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Morris v. California Physicians' Service

United States Court of Appeals, Ninth Circuit

March 18, 2019

Rebecca Morris, individually and on behalf of all others similarly situated; Becky Ebenkamp, individually and on behalf of all others similarly situated, Plaintiffs-Appellants,
v.
California Physicians' Service, DBA Blue Shield of California; Does, 1-10, inclusive, Defendants-Appellees.

          OPINION

          Argued and Submitted October 10, 2018 Pasadena, California

          Appeal from the United States District Court for the Central District of California D.C. No. 2:16-cv-05914-JAK-JPR John A. Kronstadt, District Judge, Presiding

          Jay Angoff (argued) and Christine H. Monahan, Mehri & Skalet PLLC, Washington, D.C.; Dan Stormer, Randy Renick, and Cornelia Dai, Hadsell Stormer & Renick LLP, Pasadena, California; for Plaintiffs-Appellants.

          Gregory N. Pimstone (argued), Craig S. Bloomgarden, and Joanna S. McCallum, Manatt, Phelps & Phillips, LLP, Los Angeles, California; Michael S. Kolber, Manatt, Phelps & Phillips, LLP, New York, New York; for Defendant-Appellee California Physicians' Service.

          Before: Mary M. Schroeder and Jacqueline H. Nguyen, Circuit Judges, and Thomas J. Whelan, [*] District Judge.

         SUMMARY[**]

         Patient Protection and Affordable Care Act

         The panel affirmed the district court's dismissal of a claim that plaintiffs' insurer violated the Patient Protection and Affordable Care Act's "Medical Loss Ratio" provision.

         This provision of the ACA requires an insurer to pay a rebate to enrollees if the ratio between what it pays out in claims for medical services is less than 80% of the revenue it takes in. The panel held that, in determining its Medical Loss Ratio under 42 U.S.C. § 300gg-18, the defendant insurer properly included as part of its payout the payments it made in settling a dispute with some of its enrollees, and there was no basis for excluding payments for services rendered by out-of-network physicians.

          OPINION

          SCHROEDER, Circuit Judge.

         In this appeal, Plaintiffs-Appellants contend that their insurer, Blue Shield of California ("Blue Shield"), violated an integral provision of the Patient Protection and Affordable Care Act ("ACA"), the Medical Loss Ratio ("MLR"), 42 U.S.C. § 300gg-18, a provision that has not yet been interpreted by our Court or our sister circuits. The MLR is the ratio between what an insurer pays out in claims for medical services and the revenue it takes in. Id. § 300gg-18(a). The insurer must pay a rebate to enrollees if the payout is less than 80% of the revenue. Id. § 300gg-18(b)(1). Plaintiffs in this case, enrollees seeking a larger rebate, argued that Blue Shield improperly included as part of its payout the payments it made in settling a dispute with some of its enrollees. The district court dismissed Plaintiffs' action, ruling that pursuant to the settlement, the payments had been made, whether earlier disputed or not, and were therefore properly included. We affirm.

         INTRODUCTION

         A. The Medical Loss Ratio ("MLR") Defined

         Congress enacted the ACA in 2010 to decrease the cost of health care and increase the number of Americans with health insurance. See Nat'l Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519, 538 (2012). The MLR plays a key role in furthering Congress' plan to decrease health care costs by requiring health insurance companies to spend at least 80 percent of their premium income on health care claims and health quality improvement. 42 U.S.C. § 300gg-18(a), (b). Health insurance companies that do not meet the 80 percent spending requirement must refund to their enrollees the difference between the amount actually spent and the 80 percent figure. Id. § 300gg-18(b)(1). For example, if a health insurance company has spent only 70 percent of premiums on clinical services and health improvements, its enrollees are entitled to a 10 percent rebate of premium revenue. This rule is intended to ensure that spending is focused on health care expenses, as opposed to administrative costs such as salaries or marketing. Id. § 300gg-18(b)(2); 45 C.F.R. § 158.140(b)(3)(iii).

         The statute spells out the enforcement scheme. Health insurance companies must calculate and annually report their MLR to the Department of Health and Human Services (HHS), the agency tasked with enforcing the provision. 42 U.S.C. § 300gg-18(a). The instructions for calculating the ratio are provided under the MLR provision of the ACA and further explained in federal regulations. The statute defines the MLR as "the ratio of the incurred loss (or incurred claims) plus the loss adjustment expense (or change in contract reserves) to earned premiums." Id. The MLR regulations define "incurred claims" to include payments made by an issuer for "clinical services" and to exclude administrative expenses or work unrelated to clinical services. 45 C.F.R. § 158.140(a), (b)(3)(iii). Thus, the MLR compares what the health insurance company has spent on clinical services to the premium revenue the insurance company received from its enrollees. The statute requires a rebate when reported amounts paid out for actual clinical and related services are less than 80% of reported premium revenue. It thereby encourages insurers to use premium revenue to reimburse the costs of enrollees' medical treatment rather than to use it on administrative expenses. Indeed, the statutory section containing the MLR is entitled "Bringing down the cost of health care coverage." 42 U.S.C. § 300gg-18.

         B. This Dispute

         Blue Shield was selected by the State of California in 2010 to provide affordable health care plans on the state's health insurance exchange, "Covered California." Under Blue Shield's plans, "participating" or "in-network" providers accepted Blue Shield Covered California patients and charged for medical services at Blue Shield's participating provider benefit level. "Out-of-network" providers billed for medical services at higher rates than the in-network participating provider benefit level.

         Shortly after Blue Shield was selected as an insurance company on California's health insurance exchange, however, enrollees who had purchased Blue Shield Covered California plans began complaining of difficulty finding in- network providers charging in-network rates. The enrollee complaints led to the discovery that Blue Shield had erroneously listed out-of-network physicians in its network directory who had not in fact agreed to accept Blue Shield Covered California patients. As a result of Blue Shield's network directory mistake, some enrollees were charged the higher, out-of-network rates for medical services they received. To remedy the problem, Blue Shield executed a settlement agreement to reprocess the out-of-network claims at in-network rates, and to reimburse enrollees for the extra money they were charged on account of using an out-of-network provider. Blue Shield then included these settlement payments in the numerator of the MLR as "incurred claims," or payments for clinical services. According to the settlement agreement, Blue Shield reimbursements already totaled more than 35 million dollars.

         Two Blue Shield enrollees, Becky Ebenkamp and Rebecca Morris, on behalf of a class of more than 446, 000 enrollees ("Plaintiffs"), filed an action in Los Angeles County Superior Court in 2016, alleging Blue Shield violated the ACA by including the settlement payments in the MLR numerator. The named plaintiffs are Blue Shield enrollees who had received a MLR rebate for 2014, but they asserted that Blue Shield's settlement payments improperly inflated Blue Shield's MLR, thereby unfairly decreasing their rebate. In Plaintiffs' view, under the terms of the statute and of the settlement agreement, Blue Shield should have included in the MLR numerator only reimbursements for services provided by in-network providers. Plaintiffs asserted that including the payments for services rendered by providers outside those in the ...


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