Originally published in Law Watch, March 2006.

Executive Summary

Action: California appellate court rejects long standing views of managed care plans ("Plans") (and their regulatory agency) regarding balance billing of covered individuals for care in emergency rooms by emergency room physicians who do not have contracts with the Plans.

Impact: Although the court did not discuss the issue, or limit it to the specific facts of the case, the decision could possibly be extended by analogy to other providers of care, and/or other jurisdictions.

Effective Date: Immediately.

A California appellate court has brought some clarity to the long-running and contentious legal debate: whether California emergency room physicians who do not have pre-existing negotiated contracts with managed care plans (the "Plan(s)"), can directly bill emergency room patients covered by those Plans for amounts not paid by the Plans.

Two cases, Prospect Medical Group, Inc., et al. vs. Northridge Emergency Medical Group, et al. and Prospect Health Source Medical Group vs. Saint John’s Emergency Medicare Specialists, Inc., et al. (the "Prospect cases"), were brought by delegated and risk-bearing independent practice associations ("IPAs") to obtain a declaration from the court that the non-contracted emergency room physicians were: (1) legally obligated to accept the Medicare reimbursement rate as payment in full for their services; and (2) legally prohibited from balance billing the emergency room patients covered by the Plans. The trial court denied the IPAs the relief which they sought and entered judgment against them and in favor of the emergency room physicians.

The IPAs appealed the trial court’s decision, and the District Court of Appeal for the Second Appellate District, Division 3, in Los Angeles held that:

  • Emergency room physicians who do not have pre-existing negotiated contracts with the Plans (including delegated risk-bearing IPAs), may legally bill the Plans’ emergency room patients for amounts not paid by the Plans for emergency physicians’ services.

The court rejected the argument historically made by the California Department of Managed Health Care ("DMHC"), and the Plans, that Section 1379 of the California Knox-Keene Act (the "Act") prohibits "balance billing" of emergency room patients covered by the Plans, even by those physicians who are not party to pre-existing negotiated contracts with the Plans.
  • Only previously existing and freely negotiated contracts among emergency room physicians and the Plans can bring emergency room physicians within the reach of the Act’s prohibition against physicians balance billing patients covered by the Plans.

  • The court rejected the argument historically made by the DMHC that these "contracts" are implied in law (as opposed to contracts actually negotiated) by virtue of the Act’s provisions and bring the noncontracting physicians within terms of the Act’s prohibition against balance billing the Plans’ patients.

  • The Medicare reimbursement rate is not automatically deemed sufficient as the compensation which must be paid by the Plans to noncontracted emergency room physicians.

Instead, the court held that the amount of reimbursement which must be paid by the Plans to non-contracted emergency room physicians is a "reasonable amount", which in turn is to be determined by reference to the six factors set out in prior case law and listed in the California Code of Regulations.

These factors are: (1) the physician’s training, qualification, and length of time in practice; (2) the nature of the services provided; (3) the fees usually charged by the physician; (4) prevailing physician rates charged in the general geographic area in which the services were rendered; (5) other aspects of the economics of the physician’s practice that are relevant; and (6) any unusual circumstances in the case.
  • The payers of emergency room physicians, including the IPAs such as those that initiated the litigation are entitled to bring a law-suit to determine whether the physicians are charging the Plans a "reasonable" reimbursement rate.

Notably, the court’s decision in the Prospect cases rejected an opinion letter (the "Doberteen Letter") written in May of 2003 by a senior legal counsel of the DMHC who had opined that even non-contracted emergency room physicians were legally prohibited from balance billing the Plans’ patients for amounts not paid by the Plans’. The court rejected the reasoning in the Doberteen Letter, i.e., that the federal EMTALA statute, when read in combination with the Act, created a contract implied in law among the Plans and non-contracted emergency room physicians, such that these physicians were brought within the scope of the Act.

Since there was no trial in the lower court regarding the "reasonableness" of the amount of compensation sought by the non-contracted emergency room physicians, the court remanded the cases back to the trial court for further proceedings, and to determine whether the non-contracted emergency room physicians had charged more than a "reasonable" rate for their services.

The decision in the Prospect cases did not reject, as a matter of law, the possibility of finding an implied in law contract between other kinds of non-contracted physicians and the Plans based on factors, other than the statutory interplay between EMTALA and section 1379 of the Act; such as long-established conduct and patterns of referral and payment. Section 1379 of the Act clearly prohibits all physicians, including emergency room physicians, who have negotiated pre existing contracts with the Plans from billing emergency room patients covered by the Plans.

An unanswered question is the extent to which the decision in the Prospect cases will extend to providers other than emergency room physicians, including hospitals (and possibly in other jurisdictions) who or which do not have pre-existing negotiated contracts with a Plan or other payor. The rights of other providers were not specifically before the court, but the court’s reasoning is broad and may not be limited to the facts on which its decision was based.

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