California Legal Brief

The Rule of Pomona Valley Hospital Medical Center v. Kaiser Foundation Health Plan is that a contractual exclusion limiting evidence use only applies to valuations "under" the specific regulatory provision cited, and does not preclude use of the same evidence in quantum meruit valuations which are separate and distinct from regulatory determinations, under circumstances where the exclusion clause specifically references only determinations made pursuant to a particular regulation subsection.

Appeal from judgment after jury trial in Superior Court, Los Angeles County.

Defendant Appellant was Kaiser Foundation Health Plan, Inc. — the health care service plan that terminated a 2004 reimbursement contract and unilaterally reduced payment rates for emergency services.

Plaintiff Respondent was Pomona Valley Hospital Medical Center — the regional hospital providing emergency services to Kaiser members seeking reimbursement for the reasonable value of services.

The suit sounded in quantum meruit. Kaiser also cross-appealed.

The key substantive facts leading to the suit were Kaiser terminated a 2004 Contract that provided 86% reimbursement of billed charges for emergency services to Kaiser members, then unilaterally reduced payments to 29% of billed charges (approximately $39.8 million of $136.6 million in total charges), prompting the hospital to sue for the difference claiming the reasonable value was approximately $66 million more than Kaiser paid.

The procedural result leading to the Appeal: The trial court granted Kaiser's motion for new trial finding that admission of the 2004 Contract was legal error based on a contractual exclusion clause, but offered conditional remittitur allowing plaintiff to accept approximately $8 million reduction to verdict in lieu of new trial, ruling that the contractual exclusion in section 3(G) precluded use of the 2004 Contract as evidence in quantum meruit actions.

The key question(s) on Appeal: 1) Whether section 3(G) of the 2004 Contract, which excluded use of contract terms as evidence "concerning what constitutes the reasonable and customary value" under Regulation 1300.71(a)(3)(B), applies to quantum meruit valuations; 2) Whether the trial court erroneously excluded evidence of hospital operating costs; 3) Whether plaintiff's expert testimony was improper; 4) Whether the proper prejudgment interest rate was 7% rather than 10%.

The Appellate Court held the trial court erroneously granted the new trial motion because section 3(G) of the 2004 Contract only applied to determinations "under" Regulation 1300.71(a)(3)(B), and quantum meruit actions are separate and distinct from regulatory valuations under that provision, making the 2004 Contract properly admissible evidence of fair market value, and that 7% was the proper prejudgment interest rate under constitutional limits.

The case is inapplicable when the contractual exclusion specifically references the type of valuation being conducted (such as quantum meruit actions generally rather than just regulatory determinations), or when the evidence sought to be excluded falls within the scope of activities specifically covered by the exclusionary language.

The case leaves open questions about the precise circumstances under which section 3(G) would apply to exclude contract evidence, the full scope of cost evidence that may be properly excluded in quantum meruit actions, and the application of contractual exclusions to other types of valuation proceedings.