Court Rules Provider’s Prior Authorization Calls with Payor Not a Binding Contract

Health Highlights

In a decision important to health care payors and providers alike, a California Court of Appeal, in AToN Center, Inc. v. United Healthcare Insurance Company, et al., 93 Cal.App.5th 1214 (2023), agreed with a lower court decision granting summary judgment in favor of a payor by finding that the payor did not enter into a binding agreement with an out-of-network substance use treatment provider during a prior authorization and verification of benefits communication. The court’s ruling has implications for out-of-network providers that rely on quasi-contractual theories to recover money from payors for services they rendered to members/insureds based on verification of benefits and prior authorization calls.

In addition, the decision illustrates a situation where the argument a plaintiff asserted to avoid an early demurrer paved the way for a later victory at the summary judgment stage for the defendants. To avoid the defendants’ argument that the plaintiff’s claims were preempted by the Employee Retirement Income Security Act of 1974 (ERISA), the plaintiff argued that its claims had nothing to do with the insurer’s ERISA-governed plans. On summary judgment, and following the plaintiff’s lead, the trial court refused to consider any evidence related to those plans. The plaintiff was then left to prove its remaining state-law contract claims but was unable to provide evidence to support its contention that a routine telephone call between the two parties verifying benefits created an implied contract, separate and apart from the plan documents, governing specific reimbursement rates. Judgment was entered in favor of the defendants and was affirmed by the California Court of Appeal, 4th District.

Facts and Background

The underlying facts of this case are straightforward. AToN Center, Inc. (Aton) is a self-described luxury addiction treatment center that offers residential substance abuse and subacute detoxification services. United Healthcare Insurance Company, United Behavioral Health operating under the brand Optum (UBH) and United Healthcare Services, Inc. (United) are insurers and third-party claims administrators for group health plans sponsored by employers that provide health benefits to their covered employees and dependents. United provides covered individuals with access to a network of providers that have contracted to accept established fees in exchange for being included in United’s provider network. 93 Cal.App.5th at 1218. While United also provides benefits for services rendered by out-of-network providers, such as Aton, the reimbursable amount varied due to the absence of a rate agreement.

In October 2019, Aton filed a complaint against United alleging United had substantially underpaid Aton for out-of-network addiction treatment services rendered to 29 individuals who had benefits with United. In its complaint, Aton alleged that verification of benefit (VOB) calls created an implied contract under which United promised to pay the billing rates set by Aton.1 93 Cal.App.5th at 1220. Aton claimed that United agreed to reimburse Aton anywhere between 50 and 100 percent of its billed rates.

United demurred to the complaint on the grounds that Section 514 of ERISA preempted Aton’s causes of actions. In opposition, Aton stated it was not asserting claims “based on an insurance policy or plan”; rather, it was only alleging state law claims based on “verbal representations and agreements.” 93 Cal.App.5th at 1221. The trial court overruled the demurrer on all but one of the claims.2 The parties moved forward with discovery.

United subsequently moved for summary judgment or, alternatively, summary adjudication on the remaining causes of action in the complaint. United submitted deposition testimony from both Aton and United employees along with a number of VOB forms. In November 2021, the trial court granted United’s summary judgment motion, ruling that “United had succeeded in showing, as to each cause of action, that Aton could not establish one or more necessary elements.” 93 Cal.App.5th at 1228. Aton appealed, but the Court of Appeal affirmed the ruling.

Key Facts Material to the Trial Court’s Ruling

The evidence presented during summary judgment established that when an individual with United health insurance sought treatment with Aton, Aton would call United to verify that it provided out-of-network benefits. During these VOB calls, according to United, it provided Aton, and any out-of-network provider, with information such as whether the individual was, in fact, a United member, whether the individual’s plan included out-of-network benefits, and the individual member responsibility amounts.

The evidence also established that each VOB call between Aton and United followed a similar routine. Aton had an intake team of three employees. Members of the intake team would call United, speak to a representative about the benefits of an individual patient seeking admission to Aton and memorialize the conversation on an “Insurance Quote of Benefits Form.” The form asked for a range of information, including the rate of reimbursement. “The Aton intake team member filling out the form would respond to this question by selecting one of the following four options: the usual, customary, and reasonable (UCR) rate; the maximum non-network reimbursement (MNRP) rate; the Medicare (MCR) rate; or the allowed amount (AA).” 93 Cal.App.5th at 1220. Aton intake team members only asked about these four options. “They did not ask how much Aton could expect to be paid.” 93 Cal.App.5th at 1220. The precise language of these calls proved pivotal to the ultimate conclusion reached by the court.

The trial court concluded “no mutual assent or meeting of the minds” between Aton and United occurred during the VOB calls. 93 Cal.App.5th at 1231. At the outset, the trial court stated that “Aton was foreclosed from relying on the terms of United’s plans to support its claims” because Aton had opposed United’s preemption argument on the grounds that Aton was not asserting claims based on United’s plans or policies. 93 Cal.App.5th at 1228. The same evidence applied equally to the oral and implied contract causes of action.

Evidence key to the trial court’s ruling established the following: (1) United representatives lacked authority to enter into contracts and were only permitted to verify benefits; (2) none of the terms of the contract were discussed in detail during the calls; (3) United employees testified that “[d]uring VOB calls, insurers do not agree to pay at a specific reimbursement rate or promise to pay a certain amount, nor does Aton learn how much it will be paid for a particular claim”; (4) testimony from an Aton employee that they could not remember a single promise taking place during a VOB call; (5) testimony from Aton’s CEO, James Brady, that he did not know whether United representatives “possessed information about the correlation between UCR, MNRP, and the percentage of billed charges,” nor could he state on what basis he believed that UCR or MNRP guaranteed specific repayment amounts. 93 Cal.App.5th at 1231–32. Rather, he testified that “when Aton is quoted UCR or MNRP reimbursement rates, it ‘believes’ it knows what those rates ‘should be.’” 93 Cal.App.5th at 1232. The trial court specifically noted that Aton’s belief that it had formed a contract during the VOB calls did not create a binding contract in the absence of evidence that Aton communicated this to United or United otherwise shared the same beliefs. 93 Cal.App.5th at 1232.3

Court of Appeal Analysis

The Court of Appeal noted that Aton’s argument boiled down to “two unfounded factual assertions”: (1) that during the VOB calls United representatives used “words constituting an offer or promise” and (2) that United and Aton shared an understanding that “UCR or MNRP” meant that United would pay either 50 or 100 percent of whatever rate Aton billed. 93 Cal.App.5th at 1235. The court noted that Aton based its arguments on a few unpublished federal district court decisions where a court did find that an implied or oral contract was formed during a VOB phone call, but the evidence presented in those cases supported a finding that the insurer did, in fact, promise to pay for the treatment. 93 Cal.App.5th at 1233–34. In contrast, the majority of those decisions sided with the insurer and concluded that a VOB call between an out-of-network provider and insurer did not create an implied contract. 93 Cal.App.5th at 1232–33.

The court also found that Aton submitted no evidence that United representatives used “promise to pay” language. 93 Cal.App.5th at 1235. In fact, Aton’s only attempts to support its own theory of contract liability was to point to allegations in its complaint or its CEO’s “understanding” that oral or implied agreements arose during VOB calls. 93 Cal.App.5th at 1237. Neither was persuasive, and the court concluded that “Aton again cites no evidence establishing that United representatives said anything during VOB calls that, when reasonably interpreted, conveyed an intent to enter into a contract.” 93 Cal.App.5th at 1237.

In contrast, United submitted substantial evidence that the calls were informational only and did not create binding agreements. 93 Cal.App.5th at 1236. The court also held that it was not stating that the usage of “will pay” language was sufficient to substantiate a contract claim; rather, it was noting that “to the extent Aton relies on decisions allowing contract claims to proceed on the basis of such facts, it fails to establish those facts exist in this case.” 93 Cal.App.5th at 1236.

Aton’s next argument, that United and Aton shared the same understanding regarding MNRP and UCR, was also found to be lacking in factual support. Aton initially claimed that because United historically paid 50 percent of billed charges when MNRP applied, this demonstrated a shared understanding that this reimbursement formula would always apply. 93 Cal.App.5th at 1238. The court rejected this, noting all this established was Aton’s “unilateral expectation” that historical rates would apply to future bills. It did “not establish that the parties mutually agreed during VOB calls that United’s payment of the subject claims would comport with its payment of prior claims.” 93 Cal.App.5th at 1238 (emphasis added). Similarly, Aton’s belief that its rates were “usual, customary, and reasonable” did nothing to establish that United had the same belief. The court rejected any evidence that relied on language in United’s plans. Aton had not challenged the trial court’s ruling that Aton was judicially estopped from making claims based on the plans because of the arguments it made opposing United’s demurrer.4 As a result, Aton could not rely on the plan’s language to “resurrect its claims.” 93 Cal.App.5th at 1238. “In short, Aton fails to cite record evidence supporting either of its factual assertions.” 93 Cal.App.5th at 1239.

Aton made seven additional arguments, none of which the court found compelling. First, Aton claimed that whether United’s representatives had the authority to enter into contracts was a fact that could not be adjudicated at summary judgment. But there was no material dispute about this fact because Aton cited to no evidence that “acts by United that caused [Aton] to believe United’s VOB representatives possessed authority to contract.” 93 Cal.App.5th at 1240. Second, Aton claimed that parties do not need to inform each other when a contract is made. While this is a correct statement of law, Aton did not explain how this principle supported reversal. The court referred to Aton’s third argument as “disconnected assertions that again fail to establish reversible error.” 93 Cal.App.5th at 1241. Fourth, Aton cited to case law about filling in missing provisions of “valid” contracts. 93 Cal.App.5th at 1242. These did not apply because no contract existed. Fifth, Aton argued the trial court’s reliance on disclaimers contained in some of the authorization letters was misplaced. Again, the court highlighted that the issue was Aton’s failure to introduce any evidence that a meeting of the minds occurred. Sixth, Aton focused on the issue of consideration in contract formation. The court noted that mutual consent and consideration are different elements of contract formation. A party must show all elements to establish a claim, and Aton could not establish mutual consent. Seventh, Aton argued the trial court had misunderstood the scope of Aton’s implied contract claim. The court disagreed, noting that the trial court had expressly considered Aton’s implied contract claim.

Other Causes of Action

As to promissory estoppel, Aton argued that by giving a reimbursement method and authorization for treatment during a VOB call, there was a possibility the trier of fact could find that United promised to pay. The court disagreed. Once again, the court emphasized that “United’s evidence established that VOB calls were not ‘promises to pay.’” 311 Cal.Rptr.3d at 592. Providing a reimbursement method and authorizing treatment did not establish that a promise had been made. Finally, the court affirmed the trial court’s grant of summary judgment in United’s favor on Aton’s claims of intentional misrepresentation, negligent misrepresentation and fraudulent concealment, as well as violations of the UCL. Aton’s arguments leaned heavily on inapposite unpublished case law, involved underdeveloped arguments or were factually unsubstantiated.

Takeaways

As the Court of Appeal made clear, the language used during verification calls is critical, and the lack of evidence to support a claim of contract formation was fatal to Aton’s lawsuit. In contrast, United provided competent, credible and admissible evidence that no contract had been formed. In addition, Aton may have made a fatal error in taking a position on demurrer that limited its arguments at a later stage. Forward-looking legal thinking is critical.            


1 Aton alleged eight causes of action in its complaint: (1) breach of oral contract, (2) intentional misrepresentation, (3) negligent misrepresentation, (4) fraudulent concealment, (5) promissory estoppel, (6) quantum meruit, (7) violation of Business and Professions Code Section 17200 (the Unfair Competition Law (UCL)), and (8) breach of implied contract.

2 The one cause of action that was dismissed on demurrer was quantum meruit.

3 The trial court had also granted United’s motion for summary adjudication as to Aton’s causes of action for promissory estoppel, intentional misrepresentation, negligent misrepresentation, fraudulent concealment and violations of the UCL.

4 Aton made two other arguments that were summarily rejected. First, the court rejected Aton’s expert on the grounds the testimony focused on “reimbursement methodology in hindsight,” not what the parties believed during the calls. 93 Cal.App.5th at 1238. Second, the court stated that though Aton potentially intended to make an argument based on United’s authorization of treatment, the argument under that section was not developed and, in any event, was forfeited. 93 Cal.App.5th at 1238.

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