888-599-5553

888-599-5553

An Update on Reference-Based Pricing

Last year we told you about a case that could potentially impact the use of reference-based pricing in self-funded health plans.  The name of the case was Centura Health Corp. v French and the adverse decision was rendered by the Colorado Court of Appeals.  We also told you that the case had been appealed to the Colorado Supreme Court.  Well, the Colorado Supreme Court has spoken in a decision dated May 16, 2022.

The Facts of the Case 

To refresh your recollection, the case started as a debt collection matter.  The defendant in the case, French, needed back surgery.  She was referred to a hospital owned by the plaintiff, Centura Health Corp.  Prior to surgery, she was told that the total charge for the surgery would be $57,601.77 and that she would be responsible for $1,336.90 of that amount.  However, after the surgery, she was surprised when she received a bill for $229,112.13, reflecting the balance of Centura’s “chargemaster rates”, less the amount of $73,507.35, paid by her employer, and $1,000.00, previously paid by French.

Here, we need to explain a couple of terms.  First, “chargemaster rate”.  A hospital’s chargemaster rate is the internal price set by the hospital for certain services.  The services are identified by code, which, in this case, the hospital claimed was proprietary and could not be shared with any patient.  In addition, Centura also acknowledged that the chargemaster rates are essentially a starting point for any discussion since it normally negotiates lower rates with insurance companies and provider networks.  In other words, hospitals do not generally charge its chargemaster rates for any medical care.  As the Colorado Supreme Court said in its opinion:

Moreover, as courts and commentators have observed, hospital chargemasters have become increasingly arbitrary and, over time, have lost any direct connection to hospitals’ actual costs, reflecting, instead, inflated rates set to produce a targeted amount of profit for the hospitals after factoring in discounts negotiated with private and governmental insurers.

The second term is “reference-based pricing”.  As discussed in our previous article, reference-based pricing is used by self-funded health plans that do not negotiate discounted rates with providers.  Instead, a self-funded health plan using reference-based pricing simply determines the amount that it is willing to pay for particular services and caps its payment to providers at that amount.

The advantage of reference-based pricing is that it can reduce the amount that an employer spends on employee healthcare.  The disadvantage of reference-based pricing is that some providers may not be willing to provide their services for the price set by the employer or may seek to recover additional amounts from the patient.  That is what happened here.

After the surgery, the hospital determined that it had misread the patient’s insurance card and had given a price quote based on the mistaken assumption that she was an “in-network” patient and eligible for a negotiated, discounted rate.  It subsequently realized that her employer’s plan did not have a negotiated, discounted rate with the hospital; that she was, in fact, an “out-of-network” patient; that the employer used a reference-based pricing model; and that the hospital was under no obligation to accept the amount offered by the employer’s plan.  So, it did not.

The Trial Court

In the trial court, where Centura was the plaintiff and French was the defendant, Centura claimed that French had signed multiple “hospital service agreements” before her surgery.  The hospital service agreements contained the following language:

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.

Centura claimed that the phrase “all charges of the Hospital” referred to its chargemaster rates and that French had, therefore, agreed to pay the chargemaster rates for her back surgery.

The trial court found that the phrase “all charges of the Hospital” was ambiguous and that its meaning was for the jury to decide.  The jury found that the phrase meant “the reasonable value of the goods and services provided to French” and that the chargemaster rates were not reasonable.  It further found that the reasonable value of the healthcare provided French was closer to the amounts that Centura had already received and that French was only responsible for the amount of $766.74.

Centura appealed.

The Appeals Court

In the Appeals Court, Centura was the appellant and French was the appellee.  So, the name of the case was Centura Health Corp. v French.  As discussed in our previous article, the Appeals Court found that the hospital services agreement did incorporate Centura’s chargemaster rates and that the trial court had erred when it found that the phrase “all charges of the Hospital” was ambiguous.  As a result, the jury should not have been tasked with determining the “reasonable value” of French’s back surgery, and she was responsible for the hospital’s chargemaster rates less the amounts already paid.

French appealed.

The Colorado Supreme Court

In the Colorado Supreme Court, French was the petitioner and Centura was the respondent.  So, the name of the case was French v Centura.  The Court treated this case like a garden-variety breach of contract case.  The Court said that, in such cases, a court’s responsibility is to give effect to the intention of the parties to the contract.  Furthermore, the parties’ intention is determined from the unambiguous language of the contract.  The Court further said that a contract requires assent to its terms.  Where the language is ambiguous, such assent is not possible.  As a result, it is up to the court to determine the meaning of the contract.

The Court then said the following:

With respect to consideration, when parties have entered into a contract for the performance of services but the contract lacks an express or definitive price, “it is a general rule that the court is required to determine the price on the basis of the reasonable value of [the services to be provided]. Under general principles of contract, the ‘reasonable value rule’ is universally applied where no contract price can be determined.

The Court acknowledged that a contract can incorporate unwritten terms by reference to another document.  In this case, that would be the hospital’s chargemaster rates.  However:

. . . for an incorporation by reference to be effective, “it must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms.

General or oblique references to a document to be incorporated, in contrast, are usually insufficient to support a finding that the document was incorporated by reference.

In this case, the Court found that the hospital’s chargemaster rates were not incorporated into the hospital service agreements by the language “all charges of the Hospital”.  First, there was no evidence in the record that French even knew of the existence of the chargemaster rates.  Second, there was no evidence in the record that French agreed to pay the hospital’s chargemaster rates.  In fact, Centura had claimed that its chargemaster rates were proprietary and could not be shared with any patient, including French.  In addition, Centura acknowledged that, even if it had disclosed its chargemaster rates to French, she would not have been able to understand them.

Accordingly, the Court found that the amount owed by French was the reasonable value of the services and that the determination of this amount was a job for the jury.  The judgment of the Appeals Court was reversed, and the jury verdict was reinstated.

Does This Case Have Any Impact On Reference-Based Pricing?

The reality is that this case has no real effect on reference-based pricing.  It neither affirms nor negates the concept.  After the decision in this case, an employer is still entitled to cap its exposure by adopting reference-based pricing instead of negotiating rates with providers.  A provider is still able to reject an employer’s reference-based pricing either by refusing to provide services to a participant in the employer’s plan or by billing the patient for the balance.

The moral of the story is that a provider and a patient must clearly understand the cost of the services before the services are provided.  They must also understand the amounts that the employer’s plan will pay and the balance, if any, that will be the responsibility of the patient.  Otherwise, while the employer comes up smelling like a rose, either the provider or the patient will be severely disappointed.