On October 21, 2016, the Indiana Supreme Court issued a decision in Patchett v. Lee that reaffirmed and somewhat extended the decision it made in Stanley v. Walker. The general rule in civil litigation is that, when a person has been injured through the negligence of another person, the injured party should receive an amount of money that “makes them whole.” It’s not precise, and often it’s something of a fiction, but the idea is that you ask how many dollars it would be worth for a person to never have been injured in the first place and then require the defendant to pay that much money. When the injury required medical treatment, the defendant is obligated to pay the “reasonable value” of the medical treatment. If you’ve ever wrestled with medical providers or insurance companies, you know that determining the actual value of a medical procedure can be a wildly speculative undertaking.
Back in 2009, defendants were at a disadvantage trying to prove “reasonable value.” One rule of evidence said that medical bills were prima facie evidence of the reasonable value. On the one hand, requiring plaintiffs to do anything else would be probably unfairly burdensome. On the other hand, there’s rarely anything reasonable about the sticker price for medical services. Hospitals have a charge master that forms the starting point for negotiations with insurance companies and government programs. That’s the number that gets spit out by the medical provider’s computers in the initial billing. It often has only a nodding acquaintance with the amount the provider actually expects to get paid for the service. Before Stanley, defendants were often hamstrung in their ability to present evidence of the actual value of the service by courts’ interpretation of the collateral-source doctrine. This was beneficial to Plaintiffs inasmuch as they could get the jury to award the full sticker price, repay the plaintiff’s medical insurer only the amount actually paid, and pocket the difference. The Plaintiff received a windfall depending on how inflated the medical bill was.
As I said back at the time Stanley v. Walker was decided:
There is another statutory rule of evidence known as the collateral source statute that says defendants can’t introduce evidence of, among other things, benefits from insurance paid for by the plaintiff. This makes some sense: why should the guy who hit me get a benefit from the fact that I planned ahead and paid my insurance premiums? But, this collateral source doctrine was used to prohibit introduction of evidence that a medical provider accepted not only payment from an insurance company, but also “wrote off” a chunk of the bill based on its agreement with the insurer. (For it to be a “write off,” one has to start from the premise that the starting price was something other than a fiction in the first place. A dubious proposition.)
So, what the case boils down to, as I read it, is whether the “write off” is properly characterized as a benefit purchased by the plaintiff/insured or as simply a more accurate reflection of what the “reasonable cost” of the service was in the first place. The Supreme Court, in a 3-2 decision, decided that the write-offs could be introduced as evidence of the reasonable value of the medical services — if the hospital agreed to accept the reduced amount as payment in full (regardless of whether the paid portion originated as insurance money or elsewhere), then that is evidence a jury should be able to consider along side the sticker price. The jury can then make its own decision about what the reasonable value is.
In the present case of Patchett v. Lee, the Indiana Supreme Court reaffirmed this approach: Plaintiffs can introduce evidence of the sticker price, Defendants can respond by providing evidence of what providers actually accepted for payment, and the jury can sort it out. The court described this as a middle approach when compared to other states. Some states allow only the billed amounts as evidence. Some states allow only the accepted payment as evidence. Other states, including Indiana, allow both.
The specific wrinkle in this case was whether amounts paid by the Healthy Indiana Plan, a government Medicaid program, represented a negotiated price such that it was actually probative of some sort of market value. The trial court did not think it was and, therefore, excluded evidence of the HIP payments accepted by medical providers as payment-in-full. The Supreme Court disagreed, noting that many providers accepted such payment as payment-in-full; while other providers opted simply not to participate in the HIP program: in other words, participation was not mandatory, and enough providers nevertheless did participate to suggest that the amounts paid were at least somewhat reliable proof of the actual market value of the services.
Interesting case, Doug. Illustrative of the deep problems in healthcare. And illustrative as well of how poorly judges who are not experts in the industry understand its practices.
What seems missing from the legal discussion (perhaps you have some insight into this) is the definition of a “customer” as a willing and informed participant in a transaction. The patient rarely has any notion even of the magnitude of what the charges will be. At the same time, the patient often effectively has few or no options to choose a different provider, to take their business elsewhere.
What is missing at the same time is whether:
o the price charged is in any way attached to real costs (it’s not, and few hospitals have any idea of their real “total cost of ownership” for any particular item they are selling), or
o is a market norm (prices vary by orders of magnitude for the same item in the same market, and often even in the same facility), or
o is in fact based on anything at all (It’s not. Seriously. They just make the prices up out of thin air.)
Thanks for the comment, Joe. You’ve been an influence in my understanding of the healthcare marketplace.
The Indiana Supreme Court has tried to distinguish its analysis of how much a tortfeasor has to pay for medical services in a personal injury case from its analysis of how much a patient has to pay for the same services in a contract case. Moore v. Clarian Health (pdf) from 2012 has some discussion about that. (I was not thrilled with this decision).
I think the screwed up nature of the healthcare marketplace has courts making uncomfortable contortions trying to balance some competing interests.
Joe, patients defer decision making to the professional judgement of doctors. Patients rely, payors rely, and to some extent allied healthcare providers, rely on these medical decision. This is especially profligate in a system where physicians have economic interests in the testing, treatment or procedure in which the order. Anti-fraud and abuse rules have taken much of this self-dealing away, however. But doctors rarely have any interest in operating abstemiously in a third-party payor environment.
Also, the market for most medical products and services is inelastic. The only really elastic procedures in healthcare are for cosmetic procedures. Lasik, cosmetic surgery’s, breast enhancements. I saw a figure recently that between one quarter and one third of young women that have breast augmentation do not have health insurance.
Pricing is really a conundrum, as you note. In a tax-exempt environment, few hospitals know their costs. And payors and providers often know what is the going rate for encounters. Proprietary data companies develop databases of prices based upon zips. They sort of reflect what is charged and paid, but are more outlier than average or median. I once contracted with one of these large data companies. The data was proprietary and confidential to the payor. So when a provider would look at contracting with this payor, the provider would tell the payor what their five most common codes where and decide on that to contract or negotiate based on five CPTs.
Well intentioned pushes for healthcare price transparency are being made. I do not think that patients will find much real use for pricing data, though. First, as stated earlier, the demand for these services are rarely elective and are nearly always emergent or perhaps emergency based. Try negotiating from the ambulance. Also, medical providers will generally not negotiate prices with patients anyway.
But my biggest concern is that hospitals will look at this pricing date, compare charges with comparable hospitals, and raise their prices to match the competition, knowing that payors have little leverage to bargain them down.
@Carlito. Nice post. In one part you said “In a tax-exempt environment, few hospitals know their costs. “. Why does tax-exempt play into this statement?
Rick, thanks. The tax exempt status of most hospitals is kind of a demand side issue and a competitive advantage.
For-profit firms are accountable to the owners, shareholders, other types of equity holders for profit or loss. Their mission is generally to maximize profits. (Some for- profits do recognize social goods, but it is by agreement of the equity owners.) For-profits work to contain or reduce input costs. They usually know what their costs are and work to reduce them. And they know the tax burden that falls upon the firm.
Tax-exempt organizations have a built in cost advantage because they pay no tax on the activities that are related to the organizations primary purpose. In the case of hospitals, it is providing healthcare. This could be a tax advantage of 20-50%. depending on the status of the business form of competing for-profit hospitals, clinics, physician and allied health providers.
Costs are important to a tax-exempt (TE) organization and they work to keep them low. But their competitive tax advantages does not require them to expend substantial efforts to know the exact cost for each service. It the revenue exceeds expenses, that is mostly good enough. And this does not mean that their costs are relevant. TE’s need a rough idea of their costs, and they are always examining their revenue streams to determine which revenue streams are the most lucrative. These areas change over time. DME might be lucractive for awhile. Specialty heart hospitals were lucractive 10-15 years. My last big healthcare transactional work was in oncology. Reimbursement was really good in the late 2000s and is still pretty good.
Tax-exempt organizations that are have revenues that far exceed costs are really not charitable organizations. They do provide some charity (uncompenstated) care. But in nearly all ways, the conduct themselves as for profit entities. They expand lucrative services, expand into areas with high income, and avoid markets with lower incomes. Just watch where St. Vincents and Methodist Hospital in Indy expand. Or Parkview and Lutheran in Fort Wayne. Their main hospitals are more in the nature of hotels that provide healthcare, and not acute care facilities.
It is my belief that inner city hospitals, hospitals in rural areas, and certain tertiary hospitals are really non-profit entities and should be tax-exempt. But not the St. Vincents and Parkviews of the world.