By Kevin Stawicki

Law360 (November 16, 2020, 10:55 PM EST) -- California's health exchange unconstitutionally issued an emergency regulation requiring health plans to pay for COVID-19 testing and services, which eviscerated existing contracts between plans and providers, the California Association of Health Plans said in a state court suit seeking to scrap the regulation.

As the coronavirus pandemic raged, the California Department of Managed Health Care enacted a cost-shifting mandate that classified COVID-19 testing as a basic health care service for a broad group of "essential workers" and others, which made health plans foot the whole bill, according to a petition for writ of mandamus filed Friday in California Superior Court.

But the health exchange bypassed the required notice and public comment period by saying the regulation was the "highest level emergency," even though it didn't make the case that the new rule was urgent, the lawsuit said.

"While there is no doubt that the COVID-19 pandemic presents a state and national emergency, the [California Department of Managed Health Care] failed to provide any factual basis or empirical evidence as required," the trade association said, adding that the state couldn't cite "any imminent need to nullify existing contract terms allocating risk and expense as between health care service plans and health care providers."

The health exchange issued the new regulation on July 17, declaring that COVID-19 tests were basic health services to be covered in full for essential workers by the health plan, the lawsuit said. Health plans could ask enrollees whether they were essential workers without verification, creating a "broad medical necessity presumption," it said.

The new rule also required health plans to foot the bill for all testing-related costs for enrollees regardless of whether a health care provider agreed in a contract with the health plan to cover those costs, the health plan association said.

While health plans and providers usually craft contracts to balance out risks, the new rule "immediately and materially disrupted existing carefully bargained-for contract arrangements — arrangements that have often existed for decades and been relief upon by both health care service plans and health care providers," the petition states.

By waiting more than four months after Gov. Gavin Newsom announced a state of emergency in March to issue the regulation without the required notice and public comment period, and then by refusing to give CAHP a few days to challenge the proposed rule, the health exchange violated the state's Constitution and its Administrative Procedure Act, the petition said.

CAHP, a trade association that represents dozens of health plans that cover more than 26 million state residents, asked the judge to declare the regulation unconstitutional and force the agency to withdraw it, saying the rule imposed an unfair burden on health plans.

A representative for the California Department of Managed Health Care said the emergency regulation was just one of many actions taken in response to COVID-19 "to protect health plan enrollees and support the overall health care delivery system to ensure appropriate care continues to be provided to health plan enrollees."

The department said it could not comment on pending litigation.

Representatives for CAHP declined to comment.

CAHP is represented by Moe Keshavarzi, A. Alexander Kuljis, John T. Brooks, Jack Burns and Todd L. Padnos of Sheppard Mullin Richter & Hampton LLP.

Counsel information for the defendants was not immediately available.

The case is California Association of Health Plans v. Watanabe et al., case number 20STCP03773, in the Superior Court of the State of California County of Los Angeles.

--Editing by Adam LoBelia.

Update: The story has been updated with the case number.

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