No Tort Liability for Insurer Underpayment of Hospital Bills | JD Supra

No Tort Liability for Insurer Underpayment of Hospital Bills | JD Supra

On November 4, 2021, the Second District Court of Appeal, Division 2, ruled against establishing tort liability for insurers who paid less than what the hospital believed to be the “reasonable and customary value.” This partially published opinion is based on the underlying suit between plaintiffs Long Beach Memorial Medical Center and Orange Coast Memorial Medical Center (collectively “the hospitals”) and defendant Kaiser Foundation Health Plan, Inc. (“Kaiser”) stemming from alleged underpayment by Kaiser for emergency medical services rendered at the hospitals. The Court of Appeal reviewed the following issues:

Generally, California's Knox-Keene Health Care Service Plan Act of 1975 (the Knox-Keene Act) (§ 1340 et seq) requires the plan to reimburse the hospital for providing such emergency services and care. The plan must reimburse either a previously decided value if the hospital and plan have an existing contract, or, if there is no such contract, the “reasonable and customary value” of the services provided.

Here, Kaiser and the hospitals had no current contract as they let the existing contracts expire. Kaiser calculated payment of medical bills accrued by its enrollees at the hospitals from 2015 to 2017 based on its own “internal methodology.” Ultimately, Kaiser reimbursed the hospitals $16,524,537—or 53.2 percent of the full, billed charges.”

The court held a hospital could not sue in tort for underpayment, finding that the costs of establishing such a tort outweighed the benefits. Among other concerns, the court opined that establishment of such a tort would inevitably lead to an outcome fundamentally at odds with one of the avowed purposes of the Knox-Keene Act to help ensure the best possible health care for the public at the lowest possible cost by transferring the financial risk of health care from patients to providers.

The court held the restitution available under the unfair competition law would be entirely duplicative of what was already afforded to the hospital based on its quantum meruit suit. Additionally, the court opined the injunctive relief the hospitals sought—that is, an order enjoining Kaiser from violating the Knox-Keene Act by underpaying for emergency medical services in the future is legally unavailable. While the trial court erred dismissing the claim to the extent it sought restitution, the court here found the error harmless because of this duplicative relief already provided through the quantum meruit suit.

At trial, the jury was instructed as follows on the definition of “reasonable value”:

The measure of recovery in quantum meruit is the reasonable value of the services. Reasonable value is the price that a hypothetical willing buyer would pay a hypothetical willing seller for the services, neither being under compulsion to buy or sell, and both having full knowledge of all pertinent facts. Reasonable value can be described as the “going rate” for those services in the market.

In determining reasonable value, you should consider the full range of transactions presented to you, but you are not bound by them. You may choose to use the transactions you believe reflect the price that a hypothetical willing buyer would pay a hypothetical willing seller for the services. On the other hand, you may reject transactions you believe do not reflect the price that a hypothetical willing buyer would pay a hypothetical willing seller for the services.

The hospitals challenged these instructions, particularly the use of the word “hypothetical,” while amici took issue by not instructing jurors to give greater weight to prior agreements. The court was not persuaded by either of these arguments. In particular, the court held the use of the word “hypothetical” was entirely appropriate as “fair market value” is defined similarly in other situations as the amount that “hypothetical buyers and sellers” would pay in a “hypothetical transaction.”

Further, the court stated, it is also affirmatively helpful to phrase it like that because it emphasizes another pertinent legal principle—namely, that the parties’ prior actual transactions are not dispositive.” In fact, the discretion accorded by the jury to reject some transactions does no more than reflect the reality that some market transactions will more closely resemble the transactions at issue in the case before the jury, and some will bear less resemblance, giving the jury the ability to give greater weight to the former and less weight to the latter in fixing what a hypothetical buyer and seller would pay for the specific services at issue in that case.

The Court discusses many principles integral to the holding in the landmark California Supreme Court case of Howell v. Hamilton Meats14 that a personal injury plaintiff may only recover the lesser of the amount paid or the reasonable value of medical services rendered. Here, the Court notes hospitals collect their full, billed rate only 1% to 10% of the time. Furthermore, the average rate the hospitals agreed to accept as payment for emergency medical services was just 27% of the hospitals’ full, billed rates.

When it comes to doctors providing treatment to personal injury plaintiffs on a lien basis, a similar inquiry should be conducted as to the number of times these doctors have collected their full, billed rate, as well as the actual amounts the doctors have accepted as payment in full from various health insurance entities and cash patients for the same service provided in the past in order to establish the reasonable value of the medical services provided.

6 d. at 7, citing § 1342, subd. (d), italics added; Pacific Bay Recovery, Inc. v. California Physicians’ Services, Inc. (2017) 12 Cal.App.5th 200, 207, 218 Cal.Rptr.3d 562.

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