If a healthcare plan and provider agree to arbitrate disputes under a provider contract, can the provider compel arbitration against third-party payers that access those same contract rates?

Provider networks are a key component of the managed healthcare system. Health plans frequently operate as network vendors and lease access to their networks to third-party payers, allowing those payers to use discounted rates guaranteed under the plans' contracts. In such arrangements, however, there is no direct contract between the provider and third-party payer. So, in a dispute between a third-party payer and provider, the question becomes whether the payer is required to arbitrate and/or is entitled to compel the provider to do so under the provider's contract with the health plan.

In a recently published case, UFCW & Employers Benefits Trust v. Sutter Health, 241 Cal. App. 4th 909 (2015), the California Court of Appeal said no, rejecting Sutter Health's estoppel and statutory arguments that it was entitled to enforce the arbitration provision in its health plan provider contract against a self-funded employee benefit plan that accessed the negotiated contract rates through a separate contract with the health plan. Of particular note was the provider's reliance on California Health & Safety Code Section 1375.7, known as the "Healthcare Providers' Bill of Rights," intended to protect providers from undisclosed contract terms in these types of network leasing arrangements.

Between the late 1990s and the early 2000s, providers routinely complained that they were unaware when third-party payers accessed their discounted rates and, when problems arose, there was no mechanism to govern their disputes with third-party payers. In 2002 the California Legislature passed A.B. 2907, Stats. 2002, ch. 925, which enacted Section 1375.7 of the Health & Safety Code and provides, among other things, that in a network leasing arrangement a provider cannot be held liable for contract terms that differ from its underlying contract: "When a contracting agent sells, leases, or transfers a health provider's contract to a payer, the rights and obligations of the provider shall be governed by the underlying contract between the healthcare provider and the contracting agent." Cal. Health & Saf. Code § 1375.7(d)(1). The statute then invalidates any offending contract terms: "Any contract provision that violates subdivision . . . (d) shall be void, unlawful, and unenforceable."Cal. Health & Saf. Code § 1375.7(e).

In UFCW, the question presented to the Court of Appeal was whether Section 1375.7(d) bound third-party payers to the terms of the underlying provider contracts, or instead prohibited them from accessing discounted rates on terms that differed from the underlying contracts. The Court of Appeal held the latter interpretation was the correct one. Before UFCW, there were no published cases in California discussing or interpreting Section 1375.7, making UFCW's ruling one of first impression.

The facts underlying UFCW were fairly typical. Sutter Health entered into a provider contract with a health plan for negotiated rates. That contract contained an arbitration provision and, importantly, a confidentiality provision. The health plan then entered into an administrative services organization (ASO) agreement with UFCW & Employers Benefit Trust (UEBT), an ERISA-governed employee benefits trust, which allowed UEBT to access the discounted rates. UEBT, however, never signed the underlying provider contract that contained the arbitration provision. In fact, in the ASO agreement with the health plan, UEBT expressly agreed to litigate, rather than arbitrate, disputes in California courts. Further, UEBT had never seen the underlying provider contract, because of its confidentiality provision. So Sutter Health was in the position of arguing UEBT should be held to contract terms it not only did not sign but also had never seen.

In arguing UEBT must arbitrate its claims, Sutter Health took a broad view of the Healthcare Providers' Bill of Rights, arguing the statute gave it the same rights and obligations against third-party payer UEBT as against the contracting health plan. The Court of Appeal agreed the statute applied: the health plan was a "contracting agent," Sutter Health was a "healthcare provider," and UEBT was a "payer" under Section 1375.7(d). The question remained, however, whether Section 1375.7 created contract terms, or prohibited them. The Court of Appeal held the statute, which was intended to protect providers from undisclosed contract terms, could not be used to force undisclosed terms on payers. The Court also rejected Sutter Health's estoppel theory, finding that to the extent UEBT benefited from discounted rates the plan negotiated with providers, that benefit was too indirect to compel arbitration based on equitable estoppel.

Ultimately, with respect to Section 1375.7, the Court was swayed by proposed language that never made it into the bill, which highlighted the impossibility of imposing contract terms in third-party payer arrangements through state law. Many third-party payers are employer trusts governed by ERISA. Accordingly, Section 1375.7 cannot create contract terms by operation of law for such trusts, because they are preempted from state regulation.

The complexity of networking leasing arrangements, and the application of state and federal law to separate parts of them, means that if providers want to enforce negotiated terms in their provider contracts against third-party payers, they need a direct contractual relationship or an assignment of rights. The question is whether providers and plans are willing to forgo the typical confidentiality provisions in their provider agreements to that end.

On January 13, 2016, the California Supreme Court denied Sutter Health's petition for review and request for depublication, rendering the decision both final and binding precedent.