Prices that insurers pay can help end hospital price gouging

Last month the Texas Supreme Court decided In Re Cypress Medical Center, a case focused on whether the payments hospitals receive for insured patients are relevant to determining the price an uninsured or out-of-network patient must pay. The question of how to measure the reasonable and customary value of health care services is being raised frequently in courts across the country.

This is an important issue for everyone, not just uninsured and out-of-network patients. Why? Because high hospital prices are a key reason that health care in the United States is more expensive than any other developed country.

{mosads}Crystal Roberts was taken by ambulance to North Cypress Medical Center following a car accident. After an examination, X-rays, a CT scan and lab tests, she was sent home and later billed $11,037.35 for her three-hour emergency room visit. After offering to pay a lower amount, which was refused and countered with a lawsuit by the hospital, Roberts sought to learn the actual amounts the hospital would have accepted as full payment from insured patients. The hospital refused, claiming the information was not relevant because Roberts was uninsured. The lower courts ruled in favor of Roberts and Cypress appealed.  

The Texas Supreme Court held that the prices paid by insurers are relevant to establishing the hospital’s reasonable and customary rates. The court did not say that the rate for uninsured patients is exactly the same as the rate charged to insured patients; it said only that the insured rates were relevant to determining the rates for uninsured patients.

The court is correct. Rates paid by commercial insurers are based on individual contracts knowingly and freely entered into by the hospital (this is not true of the rates paid by government insurers). These rates must cover hospital costs and provide a reasonable profit, or hospitals would not agree to them.

It would be unfair for a patient without health insurance or an out-of-network patient to pay the same price as an insured and in-network patient; that would be similar to requiring Sam’s Club to charge its discount prices to customers who did not pay the membership fee. However, it is also unfair to require these patients to pay exorbitant hospital list prices.

But, there are two important distinctions between Sam’s Clubs and hospitals. Sam’s Club’s discount is about 10 percent, while the discount given to insured patients is more than 300 percent. Also, patients don’t know the list price when they “purchase” health care services; this is not about denying hospitals freedom of contract. Hospitals are free to set their price, but patients are obligated to pay it only if they knowingly and freely agree to.

“Knowing” means awareness of the exact obligation accepted, and “freely” means having the ability to negotiate terms. Unfortunately for patients, going to the hospital is like going to Sam’s

Club, filling the cart with items and not knowing the price until weeks later when the bill arrives. Yet hospitals put any price they choose on the patient’s bill.

Legally, a patient is required to pay the “reasonable and customary” value of the necessary health care received, unless the hospital and patient agreed on a specific price, which rarely happens. Hospital admissions agreements typically contain an ambiguous reference to the patient’s obligation to pay the hospital’s “regular rates.” Also, the patient is often not in a position to negotiate because of the circumstances associated with entering the hospital, especially the ER.

Because commercial insurers provide benefits to hospitals that uninsured and out-of-network patients do not — such as quick and assured payment and access to more patients — the hospital has a legitimate reason to set prices somewhat higher for uninsured and out-of-network patients. However, the value of those benefits comes nowhere close to justifying the huge difference between list prices and commercial insurer prices.

My research indicates that the value of these benefits is about 10 to 15 percent. Thus, the reasonable and regular rate for uninsured patients is no more than 110 percent to 115 percent of the average reimbursement amount accepted for commercially insured patients.

Hospitals’ secretive pricing system leads to high prices because it eliminates price transparency and prevents price competition by making meaningful comparison-shopping by patients impossible. The Texas Supreme Court has taken an important step toward reining in excessive hospital prices by tying them to the free market benchmark established by commercial health insurance reimbursement rates.

George A. Nation III is a  professor of law and business at Lehigh University. His recent research concerns health care policy with a focus on restoring competitiveness in the marketplace. He submitted an amicus brief on the Texas case on behalf of the Alliance of Claims Assistance Professionals.