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Are hospitals gouging the uninsured?

Last week NPR posted a video created by a group called Cost of Care that asked, “What if your hotel bill was like a hospital bill?”  The film doesn’t boast a high production value (to put it mildly), but it highlights the inscrutable nature of hospital billing practices, which leave patients with no idea how much their stays will cost them.  The situation is particularly bleak for uninsured patients, who get hammered twice for their lack of coverage.  Not only do these patients lack an insurer to cover their expenses, but many hospitals perversely demand larger payments from uninsured patients than they accept from their insured counterparts.

Uninsured patients have filed a spate of lawsuits challenging the reasonableness of hospitals’ fees, as well as hospitals’ requirements that patients prospectively agree to pay for all services rendered, without any description of how prices will be determined.  In many of these cases hospitals have successfully argued that courts lack the capacity and authority to second-guess their billing practices.  For example, in 2008 the United States Court of Appeals for the Third Circuit affirmed a lower court’s dismissal of such a suit, arguing that:

[t]his case, and other similar cases being brought throughout the country, arise out of the anomalies which exist in the American system of providing health care.  A court could not possibly determine what a “reasonable charge” for hospital services would be without wading into the entire structure of providing hospital care . . . .  What Plaintiff is asking the Court to do here is, put simply, to solve the problems of the American health care system, problems that the political branches of both the federal and state governments and the efforts of the private sector have, thus far, been unable to resolve.  Like other similar suits filed in other federal courts, this action seeks judicial intervention in a political morass.

Indiana hospital chain Clarian Health Partners may have expected a similar result from that state’s Court of Appeals last fall, when two of Clarian’s uninsured patients appealed a trial court’s dismissal of their breach of contract claims.  If so, the hospital was in for a surprise.  The appellate court reversed the lower court’s decision, holding that the patients’ claims are “supported by more than 120 years of Indiana common law.”

The patients allege that before Clarian treated them, they signed contracts in which they agreed to pay for the hospital’s services.  However, “[t]he contract did not specify a price or fee schedule for the services that were to be provided.”  The patients argue that because the contracts did not establish a price for Clarian’s services, under Indiana law the hospital was obligated to act in good faith and charge a reasonable price for those services — an obligation Clarian allegedly breached.  Clarian charged one of the patients $15,641.64 – more than double the amount it would have accepted from an insurer for the same services.

The Court of Appeals agreed that this stated a valid claim, citing the well-established principle that “[w]here a contract makes no statement as to the price to be paid, the law invokes the standard of reasonableness, and the fair value of the services or property is recoverable.”  (17A Am. Jur. 2d Contracts § 488)  Accordingly, the plaintiffs were entitled to have a jury determine whether Clarian’s fees reflected the fair value of the services the hospital provided.

You can read the opinion here.  Highlights include:

  • Quoting from a recent Indiana Supreme Court case in which the court noted that “hospital executives reportedly admit that most charges ‘have no relation to anything, and certainly not to cost,’” and that “charges billed by health care providers are effectively irrelevant to the value of the services provided.”
  • Rejecting Clarian’s claim that the contracts “provide unconditional promises by patients to pay any amount for services provided”:  “That would be an unreasonable, if not absurd, interpretation, and we will not interpret a contract in a manner that results in a manifest absurdity.”
  • Rejecting Clarian’s argument that patients could determine Clarian’s rates by referring to the hospital’s “chargemaster rates” – i.e., the schedule of prices the hospital uses to calculate billing for its services: “[A]t oral argument counsel for Clarian stated that Clarian considers its chargemaster rates confidential and proprietary.  Left unanswered by Clarian is how a patient and provider can mutually agree to an ‘unambiguous’ and ‘express’ chargemaster fee schedule that is not available to the patient.”
  • Rejecting Clarian’s claim that “as a matter of public policy . . . health care billing is so complicated that Indiana courts are not capable of determining reasonable medical expenses”:  “Indiana courts and jurors are quite capable of determining reasonable medical expenses. . . .  We have found no Indiana authority supporting the proposition that medical expenses and billing are or should be exempt from the common law.”

The big catch here is that the appellate court’s decision hinged on the fact that Clarian’s contracts were utterly devoid of any description of how the hospital’s fees would be determined.  The contract stated only that “[i]n consideration of services delivered . . . , the undersigned guarantees payment of the account, and agrees to pay the same upon discharge . . .”  The court’s opinion strongly suggests that had the contracts referred to “regular rates,” “pre-set” rates, “all charges,” or “usual and customary charges” – as did the contracts in other cases in which hospitals have prevailed – the court would have affirmed dismissal of plaintiffs’ claims.

In other words, notwithstanding the court’s verbal spanking of Clarian, to avoid future liability the hospital merely needs to make minor tweaks to the wording of its contracts and make its chargemaster rates available.  The court did not hold that Clarian could not continue to charge uninsured patients double the rates it accepts from insurers.  Although these practices seem grossly unfair, absent legislation prohibiting them there is little courts can do to remedy them.

Matt Lamkin
Twitter: @lawbioethics

One Response to “Are hospitals gouging the uninsured?”

  1. hgreely says:

    Fascinating case. I wonder how old the contract language is – if it is relatively recent, the result of a new version of an old document, some lawyers for Clarion may be in trouble with their client.
    You are shocked that the uninsured patient’s bill was more than twice as high as the insurer’s; I’m surprised it wasn’t higher. I wonder, though, what you would do about differential pricing? Hospitals have long used it to subsidize patients who couldn’t pay, a practice that continues. Would you stop insurers from driving a good deal? If you require “most favored nation” treatment for the uninsured, you surely reduce the isurer’s incentives to negotiate a good rate, a rate that may give a hospital an incentive to be more efficient (or may just result in shifting costs around – or some of both).
    Hospital pricing is such a complex morass that making tweaks to it, though might benefit the few uninsured with enough money to tempt the hospital actually to go after payment, may be a losing strategy. Wouldn’t a better solution, for this and many other things, be to get everyone insured?

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