How hospital pricing traditionally works

Hospitals list their prices in something they call a chargemaster, which is typically unpublished. In admission forms, patients are often agreeing to pay “the chargemaster rate,” with no detail as to what that rate is.

Hospitals use that chargemaster rate in their negotiations with insurance companies. For example, Alpha Insurance might negotiate with a hospital to get a 40 percent discount off of the chargemaster rate when its employer clients’ employees go to the hospital.

But without knowing the chargemaster rates, it is difficult to evaluate objectively the value of a 40 percent discount. From Alpha’s perspective, as long as its 40 percent discount is more than the discount received by its competitor, Beta Insurance, Alpha Insurance can better compete for local employers’ business. Still, few know the hospital chargemaster rates, and ultimately, employers wind up footing the bill.

Enter reference-based pricing. Under this approach, the employer uses Medicare as the baseline and pays a percentage in excess of Medicare. The Medicare rate is published, and so the employer has more confidence they are making their payment off of a fair reference point.

Why the admission forms matter for reference-based pricing
The reason admission forms are so important to the future of reference-based pricing is because hospitals are trying to use them to obtain higher payments from employers in lieu of the traditional network contract.

Hospitals have built their businesses around the kind of insurance contracts described above, which ensure higher commercial payments from employers. Reference-based pricing plans, in comparison, often reimburse at a lower rate.

As a result, hospitals may be seeing a threat to their bottom lines. While employers aren’t required to obtain traditional insurance contracts, hospitals can incentivize them to do so by charging their employees very high “chargemaster” rates.

More and more employers are treating these chargemaster bills like insurers do—as a starting point for a negotiation—and offering what they consider fair and reasonable payment.

In these lawsuits, hospitals are effectively saying to employers using reference-based pricing, “You can’t negotiate this chargemaster rate, because your employee agreed to pay it when they were admitted. If she doesn’t pay it, she is in breach of contract.”

The idea is to turn the employee against his or her employer, claiming the employer offered a poor benefit plan that left the employee vulnerable. Employers, meanwhile, believe hospitals charging unreasonable rates is the problem.

If courts agree with hospitals, employers will have more incentive to obtain traditional insurance contracts. If courts disagree, employers may be more willing to drop their traditional insurance contract in favor of reference-based pricing.

Are admission forms legal contracts?

The first question judges may face could be whether admission forms are legitimate contracts establishing financial liability, especially in the case of an emergency.

A doctrine of contract law known as unconscionability applies to situations that are overwhelmingly one-sided, and courts may determine that documents signed under medical duress fit that description.

This argument is being evaluated in at least one case, and will undoubtedly come up in others. Each time it comes up, whether the contract is unconscionable will likely depend on the facts and circumstances of the case. For example, a court might look at things differently if the patient thought he was having a heart attack when he was asked to sign versus if he had just sprained his ankle.
If the document that the patient signed is ruled to be an enforceable contract, the next question is price. In other words, what price did the patient really agree to be liable for?

What admission forms say

One admission form currently in use states that the patient understands and accepts that the hospital will bill the chargemaster rates in effect when services are provided.

The form states, “I may request a price estimate for such services; I agree to pay for such services; and I acknowledge and accept my personal responsibility for payment in full for billed charges,” even if the hospital received payment from other sources.

While patients can ask for a price estimate, most hospitals are unable to provide one. Further, negotiating terms in the hospital is awkward at best, and life-threatening at worst. It is unlikely a patient experiencing a heart attack or stroke would wait to see a cost estimate before consenting to treatment.

As a result, prices aren’t typically established in admission forms or consent for service contracts, and so judges may have to determine a fair price for the services. In other words, if the patient didn’t agree to a set price, what were the services worth?

Here’s how courts might make that determination.

What courts might consider

Hospitals will argue that patients owe the chargemaster rate mentioned in the admissions form. But if the chargemaster rate was not disclosed, the courts may not find that argument convincing.

Courts may say that hospitals would need to list their prices and include them in the contract if they want their chargemaster prices to be considered a firm deal term in the contract. Hospitals would likely balk at this, citing non-disclosure agreements or other issues as keeping them from publishing their chargemaster prices.

Effectively, hospitals may find themselves arguing that they have to keep their chargemaster prices hidden, but the patient is liable for these secret prices because of a contract the patient signed in the hospital that was written by the hospital and left no room for negotiation by the patient.

If the court does not agree with this argument, it may cite quantum meruit. This is a legal term that calls for determining the amount to be paid for services when there is doubt as to the amount due for the work performed but done under circumstances when payment would be expected.

This is where courts could end up finding themselves deciding what fair prices are in healthcare, and setting key precedents around patient and employer liability. Ultimately, these factors will affect the future of reference-based pricing specifically, and healthcare finance in the United States generally.

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