The Check’s in the Mail - Who Is Responsible for Payment in a Delegated-Network System?


In today’s healthcare system, reimbursement issues involve not only prompt pay statutory provisions but also various risk-shifting arrangements included in a delegated-network system of managed care.  When the insolvency of an entity becomes an issue, state and federal courts have differed on whether health care insurers are responsible for payment of claims even when they contract with delegated entities that explicitly assume all payment responsibilities or when they have delegated that responsibility to medical providers as permitted by statute. Historically, California appellate courts found that HMOs did not have a duty to make timely payments when an IPA failed to make payments nor did they have a duty to ensure the financial stability of the IPA.  See California Medical Assn. v. Aetna U.S. Healthcare of California, Inc., 94 Cal. App. 4th 151, 114 Cal. Rptr. 2d 109 (Cal. Ct. App., 4th Dist. 2001); Desert Healthcare Dist. v. Pacificare FHP, Inc., 94 Cal. App. 4th 781, 114 Cal. Rptr. 2d 623 (Cal. Ct. App., 4th  Dist. 2001).  In California Emergency Physicians Medical Group v. Pacificare of California, 111 Cal. App. 4th, 4 Cal. Rptr. 3d 583 (Cal. Ct. App. 4th Dist. 2003), the Fourth District Appellate Court held that no negligence cause of action existed against the HMO.


In 2004, a California appellate court again addressed the issue of financial responsibility for financially troubled IPAs, but reached contradictory results.  In Ochs v. Pacificare of California, 115 Cal. App. 4th 782, 9 Cal. Rptr. 3d 734 (Cal. Ct. App., 2d Dist. 2004), the Second District Court of Appeal reversed the trial court’s order of dismissal and held that the plaintiff should be allowed to file an amended complaint setting forth a cause of action against an HMO for negligent delegation of its statutory obligation to reimburse emergency physicians when the IPA was bankrupt.

The split of authority at the appellate level in California continues.  On April 2, 2014, the Second District Court of Appeal in California issued a decision that has far-reaching implications for health plans on the issue of delegation of payment responsibilities to an IPA.  In Centinela Freeman Emergency Medical Associates v. HealthNet of California, Inc., 225 Cal. App. 4th 237, 170 Cal. Rptr. 3d 142 (Cal. Ct. App., 2d Dist. 2014),  the main issue on appeal was whether a cause of action exists, on behalf of emergency physicians, against HMOs, for the negligent delegation of the obligation to reimburse the emergency physicians, when the HMOs have delegated their duty to an IPA they knew or had reason to know was financially unable to satisfy it.  The Court of Appeal resolved the issue in the affirmative, and held that the cause of action includes a negligent failure to reassume the reimbursement obligation after the HMOs know or should know that the delegate is unable to execute the duty delegated to it. 

In addressing the issue, the Court of Appeal in Centinela noted that it was “not writing on a clean slate”  (referring to the decisions referenced above).  In reaching its conclusion that a cause of action for negligent delegation existed under the facts before it, the Court of Appeal concluded that Ochs was the better reasoned decision and chose to follow it. The court also noted that the critical distinction in Centinela was the fact that the emergency physicians were required by statute to provide emergency services to the HMO enrollees and no means to protect themselves from the IPA’s insolvency.   In Prospect Med. Grp. Inc. v. Northridge Emergency Med. Grp. Inc., 45 Cal. 4th 497, 87 Cal. Rptr. 3d 299 (Cal. 2009) the California Supreme Court precluded emergency physicians from balance billing patients.  It was noted by the Centinela Court that the plaintiff emergency physicians also had not contracted with the insolvent IPA or any of the HMOs, unlike the physicians in California Medical or Desert Healthcare.

On a related issue, the Federal Court for the Northern District of California recently addressed whether there was an independent, private right of action for violation of California Health & Safety Code Section 1371.4, the provision of the Knox-Keene Act mandating that health plans reimburse emergency service providers. California Pacific Regional Medical Ctr. v. Global Excel Mgmt., Inc., 2013 WL 2436602 (N.D. Ca. 2013).  In California Pacific, the court held that no such private right of action existed and, therefore, granted the defendant’s motion to dismiss.  While the Knox-Keene Act may confer the right to enjoin violations of the act under the Unfair Competition Law or at common law, the court concluded that it did not confer on parties a general power to enforce it.

The Texas Supreme Court also addressed the issue of the delegated entity’s responsibility for payment in the context of the Texas Prompt Pay Statute. Christus Health Gulf Coast, et. al., v. Aetna, Inc., 56 Tex. Sup. Ct. J. 505, 397 S.W.3d 651 (2013).  In Christus Health, several hospitals brought an action against an HMO and its parent company contending they were liable under the Texas Prompt Pay Statute for failing to timely pay claims for services provided to HMO enrollees under agreements between the hospitals and an intermediary that failed to pay the hospitals.  The Texas Supreme Court held that absent a contract, the hospitals could not maintain a private right of action against the HMO (or its parent). The 2001 amendments to the Prompt Pay Statute gave the Texas Insurance commissioner the discretionary authority to compel a HMO to resume the functions handed over to the delegated entity, including claim payments for services previously rendered to enrollees of the HMO. The Texas Supreme Court noted that it was "telling" that the 2001 amendments provided for administrative relief but not private litigation.


The issue of who is ultimately responsible for payment when an intermediary in the delegated managed care system fails to pay is one that the courts will continue to confront. Whether courts will expand the legal liabilities of the health care plans under these circumstances will depend on judicial interpretation of Prompt Pay statutes and other statutory provisions regulating health care service plans.  The ramifications of the Centinela decision are such that the California Supreme Court may eventually be asked to resolve the current split in the California appellate courts.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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