Title: Centinela Freeman Emergency Medical Associates v. Health Net of California
Citation: N/A
Docket Number: S218497
State: California
Issuer: California Supreme Court
Date: November 14, 2016

1 
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),  
2 
(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).) 
3 
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. 
4 
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.”   
5 
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. 
6 
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).) 
7 
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.   
8 
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 
9 
“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 
10 
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 
11 
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 
12 
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).) 
13 
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 
14 
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 
15 
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.)   
16 
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 
17 
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 
18 
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 
19 
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 
20 
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 
21 
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.   
22 
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, 
23 
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 
24 
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 
25 
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 
26 
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 
27 
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 
28 
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 
29 
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 
30 
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 
31 
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 
32 
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.   
33 
 
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 
34 
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. 
35 
 
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. 
 
 
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