In the Absence of Agreement: California Courts Define Pricing for Non-contracted Medical Services

• Publication year: 2015
• Citation: Vol. 2015 No. 2
• Author: David D. Johnson

In the Absence of Agreement: California Courts Define Pricing for Non-contracted Medical Services

David D. Johnson¹

David D. Johnson is a health law attorney in the San Francisco office of Crowell & Moring, LLP. He focuses on health care litigation and regulatory counseling. Mr. Johnson graduated from the University of Texas at Austin School of Law. Prior to law school, he worked as a C.P.A.

Americans are accustomed to dealing based on the principles of contract, in which the buyer and the seller agree in advance on the price that will be paid for goods and services. Not so for medical services.

In many cases, there is no meeting of the minds on the extent or price of medical services before they are performed. Many providers, such as physicians and pharmacies, do not publish price lists. Since 2003, California has required most hospitals to publish their price lists, called "chargemasters,"²but hospital chargemasters can contain 15,000-20,000 prices for different services and describe services using technical terms beyond the ken of the average consumer.³ Since the early 1980s, a vast gap has emerged between the list prices and actual prices paid for hospital services. A 2006 study found that the gap between charges and actual payments was 255% and growing rapidly.⁴ A 2013 study similarly found that hospitals on average billed Medicare 377% of what they were actually reimbursed.⁵

Providers, patients, and insurance companies also are often unable, or do not attempt, to reach agreement on the scope or price for services before they are rendered. Many providers have contracts with insurance companies, but others avoid them as a matter of business strategy. Even if health plan members select a contracted hospital for services, they may inadvertently wind up using a non-contracted provider, if, for example, the emergency department or a particular physician is non-contracted. Patients may also resort to non-contracted providers while travelling out-of-state.⁶ In these cases, both the insurer and the insured may be exposed to the provider's list prices— with the member potentially being required to pay a percentage of the charges in coinsurance, or being balance-billed for the difference between the provider's charges and the health plan's allowed reimbursement.⁷ Third-party tortfeasors and workers' compensation carriers are also generally unable to enter into contracts with providers for injured parties, and may thus be charged their list prices.⁸

Common law principles on pricing for non-contracted medical services

The default rule for reimbursement of non-contracted medical services is based on a common law doctrine variously known as quantum meruit, implied contract, and restitution.⁹ As stated in the recent Third Restatement of Restitution, this doctrine provides that "[a] person who performs, supplies, or obtains professional services required for the protection of another's life or health is entitled to restitution from the other as necessary to prevent unjust enrichment."¹⁰ Unjust enrichment is measured by a "reasonable charge for the services in question."¹¹ The Restatement describes this reasonable charge as the "reasonable and customary charge" for professional services and as "market value."¹² These principles are applied in California to cases where services are performed without a prior agreement of any type or without a prior agreement as to price.¹³

But, what is a reasonable charge? Providers have long wanted to be able to set their own prices, and have hence argued that their billed charges are their reasonable and customary charges. Payors counter that billed charges that are 250-350% of actual payments are neither reasonable nor customary. Many providers also have different prices for the same services: a list price and different step-downs of lower prices that they have negotiated with insurers or that are set by Medicare and Medicaid fee schedules.¹⁴ So which of these, if any, represents their reasonable and customary charge?

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Reflecting the historic market centrality of the Anglo-American economic system, judges have typically set the baseline for the reasonable value of non-contracted services at market value. According to the Restatement, "[l]iability in restitution for the market value of goods and services is the remedy traditionally known as quantum meruit" and is the "usual measurement of enrichment in cases where nonreturnable benefits have been furnished at the defendant's request, but where the parties made no enforceable agreement as to price." ¹⁵ Following these principles in the 1956 case Punton v. Sapp Bros. Construction Co., the California court of appeal found that the "reasonable market value" for a San Diego construction company's non-contracted services that a restaurant had asked it to perform was to be set "at the current market value for such labor and materials prevailing at the time in the City of San Diego."¹⁶

These principles are also applied to non-contracted medical services. According to the Restatement, both non-requested (e.g., emergency) and requested medical services that are delivered without an agreement as to price should normally be valued at "market value."¹⁷ When dealing with medical services, however, instead of "market," the term that is often used to define the rate of compensation is the "reasonable and customary" or the "usual, reasonable and customary" rate. These terms, however, are best understood as synonyms for "market"—because market value is determined by what people customarily pay or the provider usually accepts for services of the type and quality at issue.¹⁸

The Gould Factors Adopt the Common Law Approach to Determining Reasonable Charges

The common law approach to valuation of non-contracted medical services was reflected in the 1992 California court of appeal decision Gould v. Workers' Compensation Appeals Board.¹⁹ Dr. Gould had performed psychiatric services for two Los Angeles police officers who sustained injuries on the job. The workers' compensation board schedules provided for a $98.40 fee per session, and permitted higher compensation only in unusual circumstances. Dr. Gould sought $125 per session for services he rendered prior to 1989 and $150 for services after this date. Dr. Gould testified that he had extensive experience in treating police officers and presented evidence that his usual and customary fee prior to 1989 was $125. Dr. Gould further testified that since the end of 1987, the fee charged by psychiatrists in Los Angeles averaged $150 per session.

The court of appeal noted that while the Labor Code permitted the workers' compensation appeals board to adopt a medical fee schedule, it also provided that a physician could charge a higher fee, if the fee was reasonable and did not exceed the physician's usual fee—and it did not require the physician to show unusual circumstances. The court then remanded the case to the board to determine the reasonable fee that Dr. Gould should be paid. Taking its cue from the facts of the case before it, the court stated that evidence of reasonable rates included six factors: (i) evidence regarding the provider's training, qualifications, and length of time in practice, (ii) the nature of the services provided, (iii) the fees usually charged by the medical provider, (iv) the fees usually charged in the general geographical area in which the services were rendered, (v) other aspects of the economics of the medical provider's practice that are relevant, and (vi) any unusual circumstances in the case.²⁰

California health care service plans, which serve the majority of insured state residents, are regulated by the Department of Managed Health Care (DMHC). In 2003, the DMHC issued regulations to implement California's prompt pay statute, which requires health plans to reimburse certain claims within 30 days.²¹ As part of these regulations, the DMHC defined what constitutes "reimbursement." For non-contracted providers, the regulations state that reimbursement is "the payment of the reasonable and customary value for the health care services rendered based on...