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Is Reference-Based Pricing Under Attack?

The Colorado Supreme Court may soon hear arguments in a case that may impact the future of reference-based pricing.  But what is reference-based pricing?

What is Reference-Based Pricing?

In order to understand “reference-based pricing”, we need to understand three other terms:

  • Fully-Insured Health Plan;
  • Self-Funded Health Plan; and
  • Service Provider Network.

What is a Fully-Insured Health Plan?

In a fully-insured health plan, an employer pays premiums to an insurance company, and the insurance company agrees to pay the medical expenses of the employer’s employees.  The premiums may be substantial, because the insurance company needs to know that the aggregate premiums paid by all employers will exceed the aggregate claims of all insureds.

Nonetheless, an employer is willing to pay the premiums in order to transfer its risk to the insurance company.  By paying premiums to the insurance company, the employer limits its exposure for medical costs to the premiums.

What is a Self-Funded Health Plan?

In a self-funded health plan, an employer does not transfer its liability to an insurance company but pays medical expenses out of its general assets. Often, an employer will purchase “stop-loss insurance” to protect against catastrophic or unexpected claims.  However, in a self-funded health plan, the employer is solely responsible for paying the medical expenses incurred by its employees.

An employer adopting a self-funded health plan is betting that the cost of claims, plus stop-loss premiums and administrative fees, will be less than the premiums that it would otherwise have had to pay in a fully-insured plan.  If the employer is correct, a self-funded health plan can result in significant savings for the employer.

What is a Service Provider Network?

A Service Provider Network is a collection of medical professionals who have agreed to provide care to the members of a particular group.  Often, the Service Provider Network is put together by an insurance company for use by a fully-insured health plan.

Alternatively, a Third-Party Administrator (TPA), engaged by an employer to manage its self-funded health plan, will often have access to a Service Provider Network.  The benefit of using a Service Provider Network is that the members of the Service Provider Network have agreed to provide their services at discounted rates, rather than at their standard billing rates.  This reduces the cost of medical care provided by the group, thereby reducing premiums charged by an insurance company and, more importantly, reducing the deductibles and co-pays paid by the employees.  This is where the concepts of “in-network” and “out-of-network” come from.

So, What is Reference-Based Pricing?

We can now define reference-based pricing.  Reference-based pricing is most commonly used in self-funded health plans.  It is a methodology for establishing the cost of medical care.  Instead of contracting with a Service Provider Network, an employer adopting a reference-based pricing plan is betting that it can pay less than the discounted rates negotiated by an insurance company or a TPA.  The employer sets the amount that it is willing to pay for medical care based upon a reference point.

Most commonly, the reference point is a percentage of the amount that Medicare would pay – for example, 150% of the Medicare rates.  If an employer is successful in capping its costs at its reference point, it can save a substantial amount of money.

A reference-based pricing plan has no “in-network” or “out-of-network” providers.  An employee can go to any provider without reference to a network.  However, a reference-based pricing plan has one significant disadvantage.  What if an employee’s doctor refuses to accept the amount that the employer has decided that it will pay?

The employee has two options.  The first option is for the employee to find a new doctor; one who will accept the employer’s reference-based pricing amount.  The second option is for the employee to pay the difference between the doctor’s standard billing rate and the amount that the employer is willing to pay.

This is what happened in the Colorado case.

The Patient Gets Screwed

The name of the case is Centura Health Corp v. French.

The defendant-patient required surgery.  She was a participant in a self-funded health plan that used reference-based pricing.  Neither her employer, nor her employer’s TPA, had a service agreement with the plaintiff-hospital.  Prior to the surgery, she received an estimate of $57,601.77 as the cost of the procedure.  Further, she was told that her cost would be $1,336.90.  After the surgery, she was billed $303,709.48, of which her employer’s plan paid $73,597.35.  The defendant then paid $1,000, leaving a balance of $229,112.13.  When she refused to pay the balance, the lawsuit ensued.

On three separate occasions prior to surgery, the defendant had signed a Hospital Services Agreement (HSA).  In the HSA, the defendant acknowledged that she:

. . . understood that there is no guarantee of reimbursement or payment from any insurance company . . . I acknowledge full financial responsibility for, and agree to pay, all charges of the Hospital and of physicians rendering services not otherwise paid by my health insurance or other payor . . . Any remaining charges are due and payable upon receipt of the bill . . .

In other words, she agreed that she would be financially responsible for all hospital and physician charges not paid by her employer.

The issue at trial was the meaning of the phrase “all charges of the Hospital”.  There was no question that her employer had not paid the full amount billed by the plaintiff.  And there was no question that the defendant had agreed to pay the balance.  The question, therefore, is how to calculate the balance owed by the defendant.

The hospital claimed that the phrase “all charges of the Hospital” referred to the hospital’s “chargemaster rates”.  In other words, the hospital claimed that, because it had not negotiated discounted rates with an insurance company or a TPA, it could charge the defendant its standard billing rate.  The patient claimed that the phrase “all charges of the Hospital” did not mean the hospital’s “chargemaster rates” but something different.  The defendant asked the trial court to find that the phrase was ambiguous and leave its meaning to the jury.

The trial court agreed with the defendant and found that the phrase “all charges of the Hospital” was ambiguous and instructed the jury to determine its meaning.  The jury found that the phrase meant the “reasonable value of the goods and services” provided to the defendant.  It further found that the balance of the “reasonable value” of the surgery to the defendant and the amount that she owed the hospital was $776.74, not $229,112.13.

The hospital appealed, and the Colorado Court of Appeals reversed.  The Court of Appeals said that this was an issue of first impression in Colorado.  That means that no other Colorado court had considered the issue before.  So, the Colorado court looked to courts of other jurisdictions that had dealt with similar issues.  And, for reasons beyond the scope of this article, the Court found that the phrase “all charges of the Hospital” unambiguously referred to the hospital’s “chargemaster rates”.  Therefore, the trial court erred in asking the jury to determine the meaning of the phrase.

In addition, the Court held that the measure of the defendant’s debt was not the “reasonable value” of the surgery, but the full amount charged by the hospital.  The Court of Appeals remanded the case to the trial court to enter judgment in favor of the hospital and against the patient in the amount of $229,112.13.

The defendant appealed to the Colorado Supreme Court, which should hear arguments sometime this year.

How Does This Case Impact Reference-Based Pricing?

It is not immediately clear if or how this case impacts reference-based pricing.  As discussed above, reference-based pricing plans do not have pre-negotiated discounted rates with a Service Provider Network.  The employer simply sets the amount that it is willing to pay for medical care.  In addition, an employee is not limited to medical professionals in the employer’s Service Provider Network.  There is no distinction between “in-network” and “out-of-network” providers.

However, a medical professional is under no obligation to accept the employer’s pricing; leaving an employee with the option of finding a doctor who will or paying the difference.  In this case, the hospital refused to accept the employer’s pricing and billed the employee for the balance.  That is exactly how a reference-based pricing plan is designed to work.  So, who says that this case negatively impacts reference-based pricing?

The Self-Insurance Institute of America, Inc. (SIIA), in an Amicus brief filed in the Colorado Supreme Court, that’s who.

The SIIA is “a member-based association dedicated to protecting and promoting the business interests of companies involved in the self-insurance and captive insurance industry”.  Its members include employers sponsoring self-funded health plans, captive managers, TPAs, stop-loss carriers and other service providers to the self-insured industry.

An Amicus brief is a legal memorandum filed by a party who has an interest in the outcome of a case but is not a party to the case.  The SIIA filed an Amicus brief on behalf of the patient-defendant, French, in the Colorado Supreme Court.  In its brief, it said the following:

. . . under traditional reimbursement models, hospitals bludgeon payers (including self-insured entities) into accepting rates that have no relation to the value of services provided using their “chargemaster,” a secret list of tens-of-thousands of prices only experts can read set for the sole purpose of increasing profits and often varying by nearly an order of magnitude from provider-to-provider. While resulting in record profits for hospitals, this model harms patients, and the resulting high costs squeeze employers who are mandated to provide coverage to their employees.

To mitigate the problems of traditional models, many self-insured employers, like Defendant/Appellant Ms. French’s, have implemented Reference-Based Pricing (“RBP”). Rather than being based on the arbitrary, inflated, and opaque chargemaster, RBP reimbursement rates are based on a reasonable reference, such as the Medicare rate or actual cost. This approach increases transparency, empowers patients, and lower costs while ensuring quality care and reasonable profits for hospitals. If the provider refuses to accept the reference-based rate, and instead, bills the patient for the difference—here, more than $200,000 more for a single stay—courts offer the only remedy against the imposition of the arbitrary, inflated, “life-crushing, overcharged medical bill.”

While the trial court ably resolved this case, the court of appeals reversed with a new categorical rule that an agreement to pay “all charges” of the hospital incorporated the chargemaster rate. Centura Health Corp. v. French, 2020 COA 85 (the “Opinion”). This rule destroys market innovation like RBP under policy rationale that is insufficient and even incorrect. It should be reversed so Colorado courts can address agreements for health care provision as they would any other contractual dispute—based on the facts of the case.

We cannot, at this juncture, predict how the Colorado Supreme Court will rule.  Also, it is too early to know whether the SIIA’s fear is overblown or whether a ruling in favor of the hospital will in fact end reference-based pricing in Colorado.  In any event, this is an important case to follow.