BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2001-2002 Regular Session
AB 1600 A
Senator Assemblymember Keeley B
As Amended August 20, 2001
Hearing Date: August 28, 2001 1
Health and Safety Code 6
GWW:cjt 0
0
SUBJECT
Health Care Provider Contracts: Equitable Relief Actions to
Enforce Knox-Keene
DESCRIPTION
This bill would allow any enrollee, subscriber, patient,
health care provider or their representatives to file an
action for equitable relief from any licensee as to any
violation or threatened violation of the Knox-Keene Act
The bill would also establish a voluntary dispute resolution
process that the court may ask the parties to consider, as
an alternative to pursuit of the litigation if both parties
agree. The bill would direct the Department of Managed
Health Care to accredit at least three dispute resolution
organizations to handle these disputes.
The bill would also require the court to extend for 180 days
a plan provider contract under litigation that is scheduled
to expire while the litigation is pending, to provide
continuing care to enrollees except where the plan is able
to terminate the contract on specified grounds. Current
contract rates and terms would govern during the 180-day
extension, subject to appropriate adjustment by the court to
ensure enrollee access to health care.
The bill would enact related provisions to protect the
enforcement of rights under an AB 1600 action. The bill
would state that its provisions to allow specified parties
(more)
AB 1600 (Keeley)
Page 2
and their representatives to file an equitable relief action
are declaratory of existing law.
The bill would not apply to patient disputes that are
subject to the internal grievance process and independent
external review process.
(This analysis reflects author's amendments to be offered in
Committee, and reflects information provided to Committee
staff as of 5 pm, August 26, Sunday.)
BACKGROUND
This bill has been gutted and completely rewritten in the
last month. The provisions proposing an anti-trust
exemption to allow health care providers to combine to
negotiate provider contracts with health plans have been
deleted. In its place is a new proposal to allow a health
care provider, as well as an enrollee or subscriber, to sue
for equitable relief and enforcement of the Knox-Keene Act.
(Because of this "gut and rewrite," only letters of support
and opposition reflecting the new version of AB 1600 are
being reflected in this analysis.)
The health plans continue to oppose the bill.
CHANGES TO EXISTING LAW
Existing law , the Knox-Keene Act (Health and Safety Code
Section 1360 et seq.), regulates health care providers
(henceforth sometimes "providers") and health care service
plans (henceforth sometimes "plans") and sets forth the
Legislature's intent to ensure that Californians receive
high-quality health care coverage in the most efficient and
cost-effective manner possible. It further provides that
all plan/provider contracts shall be fair and reasonable,
and shall contain provisions requiring a fast, fair, and
cost-effective dispute resolution mechanism. Under existing
law, the Department of Managed Health Care (DMHC) is
required to adopt regulations to ensure that plans have a
dispute resolution mechanism that is fair, fast, and
cost-effective for contracting and non-contracting
providers.
AB 1600 (Keeley)
Page 3
Existing law provides that the Department of Managed Care
"has charge of the execution of the laws of the state
relating to health care service plans and the health care
service plan business including, but not limited to, those
laws directing the department to ensure that health care
service plans provide enrollees with access to quality
health care services and protect and promote the interests
of enrollees." (Health and Safety Code Section 1341.
Henceforth all references are to this code unless otherwise
noted.)
Existing law , Section 1347.15, establishes a Financial
Solvency Standards Board within the department, and provides
that the purpose of the board, inter alia, is to develop and
recommend to the director financial solvency requirements
and standards relating to plan-provider contractual
relationships.
This bill would allow any enrollee, subscriber, patient,
health care provider or their representatives to file an
equitable relief action against a health plan with respect
to violations or threatened violations of the Knox-Keene
Act. This remedy would not be available for resolution of
patient or enrollee disputes that are subject to the
internal grievance and independent external medical review
process set forth in law. Otherwise, this remedy would be
cumulative to other remedies or penalties under the law.
The bill would establish a voluntary dispute resolution
process that the court may invite the parties to consider.
Participation in the process would be voluntary upon the
agreement of both parties. The costs of the process would
be borne equally by the parties unless the costs are
apportioned by the dispute resolver in accordance with the
apportionment of fault between the parties. Further, the
decision of the dispute resolver would not be subject to
department review.
This bill would require the DMHC, by September 1, 2002, to
accredit at least three dispute resolution organizations to
handle these disputes. The dispute resolution organization
would be required to complete its review and submit its
AB 1600 (Keeley)
Page 4
written decision to the parties within 30 days of the
dispute being submitted for its review, unless the parties
agree to a later specified time. Upon commencement of this
process, the underlying action shall be "reactivitated"
after 90 days unless the parties arrive at and "implement" a
settlement, or agree in writing to extend the process for
another 90-day period. Any information communicated during
this process would be privileged and not subject to
discovery.
The bill would also require the court to order an 180-day
extension of any plan provider contract if the contract
expires during the pendency of an equitable relief action,
in order to provide continuing care to enrollees. However,
nothing in this law would be intended to impair the ability
of a health care service plan to terminate a contractual
relationship pursuant to the principles of Potvin v.
Metropolitan Life Insurance Co. (2000) 22 Cal.4th 1060,
which requires a plan to use a process that is
"substantively rational and procedurally fair" before a
doctor may be removed from its provider lists when the plan
possesses such power in the marketplace that the removal
significantly impairs the ability of a ordinary, competent
physician to practice in his or her specialty or geographic
area. The current contract rates and terms would govern
during the 180-day period, subject to appropriate adjustment
by the court to ensure enrollee access to health care. This
period may be extended by mutual agreement of the parties.
The bill would also make it unlawful for a health plan to
terminate, retaliate against, or otherwise penalize plan
enrollees, subscribers or providers for exercising their
rights under AB 1600, and would prohibit a health plan from
seeking indemnity, whether contractual or equitable, from a
provider, employer, or employer group purchasing
organization for any liability imposed pursuant to an AB
1600 action.
The bill would provide that a waiver of these provisions is
contrary to public policy and is therefore unenforceable and
void. The bill would also declare that its provisions
authorizing the equitable relief action are declaratory of
existing law.
AB 1600 (Keeley)
Page 5
COMMENT
1. Stated need for bill: CMA and author say that doctors are
being squeezed out and need better ability to obtain fair
contracts
According to the sponsor, the California Medical
Association (CMA), AB 1600 is needed to correct serious
imbalances in plan-provider contracts that has and could
continue to occur when the health plans have the ability
to offer provider contracts on a "take-it or leave-it"
basis. As an example, HealthNet reportedly advised some
of its providers that contract rates will be reduced by 5%
next year, and that providers have until November 1, 2001
to decide whether to stay in the plan.
CMA asserts that with four or five health plans
controlling over 80% of the market not served by Kaiser,
giving them substantial market dominance, "plans are able
to insist that providers accept contract terms which are
unfair, unreasonable and harmful to patient care."
As another example, CMA contends that reimbursement rates
on provider contracts, already inadequate in many cases to
cover the aggregate cost of treating the patient base,
have not kept remotely apace with rising business costs,
such as rents, employee wages and energy costs.
Consequently, many physicians have had to acquire personal
or business loans to pay the bills. Other physicians,
says CMA, have simply given up their practice and moved to
another locale.
This bill, asserts CMA, would allow providers as well as
enrollees to seek equitable relief in order to protect
their rights under current law. While one practical
result of an AB 1600 action might be the reformation of
the contract by the court to require a "fair and
reasonable" rate of compensation, CMA argues that more
adequate compensation would encourage physicians to stay
in practice, and will also relieve the pressures of
potential financial insolvency, which is a growing problem
facing medical groups as well as individual physicians.
AB 1600 (Keeley)
Page 6
The author further notes that "plans are difficult to deal
with, acting abruptly and refusing to renew contracts that
would provide clarity and fairness in addition to
addressing patient care issues. Saddled with ambiguous
and unreasonable contracts, providers repeatedly find
themselves in disputes with plans over the interpretation
of contract provisions. This takes time away from patient
care and increases administrative costs."
The author also argues that physicians do not have equal
bargaining position with health plans in contract
negotiations. "If this were to occur, then providers
could have meaningful discussions about both contract
terms and rates. Terms are just as important as rates."
Opponents, the health plans, dispute the claim that
providers lack bargaining power against the plans. In
some locales, asserts PacifiCare, provider groups are
actually dictating terms to HMOs who must accept the terms
in order to fulfill the HMO's obligation to its enrollees
to have an adequate physician base to provide care under
the plan. More fundamentally, however, opponents assert
that there is no justification to create a new cause of
action that will result in significant litigation costs
for the HMOs.
Opponents also contend that the bill would interfere with
long established policy, generally known as the "primary
jurisdiction doctrine," that courts defer to
administrative agencies when the questions raised involve
expertise possessed by the administrative agency and court
rulings on the matter might result in inconsistent
application of the laws.
2. CMA also says that court action is necessary because the
regulator has refused to act; further, there is no
regulatory expertise to which a court should defer because
of the historic inaction
CMA asserts that in the area of plan-provider contracts,
the DMHC and the Department of Corporations before it has
never exercised its regulatory authority to ensure that
AB 1600 (Keeley)
Page 7
the plan-provider contracts are fair and reasonable as
required under Knox-Keene. As reaffirmation of this
stance, CMA points to the department's recent letter in
opposition to the prior version of AB 1600 that stated
that "AB 1600 would interfere with private contractual
relationships between health plans and providers by
interposing the Department as the ultimate arbiter of the
adequacy of agreements between health plans and
providers." (Letter of August 1, 2001 to Assemblymember
Keeley from Daniel Zingale, Director of DMHC.)
Similarly, the opponents argue, "The Knox-Keene Act does
not invite or permit rate-setting?.Under numerous
administrations of both political parties, ?it [the
department] simply has concluded that the Legislature
never intended it to be in charge of rate setting for a
private industry."
Thus, CMA argues, because of the department's historic
inaction in policing the fairness of rates in plan
provider contracts, there is no expertise at the
administrative level upon which the court may rely and
defer its action. Where there has been administrative
inaction, and lack of expertise, CMA argues, the doctrine
of primary jurisdiction has no application.
3. Legal and equitable action compared
Actions at law usually seek a money judgment for damages,
while equitable actions seek some sort of specific relief
(such as specific performance of a contract). With regard
to actions arising out of contract, which is applicable
here, Witkin states that "There are three common types of
contract actions in equity: (1) Specific performance?.
(2) Reformation.?(3) Injunction.
In addition thereto, Witkin states that declaratory relief
actions, among other actions, are equitable in nature. (3
Witkin, California Procedure, 4th Ed. 1996, "Actions,"
Sections 120 and 123.)
Thus, an action under AB 1600 may seek injunctive relief,
declaratory relief, or reformation of the contract.
AB 1600 (Keeley)
Page 8
Implicitly, unless otherwise stated in AB 1600, a
reformation of contract could include adjustment of the
reimbursement rates, as suggested by language beginning on
page 5, line 40, authorizing the court to appropriately
adjust the contract rates to ensure enrollee access to
health care.
4. Health plans opposition: other points of contention
PacifiCare asserts that AB 1600 is extremely broad and
would substantially increase the number of frivolous
lawsuits filed against health plans and thereby
unnecessarily increases the cost of health care for
consumers and employers.
The California Association of Health Plans (CAHP) further
contends that
AB 1600 is a raw attempt to increase provider
reimbursement rates by creating the right for providers to
sue in court to reform their provider contracts. Just the
threat of a possible lawsuit could intimidate plans into
providing more generous reimbursement rates, which would
eventually increase health care premium costs.
The health plans also argue that AB 1600 would render the
new DMHC toothless and would defeat the purpose of its
creation. CAHP argues creating a private right of action
to challenge and reform contracts under Knox-Keene would
fundamentally affect the ability to DMHC to fulfill its
regulatory mission to enforce the law to promote the
delivery of medical care to the people of this State.
Private judgments could significantly affect the financial
health of the HMO and its ability to deliver services,
thus compromising the DMHC's mission. CAHP argues that
with each judge having the ability to affect policy, which
would invariably lead to inconsistent results, the
question can fairly be asked if AB 1600 is enacted:
"Who's in charge?"
The sponsor and author respond that opponents' arguments
are misleading and intended to scare. The author's office
contends that "in many other areas of law, private party
court redress is allowed when the department or board is
AB 1600 (Keeley)
Page 9
unable or unwilling to enforce the law. This is standard
practice in areas such as METAL (emergency room services),
elder abuse, labor law (the Department of Fair Employment
and Housing) and land use and water rights."
Finally, opponents argue that AB 1600 is not needed
because existing law already allows providers numerous
remedies to resolve violations of the Knox-Keene Act,
including a process for mandatory arbitration of contract
disputes and the new dispute resolution process for
plan-provider disagreements made by AB 1455 (Scott).
5. Is the proposal in fact declaratory of existing law?
Prospectively, it is clearly within the Legislature's
power to create causes of action and remedies, such as
that proposed. Indeed, a legislative enactment will apply
prospectively unless declared to be a clarification of
existing law, in which case it also will apply
retroactively.
This bill, on page 6, line 22, would provide that the
provisions specifying a right of specified parties to
bring an equitable relief action as to a violation of the
Knox-Keene Act, and specifying that a court may ask the
parties to consider resolving their dispute by a voluntary
dispute resolution process set forth in the bill,
"confirm, and are declarative of, rather than constituting
a change in, existing law."
However, saying it is so does not necessarily make it so,
or right. Case law is fairly settled that individuals may
bring an action under Business and Professions Code
Section 17200 for violations of the provisions of the
Knox-Keene Act. (Samura v. Kaiser Foundation Health
Plans, Inc. (1993) 17 Cal.App.4th 1284.) The statute, the
Unfair Competition Law (UCL), provides for civil penalties
as well as injunctive relief. However, case law does not
specifically provide individuals with the ability to
bring equitable relief actions for reformation of
contracts in violation of Knox-Keene. Even less certain
(and more questionable) is the proposition that an
individual's representative now has the right to maintain
AB 1600 (Keeley)
Page 10
such an equitable relief action on behalf of that
individual. If indeed those rights were the law, AB 1600
would not be needed.
The sponsor and author's office contends, however, that
Samura and case law does not preclude such actions, and
that it is within the legislative power to clarify the law
retroactively. Also, according to the author, this
provision is needed to avoid existing lawsuits from being
dismissed as a result of the enactment of this bill.
Opponents disagree with the sponsor's reading, contending
that Samura also restated the established rule in
California that the development of policy and regulation -
such as the determination of "fair and reasonable"
contract provisions under Knox-Keene - must be left to the
administrative agency with primary jurisdiction over the
industry involved. Said Samura at pages 1301, 1302:
"?the courts cannot assume general regulatory powers over
health maintenance organizations through the guise of
enforcing Business and Professions Code section 17200. To
the extent that the order on appeal is based on portions
of the Knox-Keene Act having a purely regulatory import,
it improperly invades the powers that the Legislature
entrusted to the Department of Corporations." (In 1999,
these functions of the Department of Corporations were
re-assigned to a newly created Department of Managed Care,
which was later renamed the Department of Managed Health
Care.)
Thus, there is considerable disagreement whether AB 1600
is indeed declaratory of existing law.
SHOULD INSTEAD OF A STATEMENT THAT AB 1600 IS DECLARATORY
OF EXISTING LAW, SHOULD THE BILL PROVIDE THAT ITS
PROVISIONS ARE NOT INTENDED TO AFFECT IN ONE WAY OR
ANOTHER THE RIGHT OF ANY PARTY TO SEEK EQUITABLE RELIEF IN
ANY PENDING LITIGATION?
6. Mandatory extension exception seems too narrow and appears
to be an awkward fit
Consumers Union, a potential supporter of the bill,
AB 1600 (Keeley)
Page 11
asserts that this provision is too broad and should not
apply to situations where an HMO terminates a contract for
just cause, such as breach of quality standards. CU
suggests that AB 1600 should be amended to provide
exemptions for just cause, similar to the just cause
exemption in a pending continuity of care bill - AB 1522
(Thomson and Frommer).
The sponsor responds that CU's requested language is too
narrow and does not provide for a fair hearing regarding
any alleged problems (financial, breach of contract,
quality). To address CU's concern, instead, the author
proposes an author's amendment (in lieu of the clear and
convincing language in the bill also disfavored by
Consumers Union and the Committee analyst) to allow the
health plan to terminate or avoid any extension by using
the process articulated in Potvin v. Metropolitan Life
Insurance Co. (2000) 22 Cal.4th 1060 for the termination
(or deselection or delistment) of a physician from the
plan's provider list. That case adopted the common law
right to fair procedure for these terminations and
requires a plan to use a process that is "substantively
rational and procedurally fair" before a doctor may be
removed from its provider lists when the plan possesses
such power in the marketplace that the removal
significantly impairs the ability of a ordinary, competent
physician to practice in his or her specialty or
geographic area.
Committee staff has significant concerns about applying
this standard, created in the context of deselecting a
single physician from an HMO's list of providers, to avoid
extending the provider contract for an entire group of
providers. The sheer numbers involved would make the
process unworkable. Moreover, the language appears to
assume that the plans have such marketpower in every
situation so that the right of a fair process would apply
in every instance, while that determination should be made
on a case-by-case basis. Indeed, that determination of
marketpower (and its degree) may be one of the ultimate
questions to be determined in the equitable relief action.
AB 1600 (Keeley)
Page 12
If, however, the intent is that plans may still deselect
individual, "substandard" doctors during this extension
period, that purpose is clearly appropriate, but the
language needs clarification.
Suggested clarifying amendment: The language should be
recrafted to provide that "This provision does not affect
the right of a health care service plan or disability
insurer to terminate a contractual relationship with an
individual provider, consistent with the principles of
Potvin v. Metropolitan Life Insurance Co., (2000) 22
Cal.4th 1060 whenever applicable."
7. Health plans may not terminate or retaliate against or
otherwise penalize plan enrollees or providers for
exercising their AB 1600 rights, and may not seek
indemnity, whether contractual or equitable, from a
provider, employer, or employer group purchasing
organization for any liability arising from an
AB 1600 action; further, any waiver of these rights would
be void
These provisions, set forth on page 6, line 9, on page 6,
line 16, and on page 6, line 20, expressly state the
public policy of the Legislature to prevent health plans
from retaliating against any person for exercising their
AB 1600, or from passing on the liability to another
party. The bill would also make any waiver of its
provisions contrary to public policy and void and
unenforceable.
Support: California Nurses Ass'n; California Ass'n of
Neurological Surgeons; California Primary Care Ass'n;
Calif, Psychiatric Ass'n; Calif. Chapter of ACP-ASIM
Services; The Foundation for Taxpayer and Consumer
Rights; The American College of Obstetricians and
Gynecologists; California Podiatric Medical Ass'n;
numerous individual physicians
Opposition: California Association of Health Plans;
HealthNet; PacifiCare of California; Health
Insurance Association of California
AB 1600 (Keeley)
Page 13
HISTORY
Source: California Medical Association
Related Pending Legislation: None Known
Prior Legislation: None Known
Prior Vote: On different bill
**************