Opinion
B225123
09-08-2011
AHF HEALTHCARE CENTERS, Plaintiff and Appellant, v. CALIFORNIA DEPARTMENT OF HEALTH CARE SERVICES, Defendant and Respondent.
Tom Myers and F. Brian Chase for Plaintiff and Appellant. Kamala D. Harris, Attorney General, Jennifer M. Kim, Andrew Dhadwal and Tara L. Newman, Deputy Attorneys General, for Defendant and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Los Angeles County Super. Ct. No. BC414760)
APPEAL from a judgment of the Superior Court of Los Angeles County. Richard L. Fruin, Jr., Judge. Affirmed.
Tom Myers and F. Brian Chase for Plaintiff and Appellant.
Kamala D. Harris, Attorney General, Jennifer M. Kim, Andrew Dhadwal and Tara L. Newman, Deputy Attorneys General, for Defendant and Respondent.
AHF Healthcare Centers (AHF) filed suit against the California Department of Health Care Services (DHCS) for breach of contract. The trial court sustained DHCS's demurrer to the complaint, without leave to amend, on the ground that AHF failed to exhaust its administrative remedies. We affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
This case comes to us on a demurrer, thus we accept as true the well-pleaded allegations in AHF's complaint. " ' "We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law." ' " (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6.)
AHF is a subsidiary of the AIDS Healthcare Foundation, a private provider of HIV and AIDS medical care. In 1995, AIDS Healthcare Foundation entered into a primary care case management plan contract with DHCS to provide medical services for HIV-positive Medi-Cal recipients in Los Angeles County (the contract). A primary care case management plan is one in which DHCS pays the plan a set amount of money. The plan in turn provides all agreed-upon services to participating Medi-Cal recipients, irrespective of the quantity of services plan members use, or the actual cost of such services. This form of "capitated" contract is a departure from the common fee-for-service arrangement, in which the State sets a reimbursement rate for particular medical services, then reimburses participating medical providers for the services they provide to Medi-Cal recipients in accordance with the set rates. Under the contract, DHCS paid AHF a monthly capitation rate and AHF provided agreed-upon medical services to its members. In 2005, AIDS Healthcare Foundation assigned the contract to AHF.
Every year of the contract until 2007, DHCS paid AIDS Healthcare Foundation and AHF a capitation rate that was between 1 percent and 5 percent less than what it would have paid on a fee-for-service basis. Under the contract, DHCS was also to pay AHF "an incentive payment based on 50 percent of any calculated cost savings. Cost savings is an actuarial estimate by [DHCS] for the FFS [fee-for-service] dollars (inpatient and outpatient) that would have been spent on eligible participants had they not participated under [the] Contract, but remained in the FFS program. The incentive payment [was not to] exceed 105 percent of the approved capitation payments attributable to enrollees or services covered by the incentive arrangement, in compliance with Title 42, Code of Federal Regulations, Section 438.6(c)(5)(iii)." Until 2007, DHCS paid AIDS Healthcare Foundation and AHF 50 percent of any savings generated by the program.
The contract included a dispute resolution procedure. Paragraph B of the dispute resolution procedure provided that within 15 days "of the date the dispute concerning performance of this Contract arises or otherwise becomes known to the Contractor, the Contractor will notify the Contracting Officer in writing of the dispute, describing the conduct (including actions, inactions, and written or oral communications) which it is disputing." Paragraph B further detailed the information to be provided in the notice of dispute (NOD), including the "date, nature, and circumstances of the conduct which is subject of the dispute," and "the reason the Contractor is disputing the conduct." The Contracting Officer, or an alternate dispute officer designated by DHCS, had 30 days following receipt of the NOD to either find in favor of the Contractor, deny the Contractor's dispute, or request additional documentation substantiating the dispute.
Paragraph D of the dispute resolution provisions allowed that if the contractor was unsatisfied with the Contracting Officer or alternate dispute officer's decision, the Contractor had 30 calendar days to file an appeal to the Director of DHCS. All appeals were to be governed by Health and Safety Code section 100171, excepting certain provisions "relating to accusations, statements of issues, statement to respondent, and notice of defense." (Health & Saf. Code, § 100171, subd. (d)(1).) All appeals were to be filed with DHCS's Office of Administrative Hearings, and were to "specifically set forth each issue in dispute, and include Contractor's contentions as to those issues. However, Contractor's appeal shall be limited to those issues raised in its Notification of Dispute . . . . Contractor shall exhaust all procedures provided for in this provision . . . prior to initiating any other action to enforce this Contract."
Health and Safety Code section 100171 states, in part: "Notwithstanding any other provision of law, whenever the department is authorized or required by statute, regulation, due process (Fourteenth Amendment to the United States Constitution; subdivision (a) of Section 7 of Article I of the California Constitution), or a contract, to conduct an adjudicative hearing leading to a final decision of the director or the department, the following shall apply: [¶] (a) The proceeding shall be conducted pursuant to the administrative adjudication provisions of Chapter 4.5 (commencing with Section 11400) and Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, except as specified in this section."
In September 2008, AHF submitted a NOD to DHCS. The NOD stated that AHF had not received any incentive or "savings sharing" payments for 2007 or 2008, in violation of the incentive payment provision of the contract. The DHCS Contracting Officer rejected the NOD on the ground that the amount of any payment for 2007 was still being determined, as was the capitation rate for 2008. The Contracting Officer asserted the issues had not yet risen to the level of a dispute. AHF took the next step in the dispute process and filed an appeal of the Contracting Officer's decision in November 2008. Before the appeal was heard, DHCS sent AHF a letter informing it the 2007 incentive payment would be $487,439. An attachment to the letter indicated that while AHF's primary care case management plan program generated $2,908,641 in savings for the State in 2007, DHCS calculated the incentive payment by selecting the lesser of either 50 percent of the actual savings or 5 percent of the total capitation payments made to the program in 2007.
AHF wrote to DHCS and objected to the calculation of the 2007 incentive payment. AHF stated its understanding that the dispute over the amount of the 2007 incentive payment was encompassed by the already-pending administrative dispute proceedings.
In January 2009, DHCS issued AHF a 2007 savings sharing payment of $487,439. It subsequently moved to dismiss AHF's administrative appeal on the ground that the payment rendered the appeal moot. AHF opposed the motion to dismiss, arguing the late payment was only one-third of what DHCS owed and the payment therefore did not cure DHCS's breach of the contract. In March 2009, DHCS dismissed AHF's administrative appeal and denied AHF's subsequent motion for reconsideration.
In May 2009, AHF filed a civil complaint for damages against DHCS. AHF alleged DHCS breached the contract by failing to pay 50 percent of the documented savings the primary care case management plan had generated in 2007, and by failing to properly calculate the overall savings the plan generated in 2007. AHF also asserted causes of action for breach of the implied covenant of good faith and fair dealing, and custom and usage. DHCS demurred to the complaint, arguing AHF had failed to exhaust its administrative remedies and the action was therefore barred. DHCS requested judicial notice of the dispute resolution provisions of the parties' contract, as well as several other documents relating to the parties' dispute and administrative process. These documents revealed that an administrative law judge had accepted DHCS's argument that AHF's administrative appeal was moot because DHCS made the 2007 savings sharing payment. The administrative law judge also concluded AHF's NOD did not and could not have raised a dispute concerning the amount of the 2007 incentive payment since AHF submitted the NOD before DHCS had calculated or issued the payment. AHF subsequently submitted another NOD challenging the amount of the 2007 incentive payment. The DHCS Contracting Officer rejected AHF's claim on the ground that it was untimely submitted. AHF appealed the Contracting Officer's decision.
It appears from the substance of the trial court's demurrer ruling that it granted DHCS's request for judicial notice.
DHCS contended in the demurrer that AHF's administrative appeal was still pending before the DHCS Office of Administrative Hearings and Appeals, and the administrative appeal concerned the same issues AHF had raised in its civil complaint.
The trial court sustained DHCS's demurrer without leave to amend, finding AHF's required administrative appeal had not concluded. In December 2009, the trial court entered a judgment dismissing AHF's complaint. This appeal followed.
DISCUSSION
I. The Trial Court Properly Sustained DHCS's Demurrer
A. Applicable Legal Principles
"In reviewing the sufficiency of a complaint against a demurrer, we 'treat[] the demurrer as admitting all material facts properly pleaded,' but we do not 'assume the truth of contentions, deductions or conclusions of law.' [Citation.] We liberally construe the pleading to achieve substantial justice between the parties, giving the complaint a reasonable interpretation and reading the allegations in context. [Citations.] When a demurrer is sustained, we must determine de novo whether the complaint alleges facts sufficient to state a cause of action under any legal theory." (Martorana v. Marlin & Saltzman (2009) 175 Cal.App.4th 685, 692-693 (Martorana).)"Courts must also consider judicially noticed matters." (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)
"[W]hen a demurrer is sustained without leave to amend, we also must determine whether there is a reasonable possibility that the defect can be cured by amendment. [Citation.] If it can be cured, the trial court has abused its discretion in sustaining the demurrer without leave to amend and we reverse. [Citation.] If it cannot be cured, there has been no abuse of discretion and we affirm. [Citation.] The burden of showing that a reasonable possibility exists that the complaint can be cured by amendment rests squarely with the plaintiff." (Martorana, supra, 175 Cal.App.4th at p. 693.)
"A demurrer may properly be granted based on the failure to adequately plead an exhaustion of administrative remedies. [Citation.] A plaintiff must exhaust the administrative remedies available before resorting to the courts." (Shuer v. County of San Diego (2004) 117 Cal.App.4th 476, 482.)
B. AHF's Complaint Failed to Adequately Allege Exhaustion of the Contractual Dispute Resolution Provisions
The question confronting us is whether AHF's complaint adequately pled that AHF exhausted its administrative remedies.
Parties to a contract may agree to exhaust administrative or other dispute resolution remedies before seeking relief in court. (A. Teichert & Son, Inc. v. State of California (1965) 238 Cal.App.2d 736, 746, disapproved on another ground in E. H. Morrill Co. v. State of Cal. (1967) 65 Cal.2d 787, 792 ["A basic doctrine of law demands exhaustion of a party's administrative remedies before he files suit, even though no statute makes it a condition of his right to sue. . . . [¶] . . . Mandatory contractual remedies must be exhausted before resort to the courts."]; cf. DeVaughn Peace, M.D., Inc. v. St. Francis Medical Center (1994) 28 Cal.App.4th 454, 460 [jurisdictional rule that member of organization must invoke and exhaust organization's internal remedies as condition precedent to resorting to courts]; Johnson v. Hydraulic Research & Mfg. Co. (1977) 70 Cal.App.3d 675, 679 [well-established that party to a collective bargaining agreement providing for internal grievance procedures must exhaust internal remedies before judicial action].) Health and Safety Code section 100171, incorporated by the parties' contract, also sets forth procedures ensuring that all hearings held in connection with an appeal under the contract would comply with the administrative adjudication provisions of the Administrative Procedures Act. (Health & Saf. Code, § 100171, subd. (a); Gov. Code, § 11400, subd. (a).)
AHF must have pled facts which, if true, would establish that it complied with the administrative exhaustion requirements set forth in the contract. We must determine what the contract required, and whether the allegations in AHF's complaint were sufficient to establish that AHF met those contractual requirements. Whether AHF adequately alleged that it exhausted its administrative remedies therefore depends in part on an interpretation of the contract's dispute resolution provisions.
AHF did not attach the parties' contract or any of its provisions to the complaint. However, as noted above, at DHCS's request the trial court took judicial notice of the dispute resolution provisions of the parties' contract, as well as several other documents relating to the parties' dispute and administrative process. DHCS argued the documents were part of the administrative record and were therefore subject to judicial notice under Evidence Code section 452, subdivision (d), as records of an administrative court. Although AHF objected with respect to several of the documents, it did not object to the request that the court take judicial notice of the dispute resolution provisions. Nor does AHF argue on appeal that the trial court erred in taking judicial notice of the dispute resolution provisions, or in granting the request as to the other documents.
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i. The contract's dispute resolution provisions
In Hervey v. Mercury Casualty Co. (2010) 185 Cal.App.4th 954, 962 (Hervey), the court explained when a court may interpret a contract to rule on a demurrer: " 'When the complaint fails to allege that the terms of the contract have any special meaning, the court can construe the language of the document on its face to determine whether as a matter of law the contract is reasonably subject to a construction sufficient to sustain a cause of action in response to a demurrer. However, when the plaintiff alleges a meaning to the document that is reasonable in light of its terms, the court cannot grant a demurrer but must permit the admission of extrinsic evidence regarding the meaning of the document as intended by the parties.' " The interpretation of a written contract is subject to de novo review, unless interpretation turns on the credibility of extrinsic evidence. (In re Electric Refund Cases (2010) 184 Cal.App.4th 1490, 1500.)
AHF's complaint does not allege any particular meaning to the dispute resolution provisions. Further, the complaint does not allege, and AHF has not subsequently argued, that extrinsic evidence is relevant to an interpretation of the provisions. We consider the language of the dispute resolution provision on its face to "determine whether as a matter of law the contract is reasonably subject to a construction sufficient" to support the conclusion that AHF exhausted its contractually required administrative remedies.
Paragraph B (Notification of Dispute) of the contract's dispute resolution procedures requires that the NOD describe the conduct the contractor disputes, specifying that the NOD must state the date, nature, and circumstances of the conduct, and the reason the contractor is disputing the conduct. Paragraph D (Appeal of Contracting Officer's or Alternate Dispute Officer's Decision) states that should the contractor appeal the response from the contracting officer, the appeal shall "specifically set forth each issue in dispute, and include Contractor's contentions as to those issues. However, Contractor's appeal shall be limited to those issues raised in its Notification of Dispute filed pursuant to paragraph B. Notification of Dispute. Failure to timely appeal the decision shall constitute a waiver by Contractor of all claims arising out of that conduct, in accordance with paragraph F. Waiver of Claims. Contractor shall exhaust all procedures provided for in this provision 15. Disputes, prior to initiating any other action to enforce this Contract." Further, paragraph F (Waiver of Claims), states: "If Contractor fails to submit a Notification of Dispute, supporting and substantiating documentation, any additionally required information, or an appeal of the Contracting Officer's or alternate dispute officer's decision, in the manner and within the time specified in this provision 15. Disputes, that failure shall constitute a waiver by Contractor of all claims arising out of that conduct, whether direct or consequential in nature."
On its face, these provisions required AHF to submit a specific NOD when disputing an aspect of DHCS's performance or failure to perform under the contract. The combined dispute resolution provisions provided more than a forum for AHF to give cursory notice of a dispute between the parties. Instead, the provisions demanded specificity and detail in the notice stage, a first level of review in which a contracting officer could resolve the dispute, and a second level of review based on the claims initially raised. The paragraph on waiver of claims indicates AHF would waive all claims arising out of disputed conduct if it failed to exhaust all of the dispute resolution procedures with respect to that conduct. In light of the language in the contract requiring AHF to identify disputed conduct in detail, limiting an appeal to issues raised in the NOD, and describing waiver in terms of claims arising out of specific conduct, we read the contract to mean that if AHF wished to dispute different categories of conduct, those categories would need to be explicitly identified in one or more NOD's.
ii. The complaint does not allege AHF pursued the dispute resolution remedy with respect to a dispute over the amount of the 2007 incentive payment
AHF's complaint alleges AHF submitted an NOD alerting DHCS that " 'AHF has not received any payment of savings sharing in 2007 and 2008, in violation of Exhibit B, section 13 of the Contract.' " It is this NOD that AHF alleges was pursued to a final decision. The complaint does not allege the NOD included any language regarding the amount of the 2007 savings share or the calculation of the anticipated payment. The complaint further does not allege the NOD was worded in broad terms such that it would encompass more than DHCS's failure to pay any savings share at all. The contract required that the NOD describe the disputed conduct. According to the complaint, AHF's NOD did not describe the conduct that formed the basis of its lawsuit: DHCS's incorrect calculation of the 2007 savings sharing payment.
According to the complaint, once AHF discerned there would be a dispute regarding the amount of the 2007 savings share, it wrote to DHCS to bring its objection to the agency's attention. In the letter, AHF informed DHCS of its belief that the objection to the amount of the 2007 savings share payment was included in "the then-pending administrative dispute." While this letter notified DHCS of the dispute, the complaint does not allege the letter complied with the dispute resolution procedure the parties had agreed upon. There is no allegation that AHF intended the letter to be an NOD, or that DHCS treated it as such. In addition, while the letter suggested the dispute over the amount of the 2007 savings sharing payment would be encompassed in the administrative appeal, this was out of step with the dispute resolution provisions, which were drafted to give DHCS the opportunity to respond and potentially resolve claims before they reached the administrative appeal stage. The complaint does not allege that AHF amended the original NOD or sought to amend the already-filed administrative appeal.
In challenging the amount of the 2007 savings sharing payment, AHF was objecting to conduct different than that identified in the NOD. The contract on its face is not subject to an interpretation that would deem the NOD sufficient to cover the later dispute. The dispute resolution provisions demanded specificity in the NOD, and indicated that only issues raised in the NOD would be the subject of the administrative appeal. AHF's complaint included allegations regarding only one NOD, and admitted that the NOD identified only one category of conduct: DHCS's failure to pay any part of the 2007 savings share. We therefore conclude AHF did not adequately plead that it exhausted its administrative remedies as the parties' contract required, with respect to the alleged incorrect savings share payment.
AHF asserts the court may not independently interpret the contract to rule on a demurrer, but must instead accept as true AHF's interpretation of the contract's dispute resolution provision. We acknowledge that in some cases it is not proper for a court to interpret a contract on a demurrer. As noted above, in Hervey, the court explained that " 'when the plaintiff alleges a meaning to the document that is reasonable in light of its terms, the court cannot grant a demurrer but must permit the admission of extrinsic evidence regarding the meaning of the document as intended by the parties.' " (Hervey, supra, 185 Cal.App.4th at p. 962.)
However, AHF has not alleged an interpretation of the contract that would reasonably support its claim that it complied with the contract's mandatory dispute resolution procedure. AHF has not argued the dispute resolution provisions are ambiguous. AHF simply states that it complied with the contract and exhausted its administrative remedies by submitting its NOD and completing an administrative appeal. AHF thus ignores, rather than interprets, the contract's provisions regarding the required content of a NOD, the limitation of issues in the administrative appeal, and the risk of waiver of claims when the contractor fails to comply with the dispute resolution provisions. To the extent AHF's allegations espouse an interpretation of the contract, it is not an interpretation or meaning to which the contract is reasonably susceptible. (Aragon-Haas v. Family Security Ins. Services, Inc. (1991) 231 Cal.App.3d 232, 239.) Moreover, AHF has not contended there is extrinsic evidence relevant to an interpretation of the dispute resolution provisions. This is not a case in which the court must refrain from interpreting the parties' contract and overrule the demurrer.
Finally, AHF has not explained how it might amend its complaint to plead around the failure to exhaust administrative remedies as required by the parties' contract. "The burden of showing that a reasonable possibility exists that amendment can cure the defects remains with the plaintiff; neither the trial court nor this court will rewrite a complaint. [Citation.] Where the appellant offers no allegations to support the possibility of amendment and no legal authority showing the viability of new causes of action, there is no basis for finding the trial court abused its discretion when it sustained the demurrer without leave to amend." (Rakestraw v. California Physicians' Service (2000) 81 Cal.App.4th 39, 44.)
DISPOSITION
The judgment is affirmed. Respondent shall recover its costs on appeal.
BIGELOW, P. J. I concur:
GRIMES, J. RUBIN, J. DISSENTING
I respectfully dissent.
In my view, the trial court incorrectly held that appellant AHF Healthcare Centers (AHF) had failed to comply with the dispute resolution process.
Because of respondent's alleged failure to account properly and provide information to AHF for the 2007 and 2008 payments due under the parties' contract, AHF filed a timely Notice of Dispute in September 2008. The hearing officer assigned to the dispute ruled that the claim was not yet ripe. AHF appealed. While the appeal was pending, respondent informed AHF of the amount of the 2007 payment which respondent by then had calculated. AHF disagreed with the proposed amount, essentially stating again that respondent had still not accounted properly for the 2007 payment. By letter, AHF informed respondent it intended to pursue the dispute over the amount in question through the appeal process that was then pending.
Rather than parse these facts by declaring the first dispute dealt with the nonpayment and the second dispute dealt with an underpayment, I believe the most reasonable interpretation of these events is that there was an initial dispute that took a turn, a turn that was both expected and was the product of the timing of the proposed payment by respondent. In civil actions, we embrace the notion of a supplemental pleading when events occur after the original complaint has been filed, and the entire matter should properly be resolved in one litigation. (Code Civ. Proc., § 646, subd. (a); 5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 1246, p. 690.) This is essentially what AHF did when it wrote to respondent, objecting to the amount of the proposed payment and stating its intent to address the issue in the already pending administrative dispute proceedings. The record does not disclose that respondent responded to this letter. At best, respondent's silence misled AHF into believing that respondent had no objection to handling the dispute about the amount of the payment as part of the pending proceedings dealing with the fact that no payment had been made. Now it claims AHF failed to exhaust its administrative remedies by not filing an earlier Notice of Dispute. Such gamesmanship by a state agency should not be condoned. There is no suggestion that respondent was prejudiced by what AHF proposed. Certainly, respondent knew how it had calculated the amount of the payment.
Our affirmance likely will mean that AHF will have lost its ability to challenge the correctness of respondent's calculation of the 2007 payment. That is a price too steep for me when AHF is guilty of at most trying to resolve a continuing dispute efficiently in one setting. I would reverse the order sustaining the demurrer. RUBIN, J.