Arbitration provision in plan provider agreement may be enforceable, California court says

A California appeals court has ruled that an arbitration provision in a plan provider agreement was enforceable as “Step Two” of its dispute resolution process.

In Epstein v. Vision Service Plan, optometrist Gordon Epstein entered into a Network Doctor Agreement with Vision Service Plan to be a member of its provider network. The agreement required Dr. Epstein to use “either a VSP lab or a VSP-contracted lab to fabricate eyeglass lenses for VSP insureds.” During an audit of Dr. Epstein’s claims for reimbursement, VSP discovered Epstein had “knowingly purchased lenses from an unapproved supplier.”  As a result, VSP terminated Dr. Epstein’s agreement.

Dr. Epstein appealed VSP’s audit and the termination decision. The agreement said that disputes between the provider and VSP were subject to a two-step resolution procedure. First, there was an internal appeal process, which complied with a requirement under Section 1367 of the California Health and Safety Code that the “dispute resolution mechanism” be “fast, fair, and cost-effective.” The second step was a binding arbitration procedure that allowed either party to challenge the outcome of Step One.

Step One for Dr. Epstein involved a hearing during which testimony and documentary evidence were presented. A three-member peer review plan hearing panel found in favor of VSP. Instead of moving to Step Two arbitration, Dr. Epstein filed an administrative mandamus proceeding in court under Section 1094.5 of the California Code of Civil Procedure.

The court denied Dr. Epstein’s petition on the ground that he had failed to exhaust his administrative remedies by requesting arbitration. The court also rejected Epstein’s regulatory law and unconscionability challenges to arbitration. Dr. Epstein appealed, but the California Court of Appeals affirmed. Specifically, the appeals court found as follows:

• Section 1367 requirements for “dispute resolution mechanisms” applied to Step One but not Step Two of VSP’s dispute resolution process.
• Dr. Epstein failed to establish that Step Two was unconscionable and therefore unenforceable. Although he was able to establish “some degree of procedural unconscionability,” he was unable to establish that any of the arbitration procedures were substantively unconscionable.

Significance for health care clients and providers in California

Among other benefits, arbitration is generally a good way to resolve disputes because of its relative efficiency and cost-effectiveness when contrasted with the court system. To reduce the possibility of winding up in court -- with the associated risks, delays, disruption, and expense -- health care clients in California who contract with medical providers may want to consider incorporating arbitration review provisions into their provider agreements or provider termination procedures.

If you need assistance in these areas, please contact any attorney in our offices in Los Angeles, Orange County, or San Francisco.

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