the
seminal case of Biakanja v. Irving (1958) 49 Cal.2d 647 (Biakanja), they owed
third party plaintiffs no common law duty of care to protect their financial
interests.
       The trial court sustained defendants‟ demurrers without leave to amend and
entered judgment in favor of defendant Health Plans. Both Centinela Freeman and
Centinela Radiology appealed, and the cases were consolidated.
       The Court of Appeal concluded that plaintiffs had properly pleaded, or
could plead, a cause of action for negligent initial delegation and a cause of action
for negligent failure to reassume the delegated financial obligation, that is, a
violation of the Health Plans‟ continuing duty of care. Therefore, it reversed the
judgment. We granted defendant Health Plans‟ petition for review.



                                          7
                II. STATUTORY AND REGULATORY BACKGROUND
       Health care service plans are governed by the Knox-Keene Health Care
Service Plan Act of 1975 (the Knox-Keene Act or Act). (Health & Saf. Code,
§ 1340 et seq.) The Knox-Keene Act “is „a comprehensive system of licensing
and regulation‟ [citation], formerly under the jurisdiction of the Department of
Corporations (DOC) and presently within the jurisdiction of the Department of
Managed Health Care (DMHC) (§ 1341; Stats. 1999, ch. 525, § 1(a); Stats. 2000,
ch. 857, §§ 19, 100).” (California Medical Assn. v. Aetna U.S. Healthcare of
California, Inc. (2001) 94 Cal.App.4th 151, 155, fn. 3 (California Medical);
accord, Prospect Medical, supra, 45 Cal.4th at p. 504.)
       The intent and purpose of the Legislature in enacting the Knox-Keene Act
was “to promote the delivery and the quality of health and medical care to the
people of the State of California who enroll in, or subscribe for the services
rendered by, a health care service plan or specialized health care service plan.”
(§ 1342.) The Legislature sought to accomplish this purpose by, among other
things, (1) “transferring the financial risk of health care from patients to providers”
in order to “[h]elp . . . ensure the best possible health care for the public at the
lowest possible cost,” (2) imposing “proper regulatory procedures” in order to
“[e]nsur[e] the financial stability” of the system, and (3) establishing a system that
ensures health care service plan “subscribers and enrollees receive available and
accessible health and medical services rendered in a manner providing continuity
of care.” (Id., subds. (d), (f), & (g).)
       Section 1342.6 reiterates the Act‟s purpose of providing “high-quality
health care coverage in the most efficient and cost-effective manner possible,” and
finds that “it is in the public interest to promote various types of contracts between
public or private payers of health care coverage, and institutional or professional
providers of health care services.” Among the contracts the Act permits are

                                            8
“contracts that contain incentive plans that involve general payments, such as
capitation payments, or shared-risk arrangements.” (§ 1348.6, subd. (b).) The Act
expressly allows contracts in which health care service plans delegate to the plans‟
contracting medical providers the plans‟ financial responsibility to reimburse
emergency service providers‟ claims. (§ 1371.4(e).) Noncontracted emergency
service providers are entitled to reimbursement at the reasonable and customary
rate for the emergency services they perform. (Cal. Code Regs., tit. 28, § 1300.71,
subd. (a)(3)(B).)
       Allowing health care service plans to shift to their contracting medical
providers the financial risk associated with the provision of medical care carries
with it a risk that the providers will at some point become financially insolvent.
Over time the Legislature became concerned with the increasing number of
provider groups, including IPAs, that had assumed the financial risk for the
medical care of plan enrollees under capitation payment contracts with plans and
that had subsequently declared bankruptcy. (Department of Managed Health Care
(Winter 2001) vol. 17, No. 2, Cal. Reg. L.Rptr. 28, 29.) The bankruptcies left
“physicians unpaid for medical services already rendered and patients stranded
and forced to change physicians.” (Ibid.) The state had no basis to intervene
because, at that time, there were no statutory or regulatory provisions governing
the provider groups or their contracts with the plans. (Id. at p. 30.)
       In 1999, the Legislature addressed this fiscal solvency crisis through the
passage of Senate Bill No. 260. (Stats. 1999, ch. 529 (1999-2000 Reg. Sess.)
(Sen. Bill No. 260) § 1.) Senate Bill No. 260 created the Financial Solvency
Standards Board. (§ 1347.15, subd. (a), added by Stats. 1999, ch. 529, § 1,
pp. 3666-3667.) The purpose of the board is to (1) advise the director of the
DMHC “on matters of financial solvency affecting the delivery of health care
services[,]” (2) “[d]evelop and recommend . . . financial solvency requirements

                                          9
and standards relating to plan operations, plan-affiliate operations and
transactions, plan-provider contractual relationships, and provider-affiliate
operations and transactions[,]” and (3) “[p]eriodically monitor and report on the
implementation and results of the financial solvency requirements and standards.”
(§ 1347.15, subd. (b)(1)-(3).)
       Senate Bill No. 260 also added statutory provisions (§§ 1375.4, 1375.5,
1375.6) that regulate contracts between health care service plans and provider
groups, including IPAs, which are now collectively referred to as “risk-bearing
organizations” (RBOs). (§ 1375.4, subd. (g).) Notably, section 1375.4 specifies
contract provisions concerning the RBOs‟ administrative and financial capacity
that must be included in every risk arrangement contract between an RBO and a
health care service plan. (§ 1375.4, subd. (a).) Section 1375.5 provides that any
delegation of financial risk in a contract between a plan and an RBO must first be
negotiated and agreed to between them. Section 1375.4 requires the DMHC to
periodically evaluate contracts between plans and RBOs “to determine if any
audit, evaluation, or enforcement actions should be undertaken” by the DMHC.
(§ 1375.4, subd. (c).) In addition, the DMHC must adopt regulations that, at a
minimum, (1) create a process for reviewing or grading RBOs based on specific
criteria concerning their financial viability, (2) mandate disclosure of certain risk
assessment information to RBOs by health care service plans, (3) require reporting
to the DMHC by both the health care service plans and RBOs, (4) provide for
DMHC audits, and (5) institute a process for corrective action plans. (§ 1375.4,
subd. (b)(1)-(4).)
       The DMHC has adopted regulations complying with these directives.
(Cal. Code Regs., tit. 28, § 1300.75.4 et seq.; hereafter all cites to “Regulations”
are to tit. 28 Cal. Code Regs. Regulations § 1300.75.4 et seq. are commonly
known as the “Solvency Regulations.”) Through the method of requiring terms

                                          10
and provisions to be included in every contract involving a risk arrangement
between a health care service plan and an RBO, the Solvency Regulations require
plans to provide to their RBOs at specified frequencies detailed risk arrangement
disclosures, including (but not limited to) information about the group or
individual members delegated to the RBO, the type of risk arrangement, “a matrix
of responsibility for medical expenses,” “projected utilization rates” and “costs for
each major expense service group,” and “all factors used to adjust payments or
risk-sharing targets.” (Id., § 1300.75.4.1, subd. (a).) By the same method, the
Solvency Regulations require contracting RBOs to report to the DMHC, on a
quarterly and annual basis, information regarding the RBO‟s organization and
detailed statements of compliance, or lack thereof, with multiple fiscal solvency
requirements and grading criteria. (Id., § 1300.75.4.2; see also § 1375.4, subd.
(a)(1) [requiring RBOs to furnish financial information to the plans].) Health care
service plans must also provide quarterly and annual reports to the DMHC
concerning their contracted RBOs. (Solvency Regs., § 1300.75.4.3.) RBOs must
notify the DMHC and each of its contracting plans (and each plan must also
independently notify the DMHC) any time the RBO experiences “any event that
materially alters its financial situation or threatens its solvency.”
(Id., §§ 1300.75.4.2, subd. (f); -1300.75.4.3, subd. (e).)
       In addition to imposing these reporting requirements, the Solvency
Regulations provide that every contract involving a risk arrangement between a
health care service plan and an RBO must include a provision that requires the
RBO to permit the DMHC to examine its books and records and to comply with
the DMHC‟s review and audit process. (Solvency Regs., §§ 1300.75.4.2,
subd. (g), 1300.75.4.7, subd. (a)(1).) Each contract must permit the DMHC to
“[o]btain and evaluate supplemental financial information” from the RBO under
described circumstances where the RBO‟s financial situation may be impacting its

                                           11
performance. (Id., § 1300.75.4.7, subd. (a)(2).) And, every plan must have
adequate procedures in place to ensure that it undertakes appropriate review of its
RBOs‟ reported financial status and appropriate action in the event of any
notification by the DMHC of a deficiency by an RBO. (Id., § 1300.75.4.5,
subd. (a)(1)-(3).)
       A health care service plan is subject to disciplinary action for any failure to
comply with section 1375.4 and the Solvency Regulations. (Solvency Regs.,
§ 1300.75.4.5, subd. (d).) And the DMHC “may seek and employ any
combination of remedies and enforcement procedures provided under the Knox-
Keene Act to enforce” section 1375.4 and the Solvency Regulations.
(Id., § 1300.75.4.5 subd. (e).)
       One of the most important Solvency Regulations, for purposes of the issue
before us, is section 1300.75.4.8 governing corrective action plans (CAPs). A
CAP is designed to correct any financial solvency or claims payment deficiencies
experienced by an RBO. (§ 1375.4(b)(4); Solvency Regs., § 1300.75.4, subd. (g).)
RBOs that have such deficiencies must self-initiate a CAP proposal and submit it
to the DMHC and to every health care service plan with which it has a contractual
risk arrangement.9 (Id., § 1300.75.4.8, subd. (a).) The CAP must identify all of
the health care service plans with which the RBO has risk arrangement contracts,
state all of the RBO‟s deficiencies (including failure to meet DMHC grading
criteria regarding payment of claims), describe the actions the RBO has taken or
will take to correct them, include a timeframe for completing the corrective action,

9       In addition to self-initiated CAPs, the DMHC “may direct [an RBO] to
initiate a CAP whenever [it] determines that [the RBO] has experienced an event
that materially alters its ability to remain compliant with the Grading Criteria.”
(Solvency Regs., § 1300.75.4.8, subd. (k).)




                                          12
and specify a schedule for submitting progress reports to the DMHC and its
contracting health plans. (Ibid.; see id., § 1300.75.4.2, subd. (b)(1)(B), (2)(A).)
       Health care service plans have a limited period of time to object and
propose revisions to the RBO‟s CAP. (Solvency Regs., § 1300.75.4.8, subd. (c).)
If objections are filed, the RBO may submit a revised CAP, to which the health
care service plan may again object and propose revisions. (Id., § 1300.75.4.8
subds. (d), (e).) Differences are to be discussed and reconciled, if possible, at a
settlement conference held by the DMHC. (Id., § 1300.75.4.8 subd. (f).)
       The DMHC approves, disapproves, or modifies the CAP, which then
becomes the final CAP. (Solvency Regs., § 1300.75.4.8, subds. (g), (h), (i); see
§ 1375.4, subd. (b)(4) [in the event the RBO and health care service plans fail to
agree on the terms of the CAP, the DMHC shall determine them].) Health care
service plans must “cooperate [i]n the implementation of a final CAP.” (Solvency
Regs., § 1300.75.4.5, subd. (a)(4).) Plans must advise the DMHC if they become
aware of its RBO‟s failure to comply with the final CAP. (Id., § 1300.75.4.5,
subd. (a)(5).) A plan‟s ability to transfer plan enrollees from an RBO that is
compliant with a final CAP is restricted. (Id., § 1300.75.4.5 subd. (a)(6).)
       In addition to addressing the RBO fiscal solvency crisis by these measures,
the Legislature, in 2000, added a requirement that health care service plans
provide a “fast, fair, and cost-effective” provider claims dispute resolution
mechanism and to make such mechanism “accessible to noncontracting providers
for the purpose of resolving billing and claim disputes.” (§ 1367, subd. (h), as
amended by Stats. 2000, ch. 825 (1999-2000 Reg. Sess.) § 2, p. 5712.)
       The Solvency Regulations, however, do not prevent a health care service
plan from taking action to terminate its risk arrangement contract with an RBO
that is fiscally unsound prior to the approval of a final CAP. The Solvency
Regulations specifically require that every contract involving a risk arrangement

                                          13
between a plan and an RBO must provide that the RBO‟s “failure to substantially
comply with the contractual” provisions required by the Solvency Regulations
“shall constitute a material breach of the risk arrangement contract.” (Solvency
Regs., § 1300.75.4.5, subd. (b).) Thus, for example, a plan that determines the
financial difficulties encountered by its RBO are of such a magnitude that
restoration of its financial solvency cannot reasonably be anticipated through the
adoption of a final CAP has the option of refusing to engage in the CAP approval
process, terminating its contract with the RBO, and either delegating its financial
responsibility to a different RBO or reassuming the obligation to pay emergency
service providers for necessary emergency medical services and care.
       This statutory and regulatory landscape nevertheless failed to eliminate
concern about the payment of provider claims, especially payment of the claims of
emergency service providers. In 2001, the Legislature attempted to address this
issue by amending section 1371.4 to require health care service plans to pay
emergency service providers on a fee-for-service basis if their delegated RBO
failed to pay. (Sen. Bill No. 117 (2001-2002 Reg. Sess.) § 2, subd. (f) (Senate Bill
No. 117).) The Governor, however, vetoed Senate Bill No. 117. After noting the
already existing financial solvency and accountability laws, he stated in part:
“SB117 would adversely affect HMO patient care by injecting the government
into allowing or prohibiting delegated risk arrangements between HMOs and
physician groups based upon the type of service. This bill would also likely result
in increased premiums by removing the financial incentives currently in place to
reduce unnecessary emergency room utilization and a disincentive to provide
preventive and non-emergency urgent care.” (Governor‟s veto message to Sen. on
Sen. Bill No. 117 (Oct. 10, 2001), Sen. J. (2001-2002 Reg. Sess.) p. 3083.)
       In summary, the Knox-Keene Act contemplates and encourages the
delegation by health care service plans to their RBOs of the plans‟ responsibility

                                         14
to pay emergency service providers‟ claims as part of a managed health care
model. A complex statutory and regulatory system has been put in place to set
financial solvency standards for RBOs, require reporting of financial and risk
assessment information between plans and RBOs and to the DMHC, monitor
compliance of RBOs with the solvency standards, and correct deficiencies by
RBOs in meeting their obligations, primarily through the CAP process. Plans play
a critical role in this scheme. Noncontracting emergency service providers,
however, have virtually no role. They must, nevertheless, continue to provide
emergency services under compulsion of federal and state law. (§ 1317,
subds. (a), (b); 42 U.S.C. § 13955dd. (a), (h).)
       III. PLAINTIFFS’ ASSERTED CAUSE OF ACTION FOR NEGLIGENCE

       A. Standard of Review
       The rules by which the sufficiency of a complaint is tested against a general
demurrer are well settled. “ „ “We treat the demurrer as admitting all material
facts properly pleaded, but not contentions, deductions or conclusions of fact or
law. [Citation.] We also consider matters which may be judicially noticed.”
[Citation.] Further, we give the complaint a reasonable interpretation, reading it as
a whole and its parts in their context. [Citation.] When a demurrer is sustained,
we determine whether the complaint states facts sufficient to constitute a cause of
action. [Citation.] And when it is sustained without leave to amend, we decide
whether there is a reasonable possibility that the defect can be cured by
amendment . . . .‟ ” (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126,
quoting Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “ „The burden of proving
such reasonable possibility is squarely on the plaintiff.‟ ” (Ibid.) Our examination
of the complaint is de novo. (McCall v. PacifiCare of Cal. Inc. (2001) 25 Cal.4th
412, 415.)



                                          15
       B. A Cause of Action Arising from the Statutory and Regulatory
          Provisions
       Plaintiffs concede that they have no “per se cause of action” against the
Health Plans under the Knox-Keene Act because the Act permits health care
service plans to delegate to IPAs and other RBOs their financial responsibility to
pay emergency service providers. (§ 1371.4(e).) As explained by Ochs v.
PacifiCare of California (2004) 115 Cal.App.4th 782 (Ochs) and California
Emergency Physicians Medical Group v. PacifiCare of California (2003) 111
Cal.App.4th 1127 (California Emergency Physicians), the statutory language
permitting “ „delegation‟ ” indicates that the obligation is not a “nondelegable”
duty for which the plans must retain ultimate responsibility. (Ochs, supra, at
pp. 789-790; California Emergency Physicians, supra, at pp. 1131-1132.) The
legislative history of section 1371.4(e) also reflects the intent to absolve health
care service plans of any statutory liability to pay in the event the delegated IPA or
other RBO becomes insolvent. (Ochs, supra, at pp. 790-792; California
Emergency Physicians, supra, at pp. 1132-1133.) Indeed, the legislative
understanding that a residual duty to pay is not included in the existing provisions
of the Knox-Keene Act is demonstrated by the Legislature‟s approval and the
Governor‟s veto of Senate Bill No. 117 in 2001, which, as we have noted earlier,
would have added a specific requirement that plans pay emergency service
providers if their contracted IPAs did not. (Ochs, supra, at pp. 791-792;
California Emergency Physicians, supra, at p. 1132.) Finally, legislative intent
against imposing statutory liability can be discerned in the contrast of section
1371.4(e), which allows the transfer of the financial risk of emergency care to
IPAs or other RBOs, with other statutory provisions in which the Legislature has
expressly precluded plans from transferring to RBOs the financial risk of certain
other treatments and medical services. (§ 1375.8, subd. (b)(2)(A)-(F).) Under the



                                          16
Knox-Keene Act, health care service plans are not statutory guarantors of their
contracted IPAs‟ financial obligations (see California Medical, supra, 94
Cal.App.4th at pp. 160-167) and no duty of care arises from its provisions.
       Plaintiffs argue, however, that a health care service plan has a duty under
section 1300.71, subdivision (e)(6) of the DMHC‟s regulations to reassume
payment obligations when its delegate fails to pay a provider‟s claims. (Regs.,
§ 1300.71, subd. (e)(6), hereafter Regulations section 1300.71(e)(6).)
       Regulations section 1300.71(e) concerns claims settlement practices that
expressly permits health care service plans to “contract with a claims processing
organization for ministerial claims processing services or contract with capitated
providers that pay claims” subject to certain described conditions. (Regs.,
§ 1300.71, subd. (e).) Among the specified conditions is a requirement that the
claims processing contract “include provisions authorizing the plan to assume
responsibility for the processing and timely reimbursement of provider claims in
the event that the claims processing organization or the capitated provider fails to
timely and accurately reimburse its claims.” (Id., § 1300.71 (e)(6), italics added.)
But plaintiffs point to later language in the same subdivision that states “[t]he
plan‟s obligation to assume responsibility for the processing and timely
reimbursement of a capitated provider‟s provider claims may be altered” by an
approved CAP. (Ibid., italics added.) From the regulation‟s use of the term
“obligation” in this latter provision, plaintiffs would have us conclude that the
DMHC intends health plans to pay them if the health plans‟ contracted IPA or
other RBO does not.
       Plaintiffs read subdivision (e)(6) of Regulations section 1300.71 in
isolation. But regulations, like statutes, must be read as a whole and construed in
context, keeping the regulatory purpose in mind. (Dyna-Med, Inc. v. Fair
Employment & Housing Com. (1987) 43 Cal.3d 1379, 1387 [stating the rule of

                                          17
construction for statutes]; Cal Drive-In Restaurant Assn. v. Clark (1943) 22 Cal.2d
287, 292 [noting that the same rules of construction and interpretation apply to
regulations of administrative agencies]; Diablo Valley College Faculty Senate v.
Contra Costa Community College Dist. (2007) 148 Cal.App.4th 1023, 1037
[same].) When we read Regulations section 1300.71 as a whole, we are not
persuaded that Regulations section 1300.71 (e)(6) addresses a health care service
plan‟s duty in the event of the insolvency of its delegated IPA or other RBO.
Rather, Regulations section 1300.71 is directed at the process for and timing of
submission and settlement of providers‟ claims. (E.g., Regs., § 1300.71, subd. (b)
[Claim Filing Deadline]; id., subd. (c) [Acknowledgement of Claims]; id.,
subd. (d) [Denying, Adjusting or Contesting a Claim and Reimbursement for the
Overpayment of Claims]; id., subd. (g) [Time for Reimbursement]; id., subd. (h)
[Time for Contesting or Denying Claims]; id., subds. (i) & (j) [interest and
penalties for late payment of claims].) The apparent purpose of Regulations
section 1300.71(e)(6) is the further promotion of accurate and timely claims
processing and settlement, and nothing suggests that the DMHC intended to
address by this provision, buried in a regulation concerning claims processing, the
broader question of a health plan‟s ultimate responsibility to pay in the event of its
delegate‟s financial insolvency.
       Moreover, even if the regulation could be construed otherwise, “[a]n
administrative agency cannot by its own regulations create a remedy which the
Legislature has withheld. [Citations.]” (Dyna-Med, Inc. v. Fair Employment &
Housing Com., supra, 43 Cal.3d at p. 1389; see Desert Healthcare Dist. v.
PacifiCare FHP, Inc. (2001) 94 Cal.App.4th 781, 793 (Desert Healthcare) [A
negligence duty of care cannot be created through administrative regulations]; Cal.
Service Station etc. Assn. v. American Home Assurance Co. (1998) 62 Cal.App.4th
116, 1175-1176 [same].) A statutory remedy for unpaid emergency service

                                          18
providers has been withheld by the Governor‟s veto of Senate Bill No. 117 in
2001.

        C. A Cause Of Action For Negligent Initial Delegation
        The Centinela Freeman and Centinela Radiology complaints allege,
however, that the Health Plans are liable under common law tort principles of
negligence because at the time of their initial delegation of their financial
responsibility to pay emergency service claims to La Vida they knew or should
have known that La Vida was insolvent and unable to pay those claims.
        “The threshold element of a cause of action for negligence is the existence
of a duty to use due care toward an interest of another that enjoys legal protection
against unintentional invasion. [Citations.] Whether this essential prerequisite to
a negligence cause of action has been satisfied in a particular case is a question of
law to be resolved by the court.” (Bily v. Arthur Young & Co. (1992) 3 Cal.4th
370, 397 (Bily); accord, Beacon Residential Community Assn. v. Skidmore,
Owings & Merrill LLP (2014) 59 Cal.4th 568, 573 (Beacon Residential).)
        The Health Plans rely in part on the statutory and regulatory scheme in
arguing that the alleged common law duty does not exist. First, they assert that the
provisions of the Knox-Keene Act, with its implementing regulations, which
recognize and permit negotiated risk-shifting contracts between health care service
plans and IPAs and other RBOs under specified contract terms and conditions,
necessarily preclude the recognition of a common law duty. (E.g., §§ 1348.6,
subd. (b), 1375.4, 1375.5, 1375.6; Solvency Regs., §§ 1300.75.4.1, 1300.75.4.2,
1300.75.4.5, 1300.75.4.7, 1300.75.4.8.) Although the Act and the regulations
contain detailed provisions governing the relationship of plans and IPAs under
such contracts, neither the Act nor the regulations speak to a health care service
plan‟s responsibility, if any, to noncontracting emergency service providers in



                                          19
entering into a relationship with an IPA or other RBO wherein the plan makes a
delegation of its financial responsibility to pay for emergency services pursuant to
section 1371.4(e).
       Second, the Health Plans point to section 1371.25, which precludes
vicarious liability by providing, in relevant part, that “[a] plan, any entity
contracting with a plan, and providers are each responsible for their own acts or
omissions, and are not liable for the acts or omissions of, or the costs of defending,
others.” However, section 1371.25 further provides that “[n]othing in this section
shall preclude a finding of liability on the part of a plan, any entity contracting
with a plan, or a provider, based on the doctrines of equitable indemnity,
comparative negligence, contribution, or other statutory or common law bases for
liability.” Thus, if a health care service plan owes a duty of care to noncontracting
emergency service providers under the common law in initially contracting with
an IPA or other RBO, section 1371.25 does not preclude a finding of negligence
liability on the part of the plan for its own conduct in breaching its duty and
proximately causing injury. We turn to the question of whether health care service
plans owe such a duty of care.
       Because the statutory and regulatory scheme does not preclude the
existence of a duty, we consider whether general tort principles lead to a duty in
these circumstances. Although “[r]ecognition of a duty to manage business affairs
so as to prevent purely economic loss to third parties in their financial transactions
is the exception, not the rule, in negligence law[,] [p]rivity of contract is no longer
necessary to recognition of a duty in the business context and public policy may
dictate the existence of a duty to third parties.” (Quelimane Co. v. Stewart Title
Guaranty Co. (1998) 19 Cal.4th 26, 58 (Quelimane).) The test for determining the
existence of such an exceptional duty to third parties is set forth in the seminal
case of Biakanja, supra, 49 Cal.2d at page 650, as follows: “The determination

                                          20
whether in a specific case the defendant will be held liable to a third person not in
privity is a matter of policy and involves the balancing of various factors, among
which are [1] the extent to which the transaction was intended to affect the
plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the
plaintiff suffered injury, [4] the closeness of the connection between the
defendant‟s conduct and the injury suffered, [5] the moral blame attached to the
defendant‟s conduct, and [6] the policy of preventing future harm.”
       The first Biakanja factor focuses on “the extent to which the transaction
was intended to affect the plaintiff.” (Biakanja, supra, 49 Cal.2d at p. 650.) We
have stated that liability for negligent conduct may be imposed “where there is a
duty of care owed by the defendant to the plaintiff or to a class of which the
plaintiff is a member.” (J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 803, italics
added; see Beacon Residential, supra, 59 Cal.4th at p. 586.)10 Here, plaintiff

10      Two previous cases have rejected negligence claims asserted by emergency
service providers against health care service plans on the basis of the inability of
the emergency service providers to satisfy this first factor, but those cases failed to
recognize that the duty of care may be owed to a class of which the plaintiff is a
member. Desert Healthcare, supra, 94 Cal.App.4th at page 792, reasoned that
“[t]he conduct alleged to have been negligent must have been intended to affect
that particular plaintiff, rather than just a class of persons to whom the plaintiff
happens to belong.” And, “[t]he failure to show a particularized effect precludes a
finding of a special relationship giving rise to a duty, because, to the extent the
plaintiff was merely affected in the same way as other members of the plaintiff
class, the case is nothing more than a traditional products liability or negligence
case in which economic damages are not available.” (Ibid.) The reviewing court
in California Emergency Physicians agreed. (California Emergency Physicians,
supra, 111 Cal.App.4th at pp. 1135-1136.) However, as the court in Ochs
recognized, the rule is not so restrictive. (Ochs, supra, 115 Cal.App.4th at
pp. 797-798.) Desert Healthcare Dist. v. PacifiCare FHP, Inc., supra,
94 Cal.App.4th 781and California Emergency Physician Medical Group v.
PacifiCare of California, supra, 111 Cal.App.4th 1127, are disapproved to the
extent they are inconsistent with this opinion.




                                          21
noncontracting emergency service providers are a specific and well-defined class,
which was reasonably identifiable by their practice specialization, hospital
affiliation, and geographic location at the time that the Health Plans negotiated and
included a delegation term in their contracts with La Vida. Although the contracts
between the Health Plans and La Vida may have broadly covered all health care
services rendered for the Health Plans‟ enrollees, the specific contractual
delegation of the Health Plans‟ statutory obligation to reimburse emergency
service providers for their emergency services and care (§ 1371.4, subds. (b), (e))
was necessarily intended to have an effect on plaintiffs. Before the delegation,
plaintiffs could seek reimbursement directly from the Health Plans for their
compulsorily provided emergency services. As a direct result of the delegation
contracts, however, plaintiffs were forced to submit their claims to La Vida, who
was responsible for reimbursing, contesting, or denying the claims in a timely
fashion. If La Vida failed in its processing or payment responsibilities, plaintiffs‟
statutory recourse was limited to action against La Vida.
       These circumstances distinguish these actions from the two cases on which
the Health Plans place heavy reliance in arguing that this first Biakanja factor is
not met. In Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co.
(2002) 27 Cal.4th 705, we concluded that an escrow company did not owe a duty
of care to the plaintiff assignee of a promissory note that was to be paid as part of
a refinance transaction. (Id. at pp. 707-708, 715.) In considering the first factor
identified in Biakanja, we found the escrow transaction “ „was not intended to
affect or benefit‟ ” the plaintiff and “ „any impact that [the] transaction may have
had on [the plaintiff] was collateral to the primary purpose of the escrow.‟ ”
(Summit Financial, at p. 715.) In Goodman v. Kennedy (1976) 18 Cal.3d 335, we
concluded that an attorney for officers of a corporation did not owe a duty of care
to the plaintiff purchasers of stock from the corporate officers. (Id. at pp. 339,

                                          22
344.) We found “[a]ny buyers‟ „potential advantage‟ from the possible purchase
of the stock „was only a collateral consideration‟ ” to the attorney‟s advice to the
corporate officers regarding their sale of stock. (Id. at p. 344.) In contrast, the
Health Plans‟ delegation to La Vida under section 1371.4(e) was specifically
intended to change who was responsible to reimburse plaintiffs for their covered
services. The impact on plaintiffs cannot be characterized as “collateral” to the
delegation.
       The second Biakanja factor considers the foreseeability of harm to the
plaintiffs. (Biakanja, supra, 49 Cal.2d at p. 650.) Assuming as true for purposes
of demurrer plaintiffs‟ allegations that the Health Plans knew or should have
known at the time of entering into the contracts with La Vida that La Vida was
insolvent, it is not difficult to conclude that the Health Plans could have
reasonably anticipated that La Vida would be unable to pay noncontracting
emergency service providers‟ claims for services and care provided to their
enrollees. It was readily foreseeable that shifting the risk of processing and paying
any subsequently incurred emergency service claims to La Vida under such
circumstances was likely to result in harm to plaintiffs.
       There is no real dispute that plaintiffs have suffered actual injury and thus,
meet the third Biakanja factor. (Biakanja, supra, 49 Cal.2d at p. 650.) Plaintiffs
allege that they submitted their claims to La Vida and La Vida either did not pay
or did not fully pay their claims and now has gone out of business.
       The fourth factor is “the closeness of the connection between the
defendant[s‟] conduct and the injury suffered.” (Biakanja, supra, 49 Cal.2d at
p. 650.) Here, it is clear that La Vida‟s financial difficulties and insolvency must
be considered the immediate and direct cause of plaintiff‟s economic injury.
However, it was the Health Plans‟ delegation to La Vida of their statutory
obligation to reimburse emergency providers that brought noncontracting

                                          23
emergency service providers, such as plaintiffs, into a position of risk from La
Vida‟s insolvency. Without such a delegation by the Health Plans, La Vida‟s
financial instability and insolvency would have had no impact on plaintiffs.
Therefore, if, as plaintiffs allege, the Health Plans knew or should have known at
the time of entering into the delegation contracts with La Vida that La Vida would
be unable to pay plaintiffs‟ claims, the fact that the Health Plans nevertheless
transferred to La Vida the responsibility to process and reimburse plaintiffs‟
claims is closely connected to plaintiffs‟ losses. These circumstances distinguish
these actions from Quelimane, supra, 19 Cal.4th 26, on which the Health Plans
rely. (Id. at p. 58 [the relationship between a title insurance company‟s refusal to
issue title insurance on tax-defaulted properties and purchasers‟ lost profit was
“tenuous at best”].)
       The fifth Biakanja factor is “the moral blame attach[ing] to . . .
defendant[s‟] conduct.” (Biakanja, supra, 49 Cal.2d at p. 650.) It bears repeating
that plaintiffs are noncontracting emergency service providers. As the Court of
Appeal described the situation: “[Plaintiffs] are required by law to provide
emergency services to all patients in need, regardless of ability to pay. Emergency
physicians cannot pick and choose their patients, but must simply treat all
emergency patients. The law then imposes a duty on the [health care service
plans] — those entities which had contracted with the patients and agreed, for
receipt of a premium, to provide them with basic medical care, including
emergency services — to reimburse the emergency physicians for the emergency
services provided to their enrollees. In other words, the [plans] had contracted
with the patients to provide them, for a price, with health care services, including
emergency services, with the understanding that those services may be provided
by physicians whom the [plans] would be required to reimburse even though there
was no contractual relationship between the [plans] and the emergency physicians

                                         24
involved. [¶] There is no bar to a plan transferring a portion of its received
premiums for an enrollee to an IPA in the form of capitation payments, and
transferring responsibility for that enrollee‟s medical care to the IPA. But when
the plan, as was alleged in this case, transfers its obligations to an IPA it knows, or
[should] know, will be financially unable to fulfill its obligations, the result is that
the emergency physicians will be forced (by statute) to continue providing
emergency services to the IPA‟s enrollees, with no possibility of receiving their
(statutorily mandated) reimbursement.” We believe it is unfair and morally
blameworthy for a health plan to take advantage of the statutory compulsion
requiring noncontracting emergency service providers to continue providing their
services in such a way. Because the emergency care providers rely exclusively on
health care service plans to arrange payment for services received by their
enrollees, plans that transfer those responsibilities onto an IPA they know or
should know will not make those payments have not only shirked their statutory
obligations, but have essentially withheld from emergency care providers the fair
compensation to which they are entitled. Forcing others to provide professional
services for the benefit of one‟s own customers, without any reasonable prospect
of payment, is morally blameworthy.
       We further conclude that imposing a duty on health care service plans to act
reasonably, by choosing a financially solvent IPA or other RBO if they opt to
delegate their reimbursement obligation, will protect noncontracting emergency
service providers from future economic harm that such providers would otherwise
not be able to avoid. Thus, the sixth Biakanja factor, which considers the policy
of preventing future harm, also supports the imposition of such a duty.
       In addition to arguing for an analysis of the Biakanja factors different from
what we have expressed, defendants rely on Bily, supra, 3 Cal.4th 370, to argue
that they owe no duty of care to plaintiffs. In Bily, we acknowledged the Biakanja

                                           25
checklist of factors, but nevertheless declined to impose a duty running from the
auditor of a public company to nonclient investors in the company. (Bily, supra,
at pp. 397-398, 406.) We identified “three central concerns” with allowing “all
merely foreseeable third party users of audit reports to sue the auditor on a theory
of professional negligence.” (Id. at p. 398.) First, we were concerned that the
auditor could face vast numbers of suits and limitless financial liability far out of
proportion to its fault and the connection between the auditor‟s conduct and the
third party‟s injury. (Id. at pp. 399-402.) Second, we found that the class of
plaintiffs was generally more sophisticated business lenders and investors, who
could control and adjust their risks by contract rather than rely on tort liability.
(Id. at pp. 402-403.) Third, we recognized that potential liability to third parties
would more likely result in “an increase in the cost and decrease in the availability
of audits and audit reports with no compensating improvement in overall audit
quality.” (Id. at pp. 404-405.) We are not persuaded that consideration of these
factors requires the rejection of a duty of care on the part of a health care service
plan making an initial delegation of financial risk.
       First, we recognize that imposition of a duty on health care service plans to
act reasonably in making an initial delegation of the responsibility to reimburse
noncontracting emergency service providers for their compulsory services may, if
violated, result in a number of suits by such providers for an undetermined amount
in claims. But such providers are a limited and identifiable class of potential
plaintiffs, whose services can be anticipated and likely statistically estimated.
Moreover, even if such estimation is not always possible, it can hardly be said that
imposition of a duty of care will likely result in a vast number of suits and
limitless financial liability on the part of the plans that will be disproportionate to
their fault. That is, unlike the secondary role played by the auditor in Bily, there is
a “ „close connection‟ ” to the economic injury suffered by noncontracting

                                           26
emergency service providers if a plan brings them into a relationship with an
insolvent IPA or other RBO through its unreasonable delegation of its statutory
financial responsibilities. (Bily, supra, 3 Cal.4th at p. 401; see Beacon Residential,
supra, 59 Cal.4th at pp. 581-583.) There is in effect a lineal connection between
such alleged unreasonable conduct by a plan and the providers‟ injury.
       Nor can the class of noncontracting emergency service providers, unlike the
more sophisticated business lenders and investors class of plaintiffs in Bily, control
and adjust their risks by contract rather than rely on tort liability. (Bily, supra, 3
Cal.4th at pp. 402-403; see Beacon Residential, supra, 59 Cal.4th at pp. 584-585.)
The law requires emergency medical services or care to be provided at any
licensed hospital that has appropriate facilities and qualified personnel regardless
of a patient‟s ability to pay. (§ 1317, subds. (a), (b); 42 U.S.C. § 1395dd (b), (h).)
Indeed, emergency service and care must be provided without even first
questioning the patient as to insurance or ability to pay. (§ 1317, subd. (d); 42
U.S.C. § 1395dd (h); see Bell v. Blue Cross of California (2005) 131 Cal.App.4th
211, 215.) And, if it turns out that the patient is enrolled in a health care service
plan and the noncontracting emergency service providers are not paid by the
plan‟s delegated IPA or other RBO because of the delegate‟s insolvency, it is
questionable whether the providers can seek reimbursement from the patient. (See
Prospect Medical, supra, 45 Cal.4th at pp. 502, 507 & fn. 5.) Thus,
noncontracting emergency services providers must provide necessary services, but
are generally at the mercy of a plan‟s delegation to an IPA or other RBO of the
responsibility for their reimbursement.
       Third, in Bily, we recognized that imposition of a duty of care to third
parties, with its attendant potential for liability, would more likely result in “an
increase in the cost and decrease in the availability of audits and audit reports with
no compensating improvement in overall audit quality.” (Bily, supra, 3 Cal.4th at

                                           27
pp. 404-405.) In contrast here, nothing suggests that health care service plans will
be prevented or deterred from entering into delegation contracts if they are
required to act reasonably in so doing. Imposing a duty on plans to act reasonably
in choosing an IPA or other RBO will promote a healthy functioning of the
managed health care model endorsed by the Knox-Keene Act. Indeed, a
requirement that health care service plans reasonably select financially solvent
delegates will more likely result in timely processing and ultimate payment of
covered emergency service claims, which will in turn support the continuing
availability and provision of such emergency services.
       For the reasons given above, we conclude that health care service plans owe
a duty of care to noncontracting emergency service providers in entering into their
initial delegation contracts with IPAs or other RBOs and that the allegations of the
Centinela Freeman and Centinela Radiology complaints are sufficient to state a
cause of action for negligent initial delegation by the Health Plans.

       D. A Cause of Action for Negligent Failure to Reassume the Delegated
          Responsibility
       The Court of Appeal found that the factors that compel a finding of a
common law duty of care on the part of a health care service plan in initially
delegating its payment responsibility to an IPA under section 1371.4(e) also
mandate a conclusion that the duty is a continuing one. Thus, it concluded, a plan
has a duty to promptly reassume its delegated obligation to pay noncontracting
emergency service providers when it knows or should know that its delegated IPA
has become financially unable to meet its delegated responsibility.
       We agree that a health care service plan has a continuing duty of care to
noncontracting emergency service providers, but we conclude the breadth of such
duty is affected by the statutory goal of avoiding disruption of patients‟ medical
care. We hold that a health care service plan‟s duty to reassume the financial


                                         28
responsibility it has delegated to a contracting medical provider group is triggered
by the plan‟s receipt of information through which the plan becomes aware or
should become aware that there can be no reasonable expectation that its delegate
will be able to reimburse covered claims from noncontracting emergency service
providers. That is, a health care service plan that initially responsibly delegates
financial responsibility to an IPA or other RBO may reasonably expect that any
financial difficulties subsequently experienced by its delegate can be adequately
addressed through the CAP process and an approved final CAP. In such situation,
a plan normally does not act negligently when it properly engages in and
cooperates with the DMHC in such process. Doing so is required by section
1300.75.4.8 of the Solvency Regulations and affirmatively supports continuity of
care by delegated medical provider groups to their patients, the plan‟s enrollees,
one of the express goals of the Knox-Keene Act. (§ 1342, subd. (g).) Indeed, the
Act, as implemented by the Solvency Regulations, specifically contemplates and
favors rehabilitation of financially struggling RBOs in support of such purpose.
(§ 1375.4(b)(4); Solvency Regs., § 1300.75.4.8.) However, a plan at all times
retains a continuing duty to monitor and assess whether such an expectation is in
fact reasonable under the particular circumstances presented and to timely take
available, appropriate action to protect noncontracting emergency service
providers when it knows or should know that there can be no reasonable
expectation that its delegated IPA or other RBO will be able to reimburse their
covered claims for emergency services.
       We briefly discuss how the Biakanja factors support imposing this
continuing common law duty of care.
       As noted earlier, the first Biakanja factor considers whether “the transaction
was intended to affect the plaintiff.” (Biakanja, supra, 49 Cal.2d at p. 650.) We
agree with the Court of Appeal that after the initial delegation, health care service

                                          29
plans necessarily intend to affect the potential plaintiff class of noncontracting
emergency service providers by continuing or renewing their delegation to an IPA
or other RBO of their responsibility to pay emergency service providers under
section 1371.4(e).
       The second Biakanja factor focuses on the foreseeability of harm to
noncontracting emergency services providers. Plaintiffs allege that the Health
Plans knew or should have known that the three La Vida IPAs failed to comply
with multiple state financial solvency requirements beginning in 2007, and
continuing through each quarter for the following four years, resulting in their
failure to reimburse the plaintiff noncontracting service providers for the
emergency care that they provided to enrollees of defendant Health Plans during
that time. They allege that the Health Plans were advised in October 2009 that La
Vida‟s lender sought protection under the bankruptcy laws and withdrew $4
million dollars from La Vida‟s account, and that La Vida was unable to obtain
funding from capital markets. The complaints allege that under the circumstances
the Health Plans lacked any reasonable expectation that La Vida would reimburse
plaintiffs, but nevertheless the plans waited until May and June 2010, years after
La Vida began openly demonstrating financial instability, to finally discontinue
their capitation payments to La Vida and terminate their delegation contracts.
Assuming the truth of these allegations for purposes of demurrer, plaintiffs‟
financial harm was foreseeable.
       And again, there is no dispute that plaintiffs have suffered actual injury,
meeting the third Biakanja factor. (Biakanja, supra, 49 Cal.2d at p. 650.)
       The fourth factor is “the closeness of the connection between defendants‟
conduct and the injury suffered.” (Biakanja, supra, 49 Cal.2d at p. 650.) In
considering this factor, we note that, as we have earlier explained, the Legislature
has provided, through the Knox-Keene Act, comprehensive regulation of the

                                          30
managed health care system under the jurisdiction of the DMHC. (Prospect
Medical, supra, 45 Cal.4th at p. 504.) It has approved various risk-shifting
arrangements by plans (§ 1348.6, subd. (b)), specifically allowing plans to
delegate their responsibility to pay for emergency services and care.
(§ 1371.4(e).) It has recognized and addressed the evolving problem of insolvency
of delegated IPAs and other RBOs through the establishment of the DMHC‟s
Financial Solvency Standards Board (§ 1347.15) and a regulatory framework that
is intended to ensure the fiscal performance of IPAs and other RBOs by early
identification of performance deficiencies and implementation of CAPs.
(§§ 1375.4, 1375.5 ,1374.6; see Department of Managed Health Care, vol. 17,
No. 2, Cal. Reg. L.Rptr., supra, at pp. 29-30.) As described earlier, the CAP
collaborative system is specifically aimed at correcting identified deficiencies of a
financially unstable delegated IPA or other RBO. (Solvency Regs., § 1300.75.4.8,
subd. (a)(4) & (5).) Such instability may be caused by a myriad of economic and
business circumstances, which may be outside the control of the delegated IPA or
other RBO. The instability may be unrelated to the health care service plans‟
actions.
       When, however, in light of those particular circumstances, a health care
service plan can have no reasonable expectation that its delegated IPA or other
RBO will be able to pay the claims of noncontracting emergency service providers
through a CAP process, we believe the eventual failure of its delegate to pay such
claims can be considered closely connected to the plan‟s conduct. (Biakanja,
supra, 49 Cal.2d at p. 650.) A plan that knows or should know that the financial
problems of its delegated IPA or other RBO are of such a magnitude that the
initiation or continuation of a CAP process will not result in payment of the
noncontracting emergency service providers‟ covered claims, but nevertheless
takes no available action to protect such providers, directly places those providers

                                         31
in a position of additional financial risk because of their statutory obligation to
provide emergency services to the plan‟s enrollees.
       Here, plaintiffs‟ complaints allege that the Health Plans knew or should
have known of La Vida‟s financial deficiencies, which spanned the course of four
years. Plaintiffs allege that the Health Plans were specifically advised that La
Vida‟s lender had filed a petition for relief under the bankruptcy laws in October
2009 and had withdrawn millions of dollars from La Vida‟s account, and that La
Vida had no alternate financing. Plaintiffs allege that the Health Plans continued
their La Vida delegation contracts without any reasonable expectation, under these
circumstances, that La Vida would reimburse plaintiffs‟ emergency service claims.
Such allegations sufficiently allege a close connection between Health Plans
conduct and plaintiffs‟ financial injury.
       To the extent that health care service plans engage in the CAP process in
good faith and with a reasonable expectation that a final CAP will result in
payment of providers‟ claims, no moral blame can be assigned to their failure to
act outside of that process to reassume the obligation to pay the claims of
noncontracting emergency service providers. (Biakanja, supra, 49 Cal.2d at
p. 650.) Both the statutes and the regulations strongly favor rehabilitation of
financially troubled IPAs or other RBOs through the CAP process and such
rehabilitation depends on the cooperation of health care service plans, who should
not fear that cooperation with the regulatory process exposes them to tort liability.
But, in the limited situation where a health care service plan knows or should
know that there can be no reasonable expectation of a successful CAP resulting in
reimbursement of the claims of noncontracting emergency service providers, the
failure of health care service plans to take available action to protect such
providers is morally blameworthy.



                                            32
       Finally, imposing a continuing duty of care, as we have defined it, on health
care service plans will help prevent future economic harm to noncontracting
emergency service providers. (Biakanja, supra, 49 Cal.2d at p. 650.)
       We expressly decline, however, to impose a continuing duty of care broader
than the one we have described because of the balance of policy interests at play
here. (Bily, supra, 3 Cal.4th at pp. 404-405.) A health care service plan should
not be required to reassume its delegated financial responsibility to pay
noncontracting emergency service providers, for example, at the first sign that its
delegate is experiencing financial difficulty or when it receives notice that there
has been a failure to pay noncontracting emergency service providers‟ covered
claims or based on the initiation of CAP proceedings alone. Imposition of such a
broad common law tort duty would risk interfering with the statutory and
regulatory CAP process for the rehabilitation of troubled RBOs because it would
incentivize a health care service plan to terminate its delegation contracts and
reassign its patient enrollees and thus interrupt medical care in lieu of the CAP
process. Such action would undermine the carefully balanced and comprehensive
managed health care scheme established by the Knox-Keene Act (§ 1342), which
expressly approves delegation contracts (§ 1371.4(e)) and supports a regulatory
framework for the restoration of fiscal stability to financially deficient RBOs
(Solvency Regs., § 1300.75.4.8, subd. (a)(4) & (5)), in part to ensure continuity of
patient care. (§ 1342, subd. (g).)
                                 IV. CONCLUSION
       We conclude that health care service plans owe a common law tort duty to
noncontracting emergency service providers to act reasonably in initially
delegating their financial responsibility to an IPA or other RBO under section
1371.4(e). The Court of Appeal correctly determined, therefore, that a cause of
action exists in favor of noncontracting emergency service providers that allege, as

                                         33
here, that a health care service plan negligently delegated its duty to pay
emergency service claims to an IPA that it knew or should have known was
financially unsound. We also conclude that a health care service plan has a
narrow continuing common law tort duty to noncontracting emergency providers
to monitor and assess the financial condition of its delegate and to timely take
available, appropriate action to protect noncontracting emergency service
providers when it knows or should know that there can be no reasonable
expectation that its delegated IPA or other RBO will be able to reimburse their
covered claims for emergency services. The Court of Appeal correctly
determined, therefore, that a cause of action exists in favor of noncontracting
emergency service providers, as pleaded or could be pleaded here, for a violation
of such continuing duty. The trial court erred in sustaining the Health Plans‟
demurrers without leave to amend.




                                         34
                                  V. DISPOSITION
    The judgment of the Court of Appeal, which reversed the trial court‟s order
sustaining defendants‟ demurrers to the complaints, is affirmed. The matter is
remanded to the Court of Appeal with directions that it remand these consolidated
actions to the trial court for further proceedings consistent with this opinion.
                                                         CANTIL-SAKAUYE, C. J.


WE CONCUR:

WERDEGAR, J.
CHIN, J.
CORRIGAN, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.




                                          35
See last page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc.
__________________________________________________________________________________

Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 225 Cal.App.4th 237
Rehearing Granted
__________________________________________________________________________________

Opinion No. S218497
Date Filed: November 14, 2016
__________________________________________________________________________________

Court: Superior
County: Los Angeles
Judge: John Shepard Wiley, Jr.
__________________________________________________________________________________

Counsel:

Michelman & Robinson, Andrew H. Selesnick, Damaris L. Medina, Robin James and Jason O. Cheuk for
Plaintiffs and Appellants.

Francisco J. Silva, Long X. Do and Michelle Rubalcava for California Medical Association, California
Hospital Association, California Orthopaedic Association, California Radiological Society and California
Society of Pathologists as Amici Curiae on behalf of Plaintiffs and Appellants.

Law Office of Astrid G. Meghrigian and Astrid G. Meghrigian for California Chapter of the American
College of Emergency Physicians as Amicus Curiae on behalf of Plaintiffs and Appellants.

Reed Smith, Kurt C. Peterson, Kenneth N. Smersfelt, Zareh A. Jaltorossian; Grignon Law Firm and
Margaret M. Grignon for Defendant and Respondent Blue Cross of California doing business as Anthem
Blue Cross.

Crowell & Moring, William A. Helvestine, Ethan P. Schulman and Damian D. Capozzola for Defendant
and Respondent Health Net of California, Inc.

Crowell & Moring and Jennifer S. Romano for Defendant and Respondent Pacificare of California doing
Business as Secure Horizons Health Plan of America.

Manatt, Phelps & Phillips, Gregory N. Pimstone , Joanna S. McCallum and Jeffrey J. Maurer for Defendant
and Respondent California Physicians‟ Service doing business as Blue Shield of California.

Hernandez Schaedel & Associates, Gonzalez Saggio & Harlen, Zuber Lawler & Del Duca, Don A.
Hernandez and Jamie L. Lopez for Defendant and Respondent SCAN Health Plan.

Gibson, Dunn & Crutcher, Krik A. Patrick, Richard J. Doren and Heather L. Richardson for Defendant and
Respondent Aetna Health of California.

DLA Piper, Cooley, William P. Donovan, Jr., and Matthew D. Caplan for Defendant and Respondent
Cigna HealthCare of California, Inc.
Page 2 – S281497 – counsel continued

Counsel:

Barger & Wolen, John M. LeBlanc; Hinshaw & Culbertson, Sandra I. Weishart and Larry M. Golub for
California Association of Health Plans and CAPG as Amicus Curiae on behalf of Defendants and
Respondents.

Carol L. Ventura, Drew Brereton and Sheila M. Tatayon for California Department of Managed Health
Care as Amici Curiae.
Counsel who argued in Supreme Court (not intended for publication with opinion):

Andrew H. Selesnick
Michelman & Robinson
10880 Wilshire Boulevard, 19th Floor
Los Angeles, CA 90024
(310) 564-2670

Margaret M. Grignon
Grignon Law Firm
5150 E. Pacific Coast Highway, Suite 200
Long Beach, CA 90804
(562) 285-3171
